國民油井華高 (NOV) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the National Oilwell fourth-quarter and full-year 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. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Friday, February 25 of 2005. I would now like to turn the conference over to Mr. Pete Miller, Chairman, President and Chief Executive Officer of National Oilwell. Please go ahead, sir.

Thank you. I'm Pete Miller, the CEO of National Oilwell, and with me in the room today is Steve Krablin, our Chief Financial Officer. We would like to welcome you to our year-end and fourth-quarter 2004 earnings conference call.

Earlier today, we issued a press release announcing our fourth-quarter results of net income of $50 million or 58 cents a share on record revenues of $669 million. The included in those results is a $15 million tax benefit or 17 cents a share, which Steve will explain a little bit later when he goes over the financial details.

For the year, we achieved net income of $110.2 million or $1.27 per share on revenues of $2.3 billion. This compares to net income last year of 76.8 million or 90 cents a share on revenues of $2 billion. We're very pleased with these results and we're also very pleased with the efforts of all the National Oilwell employees worldwide to help achieve these results.

Additionally this morning, we announced a year-ending backlog of 605 million for capital equipment. This is compared to a third-quarter backlog ending of 575 million and a year-ago backlog of 339 million. Obviously, you can see that the backlog trends are continuing in a positive fashion, and I will explain a little bit more about this later when I give you an operational overview of what we see happening around the world.

At this time, I'd like to turn the conference over to Mr. Krablin so that he can run through the financials for you.

Thank you, Pete.

During this conference call, some of our statements may be forward-looking statements within the meaning of the Exchange Act. Some of you may even believe that we have the power to see into the future, and I refer you to our press release and our SEC filings for a full explanation of what a forward-looking statement is and for all of our other risk factor disclosures.

If you are on our e-mail list, you've received a quarterly selected financial data sheet that provides not only the fourth-quarter results but also an easy reference to the results and trends by quarter for 2003 and 2004. This sheet is also available on our Web site; that's at natoil.com, and you can also contact Investor Relations through the Web site to be added to our e-mail list. Our Web site is also a source of a replay of this call.

We were very pleased to beat the Street estimates by 22 cents for the quarter. You know, I've always wanted to say that! Seriously, we did have an unusual tax item and I will explain that a little later in the call.

Our consolidated results were very good this past quarter with increasing revenues and operating profits in both groups. In fact, our consolidated revenues were at a record level and up over 8 percent from the prior quarter alone. Year-over-year, revenues were up more than 15 percent. While we still plan to make -- to achieve more margin improvement, we have made good progress in this area through 2004.

Going first to the distribution group, the revenues in the distribution group increased to 235 million, comparable to the third quarter and up nicely from the first half of this year. This represents the 8th consecutive quarter of sequentially higher revenues for this segment. A small decline in our U.S. business in the fourth quarter was offset by an increase in Canada. There's been no real change from the general breakdown of past revenues with Canada and international operations, each representing about 25 percent of our total revenues and approximately 50 percent of this segment's business coming from the U.S.

Our operating income and distribution continues to improve, increasing to 3.8 percent of revenues in the fourth quarter. If that's a trend of going from 2.5 to 3.1 to 3.6 in each of the other quarters, so we are naturally very pleased with this trend. As for return on capital, the distribution group is now at 14 percent for the fourth quarter.

Products and technology had revenues of 466 million, or up 11 percent from the third quarter, with about a fourth of the 48 million increase coming from capital equipment revenues. In other words, the fourth-quarter revenues were up without a strong boost from the capital in sight (ph). Comparing to the second half to the first half really further demonstrates the dramatic strength of this market, with second half revenues in this group being up 35 percent over the first half.

Specifically, revenues from capital equipment out of the backlog increased 13 million. That's to 212 million compared to 199 million in the third quarter. Our capital revenues broke out of the 150 million-ish range in the third quarter, but don't expect them to stay in this 200 million-ish range for very long. I think, based on our backlog and quoting activity, we do expect quarterly capital equipment revenues of around the $250 million pace by midyear. By the way, just to avoid doubt, that was a forward-looking statement!

Our non-capital products and technology revenues increased 31 million on a sequential basis, or up approximately 16 percent over the prior quarter. Each of our major product lines were up with our spare parts and service business leading the charge.

Operating income for the Products and Technology Group totaled 54 million, a 20 percent improvement sequentially and a continuing improvement of our reported results in each quarter of 2004. Operating income as a percentage of revenues has moved up to over 11.5 percent, and we fully expect our trend of 2004 to continue through 2005.

Now, onto the other matters, and we have several things to cover in this section this time. The corporate expense was over 7.5 million, which is well above our typical run rate. Approximately 1 million of the overage is due to compliance costs associated with Sarbanes-Oxley and higher audit fees. Another 1.5 million was due to the expensing of -- some tax consulting expense and of course, you may have noticed the large benefit in the fourth quarter, so it's certainly my view that this money was well spent. Then another 1 million in the fourth quarter on the corporate side was due to additional incentive plan expense associated with the good financial performance for the year. Corporate should be about 4.5 to $5 million per quarter for 2005, but that expectation will certainly be reset when the Varco merger is completed.

Interest expense in the fourth quarter was about the same as the prior quarters in 2004. Our current blended borrowing rate is about 5 3/4 percent. Midyear, in 2005, it's our intention to repay 150 million in 6 7/8 percent debt that becomes due from available cash and from borrowings under our revolver. Once that's done, our blended rate will be reduced significantly in the second half. Add to that the lower outstandings that we expect in the second half due to the cash generation in this year, our interest expense will decline significantly in the latter part of 2005.

Other income -- you know, it looks like there's not much going on in that area, but it actually has 2 large components in it that I feel like I should mention and try to describe. In other income, we had the benefit of about a $9 million gain on the sale of shares in a public foreign subsidiary that we acquired at the time of the Hydralift acquisition. Offsetting this was a loss on foreign exchange. I really want to explain this foreign exchange though as to what's driving that -- what we're calling a loss there. These foreign exchanges -- the losses in the foreign exchange that come through that line relate to cash balances and inter-company debt that is held in U.S. dollars in our own foreign subsidiaries. In other words, we ask them to keep the debt and the cash in these areas. Generally Accepted Accounting Principles, GAAP, makes us take a loss on this through the income statement and then gives us an offsetting gain in the equity section of the balance sheet. In other words -- and I realize this is a little hard to follow perhaps -- but if we leave a cash balance in Canada in U.S. dollars, Canada has to convert that U.S. dollars to Canadian dollars and record a loss on the income statement. Then they go through remeasurement of taking the Canadian balances back into U.S. dollars and record a gain in other comprehensive income on the income statement.

Now, GAAP feels like I should be kind of indifferent to this since equity stays the same. You know, you have a loss on the income statement, a gain in the balance sheet, but I'm not sure that everyone pays equal attention to the income statement and the balance sheet. In other words, I guess, though, with the share gain in our particular case, I don't expect you to give us any credit for the gain on those shares but I'd just ask that you don't penalize us for foreign exchange loss that comes through the income statement and then you get an offsetting gain on the balance sheet, either. So, it really is proper to just ignore these. You know, for the most part, this is, in my view, a fairly arcane accounting rule. But in other words, you know, this whole other income issue, it really is like the guy with one hand in boiling water and the other hand in freezing water. On average, he's supposed to feel fine. Anyway, that's what is in there and it really doesn't have an effect that affect your views going forward on either of those.

Now, the tax rate. We did record a negative tax rate in the fourth quarter. Our tax expense was lowered by about $15 million due to the elimination of valuation allowances that were deemed to be no longer needed for foreign tax credits. Now, let me try to explain what that means. Many times, in estimating tax expense, a company is entitled to a credit but actually getting that credit is dependent on earnings in certain jurisdictions, or maybe even be limited by having a fixed amount of time over which you can get that. If there's any uncertainty as to the actual usage or realization in tax terms of the credit, then GAAP would have us set up a reserve, or a valuation allowance for that, so that you haven't taken as low of taxes in earlier years as you otherwise might because you're not sure you'll get that credit. But then, as you are able to get the credit, you record a lower tax expense than you otherwise would incur. Our realization of these credits is one of the reasons that we've had a lower tax rate in 2004 and in some prior periods.

Well, at the end of 2004, we completed an internal restructuring of our subsidiary operation. This was driven by the need to properly capitalize certain of these international operations that we acquired over the last couple of years. Now, an additional benefit of this restructuring was that we were able to assure the realization of certain of these credits, and then the tax law changed in the fourth quarter that also gave us more time to actually get the benefit from these credits. The combination of these means that we no longer need the allowances for those and therefore the $15 million is taken to income, or as a lower tax expense in the fourth quarter rather than over the next several years, as it otherwise would have done.

Now, begetting this credit all at once for GAAP purposes, our future tax rate will increase and we currently estimate the tax rate in 2005 will be 32 to 33 percent, rather than the numbers that we had in 2004. From a cash standpoint, we will realize this $15 million over the next 2 to 3 years, assuming business is at least as good as it was in 2004.

On the balance sheet, our growing activity, the activity that we are seeing is driving an increase in our inventories and Accounts Payable from both the third quarter and a year ago. Our receivables really didn't go up very much over that time period. We've really had a major focus on lowering our Days of Sales Outstanding, and we've done a real good job of keeping that number down. At year-end, our debt was 500 million; that's essentially the outstanding public debt. That's down from 610 million at the end of 2003. We had no borrowings under our $175 million revolver, and we had cash of 142 million at year-end. Our book equity at year-end was 1.3 billion, giving us a debt-to-cap ratio of 28 percent and net of our cash, that ratio would actually be under 22 percent. This puts us comfortably in the lower part of our targeted 20 to 40 percent debt-to-cap ratio.

Capital expenditures in the quarter -- they were higher than normal, $15 million, which is a pretty large jump compared to where we had been. That's really around additions to our rental fleet and expenditures that we've made to improve our ability to manufacture other tools in our noncapital businesses. This jump brought our full-year capital expenditures to about 39 million, and that's about 90 percent of the full-year depreciation and amortization. Depreciation and amortization for 2005 should run around 45 million or so, and we believe capital spending will again be around 40 million.

Diluted shares in the third quarter were 86.9 million and we estimate that should be 87 to 88 million for 2005.

Looking at the projections for the first quarter, you know, we are expecting our distribution group to be about the same as the fourth quarter. We think that the noncapital piece of Products and Technology will also be around the same. You know, the rig count is accelerating a little bit, the offshore market is picking up, so we are hopeful that those will also have some affect as the year moves forward. In the first quarter, the revenues from capital backlog should increase somewhere around 10 percent. You know, as in the past, we ask you to give us a little leeway around being too exact there. We don't know all of everything that's going to be going out, but what we know now should indicate something in that area.

As to the first-quarter EPS, we generally don't try to be very specific in those areas, but we certainly do expect it to start with a "4", even with the higher guidance that we're making for the tax expense. I guess previously, we have disclosed our revenue expectation for 2005, and we really have no reason to change that guidance that we previously provided.

On the merger -- we've previously reported that we are continuing to work with the DOJ to satisfy them that there's no reason to object to the merger. Like we said before, you know, the need for review is surprising to me, but there's nothing in the process of the review that's a surprise, and we do remain confident that the merger will be approved. Each company has set March 11 for a stockholder meeting to vote on the transaction, and we will close as soon as possible after stockholder and regulatory approval is received. We still believe regulatory approvals will be completed by the stockholder meeting date, and I can assure you that we will publicly announce any change in the DOJ process status. We really can't elaborate much more than that on this call and certainly won't do that by individual phone calls.

Just to quickly take a personal moment, I guess, and to restate my confidence that the merger will proceed, I think this will be my last conference call. I want to say thanks to all of you who have helped me over the years and say that I've had a wonderful 4-year career in the oilfield service industry. Of course, that's 4 wonderful years out of a total of about 25 in this industry! After that joke, I will give it back to Pete!

Thanks, Steve. It's always a tough act to follow.

What I'd like to do at this point is give you an operational overview, a little bit of the operations as we look at them around the world. I want to start this by indicating what we believe are some of the trends that are impacting us today. I think the easiest one to look at right now is the rig count. If you take a look at the worldwide rig count, the United States rig count is the highest it's been since February of 1986. Canada is essentially at the highest it's been historically. We are seeing the Far East as high as it's been since 1993. The Middle East in particular with the most recent Hughes number is the highest rig count they've ever achieved, and I'm dating that back to about 1975. Then Latin America is up about to the highest level they've seen since the late '80s.

The only 2 areas that are really lagging behind at this point are Europe, which is well below its historical highs, and also Africa. So, you see a little bit of a mixed bag there, but I think a lot of those rig counts are driving especially the noncapital portions of our business. The prices of oil and gas remain very buoyant and I think all of these things and these trends are what really dictate what's going to happen on both the capital and the noncapital side.

On the capital side in particular, and I think the couple of trends that really need to be noted are, number one, we've talked about the age of the rig fleet and we've talked about our customer base that's doing a lot to try to modernize that, trying to change things out. The mantra for them is really efficiency and safety, and I think both efficiency and safety are driving the investment decisions of our capital customers. Then finally, I think the trend that continues to play out well is the introduction of new products. I think the industry needs new products, whether you're talking about evenwall technology on downhole tools or whether you're talking about Hex pumps, whether you're talking about iron roughnecks for land rigs, I think a lot of the capital decisions are being driven by the need for those new products. It's our intention to ensure that we continue to provide new products in the marketplace to help fuel some of the growth that we're talking about.

Now, I'd like to go into some of our day-to-day operations. When we take look at distribution, really it's being driven by a lot of the activity that's going on in the Rocky Mountains and the Mid-Continents in the United States. As I mentioned earlier, the U.S. rig count is the highest it's been since February of '86 and especially in that Rocky Mountain area and in the mid-Continent, you are seeing a lot of activity, you are seeing a lot of rigs working and fortunately we are positioned well with our distribution group to be able to take advantage of that.

In Canada, you have a lot of heavy oil, tar sands and coalbed methane drilling going on. Again, we are positioned to be able to take advantage of that. I think that drilling will continue into the future. Interestingly enough, the Gulf of Mexico still has not risen to levels that it has seen as little as 3 or 4 years ago, and I think, when you start to see an improvement there and most drilling contractors have indicated there will be an improvement, I think you'll see that pick up for our distribution group.

I'd did mention the Far East had a significant approved in rig count. As a result of that, we've opened up a new facility in Bali, (indiscernible) and Borneo. We believe we can take advantage of the international arena right there. So, really the distribution is being driven by those worldwide rig counts that I'm talking about.

The same thing kind of applies to our mission group; that is our mud pump extendables. Not only are they getting the advantage of the increased rig count, but we've also introduced some new products there. There are some that I won't get too technical on this call and talk about, but these particular products are really helping drive the growth in that mission business.

Finally, on our day-to-day businesses and our downhole tools, again being driven very much by those rig counts that I've talked about and with new products such as evenwall, drilling motors. The other interesting thing that's going on almost throughout the industry is, even on a typical well today, and it might just be a straight vertical well, I think most drillers are realizing that utilizing downhole motors is helping to, number one, probably reduce the wear and tear on your drill pipe and your rig, but secondly, making you drill more rapidly and efficiently. So, I think you'll start to see motors be used on wells that traditionally they've not been used on. Again, that plays very well for our downhole tool crew. As Steve mentioned, really the majority of our CapEx -- or not the majority but a large portion of our CapEx goes to improving and continuing to grow our rig fleet of motors and tools each year.

Now what I'd like to do is go into the capital side and talk a little bit about what we are doing strategically and what we see happening around the world. First, in our manufacturing, I just want to point out that we continue to expand our worldwide manufacturing capabilities. We've talked a lot about China; I mentioned that earlier. Here this quarter, we've increased what we are able to do in the United Arab Emirates in (indiscernible) and Dubai. We now can actually put together entire rig packages there. We've expanded some of our operations into Astonia. As we look at new projects, we have gone there to have some of the -- some fabricated materials done for us. We continue to expand that operation in Poland. So what we are trying to do is ensure that we maintain maximum flexibility and capacity on our abilities to produce product worldwide.

Now, I'd like to talk about some of the particular areas and tell you kind of what we see happening around the world. The first one I'd like to concentrate on is Russia. This is really almost a good news/bad news type of scenario. Obviously, the Yukos debacle and what's gone on with the Rosneft/Gazprom merger has really slowed Russian orders down. I think that the attention that's been paid to the pronouncement of now there's going to have to be 50 percent ownership, Russian ownership of any new project that goes on there I think has had the effect of really dampening the market. We have some very good customers there that continue to buy from us, but I think overall actually Russia itself is going to be a little bit of a mixed bag and especially in the land arena. However, other areas within the former Soviet union, specifically the Ukraine, Kazakhstan and Turkmenistan, I think are going to continue to offer opportunities. So the consequence there is I think National Oilwell -- our ability to sell into Russia and the amount of sales we expect to get should not be hampered. However, I am concerned about the short-term implications of the investment that the Russians need to make in order to both maintain production or in fact increase it.

One thing that has shifted in Russia though that has been positive for us is the look away from the land business into more of the offshore. In particular, one of the more exciting I think projects in the world today is the Stockman (ph) Field in the Barent Sea in far North Russia. That's going to be a -- that's a company called Sebronefta (ph) Gas that's actually looking for outside investment that is starting to come in there. I think what you'll see there could be an investment over the next 5 or 10 years of as much as $20 billion. It looks like it could be one of the most exciting natural gas fields in the world and it's one that we certainly keep a close eye on and hope to be able to participate in. In Russia, again, and the former Soviet union, I think you're seeing just a little bit of a mixed bag but I think we certainly keep a skeptical eye on Russia itself as to what it might mean for us in the near term.

Middle East, just the opposite. Obviously, the Middle East -- as I mentioned earlier, the rig counts there are at an all-time high and they're going to go higher. The Saudis are now saying that they're going to work about 70 rigs by the end of this year. Currently, they have 52 running. They are drilling deeper wells; they are drilling horizontal wells; they are drilling more complex wells, so what it's doing is it's changing the type of rig that they need. I think we will continue to have some great opportunity here. In the backlog, we do have some new rigs that are going in there, as well as some significant refurbishment that will move into Saudi Arabia.

As you look throughout the Middle East, you really have the same sort of things going on in Kuwait. In our backlog, we have new rigs going into Kuwait. When you look at the UAE, especially Abu Dhabi, there's opportunities there as well as I think some offshore rigs and that -- in Oman they continue to increase their rig count there. So what you're seeing is the Middle East really trying to increase their productive capacity but because of the fact that they are becoming a more mature oilfield and the type of wells being drilled, they have to drill more wells in order to maintain the productive capacity that they have.

The other thing that's playing in the Middle East today is there's more offshore rigs moving there into the Persian Gulf. You see that. A lot of the U.S.-based equity players are moving there. There are rigs over that way and there are also some new rigs being sold into companies that are in the Middle East to drill in the Persian Gulf.

I have split out North Africa separately this time. When I talk to the Middle East, generally I talk about them together, but I think North Africa needs to be talked about alone, mainly because of what's going on in both Algeria and Libya. The Algerians are very aggressive about bringing together new rigs. I think they are looking at increasing their oil production capacity. This year, we anticipate selling some significant new rig packages into Algeria. Libya out is probably the more exciting place of the 2. Since it was opened up last year, I think they've already had some of their bidding on the major concessions that it's going to award to Western companies, and the companies that are currently in there with drilling rigs need to both upgrade those rigs and buy new ones. Just this past week, we have sold our first new rig into Libya of a substantial size and we're very pleased about that. We think that it's going to be a marketplace that's going to continue to provide good opportunities for us. So, I think both Algeria and Libya are areas that are very positive.

China -- it's really an area today that is both a market for us and a manufacturing base for us. Those of you that have listened to us in the conference calls before, we have talked about our JV. Initially, that JV was set up to sell only in China. Today, we are actually selling and moving equipment out of China into other areas because of the advances that we've made both in quality and operations in our Chinese manufacturing facilities.

China itself was not the hottest market this year. We anticipate, next year, that will improve. What we are seeing -- a lot of the Chinese shipyards are starting to switch over into manufacturing of offshore rigs. They've been doing a lot of containerships. As that wines down, they look at offshore rigs as the next opportunity. We think there will be opportunities, over the next year or so, to sell both jackups and floaters into China to both Chinese customers and through the Chinese shipyards. So, I think that's an area that will improve for us. The Chinese economy continues to be very robust and they have the Olympics coming up in 2008. I think that will continue to add necessity for the economy to grow. I think their oil and gas needs will continue to follow suit.

The biggest place in Asia today is obviously Singapore. That's where the majority of jackups are being built. While Singapore is not the end destination, certainly it's a very hot spot for us, both on being able to provide day-to-day type things such as centrifugal pumps to the manufacturing shipyards there and also to sell our equipment into the shipyards to be on the jackups and the floaters and in this particular case, the FPSOs that we are manufacturing there. So I think that will continue well into the future, shipyards like (indiscernible), PPL (ph) and Jeurong (ph) essentially are almost full with the jackups that they are doing, and they also have jackups coming in after the ones that they'll deliver, so they are starting to build a little bit of backlog in their own regard.

I did mention earlier that the one slow arena that we see right now is Europe and the North Sea in particular. However, I have to say that there are some great opportunities there and that has to be mainly from the refurbishment arena. One of the neat things, I talked about new products. We actually have an active heap (ph) crane that sells anywhere from 5 to $8 million, and we've been able to sell numerous ones of these into the North Sea arena to replace existing cranes on existing equipment. So, I think that while I'm not sure what the rig count is going to do up there, I am sure that the refurbishment opportunities for capital equipment will continue solidly into next year.

Finally, in Latin America, what we see again in Brazil -- you have an awful lot of activity with FPSOs. I think there will also be activity on upgrading a lot of the locally-owned drilling rigs there to make them more competitive with many of the Western players. Venezuela I won't get into too much. Obviously there's a political situation there that one has to keep a close eye on but at this point in time, it continues to be a fairly vibrant market.

Finally, in North America, that's being driven predominantly right now in our capital business by our smaller rigs, our work-over rigs. We have a significant backlog of those rigs. We're selling those into different arenas. There really hasn't been that much movement. On some of the larger rigs, there's movement on components but really we aren't selling that many complete rig packages in the domestic market.

Finally, let me talk just a shade about our backlog. As I mentioned, it was 606 million at the end of the year. I also mentioned in the press release that, up to this point in time in the quarter, we have received another $200 million of mostly international orders. In the backlog today, 43 percent of it is offshore and 57 percent of it is land. As I look at the land, 67 percent of that is in the international arena and 33 percent of that is in North America. So, that's kind of a breakdown of that. Total new orders in 2004 were 961 million, as opposed to just a little over 600 -- I'm sorry, about 600 last year. So, you can see the growth in the capital business, and as Steve mentioned earlier, we anticipate a further growth in that business as we move forward.

So, that's about where I'd like to end on the operational overview. Again, we are excited about where the business is going. We believe that there's some positive things happening but the same time, we believe it's a market that isn't overheated but in fact is fairly steady and will continue to rise. So at that point, I'd like to turn it back over to you for any questions that anybody might have.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS). John Tasdemir.

John Tasdemir with Raymond James. A great quarter, again. Pete, it certainly sounds like you guys are seeing trends that we haven't seen in 20-plus years and are certainly starting to capitalize on those.

You answered most of the questions already, but let me just -- a couple of things for clarification. Did I hear you guys say that, in the Products and Technology segment, you are expecting 10 percent increase in revenue in the first quarter?

Yes, something in that area. It's going to be up, we believe, and you know, we think we're going to see continuing growth throughout the year, you know, as we try to achieve those forecasts that we set earlier.

Will you start to see -- you know, let's just say that that 10 percentage type sequential move -- can you kind of give me a sense of noncapital versus capital or break it down that far?

Well, you know, the capital will probably move up. I'm sorry, the noncapital and our distribution business should pretty much move up on whatever assumptions you would use for anyone else in this industry. I mean, it's going to be driven by the capital spend of the oil companies, you know, if you take it back to as far as you can. You know, but that -- most people think that's going to be up pretty nice in 2005. Our customers certainly are making more cash on their day rates; they have the ability to spend more not only on increases that way but on the capital side. That's where we think the big difference, though, will be in 2005. (multiple speakers) -- being very specific about it. I mean, there's no other way of doing that.

Well, you guys went from -- from third quarter to fourth quarter, you showed a 15 percent increase in your noncapital, which far exceeded the growth in drilling activity, so I would just maybe think that maybe the capital goods catches up a little bit more and drives more of the growth in the first quarter but --.

Again, I don't know the we're going to have -- I don't know that I can analyze the future that closely.

That's fine. Let me also ask you, you know, you've had kind of these incremental margin products and as you start to get -- as the business gets better and you're starting to book more and more revenues, does that internal margin target start to move up?

You know, it probably does in some respects, or at least preferredly from the point where we are but overall, you're starting to add in more and more capital as a percentage of total revenues, as compared to the noncapital. We do make lower margins on capital than we make on the noncapital sides of the business. So, quite honestly, you know, we've talked about that a little bit on past calls, even considering internally as to whether we need to be trying to change that bar. I don't think we know the right answer to that, and I think whatever answer we would know now would change once we do the Varco transaction. Plus, we just really haven't spent a lot of time trying to reset that. You know, we've -- in part, we've probably overachieved against the Street in revenues and underachieved in margins intentionally to, in a sense, to try to -- if we had really said what our revenues were going to be, you guys might have gotten even more carried away with expectations for the future.

Right, I got you. That's all I had for now. Thanks, guys.

Scott Gill.

Scott Gill with Simmons & Company. Good morning. Steve, thank you so much for clarifying those forward-looking statements when you made them! (LAUGHTER). Pete, you gave us a good overview of the markets -- just a couple of questions. Can you give us an update on the 2 well reconstruction program you have ongoing in Kazakhstan? How far are you along in that process and kind of give us a general update on that project?

Sure. In general, Scott, we are on target on it. The rigs themselves will ship towards the end of the summer. I think one is in August; one is in September. Those will be -- they are currently being -- parts of them are being manufactured all over the world. Ultimately, they will come together here in Houston at our Galena Park facility, which is out in the Houston ship channel. At that point in time, as we move into the summer, we will have those rigged up out there, commissioned and ready to go. But the project is going according to plan and everything is coming together the way it should.

Is this a -- Steve, when you account for the revenue and operating income here, is this a percent of completion-type of calculation?

Yes it is, Scott.

Okay. Can you give us an indication when we're going to see most of this revenue in operating income flow through?

You know, it's really being spread over the fourth quarter, the first and second. It's probably not as lumpy as what you might anticipate. There's lots of things that had been going on. You know, we really did hit the ground running on that project because we pretty much wasted all of the time available negotiating the whole thing, and then now it's really time to deliver. So we got off to a fast start at it's probably going to be fairly even throughout the period.

Okay. My last question -- Pete, you made a comment about the shipyards in Singapore being full and that they are building a backlog so to speak of these new jackup rigs. How do you kind of see the overall jackup market -- that the shipyards are capacity constrained and so kind of we can't build any more new jackups and kind of what the run-rate we're currently seeing? Is that the current assessment?

No, it's an assessment that I'm really making only given a couple yards in Singapore right now. At the end of the day, they are liable to say they can open up some more bays and do some. That's just kind of a personal observation. I think what you're going to see, Scott, is more of a movement on new jackups big build going into Chinese shipyards and then maybe even Korea. Right now, most of those shipyards have been filled with building cargo ships associated with really trying to move most of the product in and out of China around the world. I think a lot of that is winding down.

So, I don't believe that you'll see -- I don't think you'll see shipyard capacity becoming a detriment to more building of jackups. It's just that today, in Singapore, a few of the yards appear to be taking orders that are going to come online after they finish current jackups.

Based upon what you're seeing from your customers for the rig equipment sales for jackups, would you expect us to see more new builds announced this year than last year?

Yes, I think it could be more -- certainly even and maybe a few more.

Okay. Just lastly, on the new builds, I don't remember -- Finvest, a Norwegian company, I think they just exercised an option to build 2 more jackups. Did you provide equipment or are you providing equipment for the 3 that are currently under construction?

One of the things we never really do too much, Scott, is talk about the customers indirectly. We pretty much let them tell you what's on the rigs. So that's really -- not to beg off any question but we really kind of defer any issues on that back to the customer and they will tell you what's there.

Michael Lamotte.

JP Morgan. Let me offer my congratulations on a great quarter as well. Steve, we're going to miss you!

The first question, just trying to clean up the model a little bit, Steve, you mentioned obviously 212 million in sales out of backlog, a $31 million increase in downhole tools and other. Is the rest -- can we assume sort of the pass-through component there in P&T (ph)? I think that number was about 110 in the third quarter.

If my numbers didn't add up to the full amount, I just made a mistake in the numbers. It was 13 million out of a 48 million increase I think in P&T (ph), so the difference of 35 million, it was all pretty much across the board. (multiple speakers) -- and pass-throughs (inaudible).

That's what I was getting, was that 110 number in the third quarter and pass-through revenues was about the same then, maybe a little higher.

I'm not sure the 110 is the right number for pass-through revenues. I think you are actually picking up some other items in that, but I --.

Okay, well, I will follow-up with you on that off-line. Pete, can you address quickly what's going on in terms of both raw materials and pricing?

Well, right now, on the raw materials, we've -- obviously we suffered a little bit from some of the rise that occurred as you go into -- about a year ago. Right now, there seems to be a little bit of a softening of things that are going on, and we actually have seen a leveling off on the price of steel. However, we're being told that that may just be a temporary phenomenon and that the price is going to start to move up again. What we do on that, Michael, is ensure today that we have surcharges, time limits on a lot of our bids, or when we get something and we start to buy all of the steel immediately and try to hedge as much as possible. It's a lesson we've learned, no question about it. So I would think that we probably won't see an almost out of control escalation that you saw a year ago in steel prices, so we think that's going to mute.

Pricing in general -- again, it's a very competitive business right now, and on the noncapital side, we've tried to do some things but most of the pop that we will gain on our capital has to do with our ability to become much more efficient in the manufacturing arena.

On the pricing side, particularly with some of the tool rentals?

We're doing some things there trying to increase prices. We've had some price increases and we're looking at doing other things. Again, on the day-to-day business, we certainly are passing through whatever cost we might have and we are trying to be a little bit more aggressive on the pricing front.

Okay and then last question, just in terms of some of the potential competitive pressures that may be out there, obviously there is sort of the new venture between Rowan and Cooper Cameron. Can you talk about what the competitive landscape looks like as we enter into this robust environment, particularly the international competitors that we may not see too visibly here stateside?

Yes, that's a good question. This is a very, very competitive environment, and I think for a couple of reasons. Number one, there really aren't significant barriers to entry. You know, if somebody wants to decide they're going to build top drives, if they want to build draw works, if they want to build mud pumps, they can do that. We've seen competitors come into the business recently, and I think you'll continue to see that. I think you've talked about consortium here in the United States that has come together to be competitive. You know, that is there. I mean, this is in a very competitive marketplace.

When you look at the international players, you've got Chinese players, some very significant wants. You look at the European consortiums, you look at some of the Norwegian companies. You have Russian companies coming online today. So, I think this is truly a global market and it's one in which we have to try to compete globally. That's one of the reasons that we've done a lot of things that we've done on manufacturing to try to maintain our flexibility to be able to compete. So it's going to be a very, very competitive market but we feel very good about our ability to compete effectively in that market.

Okay, great.

Jeff Tillery.

Pickering Energy. Just on the noncapital side of the business, Steve, you mentioned the spares were up a little more than other component of the business. Can you give us a rough feel for how improvement in spares versus improvement in mission or downhole?

Jeff, we don't really break out those numbers very specifically, but you know, the spares business was probably up half again over the increases in general of those types of things. I mean, it was a nice increase. Part of that -- it really reflects a bit more of the increased interest in refurbishments and fixing up and, you know, getting out of the weeds those last pieces of equipment in some of our customers' cases where they are really trying to get an answer more quickly than they can buy buying a piece of capital equipment, even though it may be a patch only for a short period of time.

Then a lot of it is out of the service side. You know, there's lots of -- you know, these rigs are now -- with the number of rigs running, you know they are running hard now. That wasn't the case 5 years ago, you know, or in much of the last 20 years. You know, you've really had -- you had an O (ph) fleet but it had low miles on it. Well, it's getting some pretty hard miles right now!

That's helpful. My last question is are you guys seeing anything in the way of a bottleneck on the supplier side? Additionally, what do you see internally as -- add any constraint to your growth at this point?

That's a good question. We actually meet fairly regularly, taking -- well, we've got the supplier side, and I think the issues that you always have to be aware of are bearings, engines, things like that. But for the most part, we are trying to proact in most of those things. We don't see anything out there right now that's going to inhibit us at this point. We also, again, try to buy worldwide as we take a look at these things, so usually we can find some pockets, but it is something we keep our eye on.

I think the internal constraints generally will come under engineering. That's the area in which we might have the most difficulty. You know, as far as group line and ability to get things out, that's generally not a problem, but in many cases, the proper design, getting the drafting and engineering done is a problem. But again, we try to address these issues on a fairly regular basis, in staff meetings, to ensure that we've got the people and the product in place to be able to satisfy our customers' needs.

All right. Thanks, guys.

Robin Shoemaker.

Bear Stearns. Pete, I wanted to ask you a little further about the North American market, which you described as kind of quiet except for the kind of well-servicing work over rigs. Have you had any sales yet or customers for the Ideal rig. How -- if we continue at this high level of land drilling in the U.S., how far do you think we are from a period of replacement or sales of land rigs?

Robin, we have sold some of the Ideal rigs. We haven't sold them in a significant quantity yet, but we have sold a couple to different customers.

I think the second part of your question is one that's pretty interesting. Again, I think that we're probably closer than we believe. However, I think there's a lot of discipline in this business today. As you've listened to conference calls from a lot of the major land drillers here over the -- or at the end of this year, you've seen that these guys are starting to do better; they are getting better dayrates; they are probably approaching a replacement cost economics. But they are fairly disciplined about bringing rigs into the system. I think a lot of it's going to be taking a look at the rigs that they currently have. You know, do they need to replace rigs, bring these in, versus adding to the rig fleet in order to get some sort of growth, depending on what the demand is from the operating companies? So I think it's a very delicate balance that they are playing but I would believe that we will start to see more rigs sold as we progress into 2005.

Okay, good. Let me just -- and I wanted to give Steve a chance to take a parting shot on the issue of stock options expensing. If you could tell us when you'll adopt that and what the impact will be and how you will handle the issue of stock option expensing.

That sounds like a real set-up. (LAUGHTER).

Robin, I'm thinking he paid you to ask that question!

Robin, it's our intent to record and expense for giving away something that actually isn't the Company's at the latest moment possible, meaning July 1. The expense -- you know, we haven't spent a lot of time on that to this point in time. In the past quarters, that has added expense of 2 to 3 cents a quarter. There's no reason to think that that would not be still the case in the second half of 2005 as we implement this and going forward.

You know, the values and the way people have made those calculations in the past for good-note disclosure have all used Black-Scholes type models. That tends to give you a fairly high-value versus what most people would think is a true value. I believe that most industries will look for alternatives to Black-Scholes or refinements to that in the future as we actually have to put that through our statements, but in our case, it's a relatively small number anyway, so whether we are finding much from 2 or 3 cents just doesn't -- is probably not a very productive use of time, either.

So when you adopt it, it would be applied retroactively to the first and second quarter?

It will be applied to the minimum amount necessary! (LAUGHTER).

Jim Crandell.

Pete, great job. Steve, I echo Mike's comments. You will be missed!

Pete, how many semisubmersibles are going to be ordered this year? If you're not willing to give an exact number, maybe you can expand on your comments of last call about how you see potential builders thinking about that, both on the new build and on the upgrade side?

Well, Jim, I think you will -- you know, it's tough to give an exact number. There will be -- and I will say this -- there will be new build semis done this year, or ordered this year. I think it could be anywhere from 1 to 3. Now, as Steve would say, that is a forward-looking statement! But I think what you're seeing is, I think you'll see more people take a look at refurbishment; I think that there have been some contractors that have announced here recently in this past quarter the fact that they are refurbishing rigs, moving it up from gen 3 to gen 4 or even higher. I think that will continue to be a part of the marketplace. I think, today, when you talk about drillers, you know, there is going to be definitely -- as you take a look out into the deepwater arena, we know that that is going to be pretty well booked as you move into 2006 and 2007. You can see some of the major deepwater players telling you that. Also, there seems to be a demand for not the super high-priced deepwater rig but maybe something that's going to work in some of the shallower waters that are too deep for the big jackups but not something where you want to take the deepwater rig and put it into. You know, kind of the intermediate-type type depths may be anywhere from a 1500 to a 3 or 4000 foot type water. So, I think you're going to continue to see people be interested in doing that and you're going to continue to see some of the international players, not necessarily the U.S.-based equity players who are going to invest in rigs like that.

Pete, how much put intermediate-depth new generation (indiscernible) that kind of semisubmersible cost?

I think depending -- you know, there's so many permutations you can take on these floaters like that, Jim, but I believe you're talking something maybe 300, 350 million versus maybe a deepwater rig that might be 4 to 450. So you have a fairly significant cost savings there.

Okay. Pete, (indiscernible) has roughly 20 jackups so far that are under construction this cycle. I know, I understand you may not have the exact number but approximately how many of those have placed maybe equipment orders that would already be in your backlog or somebody else's backlog, do you think, if you had to estimate?

Oh, I would say probably 10.

So less than -- so about half. So most of the rig orders that have taken place over the last 3 months have not awarded rig equipment packages yet?

Yes. I don't know if I would say most. I'm just trying to do the numbers pretty quick in my mind, but not all of them have, that's for sure.

Okay. Pete, is it reasonable to say that the financial people who are ordering new rigs today would seem to make up the majority that, given that they have a stated desire to sell the rigs before they finish construction, that they are very likely to put premium, well-known equipment on their rig versus maybe a company that hasn't done much business in the past, because it would be much easier to sell if you have a National Oilwell or Varco equipment on there?

Well, I think, for sure, if you are building a rig today, you're going to want to try to build something that's as state-of-the-art as possible. You know, when you look at the demand for jackup rigs out there today, it's kind of the Super 116-Cs, it's the ones that have, you know, 3 pumps, you know, bigger masses that can drill deeper wells. So I think that, as you look at these players, they're certainly trying to build rigs that are going to be very good rigs and rigs that I think are obviously very marketable.

Okay. Last question, Steve -- has your sense of what you're likely to hear from the Justice Department changed at all in recent weeks?

No, Jim, I don't think that our expectations have really changed at all. I mean, it still is an ongoing process but I think our confidence level is similar to what it would have been the last time we put out a press release. You know, it really hadn't changed or when it changes, we will certainly put something out.

Okay, that's all I had. Thank you very much.

Mr. Miller, please continue with any closing statements.

Thanks. I'm not sure who is left onto the call, but I would like to say that if this is in fact Steve's last call, I want to thank him for all the things he's done to help my career and also to help National Oilwell, and he will certainly be missed. So thank you all. I look forward to talking to you again at the end of next quarter. Thank you.

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