國民油井華高 (NOV) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the National Oilwell Varco first quarter earnings conference call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mr. Pete Miller, President and Chief Executive Officer of National Oilwell Varco. Please go ahead, sir.

Thanks. Again this is is Pete Miller, the CEO and President of National Oilwell Varco, and I would like to welcome you to our inaugural earnings conference call. We're very pleased to be able to make this as the merged Company today. With me on this call today is Clay Williams, our Chief Financial Officer.

Earlier today, we announced earnings of $35.6 million, or $0.33 a share on revenues of $815 million. Included in the expenses were about $10.9 million of pre-tax charges related to merger expenses. If you exclude these charges, the net income was $44.3 million or $0.42 per share. This compares to a year-ago for National Oilwell only in the first quarter of $11 million or $0.13 a share on revenues of $496 million.

In just a moment, I am going to turn it over to Clay and he is going to take you through the methodology used on GAAP to get to these numbers and explain the segment reporting and other issues, and then Clay will give it back to me a little bit later and I will take you some of the operational and geographical things that we're seeing in the business. But in addition to the announced earnings, we also announced a backlog in our capital equipment in our rig technology group of $852 million. On a pro forma basis, we shipped $305 million from backlog and we took in a very healthy $374 million worth of orders. I will give you a little bit more color on that later, as will Clay.

But we're glad you're with us and at this point, I would like to turn it over to Clay to give you some of the financials.

Great. Thank you, Pete.

Before we begin this discussion of National Oilwell Varco's financial results for the first quarter ended March 31, I would like to point out that some of the statements we make during this call may contain projections and estimates, including comments about our outlook for the Company's business and comments regarding the expected synergies resulting from the merger between National Oilwell and Varco, which closed on March 11. These are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are based on limited information as of today, which is subject to change. These forward-looking statements are further subject to risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest form 10(K) and S4 National Oilwell has on file with the Securities and Exchange Commission for a more detailed discussion of some of the risk factors affecting our business.

Additionally, we may at times refer to results excluding certain discontinued operations, merger transaction litigation or asset impairment charges or gains and certain estimated pro forma results as if National Oilwell Varco had been merged for the full quarter. Further information regarding these may be found within our press release, on our website at www.natoil.com or in our 8(K) filings with the SEC.

National Oilwell Varco generated earnings of $.33 per fully diluted share in its first quarter which includes $10.9 million of pre-tax charges related to the Varco merger and integration activities. Excluding these charges, the Company posted fully diluted earnings of $44.3 million or $.42 per fully diluted share. Revenues were $814.9 million and operating profit, excluding the merger and restructuring charges was there $76.8 million, or 9.4% of revenue.

The merger closed on March 11, 2005. As a result, the period reported for GAAP purposes includes 90 days of results from National Oilwell but only 20 days of results from Varco. In order to provide more meaningful comparisons for your consideration, many of our comments this morning will refer to our estimated pro forma full quarter results for the combined companies, including the full 90 days of results of operations from the Varco organization. Pro forma results on this basis have been included in our press release to facilitate your analysis and to provide greater transparency into our operations. We plan to release additional information on this basis for the full year 2004, later today in an 8(K) filing.

Revenue on this pro forma basis for the first quarter totaled $1 billion $122.8 million, and operating profit, excluding transaction and restructuring charges totalled $110.5 million, or 9.8% of revenue.

Our first quarter earnings press release presents the Company's new segment reporting framework, which I would like to take a few minutes to describe to you in more detail. Going forward, we will present results of operations across these three segments -- rig technology, petroleum services and supplies, and distribution services. A lot of careful thought and analysis has gone into the design of these segments, which track how we think about and how we manage our portfolio of businesses internally. Above all, we have sought to group businesses in a manner which we believe will provide the financial community the greatest insight into our historical results, as well as assess our future prospects for revenue and profitability. Our aim is to enable you to make more informed judgments about our Company as a whole.

Let me describe these three segments to you in detail. National Oilwell Varco's rig technology segment includes most of the capital equipment we sell to keep the oil field working around the world. Our sales of drilling rigs, jackup packages, coil tubing units, cranes, mooring systems, wire line units and workover rigs are all included in this segment. Our Company has assembled leading market positions and enjoyed large install bases of equipment in most of these product categories. We are proud to have equipment at work on most of the drilling rigs around the world today. Revenues for this segment during the first quarter on a pro forma basis, including a full 90 days contribution from Varco were $543.3 million, or about 46% of our total mix of revenues, and 46% of our total contribution margin. Operating profit was $61.3 million or 11.3% of revenues. The group posted 3% sequential growth and 58% year-over-year growth in revenue. The revenue -- the year-over-year flow-through or operating leverage was a solid 22%. Sequentially, the business was impacted by higher than expected costs on a couple of large projects, partly offset by solid results from the sale of the three cap equipment units and higher margins for coil tubing and wire line equipment. Overall, this led to a $4.4 million sequential decline in operating profit in spite of the $16.9 million revenue increase. Most of our expected cost savings from the merger are expected to be achieved in this group. Looking out to the remainder of the second quarter, we expect margins to move back up above 12% on essentially flat revenues as cost savings begin to accrue to this group. Over the long run and excluding swings and mix and other factors, we expect flow-throughs for this group to be in the range of about 22%.

Our next new segment, petroleum services and supplies, provides a variety of critical services and consumables to the whole field worldwide. It brings together several widely respected brand names like Mission, Tubascope, Grant, Brandt, Martin Decker, Toddco, all long known for commitment to the highest levels of quality, technology and service. The common theme through these businesses is their dependence on oil field spending and activity. We believe that as a group they will generally track the level of oil field activity with the rig count serving as a good proxy for activity. This group is the world's largest provider of fluid ends and pump liners used in drilling operations and the largest independent provider of drilling motors. The group is the now the largest provider of oil field pipe and sucker rod inspection and reclamation and OCTG coating services. The group is also the largest provider of rig instrumentation services and equipment and the largest provider of fiberglass and composite pipe to the oil field. We're a leading provider of solid control technology and services, including shelf shaker consumables and a leading provider of coil tubing pipe used to support oil field operations and a leading provider of pipeline inspection services. The petroleum services and supplies group posted revenues of $402 million for the pro forma first quarter, again including 90 days of Varco operations. Operating profit was $63.6 million, or 15.8% of sales. This represents revenue growth of about 1% sequentially, and 26% compared to the first quarter of 2004. This group represents 34% of National Oilwell Varco's revenue in the pro forma first quarter and 48% of its contribution margin.

Group operating profit fell $2.8 million sequentially in the pro forma first quarter, due to a sharp seasonal decline in pipeline inspection services, which usually drops in the first quarter as pipeline operators curtail inspection activities to accommodate high winter through puts through their pipeline systems. And due to lower volumes and margins from the Company's fiberglass pipelines, which was seen -- which has seen some of its raw material costs rise sharply since last year. These declines were partly offset by improved results out of most of the other businesses due to higher oil field activity levels, at good incremental professional ability. In particular, down hole tools, inspection, coating and solids control all posted better results sequentially and year over year. In fact, excluding the pipeline business, the remainder of the group showed growth of $17 million in revenue, or 4.3% sequential improvement, and $7.2 million higher operating profit, representing 42% flow through as compared to the fourth quarter of 2004.

Compared to the first quarter of 2004, the group results saw operating profit rise $17.7 million, representing 21% flow through on the $82.5 million revenue increase year-over-year. We expect the second quarter results for the group to decline slightly in revenue due to the breakup in Canada, but that operating margins will improve up above 16% due to the expected recovery in the pipeline group and due to price increases across many of the other products and serves offered by the group. Over the long run, and excluding swings and mix and other factors, we expect flow throughs in this group to be in the range of 30%.

National Oilwell Varco's third segment, distribution services, is familiar to those of you who have followed National Oilwell in the past. This segment provides maintenance, repair and operating supplies to drilling and production operations arn the world. The group employs advanced information technologies to provide complete procurement, inventory management and logistics services to our customers around the globe. It operates through nearly 150 stocking points across North America, and in several international locations. Revenues were $235.9 million, and operating profit was $7.6 million or 3.2% of sales. The distribution services group contributed 20% of NOV's revenues in the pro forma first quarter and 6% of its contribution margin. First quarter results for the group reflect a decline in international sales more than offset by gains in Canada and the U.S. Margins declined in the first quarter as compared to the fourth quarter, due to the changes in mix, higher personnel expenses and the non-recurrence of Q4 supplier rebates and inventory adjustments. Year over year, the group posted 12% flow through on an 8% increase or $17.8 million improvement in sales. Margins rose from 2.5% in the year earlier period to 3.2% in the first quarter. Second quarter margins are expected to improve as international sales pick back up, partly offset by lower sales in Canada, due to the break-up. Over the long run, and excluding swings in mix and other factors, we expect flow throughs in this group to be approximately 10%. And for the margins to rise above 4% near year end.

The Company recognized $10.9 million in transaction and restructuring costs during the first quarter. These costs consist primarily of severance costs and amortization of unvested options issued as part of the consideration for Varco. As we have stated on prior calls, the integration is expected to result in synergies of $40 to $50 million pre-tax on an annualized run rate basis. We expect this flow, to flow into the financial results of the Company between now and the first quarter of 2006. The synergies are expected to result from, among other things, the reduction of redundant overheads between the companies, lower insurance, interest, I.T., and corporate governance costs, and a combination of manufacturing sales and engineering functions and product lines where the two organizations overlap. Additionally, we expect to achieve benefits from bringing the manufacturer of components inhouse that were previously purchased from third party vendors. We continue to develop our detailed plans and will update you on our progress on future calls.

Next, I would like to comment on purchase accounting. As I stated earlier, the GAAP accounting for the merger began upon the closing of the transaction March 11. In order to provide additional clarity, we plan to release the full-year 2004 results on a same pro forma basis I referred to earlier. The total count of 105.3 million basic shares and 106.6 million diluted shares in our first quarter results reflect only 20 days of the shares issued to Varco shareholders in consideration for the merger. We expect the dilutive share count for the second quarter, which will reflect a full quarter in the count to be approximately 173 million shares. As a result of the transaction, the assets and liabilities of Varco acquired by National Oilwell will be revalued to step them up to their fair market value, as well as their current estimated lives. This process is underway and our reported consolidated balance sheet as of March 31, 2005, reflects our preliminary estimate of the effect of that revaluation. Varco fixed assets have have been increased by approximately $200 million and intangibles have increased by about $400 million and goodwill, the excess purchase price over the value of the assets is approximately $1.5 billion. The purchase price allocation and asset and liability revaluation process will cause additional adjustments to our balance sheet over the next four quarters. Additionally, restructuring costs associated with the Varco operations during the first year after closing will be considered additional purchase price, and will flow into goodwill. We expect to incur higher depreciation and amortization charges and future periods during -- due to the asset step-up and have included our estimate of this impact in the pro forma numbers to improve comparability. The pro forma statements have not been adjusted to include any expected synergies.

Next, let me move to backlog. As Pete mentioned, NOV posted another strong order quarter. Combined backlog for National Oilwell Varco rose 9% sequentially from $782.9 million at year end to $851.6 million at March 31, 2005. Shipments out of backlog of $305 million were more than offset by new order of $373.7 million, reflective of the growing demand for drilling work over and well stimulation machinery that we provide.

I would like to make a couple of points of clarification regarding backlog. First, all this reported backlog resides entirely within our new rig technology segment. Although we do have some capital equipment sales that flow through our petroleum services and supplies group from time to time, this is relatively minor compared to the total revenue of the group, and as such, we do not report it in our backlog.

Second, the accounting for Varco's backlog has changed. Prior to the merger, Varco reported backlog levels for both its drilling equipment and its coil tubing and wire line products segments; the backlog numbers reported by Varco included all open sales orders under way throughout its system. So it effectively captured items down to just a few dollars in value. In contrast, National Oilwell's backlog has historically measured orders in excess of certain dollar threshold in most instances, $250,000 or greater. An exception to this was wire line units in excess of $75,000. The thinking here was to focus on large units which reflected true capital expenditure decisions by our customers. The new method of reporting backlog adopts the National Oilwell process, capturing orders in excess of the threshold amounts. The effective change in method reduced Varco's backlogs by 26% and 28% at year end and at March 31, respectively. Under the old Varco method of accounting, backlogs for just the Varco businesses increased 14% sequentially and 62% year-over-year, again reflecting the strong level of demand in our marketplace.

Some have added the old reported Varco backlog numbers to the National Oilwell backlog oil numbers amounts. Varco reported total backlog of $239 million at December 31, 2004 and National Oilwell reported $605 million, for a total of $844 million, at year end. For comparison, the equivalent backlog amount at March 31, 2005, was $928 million, which represents 10% growth on this basis. However, let me caution you that the difference in measuring the two different backlogs makes this comparison a bit like comparing apples and oranges. We expect to utilize the method I described earlier, employing the threshold cut offs going forward.

Turning to the balance sheet, cash totaled $295.1 million at March 31, 2005. Debt totaled a little over $1 billion and net debt or debt less cash totaled $705 million. This represents a net debt to total capitalization of 15.2%. The Company has $162 million in current debt, mostly consisting of 6.875% notes due July 1, 2005. We expect to repay these notes out of cash.

Additionally, we are in the process of putting in place a combined credit facility to further accommodate the liquidity of each of our companies. Working capital less debt and cash was $1.4 billion at March 31, or about 31% of annualized revenue in line with historical averages for both companies.

Finally, capital expenditures in the quarter totaled $10 million.

At this point, let me turn it back to Pete for his comments.

Thanks, Clay.

What I want to do right now is just talk about three or four different issues, kind of take you on a little bit of a tour of the world and show you what we believe is going on and then open it up for questions.

The first thing I would like to do is talk about the merger itself. We completed the merger on the March 11 and we have made some tremendous strides since that point in time. We have our management teams in place and all of our operating groups. I think we've got some great people out there. We've made some good decisions and it has been a lot of decisions made on just who the best people were, and I'm very excited about that. Any of you that might have come to OTC hopefully saw that we have one booth and it was one booth for National Oilwell Varco and in that booth we tried to integrate as many different things as we could. In particular, we had a top drive there that had not only the Varco body, but a National Oilwell motor, had a Varco PLC, and National control systems in it. So it is really kind of a neat deal that was done by our engineering team in only six weeks and we think that is the sort of thing you're going to see in the future.

Our cost savings, as Clay pointed out, will manifest themselves as the year goes on, but we are making some good strides there. I would like to thank all the employees in this Company that might be listening in, because I think we've got some great employees, the morale has been very, very solid, and I think we've got a great future. So I'm excited about the prospect of the merger, and I might also say one thing. I think a real indicator of the way this organization is working together are the amount of orders that we're taking in in this quarter. When I talk about $374 million of capital coming in, I think that is very significant, and that's groups that got together very quickly and kept our eye on the ball. So again, on the merger aspect of things, we're very pleased with our progress. We stand behind the numbers that we talked about earlier. And we look forward to doing a lot of great things in the future.

Now, I would like to talk just a little bit about the operations that we have in the petroleum services. You know, essentially it is kind of a three prong deal right now. I think you've got the Canada break up, you know, the seasonality that Clay talked about just a moment ago, already that there has been a 450 rig decline in Canada and obviously that hurts a lot of the day to day businesses that are up there. However, in the lower 48, you're seeing some good things. I think you're see the Rocky Mountains continue to show some expansion, and in all of our service lines, we have very significant operations in those arenas. Our hard banding and internal coating demand is solid. Our down hole tools are really working a lot in those areas. And our distribution and mission business goes very, very well up in there as well as our Brandt businesses. As you notice, I have to try to get everybody in there, so nobody gets their feelings hurt on that.

Anyway, so I think in the Rocky Mountains in particular, strong -- but the other thing that is looking very good on our day to day operations is the Gulf Coast. And by that, I don't necessarily mean the Gulf of Mexico, but really the Gulf Coast. You've got a lot of deeper drilling going on on land down there and I think we're seeing some opportunities down there that as we go further into the second quarter and into the third and fourth quarter, I think you're going to see some things really improve there.

So again, I think on the operational basis, for the petroleum services, we feel very good. Again, you got the seasonality aspect and you can't discount that loss of rigs in Canada. However, we're hoping that in the international arena, and the lower 48, that might offset some of that, but again, as we move into the third and fourth quarter, we certainly expect Canada to come on at a minimum as strong as it has been and probably even stronger as they have some capacity increases up there. So those -- those businesses are solid. I think throughout 2005, they look to be very good.

Now, I would like to swing into the capital. And I want to talk about that predominantly on a geographic basis. First off, kind of the center of the universe for capital right now is Singapore. That's where all the jackups are being made. Essentially, you have FELS down there, the Berge Gerdt Larsen group, have you PPL and have you Jurong. Those are the predominant manufacturers of jackups. All of you know there have been a lot of jackups ordered and there have been a lot of jackups announced. I will say this, we don't get into too much in the backlog of trying to break it up, certainly not by customer, but a lot of time, when you hear the fact that a jackup has been ordered, don't necessarily assume that the equipment has been ordered. In other cases, this may be a jackup that has not been announced where the equipment has been ordered. So many times it is very difficult to track -- to call us and say well there was just an order for a jackup -- or an announcement did you get the order for that? And generally speaking, we let our customers talk about that. But it is very, very active. All these jackups, I believe, are going to be premium jackups and I also believe the industry needs them. I know there is a lot of uncertainty on capacity, but I think when you look at the numbers, and you look at our deliverability here, I believe that these are going to be rigs that are going to be absorb absorbed into the industry very, very well. But again, Singapore, extremely active in that regard. We stay very, very in tune with the folks; in some cases we sell directly to the shipyard, and in other cases, we're selling to the actual owner of the jackup. But it is one where I think you will continue to see some strong action in Singapore well into the future.

In the rest of the world, obviously the hot spot is the Middle East and North Africa. I think without question, that's going to be where you're going to see a lot of land rigs go into and also some significant offshore abilities here. The Saudis now are talking about going above 100 on a rig count, both on and offshore combined by the third quarter of '06. Obviously, this is going to take some different type of rigs. Certainly, it is going to take new rigs. I think as the Saudis look at their drilling, and I've said this many times, for those of you who have heard me before, they really have to drill different types of wells today. Instead of just drilling a vertical well and being able to get great production out of it, today you're drilling multilaterals, you might have a 12,000 foot true vertical, but you're your measured depth could be as much as 17 or 18,000 feet in order to get the productive capacity out of those wells. The good thing for National Oilwell Varco is, they need different types of equipment. So we're able to move in some really highly technological, new, really, really cool units that are able to do the work that they want done. I think you will continue to see the Saudis push that. I think they have to drill more in order to, number one, maintain their capacity, and then number two, hopefully increase it for themselves.

Other areas of the Middle East stay very active; Kuwait, Oman, and kind of an interesting development as you're seeing throughout the Middle East is that in some cases and these countries are actually using drilling contractors from other countries. In particular, in Oman, they're actually using a drilling contractor out of Algeria and in some cases in the Middle East you're seeing a Chinese drilling contractor, Great Wall, that is starting to show up. The good news for us is because of our worldwide presence we are able to sell to these companies, and they want to have the western equipment that can work as well as it possibly can. So that's kind of a situation that really plays quite well into our hands.

I mentioned Algeria. Included in the backlog are three rigs to go into Algeria. We will deliver those later this year. Algeria continues to be very aggressive. The two major players there that are government-owned are ENT [inaudible]. We have a great relationship with them. And I think that we will continue to see good activity in the North Africa arena.

And the other place I want to talk about there that I think is really exciting is Libya. Libya has come on very strong. They've been very aggressive in getting the U.S. based oil companies in there to take a look at their concessions. We have already sold some equipment in there, and I'm actually going to travel to Libya at the end of May, hopefully to sign a contract for some new rig deals at that point in time. But really want to see what is going on on the ground there and I think Libya is one that over the foreseeable future really has an opportunity to be a great place.

So all throughout the Middle East, extremely active. I'm talking on the capital business. But really for our petroleum services group, too. It is very positive. I mean when you look at the rentals of brand equipment and everything else, it is extremely important. So I think the Middle East is going to be solid for quite some time. I believe that they need new equipment, and they need the technology and I'm very excited about the prospects there.

Let me kind of switch back over to China for a moment. China is going to be a couple of things for us. Obviously, it is a manufacturing base. You know, we've been able to do some things. We've expanded our operations there. We have offices now in Shanghai and manufacturing in Shanghai, as well as Lanjou. We have also some petroleum services operations there, and are just completing some joint ventures that are going to allow us to do even more in that regard. So I think China is going to be a great place for us on the manufacturing. We're starting to ship some of the land rigs that we make there out into other parts of the world.

But more than that, it is also a very good customer for us. You're starting to see an awful lot of the Chinese companies, Coso, the Chinese Offshore Limited, CMPC that are starting to look for things to do in other arenas. They want to go to Venezuela. They want to do things in Borneo. And they're coming out of China and again, with that comes the demand for a very good product, western type product that has the best technology on it and that plays very well for us. So we're able to do things there both on a manufacturing basis and sell a lot of things into China, and I think you will see a pretty good push by their major companies to try to do things in other parts of the world. And again, we're prepared to be able to help them there.

Russia, it is an interesting political place right now. Obviously, those of you on the call are probably pretty up to speed with some of the politics associated with that. Certainly, what happened in UCOS doesn't help anybody. The big issue there today though, I think where you're going to see a lot of investment is the Stockman field in the Bering Sea. That could be as much as a $20 billion investment. That is supposed to be one of the best natural gas fields any place in the world and I think you're also seeing western companies such as Statoil, OGIP and others that are looking to invest with Gazprom in doing that. So I think that is going to be a tremendous opportunity. We continue to have good opportunities in Russia with our coil tubing units, with our drilling units, and also there's some jackups being built built, very small type jackups that are in different areas around there. So I think Russia will continue to be a good market for us. It is -- you know, in the past, it's been a $75 to $100 million market. I think that will probably remain. However, you know, what I would love to be able to do one of these things is look into some manufacturing capability around there, but I think right now, the opportunities really don't present themselves quite as well as some other parts of the world. But Russia, I think long term, certainly is a place that is going to be very, very positive. I think their need for western style equipment is going to be -- going to be there so I think that is something that is exciting for us, also.

The North Sea, it is more of a repair, refurbishment and upgrade business. One of the neat things for us is we've just sold a series of hex pumps into the North Sea. Norsk Hydro is going to put the hex pumps out on one of their platforms and we also have another contractor up there that is refurbing rigs and putting hex pumps on it. I will talk about hex pumps in a little bit more in a moment when I get to the technology, but we're starting to see some exciting things on it and I think as we get more and more into the field, I think people are seeing the advantages that these pumps give them.

Those are kind of the major plays in the world. Right now, I think west Africa continues to be an interesting place. I think a lot of mobile rigs are moving there. I think there will be opportunities in west Africa for some additional production platforms, just not sure when a lot of that will come to fruition. However, for our petroleum services groups, really provides a lot of opportunity on pipe inspection and other things there.

Venezuela, I think most of you kind of know what is going on there. But again, it has been a reasonable place to do business. It is just kind of cash and carry at this point. But I think the politics there are going to be very interesting. I think they're going to be very interesting on a macro sense, if they can't keep up the PDVSA productive capability, you could have some very productive issues associated with that.

For the most part, we think just about every place in the world is at a minimum okay and some places fantastic. So we're very excited about those prospects and I think you will continue to see a lot of capital equipment orders come out of there.

Let me touch on the backlog for just a moment. As we mentioned earlier, it is about $852 million. That is a 60/40 split on land versus offshore. And it is a 70/30 split on international versus domestic. So you can see it really is kind of weighted toward the land and certainly weighted toward the international arena and I think one other thing I want to point out is the largest single project in there is only 6% of the backlog. And that's a big refurbishment that we're doing on a floating rig. So it is a very varied backlog. The neat thing for us today is an awful lot of the equipment that we just manufacture, it probably doesn't have as much buyout in it as some of the backlog had as much as six months or a year ago. This is much more oriented towards the products that we manufacture at National Oilwell Varco. And again it is a little bit of everything. You know, jackups, floaters, coil tubing, pressure and nitrogen units, workover rigs and land rigs. So it is a very varied backlog and a lot of different things are coming into it. And again, I want to point out -- and you heard me talk about this a lot -- it is an old rig fleet and it needs technology and so I think a lot of the things that are going on on the rig fleet today are not necessarily going to be additive to capacity. but they're going to replace capacity. We need this kind of equipment in the field to drill the wells that we're drilling.

Finally, I just want to talk about new products real quickly. We've got -- I mentioned the hex pump earlier. We're continuing to expand the sales of those. I think it is exceeding our expectations on the way if operates. It is doing very well. At the oil show, the OTC, we had our continuous circulation system. It won an award, as one of the top technological products at the OTC. It is really a neat system that is commercial. We're moving on. We've got our casing running tool. Even wall motors. Our ideal rig has now been selling very well. Two-speed motors. Up and down the line. We believe the life blood of what we're doing is getting the new products out there, being able to help our customers increase value.

One other thing is our -- we have our sim module which is our subsea intervention module. That was announced by BJ Services and Otto Candies and Exxon earlier in the week, but we at National Oilwell Varco are the ones that put together the actual component that goes on the sea floor, with the coil tubing unit. We're very excited about the prospects for that. And I think it also shows the ability of this Company to really impact some of the most fine level technology that there is in the business.

So that's a quick run through. Taking a little bit longer but we wanted to cover a lot of areas with you. So at this point, Operator, I'd like to turn it back over to you for any questions that folks might have.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

And our first question is from James Wicklund. Please state your company name followed by your question.

Banc of America. Good morning, guys.

Good morning, Jim.

Pete, you mentioned China as a place where you manufacture and a place where you can sell stuff into. What about competition? There were two -- actually, there were three Chinese rig manufacturers at OTC promising to be able to deliver a 1,000 horsepower rig to the U.S. for $7 million. I will go ahead and get at the hard question out on the table first. Talk to us about that.

Well, I would say this. Certainly, we view the Chinese as very viable competitors, Jim. I think it is something that we have to keep our eye on. That's also one of the reasons we're in China. You know, my philosophy is be close to your friends, but even closer to your enemies and we're going to try to be able to do the same thing.

Now, I will tell you this, they can deliver a rig and they can put it here. Can they service it and can they support it? You know, when you buy from National Oilwell Varco you not only get the rig at an attractive price, but you also get the service and support that takes care of it for the next 20 years.

So we certainly are watching them. We are watching them closely. I think we've done some things in our Chinese facility that has really enhanced our quality. I don't know that -- well, I do know that some of the competition has not done the same thing. I think they will get there though and that's one of the reasons that we're going to continue to push as much as we can to get greater efficiencies and actually to be able to reduce the cost of what we can provide to our customers. We've got to try to do that.

Thanks for addressing that. I appreciate it.

Next, if I look at your splits, you've got about $155 million for domestic land, et cetera, et cetera. In the international or domestic offshore, there are 30, 32 jackup rigs that have been ordered. How many of those rigs are in your backlog?

Jim, there have been a lot of rigs announced. Okay? And they haven't necessarily been ordered at this point. And what we've done -- we haven't really broken that down too much.

I know, that's what we want to you do.

And that's what I won't do. So we're okay. We let our customers announce that. But I will just say this. We've got a very, very good position in the equipment that's going on the jackups.

And the reason for my question is, I wouldn't think you have a lot of that equipment in the backlog. While you won't win all of it, you should win a chunk of it, so we should see that part of your backlog grow over the next couple of quarters from rigs that have already been announced to just equipment on order, right?

Before I answer that, I will refer to you Clay on his forward-looking statement earlier. But the fact of the matter is, that could very well be right.

Okay. Gentlemen, thank you very much.

Thanks, Jim.

Thank you. Our next question is from Jim Crandell. Please state your company name followed by your question.

Good morning, Pete and Clay.

Good morning, Jim.

Could you tell us what the $374 million order number compares to in the fourth quarter, apples-to-apples?

Jim, unfortunately, we can't. We -- as I mentioned, we changed our backlog accounting. We got good numbers for the first quarter that we just wrapped up for the combined Varco National Oilwell backlog numbers, but we haven't gone back before that to try to recap history. We have obviously had a lot of things going on. And suffice it to say, every backlog and order indicator we've looked at is all pointing in the same direction. So I think it is fair to say that orders and backlog across all these product categories are turning up indicative of a very solid market that we find ourselves in.

Okay. Pete, you've, in the past, tried to quantify how you see the order number going forward, at least in general terms. Can you comment on that?

You know, I think right now, Jim, obviously, we feel very comfortable that the marketplace is still really active. I think there is a lot of things that are going on. You know, the big issue for us is we're -- I think as we go forward, we're going to be shipping a lot more, too. As we look into the future, so -- but I'm pretty comfortable right now that the order intake is going to continue certainly at the levels we're seeing now and could even improve a little bit. It's a solid market. There's a lot of things being talked about out there. I don't think they're science projects. I think they're real. It would be my belief that you will continue to see an improvement if in that regard.

Okay. Pete, on the orders, you're getting for the new jackups, presumably you're dominating the rotary equipment and the pipe handling equipment, but based on our work, you also seem to be getting more of the blowout presenter work than anyone else and at least, some of your competition is alleging that that's in part due to -- at least with the Norwegian companies, you're willing to discount the BOP package if they give you the rest. Can you comment there?

Oh, Jim, any sales people say if they lost a bid, it is because the other guy discounted too much. You know, I think at the end of the day, we will stand behind our numbers. I think as we move forward, you will see good things out of it. The fact of the matter is that I think what is important for people today are the quality of the product, deliverability of the product and your ability to service the product after it goes into the field. I think those are the critical issues and those are the issues that our salesmen are selling on. If people say all the time, "Well, I lost a deal because they discounted it". Well, you know, I mean we have a salesman here said the same thing, but the fact of the matter is I think that customers are more concerned about quality and deliverability today.

But Pete, would you disagree with the notion that you are -- you do seem to be winning more than your historical market share in blowout preventers? And then could you also comment on -- for businesses like -- where there is an alternative supplier like mud pumps and cranes, do you think you're winning at least your historical market share there for the new rigs?

Yes. I think we're in good shape, Jim. I think we're continuing to match what our install base is and I feel very good about it. And again, one of the nice things about the merger was the fact that we can now offer our shaft for BOPs with the things that we're doing. As we strategically try to put this Company together, it has really been to be an integrative supplier to our customers.

And last question, Clay. Can you comment on the depreciation and tax rate going forward?

The depreciation on the pro forma basis, Jim, in the first quarter, depreciation and amortization combined was about $35 million. Tax rate going forward, about 32% is where we're working towards, excluding our restructuring charges, it's a little bit higher than that in the first quarter, but that is due to lower mix of -- lower tax rate, foreign income in the first quarter. But that's what we expect for the remainder of the year.

Okay. Thank you, guys.

Thanks, Jim.

Thank you. Our next question is from Dan Pickering. Please state your company name, followed by your question.

Hi. Pickering Energy.

Hi, Dan.

Pete and Clay, can you talk a little bit -- you just mentioned that you expect to be shipping more in future quarters, in the rig technology business. Talk to us maybe about capacity and sort of as you see the backlog delivering, you know, what can we think about in terms of second half revenue rates relative to the first half?

Let me take the latter part of that for just a moment, Dan, on capacity. You know, we've kind of told people over the years, we certainly believe capacity is a dynamic and I think that we have a lot of capability here to continue to be able to grow our business without a significant amount of investment certainly not in any roof line or anything like that. I think the capacity issue, while certainly some things kind of start to lengthen out, a lot of that has to do with what we have to buy out. For instance, things like bearings and engines, and things like that, that are going into other industries, that really kind of creates some issues for us. But I think overall, we've got the capacity to improve pretty well on our numbers of the things that we can ship out. I think we've proven that really over the past year in both organizations. But I will let Clay kind of address a little bit on where we see the actual numbers, how we kind of project that out on the capital deliveries.

The revenue flowing out of backlog, Dan, we expect to rise through the remainder of the year, but a lot of what's in the backlog and a lot of what we expect to get into the backlog on these jackup packages have deliveries that are pushed out a little bit to sort of fit with and articulate with the construction schedules that those rigs are working under. And that means the deliveries are pushed out a little bit on those things. But we do expect that rate to rise modestly kind of quarter by quarter through the remainder of the year.

And do you guys have a number in terms of percent of backlog expected to ship '05 versus '06? Can you talk about that?

I think the easiest way to look at that, Dan, is I kind of gave you the -- I think the break down earlier on the -- onshore versus offshore. And basically, it is 60/40 land. Generally, speaking the land is going to go through it much more quickly. Most of the land guys, they would take their rigs today if they could have it. But on the offshore stuff, as Clay just pointed out, it really is more when the shipyard needs it. For instance, if we're building a Derrick, they may not need that until a year into the project, as an example. So I think as you look at that 60/40 split, I would just think of that 60% on the land going out pretty much all this year, and the 40%, some of it this year, some of it even goes out as far as 2007 at this point.

Right. Okay. And then you talked in the rig technology business about a couple of projects that had some cost issues. Were those raw material costs? Or were there some execution issues that we need to think about?

Kind of a hodgepodge of different things, Dan. As part of our review process, we scrubbed those projects each quarter. We scrubbed them this quarter, and encountered some things that we flow through in the quarter. One of those projects is gone. And the other is about three-fourths of the way completed. But that represents basically an adjustment to reflect a little bit lower final margin that we expect to get on the -- on one of those big projects.

Okay. It doesn't sound like it is raw materials. It just sounds like it is taking more man hours, or it is something related to there.

Exactly.

Okay. And last question for me, if we looked today at current margins, sort of 11% to 12% in the rig technology business, 15%, 16% petroleum services and right around 3% in distribution. As we step out through this cycle, where do you think those businesses find equilibrium if we are indeed in kind of a replacement cycle here? What should we think about as margin targets?

I think as we kind of work through all the noise and the issues that we're going to have for the next couple of quarters, related to the transaction and restructuring, Dan, long-term the rig technology north of 15% I think is a good goal. The petroleum services and supplies, high teens, approaching 20%, would be sort of a good target. The distribution business has exceeded 5%. I think has even touched 6% once or twice. But certainly over 4%. And hopefully up into the 5% range longer term.

Okay. Great. Room to run. Thank you.

Thanks, Dan.

Thank you. Our next question is from Scott Gill. Please state your company name, followed by your question.

Scott Gill with Simmons and Company. Pete, I have asked this in the past, can you just give us a quick update on the Kazakhstan project, where that stands and how much that is in terms of percent completion?

You know, Scott, we've kind of -- it basically is about 75% through. That's kind of where we are on it. And I don't know that we want to break it out too much more other than that. But it is not -- you know, there is not a big chunk sitting in the backlog of that left really anymore.

Very good. And Clay, on your guidance here, for the rig technology segment, you said revenues are to be flat to the second quarter. Can you talk us through the rationale for guiding flat sequential revenues in that segment?

Flat -- maybe up modestly, Scott.

Okay. And if you look at the backlog, Pete, you gave us a break down between land and offshore. Is there any chance we can get what the old Varco coil tubing and wire line backlog would be?

Sure. Perhaps it might be more helpful, Scott, is talk about the total coil tubing and wire line backlog, because National had a little bit on their backlog as well, but on a combined basis of 14% of the reported Q1 ending backlog is coil tubing and wire line products.

Okay, I can do the math. That is up sequentially, Clay?

Yes. I really think almost all parts of the backlog are up sequentially.

Very good. And lastly, going back, a little bit on Dan's question, you got to that margin to be up more than 12%, going back to the RT segment. So for the next couple of quarters, I guess how soon do you think you can ramp it up to that 15% level? Is that something you hope to achieve by the end of this calendar year?

Scott, that is going to take a while. So I don't want to -- we've got a lot going on, and I think it will take probably several quarters to get to that level.

Okay. Thank you.

Thanks, Scott.

Thank you. Our next question is from Marshall Adkins. Please state your company name, followed by your question.

Raymond James. Let me follow-up a little bit on the margin front. We've had pretty substantial pricing increases across the board in pretty much all oil field products and services, and just based on the incremental margins I'm seeing here, it doesn't look like you're getting a whole heck of a lot of pricing increase so far. Where do you see the pricing going, and is part of this margin increase going to be captured with higher prices?

Marshall, most of the pricing opportunities that are out there are in the service businesses. And if you look at our products, our petroleum services and supplies group, which is where most of our service businesses reside, I think our sequential movements there from Q4 to Q1 were really masked by the results out of our pipeline group. It declined very, very sharply down nearly $10 million in operating profits. If you take the pipeline business out of the results, sequentially, we are up about 4% at 42% sort of flow through operating leverage and that high level of operating leverage I think is indicative of price increases that have been filtering into those businesses through Q3 and Q4 Q4 and again in Q1 with rising activity levels. We kind of took a walk around a number of our North American service businesses within petroleum services and supplies, and found that price increases that people have implemented kind of Q4, Q1, have ranged from anywhere 2% all the way up to 10% and so I do think those are starting to come through. There is always a little bit of a lag. You got to wait for contracts to roll over before those take effect. Our customers are never terribly happy to hear that we're raising prices so we get pushed back from time to time, but I think we're at a point where we're beginning to see some pricing leverage start to show up in some of the individual services and products that we offer.

I assume given the market condition, you would expect that to continue. Is that fair?

Yes, yes. Now, a couple of factors working against us on the margins, we do have some inflationary forces in our business. The cost of diesel and utilities and blast material and personnel, are all trying to move up along with steel and other commodities that are out there. So we're certainly fighting that as well.

But I guess, what you're also saying here is that you're not seeing a whole lot of pricing movement on the manufacturing side.

Marshall, we haven't up to this point in time and there's a lot of reasons for that, but that certainly is something I think you will see as we push forward. The pricing leverage that you start to have today really is one of the determinants of how you use your capacity so I think there is going to be some opportunities that certainly will manifest themselves as we move into the second half of this year.

Okay. Last one for me, and obviously, when you put two companies together, particularly this magnitude, a lot of times you get disruption as you go through that process. Do you sense in this last quarter, we saw any impact on the earnings from that? I mean did you see any disruption, kind of normal work flow, just because of the merger? Or do you think it was pretty seamless in terms of impacting the numbers so far?

You know, in reality, Marshall, I mean I'm not as much of a Pollyanna to think that there wasn't some disruption. We announced this on the -- or we finalized it on March 11. You know, there was a period there where we were working to see what the management teams were going to be. And I'm sure -- I'm sure some folks lost some focus. I think there was probably a little lost focus as we led up to the 11th of March, with both getting the government issues finalized and some other things. And I think that happens in an organization. So I wouldn't say that there wasn't any of that. Now, what I will say is I think if there is any of that, it is behind us, and I think we're moving forward. A great group of people and I think things have -- I think people are starting to see how it is playing out and I think they're very excited about the future.

Good job, guys. Thanks.

Thanks, Marshall.

Thank you. Our next question is from Ole Slorer. Please state your company name followed by your question.

Morgan Stanley. Just wanted to follow up a little bit on the new rig construction. I mean you, seem to be doing a very solid job in getting a very high market share on the jackups that are for construction in Singapore. Could you comment a little bit on what you see happening in the flow through markets, both in terms of extreme upgrades, and new projects that are being worked on at the moment, comment a little bit on what you see, or revenue opportunity being there on a per rig basis?

Ole, I think you will see some decent activity in the floater market. I think you're obviously going to see some upgrades. There's some that, you know, were announced in the first half of the year. I think you're going to see actually some new builds. The interesting thing though is if you decide you want to have a new floater today, the delivery of it is probably going to be in 2009. So it certainly isn't going to have any immediate impact on the marketplace.

On a revenue basis, if you take a look -- and I will just -- each floater is such a different animal, but let's just say it is about $450 million and if you look at a floater out there for about $450 million, depending on how you outfit it, the revenues for National Oilwell Varco could be as much as $90 million on it. Generally, it would be between the realm of $70 to $90 million. So it is a very healthy opportunity for us to be able to do that.

I think you could probably see quite a few deliveries, or at least targeted before 2009. You have two after Denmark at $450, a couple of Sweden, and by the looks of things, Fredericks, and you have about 10 projects about to come forward. But most of them seem to be coming with the dual ram rigs. You use -- making an effort to kind of get parts of the drilling package as well or are you going for other kind of components of those rigs? I mean you made the acquisition of high-tech, you have some interesting equipment there. Can you talk a little bit about exactly what you expect to get?

I think we expect to get an awful lot. I think that a lot of the projects that might -- they may be on the board with one thing but certainly when you lock at our active heave draw works, you look at all the capabilities we have on the Derrick mass, substructure, all the drilling equipment, active heave cranes that we have, windlasses, mooring systems, riser tensioner systems, subsea BOPs. I mean when you look at the package we can put together, it is pretty compelling. And I think that out of the ones that I believe will be announced, I think we're going to be in pretty good shape to be able to get a lot of those packages.

Interesting. Could you also comment maybe a little bit on -- you mentioned in a comment that you saw bottlenecks and that deliverability would be increasingly -- I assume that was on land rigs. Are there any other parts of your business where you're starting to see some bottlenecks and see that time to deliver products is starting to go out to a level where it could represent a bottleneck, particularly with respect to either pressure pumping equipment, or wire line equipment? Or do you still have a very significant spread capacity?

I don't think that we -- when I mentioned the potential bottlenecks, I use that just as an example. Really, we're not experiencing tremendous bottlenecks in that right now. But that's where you will start to see it. You know, in the bearings, in the engines, but at this point in time, that's not a big issue with us, and I think especially on the coil tubing and the pressure pumping, we're able to continue to move product out the door pretty rapidly.

Could you comment a little bit on how your backlog has developed on the pressure pumping and tubing side?

How it has developed?

Yes. In those two segments.

That is included in the total backlog and the revenues were also included in the rig technology segment.

Could you give us a little hint of a break down there for those two segments?

The mix of coil tubing and wire line business in the rig technology segment is on the order of about 10%, 12%.

Okay. In terms of ability to manage turnkey projects, would you say that that's a thing that you can use more aggressively now in your marketing? I mean historically, some of the cost overruns took place was because of mixing different types of equipment. Is this something you can actually bring to the table and actually lock down projects?

Absolutely. I think if you look at our ability to bring the entire rig floor together under one contiguous control system, I think that is a very compelling argument. A lot of the issues if you go back to the mid to late '90s when a lot of the deep water rigs were being built, you had equipment on the rig floor that came from four or five different manufacturers and they kind of spent all the time pointing at each other when there was a problem saying "It's not my problem it is the other guy!" So I think the things we're able to do today -- at the end of the day, the real brains behind that is your control system. You got all the equipment out there and if we have a similar control system that can put that all together and make it run and run on the same language, I think that is very compelling for our customers. So that is certainly part of our strategy.

And you think even with that, it will still be $450 million to build a low-end deep water rig?

I've never bet right on the cost of those deep water rigs so I don't think I would want to go much lower than that, Ole.

Okay. Thank you very much, Pete.

Thank you.

Thank you. Ladies and gentlemen, that does conclude today's question and answer session. I would now like to turn the conference back over to Mr. Miller for any closing remarks.

Thank you very much for listening in today. Again, as I tried to reiterate here, we're excited about the future. And if any of you were on the line to ask questions, certainly feel free to call Clay or myself later today or next week and thank you for calling in. And we look forward to talking to you after the second quarter. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the National Oilwell Varco first quarter earnings conference call. You may now disconnect.