國民油井華高 (NOV) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the National Oilwell Varco second quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Friday, August 5, 2005. I would now like to turn the conference over to Pete Miller, Chairman and CEO of National Oilwell Varco. Please go ahead, sir.

This is Pete Miller, the CEO and Chairman of National Oilwell Varco. And on this call with me today is Clay Williams, our Chief Financial Officer. Earlier today we released a press release announcing second quarter 2005 earnings at $0.35 a share, or on revenues of $1.215 billion. These results include a 15.3 million pretax charge, or $0.06 a share after-tax, for the transaction cost associated with the National Oilwell and Varco merger. It also includes a $21.7 million pretax charge, or $0.08 a share after-tax, related to the Kazakhstan engineering procurement and construction rig project that we had undertaken. Clay will provide more detail on these numbers in just a moment.

Additionally today we announced a quarter ending backlog of $1.2 billion. This is an all-time record for the Company. New orders in the quarter totaled $735 million. A little bit later in this call I will break down the components of this backlog in fairly general detail to kind of what you know what is in there. But I do want to say that this backlog really indicates the robustness of our markets, and it really indicates our ability to provide the products needed for the worldwide drilling industry.

At this time I want to turn the call over to Clay. And then when clay finishes up on the financial highlights, it will come back to me and I will go through a little bit of an operational overview that will allow you to see what we're seeing in the business in the foreseeable future. So at this point, Clay?

Before I begin this discussion of National Oilwell Varco's financial results for the second quarter ended June 30, 2005, 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, expected synergies resulting from the merger between National Oilwell and Varco, and the completion of the Kazakhstan rig fabrication project.

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 the results excluding certain discontinued operations, merger, transaction, litigation, asset impairment charges or gains, and certain other items, and also to certain estimated pro forma results as if National Oilwell and Varco had been merged during 2004, or during the first 70 days of 2005. Further information regarding these may be found within our press release, or on our website at www.nov.com, or in our 8-K filing with the SEC.

National Oilwell Varco generated earnings of $0.35 per fully diluted share in its second quarter. This concludes $16.3 million of pretax charges related to the Varco merger and integration activities. Excluding these charges, earnings were $70.9 million, or $0.41 per fully diluted share. Revenues were $1,215.7 million. And operating profit, excluding the transaction cost, was $117.4 million, or 9.7% of revenue.

The second quarter results also include the impact of the $21.7 million pretax charge taken on a large Kazakhstan rig fabrication project, which we will discuss in more detail in a few moments. This charge otherwise overshadows very strong results from all of our other oil field businesses. The impact of this charge is $0.08 per share. And excluding this charge and the transaction costs, consolidated earnings were $0.49 per share.

As we discussed last quarter, the merger between National Oilwell and Varco closed on March 11, 2005. As a result, the reported GAAP financial statements for all periods prior to the second quarter of 2005 do not include a full 90 days of results from Varco. In order to provide more meaningful comparisons for your consideration, many of our comments this morning will compare the second quarter results 2005 with estimated pro forma full quarter results for the combined Company in the historical periods. We have made these estimated pro forma results from the first quarter of 2004 through the first quarter of 2005, available on our website and through 8-K filings. We believe that these comparisons provide a more meaningful indicator of the trends in our businesses. And we tend to look at these internally to evaluate results as well.

Almost all of our businesses showed excellent sequential improvement. Rising levels of rig activity and higher prices for the goods and services we provide fueled significant improvements in revenues and margins, in spite of the seasonal second quarter breakup in Canada. We estimate that the overall impact of the breakup to have had -- was approximately $0.04 per share, going from the pro forma first quarter to second. And we expect to get $0.01 or $0.02 back as we move from the second quarter to the third. Year-over-year, all of our segments posted higher revenue and profits.

National Oilwell Varco's Rig Technology segment includes our sales of drilling rigs, jackup packages, coiled tubing units, cranes, mooring systems, wireline units, nitrogen injection units, and workover rigs. Revenues for this segment during the second quarter were $575.2 million, and operating profit was $51.9 million, or 9% of revenues. This represents sequential sales growth of 6% compared to the pro forma first quarter of 2005, and 50% growth compared to this pro forma second quarter of 2004.

Our outlook for this business continues to be good. Joint contractor customers began to realize meaningful increases in day rates, and are beginning to place orders for new rigs. Many have announced plans to build new land rigs, jackups and floaters. Additionally, many continue to order products to refurbish and upgrade existing rigs. NOV has fared very well in securing orders for rig equipment required to outfit these new rigs. As a result, our backlog for capital equipment sales in this segment surged during the second quarter to nearly $1.2 billion. And we continue to quote new orders at a brisk pace.

Backlog for National Oilwell Varco rose 40% sequentially from $852 million at March 31, to $1,191.1 million at June 30. Shipments out of backlog of $396 million were more than offset by new orders of $735.5 million during the second quarter, which nearly doubled from the first quarter.

NOV is exceptionally well placed to benefit from new rig construction across all market segments. And in fact, we're seeing demand for equipment at very high levels across all our segments. Offshore rig packages, complete land rigs, small workover rigs, coiled tubing units, wireline units, pressure pumping, nitrogen vaporization equipment, all are witnessing tremendous demand growth resulting in 97% growth in orders for new capital equipment from the first quarter to the second.

The Kazakhstan rig fabrication charge of $21.7 million was recognized in this segment during the second quarter. Excluding the revenue and operating profit impact of this project, Rig Technology revenues were $563.2 million, and operating profit was $73.6 million, or 13.1% of revenue. We estimate that sequential operating leverage for this segment, excluding the impact of the Kazakhstan rig project from both periods, and compared to the prior pro forma period, was over 25%, indicative of the strong market that we find ourselves in in this segment.

Developments with the Kazakhstan rig fabrication project this quarter were disappointing. Our customer awarded us this design and fabrication project last summer on a very fast time track in order to be able to get the rigs to Kazakhstan before the cold winter weather there prevented their arrival by the end of this year. The project includes two large 3,000 horsepower land rigs that are mated with a joint support module to house enough pipe and mud and cement to continue drilling throughout the harsh Caspian winter without resupply. The entire structure, two rigs and a joint support module, crawls across the ground utilizing a unique skating system to move from well to well. The basic drilling hardware, to draw works and top drives, lap preventers, pipe rackers and control systems were all fairly standard products for National Oilwell Varco, incorporating features for arctic operations that we have built successfully many times over many years for places like the north slope of Alaska. We discovered during the quarter that our original cost estimates significantly underscoped the amount of labor required to rig up this massive structure. All in the structure weights about 11,000 tons, which is as large as many offshore platforms, and is heavier then was originally planned due to modifications and refinements in the final engineering design.

The drilling floor stands 62 feet off the ground, which is about twice as high as most land rigs. Due to the short time frame, components for the rigs were fabricated in many NOV facilities around the world, and were brought to our Colina Park facility in Houston during the second quarter for final rig out. We found that rig up labor costs required to assemble such a large structure is running two to three times our original estimates. The rig up labor costs overruns were magnified by the higher weights involved, and further increased by our firm commitment to get these rigs built and shipped as soon as possible for the benefit of our customer.

At this point we expect to ship the rigs in about three weeks, very close to our original deadline. We believe our latest cost estimates to complete the project are realistic. We cannot offer absolute assurance that we will not encounter additional setbacks. We have some of our best project managers working on this. And together with our customer, we look forward to getting this equipment commissioned and operating as soon as possible.

Despite the financial disappointment, we're confident that these rigs well soon be performing very, very well operationally.

Our Company remains exceptionally well positioned to benefit from the rise in demand that we see for rig equipment. We have no other projects remaining in our backlog, which approach the size or the complexity of the Kazakhstan project. Most of the projects we have been awarded lately consist of far more standard types of drilling equipment sets, and we believe they therefore carry less EPC project type brisk.

Looking out to the third quarter for Rig Technology Group, we expect continued steady growth, with margins in the range of 13%. As we said before, over long run and excluding swings and mix and other factors, we expect flow throughs for this group to be in the range of 22%.

Our Petroleum Services and Supply segment posted an exceptionally strong quarter, generating $451.5 million in revenue, and 76.6 million in operating profit, or 17% of revenue. This group provides a variety of critical services and consumables to the oil field, and generally depends on oil and gas well spending and activity. Compared to the pro forma historical periods, the Petroleum Services and Supplies Group's revenue improved 12% sequentially and 32% year-over-year. Both well in excess of the change in the rig count worldwide. Operating leverage from the pro forma first quarter was 26%, and from the pro forma second quarter of 2004 was also 26%.

Roughly higher sequential results in many areas overcame the seasonal breakup effect in Canada. Nevertheless, the sequential operating leverage of the group was somewhat affected by the breakup in Canada, which drove a $10.2 million decline in sequential operating profit from the group's businesses there. The effect of the Canadian breakup is most pronounced for this segment, and usually occurs with steep detrimental leverage. But we typically see good recovery at excellent incrementals coming out of breakup in the third quarter. Both sequential and year-over-year operating leverage for the group were also adversely expected by poor results from the pipeline inspection business, which suffered from the delay of several projects and lower volumes. Excluding Canada and pipeline, the Petroleum Services and Supplies Group posted a very strong sequential revenue increase of 13%, and an equally impressive 41% leverage.

Price increases effected throughout late 2004 and early 2005 are beginning to drive improving results across most areas. Our outlook for Petroleum Services and Supplies Group continues to be strong. NOV provides numerous critical consumables and services, and is a market leader in most businesses in which we participate. The second quarter benefited from a high level of product sales out of Canada, and a high-level of international inspection activity, which may not fully repeat in the third quarter. Nevertheless, we expect the third quarter results from the group to show solid margin gains, as we emerge from breakup in Canada and as additional rounds of price increases begin to take effect. Over the long run, and excluding swings and mix other factors, we continue to expect flow throughs in this group to be in the range of 30%.

NOV's Distribution Services Group generated revenue of 258 million, and operating profit of $9.6 million, or 3.7% of sales, during the second quarter of 2005. This group provides maintenance repair and operating supplies to drilling and production operations around the world, with about three-fourths of its revenue coming from North America. It operates from nearly 150 stocking points across North America and in several international locations. Revenues grew 9% sequentially, and the business generated 9% operating leverage. Compared to the second quarter of 2004, the group's revenue grew 18%, exceeding the worldwide rig count growth, and at 7% operating leverage. Both the sequential and the year-over-year growth rates exceeded the change in both the North American and the worldwide rigs counts.

Second quarter results for the group were only modestly affected by breakup in Canada, where revenues declined only about $700,000, due to a large sale of line pipe in the second quarter in Canada. However, results out of Canada were more than overcome by very strong growth in the U.S., where demand was up significantly across the mid continent areas and the Rocky Mountains. The price increases in the highly competitive Distribution sector continue to be difficult to effect. Nevertheless overall margins rose significantly to 3.7% from 3.1 and 3.2% in the second quarter of 2004 and the first quarter of 2005 respectively, mostly due to the higher volumes and close attention to costs.

Looking to the rest of 2005, we expect margins to continue to rise above 4% by year end. Over the long run, and excluding swings in mix and other factors, we expect flow throughs in this group to be approximately 10%.

NOV recognized $15.3 million in transaction and restructuring costs during the second quarter, including severance expenses, inventory rationalization cost, and the amortization of options issued by the Company as consideration for the Varco merger. We believe the integration effort is going very well. We have continued to refine and execute our plans, which require thoughtful planning and adjustment in view of the strong market that we find ourselves in.

At this point we expect to achieve operating profit improvements to reach the $60 million range on an annualized run rate basis, significantly higher than our earlier estimates of 40 to $50 million.

We announced in late June that the merger between National Oilwell and Varco has been challenged by the Norwegian Competition Authority as being anticompetitive. The NCA's objections stipulates that the Company divest certain Norwegian subsidiaries owned by National Oilwell prior to the merger which conduct business related to the sale and maintenance of drilling equipment. Analysis by the NCA focuses principally upon a subset of the drilling equipment we offer.

Their proposed remedying does not affect businesses in Norway owned by Varco prior to the merger, nor does it affect National Oilwell's businesses not engaged in the provision of the products viewed by the NCA as problematic. We strongly disagree with the NCA's conclusions, and are actively pursuing an appeal before the Norwegian Ministry of Modernization. NOV believes that the merger is in the best interest of our customers and employees, including those in Norway. And we continue do believe that we will be able to resolve matters with the relevant Norwegian government authorities without any material impact on our business or operations. We will continue to update you on the progress as appropriate, and expect the appeals process to stretch into the fourth quarter. The merger between National Oilwell and Varco was closely scrutinized by several antitrust regulatory agencies around the world, including the antitrust division in the U.S. Department of Justice, and has been cleared in all instances, except for Norway.

Turning to the consolidated second quarter income statement, overall revenues of 1,215.7 million grew 8% from the pro forma first quarter, and 35% from the pro forma second quarter of 2004. Operating profit, excluding transaction cost, was 117.4 million, or 9.7% of sales, up $6.9 million from the pro forma first quarter, and up 39.3 million from the pro forma second quarter of 2004. Year-over-year operating leverage was 13%, and excluding the Kazakhstan rig charge was about 20%. Net interest expense was $12.6 million, and other income was $1.1 million, due primarily to foreign exchange gains offset by other items. The tax rate for the remainder of the year is expected to be approximately 32%.

Turning to the balance sheet, working capital, excluding debt and cash, was 1,466 million at the end of the second quarter, up about $42 million sequentially. This equals 30.1% of Q2 annualized revenue, which compares favorably to 31.7% in the pro forma first quarter. Growth in accounts receivable and inventory were offset by increases in payables.

Cash totaled 322.4 million at June 30, 2005, up $27.3 million sequentially. Debt totaled 989.7 million. And net debt, or debt less cash, totaled 667.3 million, representing net debt to total capitalization of about 14%. The Company repaid $150 million in 6 and seven-eighth notes due on July 1, 2005 after the end of the second quarter out of cash. Additionally, we closed a new $500 million syndicated credit facility on June 21, 2005, which is presently undrawn. Capital expenditures in the quarter totaled $28.5 million, compared to depreciation and amortization of $35.2 million.

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

What I want to do right now is just kind of give you an operational overview of what we're seeing in the business, really with each one of the three segments that Clay has talked about, probably emphasizing the Rig Technology segment the most, simply because I think that is where a lot of the pizzazz is that is going on right now with the new construction going on.

But first I would like to talk about distribution. As Clay mentioned, we are up to about 3.7% on the operating profit line, and we're very pleased with that. We think we're pushing that even higher as they go forward. The big areas for distribution today are the Rocky Mountains and the mid continent. Also we're starting to see a little bit more of an international flavor. We have extended our operations in Latin America fairly significantly, in both Brazil and Mexico, and receiving some very good business improvements there.

But also one of the neat things, and I think this will be also with distribution and petroleum services and supplies, is that these are also being impacted by the new construction that is going on. So not only are we getting new construction in the rig side, but we are getting the advantage of that with these two operations. And distribution in particular, we are able to go into a lot of the rig up yards, where things are being refurbed and redone and utilize our distribution products there to help them. And additionally there are new companies that are coming on board out there that are really looking at the direct integration model that we have utilized over the years.

This is a great model. It allows us to enhance our profitability, while at the same time really reducing the cost of our customers. So I think there's some good opportunity there. And we think we will continue to see some decent growth out of our distribution business, as we both I think improve our market and also see the growth that comes with both -- with the new construction and some of the new customers.

In the petroleum services and supplies area it is really kind of the same thing. If you take a look at what we have there, and especially where our brand names are, these are all top-of-the-line brand names. We're talking about Tubascope. We're talking about Mission Fluid King, Brandt, M.D. Toddco, Griffith and Vector, Boeing. These are all market leading names.

And not only are we getting the advantage of our ability to put great products into the field in these areas, but we are also getting the advantage of being able to put a lot of this equipment on the new rigs. A good example is Brandt. Many of the new rigs are going on out there are going to have Brandt solace (ph) controlled equipment. The same thing happens with our (indiscernible) facilities. You're talking about a rig sense (ph), which is one of the meter elements there that allows you to tie all your rig information back to accounting very quickly. And so a lot of the new rigs are looking at these types of technologies to go on them, as well as all the existing rigs that are currently working. So we are getting what we feel is a nice double top on this.

Obviously in this area we're pushing pricing. That is one of the things that is very important to us. We want to see what we can do in that arena. Additionally, the other product names that make a lot of sense in this arena are Fiberglass Pipe, STAR, our quality tubing, which goes on a lot of the coiled tubing units around the world, and those are expanding. You see that the petroleum services and supplies arena and really does have some good opportunity for, not only servicing the rigs that are currently working, but also putting on products on some of the construction that is going on that is currently located in the backlog. We feel very, very positive about those things.

In the rig technology area, I really kind of want to talk a little bit about what we are seeing worldwide. And this will really apply to a lot of the distribution and petroleum services side too, because as these rigs go to work it really expands our marketplace for these other arena. Obviously, one of the biggest areas today is still the Middle East. The Saudis continue to say that they want to have as many as 100 rigs working by the end of next year. Recently I think they brought in like six rigs, jackups into the Persian Gulf to kind of help that along. They've got a lot of tenders out today.

You're saying a couple of things. Aramco is looking at buying rigs directly. That generally happens when they think that they can keep the rigs busy. They are also tendering to a lot of the contractors that currently have rigs in the area, and we're a big part of that particular process. I think you'll see the Saudis continue to push hard on this rig count. And again the opportunities that it provides are not only building new rigs, but being able to support this with the products and services that come after the fact.

I think that Saudi will kind of be the area of the most increase in activity in the world for a period time. And again, we're very well situated there. One of the things that we currently are able to do is actually manufacture rigs in Dubul (ph). What that does is it really helps to shorten the delivery times. So if they want a rig within six months, we get automatically a 45 day pop on that, because we don't have to do it here or some other place in the world and ship it. So it really puts us in a really good competitive position. And additionally, probably contrary to what many of you think about Dubai, the actual manufacturing and the fabrication cost there are very, very competitive with other parts of the world. Hotel rates may not be, but the manufacturing side of it is.

Also in the Middle East in Kuwait you're saying a not a lot of refurbishments and upgrades. I think we have talked for a long time about rigs needing technology. And we have talked a long time about trying to make our rigs safer. And you're seeing a lot of that manifest itself today. Even the folks that aren't buying new rigs, are putting our roughnecks, they are putting top drives, they are putting kinetic energy monitoring systems, disc brakes, a lot of the things that make a rig much more efficient and make a rig much more safe.

We're seeing a happen in places like Kuwait. Not only do they want to increase the rig count, but they want to improve the rig count that they have. In Abu Dhabi, NDC continues to be a very aggressive player. They want both land rigs and offshore rigs. Last week in Singapore I was on a rig -- a jackup rig that is going to be delivered to them very, very soon. I think they will continue to push that effort as the offshore arena off of Abu Dhabi makes a lot of sense for them.

Finally, what we're seeing kind of in that Middle East area, there are a few shipyards that are starting to put their toe in the water on building rigs. From our perspective this is good news for National Oilwell Varco simply because many of those shipyards really don't have the wherewithal to take care of an a lot of the products that are there, and it gives us a much greater market opportunity. However, those of you that are worried about capacity additions, my guess is that these shipyards really can't do many more than about one or two at a time. So I don't think it is going to be a great increase in the ability to do things, but it is there. And it also makes sense when you talk about the availability and the lead times associated with it.

One area that is kind of interesting, and we are starting to finally see some out of movement out of there is Iraq. They have budgeted about $20 million to be utilized in the last half of the year on some rig equipment. And it is our belief that we'll probably get the lion's share of that on different things that we offer. We're finally starting to see a little bit of activity in that arena. Other places, Yemen, Turkey, Pakistan, these are all places that continue to have good business opportunities. And we start adding all these together, they really start approaching that nine figure level on things that we have to offer.

A break out North Africa, separately this time. A lot of times I talk about those together, but I think that North Africa by itself right now is very exciting. Algeria is probably the most important place for us, as in the backlog we do have some land rigs that are being delivered to Algeria. They are continuing to expand their oil exploration activities. They are bringing in more and more outside E&P companies. For instance, Repsol is now going to do some things in Algerian. They have expanded. I think they're going to have as much as a seven rig tender. Many of those rigs will be brand new. They will be rings that -- again, Algeria, a lot like the Saudis, are drilling different types of wells today. They need different types of equipment, and we're very well situated to provide that equipment.

Libya, I think is another significant player in the North Africa arena. I was in Libya earlier this quarter, and they have a lot of needs for rigs. They have had some rigs that haven't been taken care of the way they should have been. And their drilling needs are changing also. They are doing a lot more horizontal wells. They found a new discovery in the western side called the Elephant Field that really has to have a different type of rig than what they have used in the past. So we think probably over the next couple of years Libya stands to be a very positive market for us. And I could see as many as ten new rigs going into that particular arena. That kind of covers the Middle East and North Africa.

Another area that really is becoming much more exciting, of course, is Russia. This quarter in the backlog we have a ten rig package that is going into Russia. These are predominately smaller rigs, about 4.5 to $5 million each. But it does show the necessity for rigs to go in there. We continue to see an increasing demand in this area. I think Russia probably will be a good market for us over the very foreseeable future, and certainly in the next couple of years. And again, the Russians are moving more toward the big rig market. Kind of like the United States, if you take a look at the signature of the Russian rigs, they are very old. And a lot of the larger rigs going to the deeper zones really don't have the equipment that they need. They are becoming aged. And in many cases it is much easier just to go ahead and fix up -- or I am sorry, build a new rig, as opposed to fix up what they currently have. So we believe that that Russian market is going to stay very, very active for us over the next 18 to 24 months.

Additionally, the Russian offshore market is heating up. This particular quarter also in our backlog we have some jackup packages that are going to a gas block and luke (ph) oil offshore. The Stockman Field, which is in the far north Bering Sea, it is going to be run by Stroitransgas. We believe that that probably has as much as a $20 billion investment opportunity over the next ten years. It could truly become one of the largest natural gas fields in the world.

So Russia again is a very important element for us. We're starting to put our toe in the water to get some structural things done in Russia where we provide all the components from here. So it will be more western machinery with some of the easier welding, some things like that that take a lot of volume when you are shipping -- being done there. So I think that that is an area that we'll continue to pursue. And we will continue to see what kind of opportunities we can have there.

Obviously, the most important area in the world today for the offshore business is Southeast Asia. Singapore is hot; no question about it. You've got the three major shipyards down there, Keppel, Jurong, PPL. They are essentially full. I know that they have been able to -- today I think if you go into some of those yards, and if you're going to start just from scratch without a current option in hand, I think deliveries are being quoted in the 2009 timeframe. They are very full. There is a limit on how much more they can put in down there obviously. Singapore is not that big of an island. But I think it is an extremely important area for us. We are involved in quite a few of the jackups that are being built down there. And depending on the shipyard, it really impacts the size of the package that we have.

They are starting some refurbishments down there. You're seeing some semis come in that are being stripped up and taken from a third to a fourth generation or a fourth to a fifth generation. So I think that that Singapore area is certainly going to be a nexus of activity in the jackup arena, I believe, through the end of this decade. It is extremely active.

China, our JV, we had improving numbers this quarter. We're starting to ship a lot more equipment out of the JV, both for internal use in China and external use in different parts of the world, to include the United States. Also this quarter we opened a fiberglass pipe facility in China. And we have looked to extend our operations there in that arena into the Chinese market. So we are actually doing some manufacturing there. But also I think you're going to see some of the Chinese shipyards finally start to dip their toe in the water a little bit more. I don't think it is going to be something that over the next six months to a year is going to impact the capacity in this business dramatically, but I think you'll see some things done.

We're currently doing a jackup in New Delhi on the shipyards for Costal (ph). We talked about that probably over a year ago. My guess is there will be some opportunities in some other areas there. So I think that the Chinese will be very active. We think obviously with our manufacturing and engineering facilities we have in China, we're very, very well situated to take advantage of anything that goes on in the Chinese shipyards.

Korea, is really kind of becoming the center of the semi world. And I think one of the things you are going to start to see, jackups were kind of the story of the last -- or first half of this year. And my guess is floaters are going to be the story of pretty much the second half of the year. And a lot of those in fact will be done in Korea.

The last few spots, North Sea, again not the hottest place in the world, but very active in refurbishments, a lot of AC top drives. We're putting hex pumps up there, active heave (ph) cranes -- different things like that. There's a lot of crane replacement going on in many of the platforms. We think it is going to be very solid performer for us.

Latin America, actually we're seeing some good movement there, and especially in Mexico. And again it comes back to the thesis on technology and having better equipment. I think today we have like 50 iron roughnecks on order for companies in Mexico. We're putting in top drives. Again, the Kim (ph) systems, things like that.

In Brazil we're doing some upgrades on some rigs, changing them from different generations on some floaters. And even in Venezuela, which we watch very closely, and we make sure that we get paid ahead of time, that there is some activity that is going on there that I think is going to be positive as we take a look at what is going on in the future.

North America, most of you are pretty familiar with. Canada, we're getting out of breakup. I think it is going to be extremely active as we go into the last half of the year. And then in the United States we're selling a lot of components. There's a lot of different things that are going on with rigs in the U.S. as the contractors here try to increase their availability of rigs to satisfy their customer needs. We are selling some new rigs in the United States, but we're selling an awful lot of components, iron roughnecks, top drives, a lot of the things that we have developed over the years to enhance the rig operations.

I would like to go for just a moment now to backlog. As we talked about, backlog is about 1.2 billion. It is about 56% offshore, 44% land. And it is about 35% domestic North America and 65% international. Obviously, we had our challenges on the Kazakhstan EPC contract. I think the thing to know about what is currently in our backlog, there is nothing -- not any single project that is over $30 million. And this is a backlog that really contains no EPC projects. This is a backlog that really is what I kind of call stuff. It is components that we do very, very well. It is top drives. It is draw works.

To give you an example, a typical jackup project is going to be draw works, mud pumps, top drives, SCR electrical system, iron roughnecks, maybe a pipe handler, and then a derrick. And so that is what we see. And those are all components that we manufacture very efficiently and very effectively. Don't need a whole lot of new engineering on it. And it is things that we put together very well. We have jacking systems and cranes that go on a lot of these jackups, and so these are all component products that we manufacture very, very well. Again, we have $735 million worth of new orders. I would expect the backlog as we look into next -- the next quarter to grow even further. We're seeing some things are ready through July that make us feel very pleased.

I would like to talk for a second about our merger. In this quarter we have got $735 million of new orders in capital equipment. That is because a lot of people are really working together. I am very, very pleased at what we have done with the merger at this point. By the end of the quarter we have been together 111 days. And I was very pleased with the way that, number one, Clay mentioned earlier, we have upped our target on cost reductions. But more than anything, it is the fact that we haven't lost focus of getting things done. The Petroleum Services Group and the Distribution Group, they have kept their eye on the ball, and they had very good results. And the sales folks and the people in the capital side have really also kept their eye on the ball. And they have really moved it forward. And I have been very pleased with what we have done.

And I think as we go into 2006 you are going to see the savings and the capabilities of this Company really manifest themselves fully to really unleash the power of this Company that we have. And I know -- I have got a lot of employees that listen to this conference call, and I would just like to say to them, thank you very much for your efforts. Because putting two companies together like this is not an easy transition, and I think people have really performed yeoman's duty to get there.

Having said all that, what I would like to do then is turn in over for questions. I would ask this, if you have any questions, if you could limit it to a couple of questions. We're going to try to cut off pretty much at the top of the hour. And then we will be available later if you have anything additional. So at this point, Eric, I will turn it back over to you for any questions.

(OPERATOR INSTRUCTIONS). Ken Sill.

Credit Suisse. Congratulations. I think people were wondering how things would look, but considering Kazakhstan it seems good. My question in general is, you have seen all these orders for the rigs offshore. How much -- how many of those rigs have actually had the equipment ordered so far? How much is left to still come? And have you seen any change in terms of marketshare in the different product lines since the merger -- of what you are winning?

I think as each day -- that is actually very much of a moving number. There have been a lot of announcements on jackups. And some of those announcements you know they will say like it is one plus one plus one, meaning one plus two options. Well, in many cases the equipment won't be ordered until those options are exercised. And you are coming up to a time frame right now where many of those options are being looked at.

So I would say the lion's share or the majority of the equipment on the jackups that you have heard about probably have been ordered, but certainly there are still things left to come. And when it comes to the equipment, we feel very good about where we are. We think that when you look at the backlog improvement, when you see the amount of orders, I think that bodes well for the equipment that we're offering our customers, and what it is we're providing them. And I have said this a lot of times, there is none of these that are being built without something on it from us. It may not be much, but there's something on it from us. So we feel real good about how -- the success we have had on a lot of these projects.

With respect to the floaters we have seen several of those announced in the last week. It seems like the Norwegians are kind of kicking it up a notch. What are the prospects for National Oilwell Varco equipment on those considering they have got a pretty good homegrown industry?

We're part of that homegrown industry up there. We've got a very significant position in Norway. Over the years we have developed our Norwegian processes and products. I think that as the floaters come out, we stand a very good opportunity of being a major player in that. One of the things that I shill a lot in my investor presentations is the floater capability for us. And if we got everything we could possibly get on the floaters -- and again these are components -- it could be as much as 90 to $100 million depending on the makeup of the floaters. So we think that when these semis start really kind of coming more into focus, and people are putting the pencil to the paper and making the orders, we feel very good about where we will be in many of these.

But most of those are still not in the backlog yet? I mean it is just a handful right now?

Yes, those semis that you have heard about recently are more I think things that are going to -- the first half of this year was really a jackup year. I think the latter half of the year probably is going to be more semi focused.

Scott Gill.

Scott Gill with Simmons and Company. My first question, and maybe Clay or Pete either one can answer this. When we look at the Rig Technology segment, if we back out the capital equipment revenues in the second quarter and compare that to the first quarter, I'm showing that to be down from roughly 238 to 179. I was just wondering if you could give some commentary on that part of the rig technology business and why the sequential decline there?

That business still tends to -- it is performing very, very well. I just think we had kind of some swings and roundabouts going from Q1 to Q2.

Clay, would you say then the Q1 is more reflective of a normal run rate for that part of the business?

Probably somewhere in between. I think we had some flush orders in Q1 that came out that helped that quarter.

I guess my last question then, Pete, as you look at the second quarter order flow, very impressive. From what Clay said in his commentary and what you said in your commentary would we be wrong in assuming that that order flow rate could actually expand through the rest of 2005?

I guess I would harken back to Clay's opening statement on forward-looking statements. I will say this. The industry is still very, very active and hot. And I think it will stay that way for a period of time. Again, you have the vagaries of order placement. And I kind of mentioned, we're looking more at semis right now. Semis -- it is a little bit longer process to get all the orders in that you want, simply because there is a little bit more engineering involved, and no two semis really look the same. A lot of these jackups that are being built are kind of a cookie cutter, 116 C (ph) type, or a super MOD B or something like that. So I think the potential is there that you can continue to have that kind of order intake. I think the reality of it is you could get a little choppier.

Thank you. Very good quarter gentlemen.

John Tasdemir.

Raymond James. Kind of following up to that, but in a different perspective was your order rate was up huge. And Clay kind of made somewhat of a seemingly conservative comment about revenue and the rig technology continuing to grow sequentially and this and that. But just based on the order rig increase, going into the third quarter the Rig Technology segment alone, why wouldn't you see the revenue pace going from 575 up 15 to 25% quarter to quarter? What am I missing there?

Let me dissect it for you just a little bit. The noncapital equipment piece of the Rig Technology Group, which is, as Scott referenced, is about one-third of the revenues there, that is more kind of -- has more kind of a spare part and service and rental feel to it. And it is going to be tied to level of activity more than the backlog.

The actual revenues that are coming out of backlog, which are about two-thirds of this group, are developing much more than an offshore rig kind of feel. The flavor of the orders that we got in the second quarter had a lot of jackup packages in there. It had other offshore pieces of equipment in the order rate. The delivery of those is really tied to the shipyard schedule and fabrication of those rigs. And so some of the deliveries on that capital equipment stretch out into late 2006 and even into 2007. The flavor of the backlog is much more offshore, and the deliveries on that backlog are going to be much more further out.

Just to help me out a little bit -- but just the Rig Technology segment. I think sequential growth was from second quarter -- from first quarter to second quarter was like 5 or 6%, whatever it was, 540 million to 575 million. But the order rate has gone up. Now I understand what you just said, but wouldn't that suggest -- even though that suggests a higher sequential growth rate of revenue from the June quarter to the September quarter, or I'm just not doing that right?

Again, a third of the base is really tied to activity. I'm not sure that there are that many more real work. So that's the order of the revenue we're not really talking about here. The other two-thirds, the nature of what flowed into the backlog has deliveries that are tied to the rig fabrication schedules, and those are pushed out kind of beyond Q3.

I guess the follow-up question I have is, I think it is going to start coming to the table more over the next year is that with such demand for manufactured products for rigs and whatnot, you're going to see a lot of people poking their heads out and trying to manufacture rigs and different types of equipment and such. You're going to see some Chinese rigs coming to the U.S. market. I know you guys are in China. So you kind of are the Chinese to some degree. Can you talk about -- I know you don't really like to talk about marketshares or where you are -- but how do you feel about the market developing over the next year at this type of rate? Are you worried about an influx of Chinese manufactured parts, or what are your thoughts there?

We're always obviously very worried about competition. And there is a lot of competition out there. I think as you pick up the pace a little bit, certainly the competition will in fact be there to rear its head. But I will say this, number one, we do not a lot of things that are going to go on to rigs. Even if you want to buy a rate from somebody else, you are still going to come to us most likely on an iron roughneck, on top drives. We're doing some neat things on electronics that a lot of people can't do. So we're going to be part of it even when some of these other rigs move in here.

But I think to the second point, and it is one we have talked an awful lot to, buying a rig is one thing, servicing that rig after the fact is the other thing. And I think where we positioned ourselves, both in your Petroleum Services Group and in distribution and our ability to provide spare parts and service, and our worldwide footprint is that when you buy from us, we are going to take care of it too. And we're going to make sure that after that happens, you have got a rig sitting out there. If the mud pump goes down, if the draw works goes down, if the electronics are down, we're going to have people there that can fix that. I think that is important. And I think our customers gravitate to that. Are there going to be other rigs coming in? You bet. But we think that, given our footprint, given our -- the equipment that we have, we're going to be able to maintain a very strong market position.

Jim Crandell.

Jim Crandell from Lehman Brothers. Unbelievable order number. I was a little bit surprised when you said if you look at the OTS factory data number there is 42 jackups which have been ordered, excluding options. And, Pete, did I hear you in response to the first questioner say you believe that the majority of those 42 rigs have placed rig equipment orders?

Yes, I would say so. If you look at the 42, I would say there is equipment orders placed on over 21 of them. Yes. I would say that is correct.

Now if we were looking at the business six months from now, Pete, would you be surprised at the level of jackups under order was twice the level of today?

That is a good question. I think -- the issue that you're going to have on jackups is really the deliverability side of it. I think you're going to see more options come out. I think you're going to see people probably try to get in line, but I think you're going to see these things stretch out for the remainder of this particular decade.

And so I am not -- I have contended for quite some time that they're going to be -- you've got to get 10 to 12 rigs ordered per year for the very foreseeable future for this industry. I think you've got the technology changes, you've got some rigs that are going to retire. I think you have different needs offshore. But I think the way it is moving right now, the real question is going to be does the shipyard want to extend out and give pricing and commitments for something that is going to be four or five years down the pike? I think that really becomes a question mark.

And if we consider the number of floating rigs under order to be somewhere around 8 to 10 currently, do you think that six months from now we could be looking at twice the level of floating rigs, given your point about the industry moving more to the floater side in the second half of the year?

Yes, I think that's real possible. I think you can see -- certainly in the second half of the year I think you're going to see more floater activity.

Pete, you made also the comment in your comments that there's no project over 30 million in backlog. I know your revenue opportunity for floating -- one floating rig is more than twice that level. Even for a premium jackup, it would seem you would go over $30 million. Can you elaborate on that in relation to those -- that revenue opportunity?

Yes, I think what really it boils down to is a lot of those floaters that are talked about haven't ordered their equipment yet. And really some of that -- it is obviously not in the backlog.

Are a lot of these premium jackups, are they splitting the rig equipment order between various companies? Is that what you're seeing out there?

Okay, going back to the jackups now, that is a little bit different. What will happen on some of these jackups we are up around $30 million, and on some of them that we were actually over 40 when it initially came. We have already shipped some things, so we're down below that 30 mark. We have had a few that came in in the first part of the year that we were over 40, but again we had made the shipments already. So I am talking about stuff that is currently in the backlog. And on the thirtyish, usually what you're talking about there are the jacks might be built by the yard. They might go with cheaper cranes from somebody else. They might have a different the BLP set that they want. So that becomes a little bit of a moving number.

Okay. Last question, Pete, could you run through what you have been -- what you have done in terms of price increases over the last three to six months by product line?

I think that would -- if I did by product line I think we would probably be here till about Saturday.

How about doing it in more general terms then?

I think in the distribution arena it is pretty competitive. But we have been able to move the pricing a little bit. We have seen an improvement from about 3.2 to 3.7 operating profit. We believe we will continue to see an improvement. Some of that is driven by efficiency, and some of that is by price increases. But a lot of that business is contractual too.

So if you've got a contract, you can't really do much other than pass through cost increases until the contract comes down. And we like contracts. We like locking that in because we do get a degree of business. So on the distribution side, we're pushing it, but again pretty competitive.

On the petroleum services side, we have been very active in the price increase arena. And I think that kind of also showed it a little bit here with the improvement in margins this quarter. Again individually a lot of pipe inspection and tuba scopes done on contract. On the ad hoc basis, if you just wanted it spec’d then we have been able to move it probably 5 or 6% pretty regularly. That is kind of what you are seeing there in our mission of business. Again, a lot of contract business (indiscernible) but stuff that we could move in that for 4 or 5% range.

In the drilling equipment side of the business, it really is a situation where there's a lot less discount being given. We're moving -- we're pushing the pricing, and that has really been a phenomenon that has occurred just about the time that we closed the deal. It had about 111 days worth of action here in the first quarter, or in the second quarter, and we're moving that. We're getting some efficiencies in our system. And so I think overall we're starting to get that kind of pricing, but it is certainly not like the mud company (ph) and some other things. We're pushing that, but we're also getting the efficiencies.

Yes, we have definitely had the best success in petroleum services and supplies, which are more activity driven, rental tool type businesses or critical services type businesses. And that has been where we have been able to achieve the most. And a lot of what you saw on the second quarter really were the result of the actions taken starting last summer. And it just takes a long time for these things to roll in as contract roll off.

That's it for me. Good job.

Jeff Surlary (ph).

Community Partners. Just to follow-up on Scott's question from earlier. Maybe asked a little bit differently. In the back half of this year do you expect shipments to exceed orders in either the quarters as you look forward?

I think probably overall, again, it kind of comes back to what I was saying earlier. You get a choppiness of this. I would expect the backlog to grow, certainly in the third quarter, which would indicate then that means orders exceed shipments. For the rest of year I don't know that I would want to go out on a limb yet on the visibility there. But again from what I have seen in July, what I have seen in the first week of August, what we're projecting, the things we're working on, I certainly think you'll see a growing backlog in the third quarter.

And we want to be clear, we're talking about the backlog moving up, not necessarily the order rate.

Right.

Okay.

We going to see the revenues move up more steadily. The order rate is going to be choppy and lumpy.

Sure. Does this rough map on the changing composition in the backlog from quarter to quarter so that offshore up on the order of 300 million, and land closer to flattish, or up a little bit. Do you look for the land shipments to keep pace with your orders as we progress through the back half of the year?

The land business tends to have a much faster kind of turnaround than the offshore business.

My final question, of the 60 million of cost savings that you guys see, how much do you think you captured in the second quarter?

On the order of -- a little over 2 million.

Gentlemen, at this time I am showing we have time for one last question. Robin Shoemaker.

Pete, I just want to clarify something. If you had a project come your way of the same complexity as Kazakhstan, and were asked to bid it on a fixed-price EPC basis, would you do that or has this experience lead you to do it only on a cost plus basis?

This experience leads me to say I would not do that at this point in time. We were disappointed in the results. We've got the capability of doing things. I never want to say never, but certainly on a fast time frame, without the ability to do a complete feed analysis, feed meaning front end and engineering and design, I would not take it. That is where I am right now. Right now we want to concentrate on this business that we have. And it kind of comes down to what I called earlier the stuff. And we don't -- we do not perceive taking an EPC contract unless it was a T&M basis.

Okay. Good. Just one other issue then. I have heard from other companies that are selling equipment on the jackups in the Far East that there is a different buying pattern between the speculators and the established drilling contractors in terms of several areas. I wonder if you see that? If you think you're doing as much business with the speculators as with the established companies, or what is the pattern there for you guys?

The pattern for us really kind of boils down to almost the shipyard. And if you take a look at some of the shipyards out there, they are able to do things. And if they're actually pricing a turnkey project to the people buying, then to them it is much more important for them to try to minimize their investment, i.e., go out and buy the cheapest stuff they can find. And some shipyards though don't have the same capabilities. So it really is a pretty wide band of things.

There are -- we know that in certain shipyards we're going to get a lot more than we get at others. But still even in some of the ones that have some of their own equipment, we're still doing quite well. I would say even these speculators that are doing it right now are pretty drilling savvy. Some of the Norwegian money coming in there, these are guys that know what is going on. And so they really do have an emphasis on ensuring that have National Oilwell Varco equipment.

Thanks a lot.

I think everybody for calling in today. That was the last question. We look forward to talking to you again at the end of the third quarter. And thank you very much for your interest.

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