國民油井華高 (NOV) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the National Oilwell Varco third quarter earnings conference call. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded, Friday, October 28, 2005. I would now like to turn the conference over to Pete Miller, President, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. And welcome all to the National Oilwell Varco third quarter earnings conference call.

Earlier today, we announced earnings of $88.5 million, or $0.50 per share on revenues of $1.24 billion. This compares to the second quarter of $0.35 a share or $61.2 million of earnings. Included in this is a $0.03 charge for the merger between National Oilwell and Varco that was closed approximately seven months ago.

Also impacted by these earnings was the hurricane, and Clay Williams, our Chief Financial Officer, will expand upon that in just a moment. In addition to the earnings we all announced a backlog of $1.75 billion. This is a record backlog for the combined companies and I think indicates the robustness of the new build activity in the world. I'll expand upon that a little bit later when I come back to talk about the operations.

We received this quarter, $921 million of new orders. Again, this was a record. This surpassed last quarter by almost $200 million which, again, was a record. At this point I would like to turn it over to Clay Williams, our Chief Financial Officer, who will take you through the financial elements of this report. Then it will come back to me later and I'll take you through an operational overview, then we'll open it up for questions.

Clay?

Thanks, Pete.

Before we begin this discussion of National Oilwell Varco's financial results for its third quarter ended September 30, 2005, I would like to point out that some of our statements during this call may contain projections and estimates, including comments about our outlook for the Company's business, expected synergies from the merger between National Oilwell and Varco, and the and the completion of rig fabrication projects, among others.

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 these statements will 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 time 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 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 on our website at www.nov.com or in our 8-K filings with the SEC.

National Oilwell Varco generated earnings of $0.50 per fully-diluted share in its third quarter which includes $7.6 million of pretax charges related to the Varco merger and integration activities. Excluding these charges, earnings were at $93.1 million or $0.53 per diluted share. Revenues were $1.2365 billion and operating profit excluding the transaction costs was $152.6 million or 12.3% of revenue.

Third quarter results also include the impact of two major hurricanes which struck the gulf coast. Hurricanes Katrina and Rita resulted in several days of down time for drilling and support operations along the Gulf as well as the delay in shipment of equipment. We are grateful that our -- all of our most important assets, our employees, are safe and sound following the storms, although many suffered personal losses and some continue to work out of different locations. Overall, we estimate the impact of these storms was approximately $20.2 million in revenue, and $9.5 million in operating profit, or about $0.04 per share.

Excluding the hurricane impact, earnings were approximately $0.57 per share for National Oilwell Varco in the third quarter. The impact from the hurricanes was most pronounced on our petroleum services and supplies group, which experienced an $11 million reduction in revenue and a $5.1 million in operating profit due to the disruption in operations. Our rig technology group was also negatively impacted by about $9.2 million in revenue, and $4.4 million in operating profit due to shipment delays and facility down time.

Our distribution group experienced minimal financial impact despite lose two of our stores for at least several months. That group has seen a sharp increase in sales from nearby locations which are providing materials to help rebuild and restore damaged oil and gas production. As a result, we believe lost distribution sales due to the hurricane have been fully replaced. We expect hurricane disruptions to continue into the fourth quarter and are currently forecasting earnings impact in the range of $.01 or $0.02 a share within our petroleum services and supplies group.

Our rig technology group began to benefit from a handful of orders for equipment to repair the many rigs damaged by the storm. We expect to see this continue into the fourth quarter and into 2006. As rig operators continue to survey their equipment and assess damages.

As a major provider of all types of drilling work over winching and mooring equipment, NOV stands ready to help the industry get back on its feet in the Gulf Coast. We do not record any charges for lost equipment or facilities since we are fully insured. We are working with our insurers to determine the magnitude of potential recoveries from our business interruption insurance. No recovery benefits have been recorded as of yet.

As we have discussed throughout the year, 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 third quarter results 2005 with the estimated pro-forma fourth quarter results for the combined companies in 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 these comparisons provide a more meaningful indicator of the trends in our businesses and we tend to look to these internally to evaluate results as well. Transaction and restructuring costs of $7.6 million during the third quarter includes severance expenses and amortization of options issued by the company as consideration for the Varco merger.

We believe the integration effort is going very well. We executed several important initiatives this quarter and remain confident that we will achieve our expected $60 million in savings by the end of the first quarter 2006. We estimate that the savings impact during the third quarter was about $6 million which should continue to rise through the coming months.

Despite many distractions in the third quarter, our business has performed well in the strong market we serve around the world. The sharp turn around and breakup in Canada and pricing improvements in several product lines contributed to solid results. The desire for better standards of living is driving up demand for energy and oil and gas prices are very high as a result. Oil and gas resources are tough to find and tough to produce. Our company is exceptionally well positioned to help the industry gear up its efforts.

Year over year each of our three segments posted higher revenue and profits. NOV's rig technology segment includes our sales of drilling rigs, jackup packages, coil tubing units, cranes, mooring systems, wireline units, nitrogen injection units, and work over rigs. Revenues for this segment during the third quarter were $572.8 million, down slightly from the second quarter, due in part to the $9.2 million impact of the hurricanes. Year over year revenues were up about 20%.

Operating profit was $70.4 million or 12.3% of revenues, up from $51.9 million or 9% of sales in the second quarter, and up from $53.3 million or 11.2% of sales in the third quarter of 2004. The sharp sequential improvement was mostly due to the charge taken last quarter on a large drilling rig fabrication project. Those two rigs were shipped to Kazakhstan during the third quarter, as expected and will be commissioned there over the next few months.

Backlog for the rig technology group surged again this quarter to nearly $1.8 billion on the strength of over $900 million in new orders. Backlog was up 47% sequentially and orders rose 25% sequentially as we secured several new drilling equipment packages for recently announced jackup and floater new builds.

Scheduled delivery on our backlog for the new build off shore rigs is tied to the planned construction schedule for these rigs. As a result, deliveries of certain equipment and commissioning and startup work in our backlog stretch out to 2009. Revenue out of backlog declined $36.6 million, nearly completely replaced by non-backlog revenues in the quarter, which improved $34.2 million. I'd like to take a moment to address the reasons for this.

For the most part our backlog consists of orders in excess of $250,000. Much of the equipment we provide sells for less than $250,000 and is therefore not normally included in backlog if bought individually. However, if these individual pieces are included in a package they flow into and out of the back log with the total order if that total order package is in excess of the $250,000 threshold.

If these pieces are purchased separately, they are not counted towards back log. As a result, the mix of backlog and non-backlog revenue in orders will swing period to period based upon buying patterns of our customers. In the third quarter we saw our mix swing toward smaller individual sales which drove the sequential results. Additionally, we changed our accounting procedures in order to implement additional controls which may have had an impact as well.

Perhaps most importantly, the rig technology segment, where all of our reported backlog resides, is expected to generate most of the consolidation savings resulting from the Varco merger since it contains most of the products where the two organizations overlap. After developing our plans through the second quarter, much was executed during the third quarter including a reduction in force in the group of about 300. And the movement of several overlapping products between different facilities. The game plan here is to combine light products such as hot drives, racking systems, iron rough necks and handling tools into the most efficient factories in order to improve margins.

Needless to say the execution of these initiatives during the third quarter was probably a little bit disruptive to this group. Thankfully, substantially all of our headcount reductions planned for rig technology had been made at this point, although a few product lines remained to be moved in Q4 and Q1, 2006. With record backlogs and improving efficiency, our outlook for this business continues to be very good. Drilling contractors are ordering new rigs, both on shore and off shore and they are running their existing rigs harder than ever.

They continue to demand the best technology and highest levels of safety for their rig fleets and we are proud to serve them. We continue to target 22% flow throughs for this group and hope to achieve 15% operating margins but this goal still appears to be a few quarters away.

Our petroleum services and supply segment posted another exceptionally strong quarter. Generating $472 million in revenue and $87 million in operating profit or 18.4% of revenue. The 5% sequential revenue growth generated 51% operating leverage due to higher volumes. The turn around of the Canadian breakup and improving pricing in many areas.

Heading back the estimated impact of hurricanes on Gulf Coast operations, revenues would have improved 7% sequentially at about 49% leverage. Compared to the prior third -- prior year third quarter revenues were up 27%, well above the 18% improvement in the world wide rig count over the same period.

Solids control, equipment and services, pipe coating operations and sales of fiberglass pipe led the increase. The fiberglass pipe business has done a terrific job of overcoming sharply higher resin costs which eroded margins in late 2004 and early 2005 by improving efficiency and pricing.

High demand for oil fuel pipe has enabled the group to raise prices, and as a result, this product line posted record margins in the third quarter. Pipeline inspection services also improved sequentially but remain soft compared to prior periods. Compared to the prior year, the group's mission products and downhold tools rentals and sales drove much of the 27% top line improvement.

Of our three segments, the petroleum service and supplies group is most affected by the breakup in Canada. Break up is the seasonal ban Canadian authorities place on moving heavy equipment during the spring thaw in order to avoid damage to the roads. We reported last quarter the breakup resulted in a $10 million decline in operating profit from the group's canadian business. The lifting of the road bans and the resumption of activity drove an $8 million improvement from Canada during the third quarter as compared to the second.

The $11 million impact from the hurricanes on the petroleum services and supplies revenue was spread across most product lines but our solids control, tube inspection and mission operations were most probably most affected. As I mentioned earlier. the corresponding operating profit impact is estimated to be about $5.1 million.

High levels of oil fuel activity coupled with 5 to 10% pricing increases over the last few quarters should drive solid results from this group. We are increasing our investment in drilling motors, solids control equipment, instrumentation systems and other machinery released to drilling and production operations to meet the rising demand we see in most oilfield markets around the world. About two-thirds of our capex flowed into the petroleum service and supplies group.

Our outlook for the petroleum service and supplies group continues to be strong. Over the long run and excluding swings and mix and other factors we continue to expect flowthroughs in this group in the range of 30%.

The distribution services group posted outstanding results. Revenue was $272.4 million and operating profit was $14.5 million or 5.3% of sales. This compares with 3.7% operating margins in the second quarter and 3.6% operating margins in the third quarter of 2004. The group benefited from the turn around of breakup in Canada, strong gains across the midcontinent area of the United States, and greater international activity in Indonesia, the North Sea and the Middle East.

Favorable mix helped drive the margin improvement , as did a supplier rebate credit net of other items which contributed 2 million in the quarter and which may not fully repeat. Without the supplier rebate, margins were approximately 4.6%, up substantially and representing outstanding results for this group. Revenues for the group grew 6% sequentially at 34% leverage, well above our expected 10% flowthroughs in the business. Compared to the third quarter of 2004, revenues grew 16% -- I'm sorry. 17% at 16% flow throughs.

Looking to the fourth quarter of 2005, we expect margins to be in the mid 4% range and excluding swings and mix and other factors we were targeting flowthroughs in this group of about 10%. We announced in late June that the merger between National Oilwell and Varco has been challenged by the Norwegian Competition Authority as being anti-competitive.

The NCA's objections stipulates that the Company divest the 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 two subsets of the drilling equipment that we offer. The NCA's proposed remedy does not affect businesses in Norway owned by Varco prior to the merger.

We strongly disagree with the nca's conclusion and are actively pursuing an appeal before the Norwegian Ministry of Modernization. NOV believes the merger is in the best interest of our customers and employees, including those in Norway, and we continue to believe that we will be able to resolve matters with the relevant Norwegian government authorities without any material impact on the business or operations of the company. We will continue to update you on our progress as appropriate and expect the appeals process to be completed in the fourth quarter.

The merger between National Oilwell and Varco was scrutinized by several anti-trust regulatory agencies around the world including the anti-trust division of the U.S. Department of Justice and has been cleared in all instances. Except Norway.

Turning to the consolidated third quarter income statement, revenues of $1.2365 billion grew 2% from the second quarter and 20% from the pro-forma third quarter of 2004. Operating profit, excluding transaction costs of $152.6 million or 12.3% of sales was up $35.2 million from the second quarter and up $47.2 million from the pro-forma third quarter of 2004.

Year over year operating leverage was 23%, excluding transaction and merger charges. During Q3, we reclassified certain engineering expenses from SG&A into cost of sales. Interest expense was $14.6 million, another income was $1.1 million due primarily to gains of a small business in France, the sale of a facility slated for closure offset by other items.

Tax rate for the quarter and for the remainder of the year is approximately 32%. Turning to the balance sheet, working capital excluding cash and debt was $1.649 billion at the end of the third quarter up sequentially to about 33.3% of Q3 annualized revenues. Several items contributed to the increase in working capital. A collection of accounts receivable was hindered by the late September evacuation of Houston due to Hurricane Rita, resulting in an increase in DSOs. Additionally, we reclassified certain customer prepayments which led to higher stated accounts receivable as well.

Inventory increased due to the rising back logs and the delay in shipment of equipment due to the hurricanes and accounts payable declined due to reduction of overdraft balances among other items. Cash totalled $162.2 million at September 30, 2005, Down $160.2 million sequentially, mostly due to the repayment of 6.875% notes on July 1st. Debt totalled $845.6 million, and debtless cash totalled $683.4 million.

Net debt to total capitalization was 14.2% at the end of the quarter. Capital expenditures totalled $29.4 million compared to depreciation and amortization of $34.6 million. At this point, let me turn it back to Pete for his comments.

Thanks, Clay.

What I'd like to do is talk about some of the trends that we're seeing, some of the issues that we face and also kind of give you a quick tour of the world showing where we believe some of the business will be. I'll try to make these comments brief and get you on to Q & A as soon as possible.

First as you take a look at the trends, it's clear that we are in a new build cycle. If you go back the last couple quarters, I think most everything has been in the jackup arena while there have been some land rigs announced. This particular quarter you're starting to see the floaters come out.

Probably for the first time that I would say in almost 25 years you've got a new build cycle that includes land, jackups and floaters being built simultaneously, as well as domestically and internationally. When I break down the backlog you'll get to see that in a little bit. This is really one of the few times that you've seen all three legs of the stool really kind of standing and hitting.

Another interesting element of this trend is we're starting to see operators buy rigs. What I think this leads you to is the fact that most of these operators know that they have very solid drilling programs, and they have programs that can keep these rigs running, say on land, for a three to four year time frame. Obviously that bodes well for future business but it also says that they feel comfortable investing in those rigs and getting a pay back, rather than having to go to some of the established companies and get the rigs themselves.

Second element I think in the trends right now is refurbishments. Again, these rigs are very old. You're starting to see some elements crop up where people want to drill wells efficiently. If you're paying $20,000 a day for a land rig, or $300,000 a day for an offshore floater, you want to make sure that drills as efficiently and effectively as possible.

The consequence of that is they're looking for more equipment. A lot of our back log today isn't necessarily a package but it's individual components of things like iron rough necks, pipe handling systems, hex pumps, new SCR systems, things like that, that really enhance the efficiency of the rig.

Third part of it is the technology. People want the best rig they can possibly get. They want it to drill efficiently. They want things to do well. When you're looking at these rigs that are being built what you are seeing are Cadillac rigs.

These rigs are going to have most of the bells and whistles that you need. They are going to have the handling systems, they're going to have the control systems. All of these things play very well to our product development over the years. And I think that's very important and one of the biggest trends that you're seeing today.

A lot of the lower end rigs are ultimately going to move out of the market. What that also means is that you're probably not going build up capacity quite to the levels of the absolute numbers would show because I think you're going see some retirements of these rigs.

I think the third trend, or the fourth trend obviously is the hurricane. I think the hurricane has done a couple of things. Probably one of the biggest things that it's done is make people take a second look at the mooring systems that a lot of these rigs have. This past hurricane, a lot of rigs broke loose from mooring systems. I'm not sure if any of us have ever designed anything that can handle a Cat 5 if it hits a rig directly.

There's going to be a lot of pressure from the Department of the Interior, obviously the MMS, to try and see what they can do about changing mooring systems and make these rigs be able to withstand a little bit more. I think you're going see a lot of action because of these hurricanes. People will take a look at the design of the rigs that they have out there. They're going to take a look what the future is going to bode, how you can maybe start looking at 100-year storms and improve the type of equipment you have out there. Again, we stand ready to help our customers do that.

Finally, Clay mentioned earlier a lot of our services. We had a very solid quarter with our services. They did a wonderful job. Each one of those services is really designed to help the rigs become more efficient.

As an example, our pipe coating did very, very well. And the reason this pipe coating is so effective is because it gives you better hydraulics when you're drilling. Now you have less pressure losses when you're pumping your mud and you have is a lot of capability to be able to drill faster.

We look across the board at our [MB Tyco] facility. They have automatic drillers that are helping people drill more efficiently. Look at our coil tubing and different things like that really help improve the efficiency of the rig. So everything we're trying to do as a company is really designed to make the rigs more efficient, to provide the operators and the contractors with the best capability. I think the build and the back log and what we've done in our services indicates that people are recognizing that.

Now, the issues for National Oilwell Varco are going be a couple as we move into the future here. Obviously it's execution. This industry had a lot of trouble back in the mid 90s to late 90s when we built a lot of floaters. When you built a lot of the deep water rigs there was issues around on-time delivery, quality, cost overruns, putting these rigs together appropriately.

I think the biggest challenge and the thing we're focused on is executing appropriately, giving our customers on time delivery and giving them high quality products. That is the single most important element of what we're doing today. We want to take care of our customers. We don't want to see a replay of some of the things that have occurred in the past. And the whole organization's focused on trying to execute, deliver high quality products on time, take care of our customers' needs. I think that's going to be the biggest mantra that we have around here to ensure we're delivering these things when people need them.

Secondly, if National Oilwell Varco capacity is a dynamic situation, not static, we continue to work on the processes. Clearly lead times lead out when business is quite like this. I think a lot of times our customers that are used to the last 25 years when they could call up and say, I want something tomorrow and we'd say maybe not tomorrow but the day after. Well, today, we're probably not saying the day after. We might be saying a couple months after.

However, we've been able to do a lot of things on process changes that allow us, with a very, very small incremental investment to be able to enhance the through put in every one of our facilities. I could give you a lot of stories on it. We're in the process of looking at a lot of places right now. We're increasing the deliverability of a lot of our mobile rigs right now. We're doing same thing with mud pumps, land rigs. We're going to be able to take care of the customers' needs. Maybe not quite to the time frame they want.

I think the expectation level is such that we're going to be able to put these rigs out in an ordinarily fashion, that people are going to be able to demand them appropriately and take care of their needs. So those are really the things that are pushing us today. The third element and i think the biggest issue as we continue to have to produce new products. We have to give the industry the technology and the new products they need. Things like the hex pump, fast-moving rigs, automatic drillers, true scan, true scope.

Things like that, that really increase efficiency, continue to ensure products work appropriately are what we're pushing for. That's what's going to continue to differentiate us from our competition in the future. You hear a lot of things about people coming in, competing, but there are a lot of folks building rigs that's 20 years old. The industry doesn't want that. The industry wants the best technology they can get today. We're going to continue to raise the bar through new product development that's going to put us in a position to take advantage of that.

What I'd like to do right now is look around the world to tell you where we're seeing some of the great opportunities, where we think that the future is going to be as we look over the next couple years. Clearly the hottest spot going is the Middle East and south Africa.

The Saudi expansion continues. You start to see every time I come on a conference call, I have upped the Saudi Arabia count. I think last number I heard is they're looking to have about 117 rigs working. That was as opposed to 35 a year ago. So you see the demand that's happening there.

But it's also happening in places like Kuwait, the UAE, Oman, Yemen, all throughout the peninsula right there you're starting to see a lot of demand for new equipment. Again, it comes back to the same thing I was talking about on the trends. These countries don't want rigs that can't do the type of wells they need done. They need to have horizontal, long extended reach wells, they want to have motors, they want to have the hydraulic capability to drill very rapidly.

So what you're seeing is they're demanding the same technology that you're seeing in other parts of the world. I really think now it's a very contiguous global market that it's not like one part of the world wants one type of technology, the other part wants the rest, or a different one. They all want to have the same sort of top of the line technology that can do things.

So you're seeing that throughout the Middle East. I think one of the other elements in the Middle East that's interesting is some of the shipyards there are now starting to put their toe in the market of making jackups and refurbishing rigs over there. I think you'll see especially in the UAE, Georgia, some of those areas, you're going to see those shipyards start to come into the marketplace and try to compete with many of the Asian shipyards for some of this business. And I think there's going to be some real meat here. I think it will enable a couple, three, more jackups to be built in that particular area.

North Africa, and I include that as part of that entire area. Very active in Libya today we expect over the next couple months to sell as much as $40 million worth of rigs into there. As they expand the western presence in Libya, I think that becomes an extremely important market. Very exciting. A lot of western companies are in there looking at tenders.

So, without question, I think the Middle East appears like it's going to be a market place that's going to continue to be very active for quite some time. Not only on the capital build. But once those rigs are in there, I think the service element of what we do and other companies are going to benefit very greatly from the type of wells that are going to be drilled in there.

Second place that I think is really starting to show some good signs of life is Russia. I have talked a lot about Russia. I think you're starting to see more of an emphasis now on larger rigs. In the past they've looked at some of the smaller rigs. Today, again, it's almost a changing equation of lot of the easier shallow wells are gone. Now you're looking at much more harsh environments.

Two of the most interesting areas in Russia are the Yamal Peninsula and Stockman Field in the Bering Sea. Both of those provide some very, very interesting challenges for drilling rigs and operations, and they need to have, again, the top of the line equipment. They need to have things that can really drill the wells more efficiently.

The Caspian continues to be a very active place. I think the Caspian Sea will be very big, both in the Azerbaijan area and the Kazakhstan n arena. You're starting to see more and more activity. We have delivered the Ajup rigs into those arenas. I think that's going to be one that will continue to be very active for the next four to five years.

Also in Russia, you're getting another element today. They're starting to refurbish a lot of their rigs and make more of the components. When I go back to the backlog, we're seeing a lot of components go in there, so we're selling things like top drives, BOPs, iron rough necks, things like that that are going into Russia to help improve the rigs that they have there.

Third of course is China. And China continues to be both a user of drilling equipment and of course for us a provider of drilling equipment. One of the more interesting things that have happened here over the past quarter is the New Delhian shipyard is starting to become very active. You've seen some announcements regarding new builds coming out of there both on a jackup basis and floater basis.

I think you'll see more Chinese ship yards start to put their toe in the water regarding this and especially as they move away from some surface ships. Additionally, the Chinese market continues to be very active. Again, on a component basis, they want a lot of the technology, top drives, the rough necks, pipe handling systems. So I would expect China to be a good market, but also a good provider.

In this past quarter, we did complete another joint venture in China and Bombay for pipe coating. And we continue to very aggressively look at different thing sin China to help improve our manufacturing base and our ability to support our customers.

Latin America, Brazil I think is going to be very active. Even in Venezuela today you're starting to see some activity improvement. Clearly there's some issues in Venezuela, but I think they need a lot of equipment. As long as they prepay and do things like that, we're very happy to support them. I think those would be good areas.

The other part of Latin America is Mexico. I think between Brazil, Venezuela and Mexico, you're going to see a very active oil field and you're going to see some demand over the neck couple of years.

Asia Pacific, it's really all about the shipyards. When you look at Singapore, and then of course with the floaters, you're really starting to talk about Korea. The Koreans are -- they have a very solid base of being able to develop semi-submersibles, drill ships very efficiently. You're seeing a lot of the new build activity gravitate toward the Korean ship yards. Of course in Singapore, PPL, Jerong, you're seeing kind of the ultimate of being able to build the jackup rigs.

I think that particular arena and the world is going to be very important to us more for the new build. In some cases, people like Keppel Fels are booked up through 2009 down there in the shipyard with the jackups that they're building. Those are kind of the big areas.

Obviously Europe we're starting to see some increased activity. The real story about Europe, are really the Norwegian investors that are investing a lot in the new build jackups and floaters they won't necessarily be built there. Lot of the equipment won't come from there. Lot of the investment is originating from there. We think that's going to continue to be very positive deal.

The U.S., you're not seeing much on the off shore arena yet. You are seeing some that are doing some things. Obviously the hurricane is going to change that, too, on refurbishments. Really, the U.S. today is kind of a land build story. You're seeing a lot of the majors, both on whether you're looking at drilling rigs and/or work over rigs, you're seeing a fairly decent expansion and people trying to start picking up a lot of different rigs there.

So that's kind of a quick run through of the world. I'd like to talk just a moment about our backlog. As Clay mentioned earlier, it's $1.75 billion, about 25% domestic, 75% international. It's about 38% land, 62% off shore. On the 38% land, that's split 50/50 international/domestic on the 62% off shore that's split 10/90 domestic/international. So about 10% of that's here, 90% is international.

I think the activity over the next couple quarters is really going to be floater driven and technology driven. Goes back to what I was talking about earlier in the trends. I think the floaters are the things that are out there when you look at the number that have been announced versus the number that have been ordered. There appears like there will be some very significant activity.

One other point about our back log, it's very diverse. The top customer only has 12% of it and it's very widespread. The top seven customers only have 33% of it. So you can see it's a very widespread and diverse backlog.

Finally, I just like to make one or two comments about the merger. Things have gone very well. I'd like to thank all the employees of National Oilwell Varco for their patience, their efforts and the things that they've done to help push this merger along. We're seven months into it. I would argue lot of companies when they're 7 months into it are still kind of learning a lot.

I truly believe we've got most of the heavy lifting behind us. We're very excited what we're doing. I greatly appreciate all the efforts of our employees. So that's a quick rundown.

At this point, I d like to open it up for any questions that anybody might have.

Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS]. And our first question is from Ken Sill. Please state your company name followed by your question.

This is Ken Sill with Credit Suisse. I had a question, since we're going over the backlog. Out of the rigs that have been announced, how many do you estimate are still to come into backlog? And do you have just kind of a ballpark figure where you think the new build total could end up for the floater side?

Ken, that's really a fairly dynamic number. I'm going to kind of throw some things out that I have heard that appear to be kind of industry-wide numbers. The other day there was a deal that came out that said there were 40 floaters being ordered, or that have been announced. And my guess is that if there are 40 floaters that have been announced you probably had about seven or eight that have been ordered. Okay? So that shows you there's a big, big differential.

Probably on the jackups there's as much as 60 of them that have been announced. Again, I'm kind of using -- these aren't necessarily my numbers. These are numbers that I have read throughout the industry so I can do something that's kind of out in the market place. If I would guess if there's 60 jackups that have been announced, probably 40 have been ordered, some place in that vicinity.

So what it says is there's still a whole heck of a lot out there to be ordered. But secondarily, there's an awful lot of conversation by other contractors about trying to add to those numbers. So I think what it says is probably over at least the next year, you're going to have a fairly robust market place.

That's a little bit higher order book than we've got from the formally announced ones but probably indicative of where we're going to go.

If you got to track through and see what some of the people have written about the Norwegians and the like, I think that 40 and 60 number -- There's different things that people have talked about but those seem to be fairly decent numbers.

That's inclusive of options and projects being considered. That's everything under consideration. That people have made public.

That makes sense then. As a follow-up, are you seeing with rig rates as high as they are now, are you seeing any existing customers coming in and ordering major spares, particularly after the hurricanes? Is that something that's starting to show up in a back log or is that still to come?

Spare parts will never show up in our back log. Our back log is really only for significant pieces of capital equipment that, for instance, are over $250,000. So when you say spares we have a tendency to think about the parts that make the equipment run.

Certainly, there's a greater demand today for spares and a lot of our customers are probably bulking up on the amount of spares that are on their rigs. The real reason for that is because downtime becomes so much more precious today. When you're running a land rig for $20,000 a day, or an offshore rig for 300, a little bit of down time if you are on a 0 downtime clause can be very, very expensive. Having an incremental spares to take care of that makes a lot of sense.

I was thinking more in terms of spare BOP stacks or riser or like major piece of equipment just in case something happens they could replace it quickly?

There's been some of that, but not anything that I would say that adds a material impact to our backlog at this point.

Okay. I'll let somebody else ask questions. Thanks.

Thanks, Ken.

thank you. Our next question is from James Wicklund. Please state your company name, followed by your question.

Banc of America. You talk about all the shipyards that are expanding capacity that's out there. What are you guys doing to expand capacity, both in terms of rigging up yards, I guess that's mainly for land rigs and terms of increased manufacturing. You were saying people used to say I need it right away. Now it's a longer time frame. With the number of rigs under consideration, don't you have to add capacity?

Jim, when we talk about capacity, we are enhancing our capacity. But I think what you're not going see much of is an incremental roof line. We've got a lot of roof line. What we need to do today and what we are doing are changing our processes so that we can get a lot quicker throughput.

As an example in our mobile rig facility out in Texas we fully expect to be able to double the throughput out there with very minimal investments but lot of fairly significant process changes. Also, we have to do a lot of procurement changes on lead times, things like bearings, castings, forgings that take a little bit more time. In the past, we haven't bought more of those in anticipation of orders where today we will.

So we are going to increase our capacity. We are doing it on a daily basis. We fully expect to be able to handle all of the demands of our customers by doing that. What I will also tell you is that we're going to be able to do that with a very, I think, very efficient investment policy.

We're able to take our quality tubing as an example, we're building another line to be able to manufacture more of that. And we're able to do that and very efficient investment levels. So that's the goal for us. We are going to increase our capacity. We are doing it on a daily basis. We will be able to, I think, meet the demand of our customers. However, unfortunately, some customers say I want 50 of them tomorrow. We're never going to get there.

You're never going to make everybody happy.

But we're in the process of doing that. When I talk about the real goals for us over the next year, Jim, really do have to be with improving that through put in all of our facilities.

Now, I realize this is going to be an awful fuzzy question, but just in terms of throughput capacity components, major parts. Over the next 12 months, or in 12 months, about how much do you expect to have increased your throughput by?

That is a fuzzy question.

Are we talking 5% or 20%?

I think we're really going to be able to certainly, the 30% and 40% range is not unreasonable.

Okay. That's very helpful. Last question. You guys said last time in terms of rig technology and if I don't get this right correct me.

Clay, you were saying pricing was not something you were going to really focus on dramatically. Now you're going to work on processes and efficiencies. Have you got to the point yet where demand is so strong you're ready to start talking price book increases?

I think we're about there, Jim.

That's it?

We're not sure who's listening in. Certainly, we're there.

Okay. As long as you're there. Thanks gentlemen.

Thanks, Jim.

thank you. Our next question is from Roger Read. Please state your company name.

Natexis Bleichroeder, Inc. Maybe if I could follow-up on that last question. What sort of magnitude of price increases would you consider across your various segments?

Well, in our petroleum services and supplies group, we kind a, I think most of the businesses there, we've looked at sort of 5% to 10% price increases kind of maybe every other quarter has kind of been the pattern. It varies obviously by product line and by region. But we've seen those kinds of moves.

We're probably looking at comparable kind of moves in our rig technology segment going forward. We have had a little bit of price improvement on spare parts a little earlier, but I think now that will start moving into some of the capital equipment units that we sell as well. Distribution is a tough business. They have a lot of competition in that area. It's a tougher business to raise prices in. I suspect a little bit of price improvement did help contribute to the margin improvement.

Okay. And then, the other question I had for you. Margins in the rig technology segment, they've been creeping up slowly but surely. Obviously pricing increase is going to help there. Is this an area where you're seeing more of the benefits of the merger or less of the benefits of the merger? I'm just trying to get a magnitude of margin expansion. Or do we just simply plan on something in the incrementals as you said before, between 15 and 20%?

We got it 22% incrementals for that business, kind of all of the things being equal. We believe there's obviously lot of things going on with mix and everything else in that business. We've kind of sorted through all that and believe we're seeing, starting to see the first effects of the merger flowing through in that product line. I mentioned in my remarks we had 6 million in total savings in Q3. Not quite half of that came from the rig technology group and is starting to --

Okay. Thanks.

Thanks, Roger.

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 want to back to Ken Sill's question. I think you were talking about the number of floaters and jack ups ordered. How many of those rigs have placed orders for equipment?

Again, Scott, kind of what we were talking about, if you got 40 floaters out there I'm thinking in terms of probably 10 have placed equipment. If you use the number of, say, 60 or 59 jackups I would say probably 40 have placed orders at this point.

I just wanted some clarity on that. Pete --

That also, Scott, and I will tell you, that's a number that certainly isn't GAAP by any stretch of the imagination. There's a lot of noise out there. There's some people that I think they say well I'm going to build this. They want to see how the market reacts. I have kind of said I support those reasonably and I'll kind of use those. But you could read things that people might disagree with those.

Okay. Pete, let's go back to the end of the second quarter when you were talking about the then record order flow in Q2. Kind of indicating that that was going to be very difficult to repeat. You clearly did more than repeat it this quarter. I guess what changed during the quarter to accelerate the order flow versus what you were expecting back in July? And then if you could also provide any commentary what you think order flow might look like here in Q4?

I'll tell you what changed. We've got a lot of people chasing that work. We did a wonderful job. I just would have been very remiss to presume that we could have gotten that much in. Going through the merger and doing all the things, I had to kind of hedge my bets on the low side, but I'll tell you what. Our people have done a MAGNIFICENT job. I think that's the reason that you see that $900 million inflow, Scott.

As far as the future, there's a lot of stuff out there. There's a lot of comments, lot of talk. I think obviously the fourth quarter is always impacted by Christmas. You've got a couple weeks there in December that you don't get much done. We think that there's -- the potential is still very very positive on getting orders. I would really be remiss to say this is what we're going get. There's a bunch of stuff out there.

We've actually gotten some orders in the 28 days between the end of the quarter where we got this off to today that are very substantial orders. These take on a life of their own and run out. I would say this: I'm pretty comfortable that we've got a back log that probably is going to show some growth again in the fourth quarter.

Okay. Scott, one other comment on that. We are seeing more floaters coming in. Those come in in bigger chunks. As you go from Q2 to Q3 we've had a couple big floater orders come in. As we said before, we can make up to $41 million on a jackup package, for a floater, we can make up to $100 million. In fact, we can exceed $100 million.

Just a couple real quick accounting questions. In your press release I think in your comments you said in rig technology, delayed shipments of $9.2 million of revenue and operating income of $4.4 million. Why such a big margin on just delayed shipments?

The margin attributable to the delayed shipments is about two-thirds of that $4.4 million. The other has to do with facilities shut down during the hurricane, fixed cost associated with those.

Thanks. Lastly, Clay, we had $7.6 million charge in Q3. Any M&A charge expected in the fourth quarter?

Yes. Probably at the same order of magnitude, Scott.

Thank you.

Thank you, Scott

Thank you. Our next question is from Jim Crandell.

Morning Pete and Clay.

Okay, Jim. How you doing?

Good. I'm going to guess your September orders were at least $0.5 billion, and we're going to look forward to seeing over $1 billion order quarters going forward.

I certainly hope so.

That was a forward-looking statement.

If September is as good as I think it is for the month, how much of your business in September approximately was hurricane-related and can you try to quantify the business opportunity in mooring systems and other things that could come about from stricter regulations?

The railway, Jim, and the back log that I announced, I would say there's very, very little of that that's hurricane-related. Because most people, by the time we closed out the quarter on the first of October, they were -- they really hadn't assessed completely their damage. As a matter of fact, in the last week or, so we probably gotten in the first orders maybe in the magnitude of about 15 million to 20 million that we think we can track directly to the hurricane. And so I think you'll start to see more of that flow through in this entire quarter.

On the mooring systems, it's really going to be kind of a case by case type analysis. I do know some of our customers have spent as much as $60 million on particular rigs to install mooring systems that were much more cat three, cat four type mooring systems. That really though becomes kind of a case by case. Depending on the type of rig you have, the type of mooring system you want. Certainly $60 million on an individual rig basis is not out of the question.

Wow. Okay. Pete, how much are the new top of the line land rigs you're building for the Middle East going for approximately?

Again, it's kind of a depending on the rig, but let's say you're going to have a 2000 horsepower rig that's got most of the bells and whistles. Top drive, three mud pumps, probably an expanded or an extended substructure. Those things, Jim, can be as much as $20 million. That's without drill pipe.

Rally? Okay. Last question, Pete, looking just past these near-term consolidation issues and looking at your business as being in a prolonged boom phase for let's just say the next three to five years, what do you see as the main execution risk for the Company in a prolonged -- sort of global boom in new construction?

I really think, Jim, it comes back to quality and on-time delivery. I think without question, that's what we have to be able to provide this industry. I want to have products that work when we get out there and I want to have products delivered on time. The industry in general doesn't have a great record of doing big projects.

If you go back to the mid to late '90s when we were doing a lot of those deep water rigs, there were some bad stories. There were some significant cost over runs. Lot of it had to do with equipment delivered late. Lot of it had to do with ship yards and project managers that just couldn't get along. I think as an industry, what we've got to do is ensure that we have those products where they need to be, when they need to be there and that they work appropriately. That's really going to be the mantra and goal to ensure that that happens.

I think that's the single biggest challenge we'll have to take care of our customer over the next three to five years.

Okay. Great. Thanks, guys.

Thanks, Jim.

thank you. And our next question is from Robin Shoemaker. Please state your company name followed by your company name.

Bear Sterns. I was wondering Pete if you could update us on the sales of the ideal rig and the hex pump and how that's going versus your hopes or expectations?

On the hex pump it's going very, very well. I don't have the exact number in front of me, but I'll say it's about 20 to 25 of those that are out there. We've got that are some that are working right now and doing well. We're very pleased. I think the operators are appreciating them. I have talked a lot about the pulseless flow and some different things like that. That's going very well.

On ideal rig, again, don't have the number sitting in front of me, but I think we're up to 10 or 15% of those that are going out. We've got some that are out working right now. Again, they're doing very well. We've actually just developed kind of a little sister to the ideal rig called the rapid rig. We're starting to market that. It's being received very well. We'll have one of those at OTC this may.

I think it's going to be a good offshoot. We're pleased with what we've done with that. Acceptance has been real positive.

And how about like on these smaller rigs and rapidly deployable rigs? What about like the competition from China and others? What is a competitive landscape there and how are you responding to that?

I think the competitive landscape there is probably a lot more noise than reality. I think we've been in China for a long time. We've been there now for about five years. We understand I believe the challenges to manufacture. I think some people think they can go over there and order ten rigs and get ten really fine rigs coming over here within six months for them. That's not the case.

The processes over there we think we've gotten down, so we're pretty confidentwe're going to be able to compete. I tell you, the thing that we've done and the Chinese have not been able to do, some of those competitors is the technology aspect of things. We're raising the bar. These ideal rigs, you can get a standard substructure and mass out of China and bring it over here, but it's not an ideal rig. It can't move in a day as opposed to five days.

I think that's where the big difference is going to be. You want hex pumps you come to us. You want good electronics, you have to come to somebody different. What you have in many cases, the Chinese rigs you're hearing about are rigs that are really almost vintage 20 years ago. Today, the contractors and operators want rigs that can run today.

That's even on the smaller rigs. You look at things like workover rigs. We developed the millennium rig which is PLC controlled. There's very few workover rigs that are like that. This is a rig that's in high demand. We think by raising the technology bar and continuing to keep that raised, we're going to be able to handle the competition out of the parts of the world.

Okay. Thank you.

Thanks, Robin.

Thank you. Our next question is from John Tasdemir. Please state your name followed by your question.

I tell you, back log numbers just keep impressing. But it is actually make it more difficult to try and determine I guess on a quarterly basis or annual basis of what the revenue contributions is going to be from the back log seems like we've got major projects that are going to extend many years. Is there any way to help talk about revenue contribution from the back log and 2006 or progressively how much of that back log is 2006 oriented or growth rate on kind of back log driven revenues year over year and anything to help?

Yeah. John, I think what I would direct you to is really the top line for the segment. I really wanted to clarify this, that the same factories and same plants that produce back log revenue all make non-back log revenue. That's how we account for back log.

I want to caution you not to get too focused on revenue out of back log revenue. It depends on how the order is placed. I ran through that in my opening comments. I think what we foresee here is continued kind of top line growth for the segment.

This quarter it was actually down half a percent sequentially. You put the hurricane shipments back in there, we'd have been up another 1 or 1.5%. I think we're going to see kind of steady top line growth for the segment going forward.

Well, it would seem to me like the top line growth for that segment would outpace drilling activity simply because your back log is moving up. It's such a rapid clip.

And I think it will. I think but for all of the big integration moves that were going on in the quarter, this group would have done more in revenue. Certainly had an impact on the Q3 results.

So I guess at this point, you're not ready to say that 2006 revenue in that business ought to be 20% growth in '05 or 10% or 50%?

No. Going back to Pete's comments we have capacity to do more. We expect revenue in that group will continue to move up. I'm going to stop short --

All right. And then I guess one follow-up question is, you talked about the distribution business, margins that were extremely high for that business. You said some of that had to do with higher rebates from your suppliers. I'm not sure I understand that. Does that mean that's not really repeatable and that the 4.6 number, that you said is probably more indicative of the margins in that business?

We have supplier rebates every quarter. They're typically tripped by the volumes. Achieving certain volumes with our suppliers mean we get a better price. And we have a little bit of that. This quarter it seemed larger than is typical. I would expect some supplier rebates to flow through in Q3 as well. I'll not sure we're going get the same order of magnitude.

Thanks, guys.

At this time, I would like to turn the call over to Mr. miller for any closing statements. Please go ahead.

Thank you. I appreciate everybody calling in today. We look forward to talking to you again probably in February when we do the end of the year call. Thank you very much.

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