國民油井華高 (NOV) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the National Oilwell Varco fourth quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder this conference is being recorded today, Friday February 24th of 2006. I would now like to turn the conference over to Mr. Pete Miller, Chairman, President and Chief Executive Officer. Please go ahead sir.

Thank you [Marsia], and welcome everyone. I'm the Pete Miller the CEO of National Oilwell Varco and with me on this call this morning is Clay Williams our Chief Financial Officer. Earlier today we announced fourth quarter 2005 earnings of 101.6 million or $0.58 a share and revenues of three point -- I'm sorry $1.37 billion. Included in these results was 13.5 million of pretax charges or $0.05 per share after tax. These are -- these charges were related to the merger between National Oilwell and Varco that was closed on 11 March, 2005. Excluding these integration and stock based compensation charges, earnings were $0.63 per fully diluted share. In addition we also announced our -- our year end backlog of $2.3 billion. This backlog included new orders in the fourth quarter of over $900 million, again a very robust quarter. I will go into that backlog a little bit more in detail when I come back and give you kind of an operational overview on our business. Overall I'm very pleased with what occurred in 2005 for National Oilwell Varco. Obviously our biggest challenge was bringing the merger together and I believe we've done a very successful job with that. I think we've kept our eyes on customers' needs. And we've kept our eye on the needs of our shareholders. For that I'd like to thank all the employees of National Oilwell Varco for their dedication and effort to make this come together the way it has. We have challenges ahead of us but I'm pleased with the things that we have been ac -- able to accomplish.

At in point I'd like to ask Clay to give you an overview of the financial results and then he'll send it back to me and I'll kind of give you an overview of what we're seeing in the industry and our operations around the globe. Clay?

Great. Thanks, Pete. Before we begin this discussion of National Oilwell Varco's financial results for fourth quarter and year ended December 31, 2005, I would like to point out that some of our statements we made during this call may contain forecasts, projections and estimates -- excuse me -- including but not limited to comments about our outlook for the Company's business 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 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 National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of some of the risks -- risk factors affecting our business. Additionally we may at times refer to results excluding certain discontinued operations, merger integration litigation, or asset impairment charges or gains, and 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 on our web site at www.NOV.com or in our 8-K filings with the SEC.

National Oilwell Varco generated earnings of $101.6 million for $0.58 per fully diluted share in it's fourth quarter ended December 31, 2005. And $286.9 million or $1.81 per fully diluted share for the full year 2005. Report GAAP revenues were 4,644.5 million for the full year 2005. The merger between National Oilwell and Varco closed on March 11, 2005, which means that the 70 days of Varco results in the prior year -- in the year prior to the merger are not included in these full year GAAP results. In our quarterly disclosures, and discussions since the merger we have identified transaction integration and stock based compensation charges including items such as severance, restructuring, equipment and inventory rationalization, amortization of op -- options issued to replace Varco options, and write offs of discontinued product lines related to the merger. We have also presented supplemental pro forma results as if Varco and National Oilwell had been merged throughout 2004 and 2005 in our press release on our web site, through our 8-K filings to better identify trends in our businesses and provide more meaningful comparison. Many of our comments this morning will speak to the results on this pro forma basis as we have done on previous earnings calls. We tend to look to these internally as well to evaluate results. I also note that our identification of inter-company accounting errors led to our restatement of 2004 results in an amended 10 form -- form 10-K filed last week and that these changes will be incorporated into our -- our remarks as well.

The fourth quarter of 2005 includes $13.5 million of pretax charges related to merger and integration activities. Excluding these charges, earnings were $110.6 million or $0.63 per fully diluted share. Revenues were 1,377.4 million and operating profit excluding these charges was $177.3 million or 12.9% of revenue. Sequential sales growth was very strong. The flow throughs were below expectations in a few areas, and I'll address these in just a moment. Compared to the third quarter, revenues rose 11% and operating profit excluding transaction charges was up 16%, representing 18% operating leverage. Compared to the pro forma fourth quarter of 2004 revenues rose 24%, and operating profit excluding integration charges was up 41%, representing 19% operating leverage. For the full year 2005 pro forma for the Varco merger and excluding transaction related charges, the Company generated $557.8 million in operating profit on 4,952.4 million in revenue, or 11.3% operating margin. This compares to 371.1 million in operating profit on 3,886 million in revenue for 2004 on the same pro forma basis. Year-over-year revenue grew 27% and operating profit was up 50%, representing 18% operating leverage.

Overall, National Oilwell Varco continues to perform well in an outstanding market. 2005 saw worldwide oil and gas drilling activity rise to levels not seen since the early 1980s and day rates for rigs have moved up sharply through the year as a result. I would like to offer a few observations about the current market. First, virtually every rig that can work is now working. Rising day rates lured many older rigs back to the market and National Oilwell Varco has played an important role in providing the equipment, consumables and services needed to make this happen. Our sales of individual drilling components, many of which do not flow through our backlog, generally trended up through the year as operators reactivated rigs for service. Second, technology has advanced significantly since most of the existing rig fleet was built. The industry invested very little during the late 80s and 90s on new drilling hardware. But new drilling technology progressed steadily none the less as we and others continued to invest in new and better ways of drilling. As a consequence, the safety, reliability, and efficiency of new modern rigs far surpasses most of old rigs still around today. This has not gone unnoticed by the MP world which demands top performance from drilling rigs, particularly at the premium day rates being paid today. As a result, National Oilwell Varco has benefited from a strong push to upgrade certain rig components to make them safer and more efficient. New products such as our small iron roughnecks for land rigs and our LXT block preventers saw very high demand in 2005.

Third, rigs are being run harder. They are being asked to drill deeper wells, more complex wells and highly deviated and horizontal wells which require bigger rigs with more capability. Our day rates magnify the opportunity cost of down time and rigs are being pushed harder than ever to maximize revenue days. In a broad sense drilling actually consumes rigs. It's mechanical components wear out and need periodic repair or replacement. A few years ago a drilling contractor in need of a replacement component to get his rig back to drilling was more likely than not to cannibalize that component from an idle rig in his fleet rather than place an order with NOV. As the fleet of idle rigs has dwindled, the availability of used parts has dwindled as well which has spurred incremental demand for re-components from our Company. Again many of these do not necessarily flow through our backlog. Additionally, changing methods of drilling had benefited our business. As the largest independent provider of drilling motors through our Griffith Vector line, we have seen first hand the application of more motors applied to performance drilling in addition to their traditional directional drilling application. This trend has driven demand for more and bigger mud pumps which we also provide.

Fourth, personnel are very tight -- or in very tight supply in the oil field. There were 450 more rigs working in the fourth quarter of 2005 than there were in the fourth quarter of 2004. This means that there are now 450 new crews working today that weren't working a year ago. Experienced crews are more likely to perform routine maintenance and take care of rigs. Lapses in maintenance add additional stress on drilling machinery. Additionally, drilling contractors are faced with new competitive pressures to attract and retain experienced crews and new or more modern rigs continue to be the best places to work. Finally the lift in day rates have made economics of the billing new rigs compelling many markets. For the first time in many many years the world is actively building land rigs jackups, and floaters in ernest. National Oilwell Varco has fared very well in winning orders for equipment for these new rigs and we finished the year with a record backlog as a result. If you have seen our investor presentation you know how highly we value technology, quality and reliability and we have consistently focused on the high end of the market. Our mission is to remain the preeminent supplier of the best drilling technology available. That's what our customers have relied upon us for for over 100 years.

Going forward, we expect another strong year in 2006. Although the warm winter across North America has resulted in some nervousness in the gas markets, in the longer term this region faces significant gas deliverability issues. Likewise gas supply disruptions in Europe in recent months have exposed this region's vulnerability as well. Oil remains subject to significant political risk in many regions and in the entrance of China and other emerging economies into the oil equation further clouds the supply/demand picture. In short we believe the very high commodity prices that have resulted will continue to sustain very high levels of oil field activity. The other driver of activity is the nature of mature and declining oil and gas fields. Declining production invites more activity, not less. North America is arguably the most mature oil and gas production area in the world and nearly 70% of all the rigs working around the world are at work on this continent. If -- if economies and commodity prices hold we believe we will continue to see strong demand through 2006 for the critical services and drilling machinery we provide to the world's oil and gas industry. We are proud to play an important role in this vital enterprise.

Turning back to fourth quarter results, we continue to see our integration efforts between National Oilwell and Varco proceeding well. We estimate that savings resulting from the merger were about $13 million in the fourth quarter, split mostly between overheads in our rig technology segment. We believe we are well on track to achieve our estimated savings of $60 million annually or $15 million a quarter. We continue to rationalize and consolidate products into facilities to improve manufacturing efficiency. Our game plan is to combine like products such as top drives, racking systems, iron rough necks and handling tools into the most efficient of factories to improve margins. The execution of these initiatives continued during the fourth quarter and we expect to substantially complete our work on this during the current quarter. Overall our business has performed well in the strong market during the fourth quarter and we have posted 11% top -- topline growth as compared to the third quarter. Each of our three businesses posted higher sales and profits both sequentially and year-over-year in the fourth quarter on a pro forma basis.

Revenue for our rig technology segment was $644.4 million in the fourth quarter. Up 12.5% from the third quarter and up 22% from the pro forma fourth quarter of 2004. Operating profit was $80.5 million or 12.5% of revenues, up from 70.4 million or 12.3% of sales in the third quarter. And up from 69.3 million or 13.2% of sales in the pro forma fourth quarter of 2004. Sequential flow through or operating leverage from third quarter to the fourth was disappointing at 14%. However leverage was negatively impacted by a couple of items that I would like to explain. First, during the quarter we incurred higher expenses than planned on some large 96" king post cranes that we are developing for the offshore market. This reduced operating profit about $4 million as compared to the third quarter. Second, we wrote off several work in process inventory items and increased our legal reserves in allowance for doubtful accounts which totaled $6.5 million combined. Excluding these items sequential flow throughs were 29% higher than our expected flow throughs of 22%. We have believed that we achieved higher than average incrementals, excluding these items, due to about $5 million dollars more in cost savings achieved in the fourth quarter as compared to the third quarter. Also excluding these items, margins would have slightly exceeded 14% in the fourth quarter.

Backlog for the rig technology group surged 31% this quarter to approximately $2.3 billion, nearly triple the combined pro forma backlog for the Company at end of 2004. Net new orders in the backlog of $901 million ticked down slightly but remained extremely strong nevertheless. We have also continue to quote new orders at brisk pace through the first several weeks of 2006. The offshore mix within the backlog continue to rise as many of the incremental orders this quarter were for floater packages. Revenues out of backlog were approximately flat for the third quarter at $356 million and continued to be mostly land rig equipment. All of the revenue growth from the third quarter to the fourth therefore came from higher sales of the spare parts, services, rentals, and smaller equipment not flowing through the backlog like the type I described earlier. As we've explained in previous calls, our measurement of backlog orders applies a some what arbitrary $250,000 cutoff. Many purchases of individual pieces of equipment fall below this threshold and therefore do not flow into or out of backlog. Additionally most of the incremental growth in the backlog this year has been for offshore drilling packages for the many new jackup, semi submersible and drill ship rigs being constructed or undergoing major refurbishment. These customers do not want to receive equipment until they have actually fabricated a rig to put it on. Therefore delivery of this equipment is typically tied closely to the construction schedule of the rig which can take as long as four years to complete. As a result much of our backlog delivery extends well beyond 2006. In effect we have commissioning and installation work out -- out as far as 2010. We presently expect about $1.3 billion of our current $2.3 billion total backlog to flow out as revenue during 2006. With record backlogs and improving efficiency our outlook for this business in 2006 continues to be very good, but the nature of capital equipment shipments continue to make quarter to quarter revenue changes a little volatile. We continue to expect normal flow throughs of 22% for this group and hope to achieve 15% operating margins within the next few quarters due to higher pricing and volumes.

Our petroleum services and supply segment posted another strong quarter generating $513.2 million in revenue and $101.4 million in operating profit. Or 19.8% operating margin. Revenue growth was a very healthy 9% in the fourth quarter as compared to the third, well above the 5% increase in the worldwide rig count. Revenues grew 28% compared to the pro forma fourth quarter of 2004, again, substantially higher than the 18% year-over-year improvement in the worldwide rig count. The sequential revenue growth generated 35% operating leverage due to higher volumes and improved pricing in many areas. [Tube-O-Scope] inspection and coating services Branch [solis] control equipment and services Griffith Vector down hold tools, Martin Decker [topco] rig instrumentation, emission Fluid King all posted good sequential improvement. Additionally the pipeline inspection group posted a sharp sequential improvement as well. Overall the group benefited from a large decrease in depreciation expense related to purchase accounting adjustments stemming from the merger of Varco in -- during the fourth quarter which was largely offset by higher incentive compensation accruals in the fourth quarter as well. The group continues to press pricing in the mid single digit range but the margin impact of these efforts is being mitigated some what by inflationary forces across the oil field as personnel, raw material costs and energy expenses continue to rise.

We expect continued high levels of oil field activity coupled with price increases over the last few quarters to drive continued improvement in 2006, but expect to see our first quarter 2006 results down slightly sequentially due to seasonal effects in our pipeline and fiberglass business and a non recurrence of a large mill shipment to the Caspian region that happen during the fourth quarter. Additionally we will not be surprised to see the warmer than normal winter in Canada result in an early breakup. We continue to invest in this group to satisfy the needs of our customers for drilling motors, solis control equipment, instrumentation systems and other machiner -- machinery we leased to drilling and production operations to meet the rising demand we see in most oilfield markets around the world. Once again, this quarter, about two thirds of our Cap Ex went to the petroleum services and supplies group including an investment in an additional coil tubing manufacturing capacity as we plan to add an additional mill late this year to our quality tubing operation. Over the long run and excluding swings in mix and other factors we continue to expect flow throughs from this group to be in the range of 30%.

Turning to the distribution services group. Fourth quarter results were again very strong with sales surging across North America in -- and in many international locations we serve. Revenue is $308.2 million up 13% from the third quarter and substantially better than the worldwide rig count [roof] of 5% in the quarter. Compared to the fourth quarter of 2004 revenues improve 31% again significantly higher than the growth in worldwide rig count of 18%. Operating profit was $14.9 million or 4.8% of sales. Operating profit rose only slightly and margins declined from 5 .3 % in the third quarter due to the non recurrence of supplier rebate credits in the third quarter which we discussed on our last call. Excluding these net credits, margins improved about 20 basis points from the third quarter. Year-over-year fourth quarter margins improved 100 basis points and the business generated 8% operating leverage year-over-year. The group benefited from heavy purchases along the Gulf coast to support cleanup operations following hurricanes Katrina and Rita during the fourth quarter of 2005 which may slow a bit in Q1 of 2006. Additionally heavy line pipe sales in Canada and high activity in the Rocky Mountain states contributed to the strong fourth quarter 2005 performance. We expect the distribution group to continue to perform well throughout 2006 as we focus on selective expansion into key international markets, strengthening alliances with customers and leveraging our buying power and IT infrastructure to keep costs low. [Plush] fourth quarter Gulf of Mexico sales following the hurricanes and high line pipe sales may not repeat in the first quarter which may limit topline growth in Q1. We continue to expect flow throughs for the distribution business excluding swings in mix and other factors to be around 10%.

Turning to the consolidated fourth quarter income statement. Revenues of a $1.377 billion grew 11% from the third quarter and 24% from the pro forma fourth quarter 2004. Operating profit excluding transaction charges of $177.3 million or 12.9% of sales were up $24.7 million from the third quarter and up $51.5 million from the pro forma fourth quarter of 2004. Sequential operating leverage on this basis was 18% and year-over-year operating leverage was 19%. Interest expense was $13.5 million down from the third quarter due to the non recurrence of a $1.1 million charge related to interest rate hedges on Varco debt. Tax rate for the quarter and the year was approximately 32.2% and we expect the tax rate for the coming year to be in the range of 33%.

Turning to the balance sheet, working capital excluding cash and debt was $1.607 billion at the end of the fourth quarter, down about $42 million from the third quarter. As a percent of annualized revenue, working capital on this basis declined to 29.2% of sales at year end, compared to 33.3% of sales in the third quarter. Accounts receivable and inventory were uses of cash due to higher revenues and backlogs respectively, accounts payable accrued liabilities, billings in excess of costs and the customer prepayments were sources of cash in the quarter. Capital expenditures in the quarter totaled $37.2 million up $7.8 million from the third quarter, due mostly to investment in the new quality tubing mill I mentioned earlier, a new consolidation accounting package related to the merger and IT investments in the rig technology group. We expect the Cap Ex for the full year 2006 will be in the range of about $170 million. Up about 40% from the pro forma prior year. Depreciation and amortization was $28.5 million, down 6.1 million from the third quarter due to the purchase accounting adjustments coming out of the Varco merger that I referred to earlier. We expect depreciation and amortization to be in the range of about $33 million in the first quarter. Cash totaled $209.4 million at December 31, 2005, up $47 million sequentially. Debt totaled 841 million and debt -- net debt or debt less cash was $632 million. Net debt to total capitalization was 13.1% at the end of the quarter.

Both National Oilwell and Varco consistently pursued acquisitions for many years prior to our merger to build and grow our businesses and most of our business -- businesses as a result boasts leading market positions. We are pleased to report that we are resumed our corporate development efforts with good success since closing and see many interesting acquisition opportunities for our Company. During the fourth quarter of 2005 we closed three small acquisitions including the purchase of 80% of a manufacturing business in the former Soviet Union, which makes coil tubing equipment, and a domestic business which rents proprietary electronic drift instruments. We also purchased a manufacturer of oilfield valves for mud pumps a few days ago which brings the total number of transactions closed to eight since March 11, 2005. Total consideration for the transactions was in the $40 million range. At this point let me turn it back to Pete for his comments.

Thanks clay. At this point what I'd like to do is kind of give you a brief overview of some of our operations, give you a little bit more of an explanation of the backlog and then talk a little bit about some new products. As Clay pointed out, our distribution group performed very, very well during the quarter and actually during the year. Right now, our distribution and our -- and our services businesses are really being driven by the worldwide rig count. I think as you take a look at the rig count increasing, you see the improvement in these businesses both in pricing and the amount of business that we are able to do. Additionally these businesses are also benefiting from the fact that we are building new rigs. And as you build new rigs the yards were there being built have to have the -- MRO type products and the services that we provide to help get those rigs ready to go into the field. And then of course once they go into the field they enhance our business opportunities while they're there. In distribution, this year really I think is going to be more of an inter -- international growth story. We're really looking forward to being able to expand into arenas where we haven't been before and we're also getting a lot more interest and direct integration. I think most people are starting to understand, a lot better, the total cost of the supply chain management. As that happens it plays well to the strengths of the distribution group and we see a lot of growth opportunities there. Additionally when you see plays like the [Fayetteville] shale, the Barnett shale and the Rocky Mountains, I think all of those areas are going to really increase our opportunities in the distribution area.

In our products and services groups it -- it really is kind of a neat array of companies that we have. I think many times we probably don't talk enough about these individual companies, but when you really think about it, when you think about [Tube-O-Scope] and Mission and Brandt, and MD Topco, Quality to -- tube, Star fiberglass, these are in fact the top players in the industry. You know, these are the ones that are the household names and when you look at the -- at their penetration into the market it -- it really is something. I mean when you want you pipe inspected you call for Tube-O-Scope. When you want mud [pup] expendables you call for Mission. When you want downhold tools you call for Griffith Vector. And I think these are going to be -- these are the the leading lines. And really are dependant upon the worldwide rig count. And I talk about worldwide because that is very important to what we are doing. It is not just to play in the lower 48, which is a lower mature oilfield, but it's a play all over the world where we're expanding these operations. The other thing that we really have that is very unique about these operations, because of the geographic dispersion, we're able to utilize the capacity that we have in areas that aren't quite so hot. As an example, I was down in Odessa recently which is very active on our Tube-O-Scope coating business and they were actually shipping pipe up to Oklahoma to have it coated there where it wasn't quite as active, even though it's still very hot. But they were able to ship -- ship pipe and go back and forth. And I think that geographic des -- diversity like that really helps us in being able to take care of our customers.

So I think as you go forward and you look at those businesses you see that -- that there is a lot of opportunity out there. We're looking at what we are doing around the world. I think our growth in the next four or five years is really going to be in the international arena while we are able to -- to continue to -- to have the market presence that we have in the United States. So we're very excited about all of those particular businesses and I think as Clay kind of pointed out in the numbers, they're all -- they're all producing quite well. That -- that really is where we have the most immediate impact on pricing. In the capital equipment business to pricing is going flow through a little bit more slowly but in that business we've done -- we've done quite well. So that's kind of a quick overview of what you're seeing there.

Now I'd like to go into a little bit of the capital business and rig technology. What we are really seeing here, I think the U.S. players are starting to come into the market a little more than they have been. When you look at the -- at a lot of the offshore rigs that were being announced in the last couple of quarters, most of that was -- was coming out of the Norwegian sector in the North Sea. A lot of the money plays were there. I think you're starting to see a lot of the U.S. based equity companies kind of coming into the market today. In addition to that, you're seeing the U.S. land players start to get more involved in the market. We have a significant demand for things like top drives, our iron rough neck. We're producing those as rapidly as we can. Pipe handling equipment. You know you go back into the services group. You know with pipe you have a lot of inspections from our Tube-O-Scope, a lot of coating. You have a lot of pipe being rehabed because people need to get pipe in the field as quickly as possible. That plays very well to the things that we do in -- in our services group but we're also seeing it now manifest itself in the capital group. Our ideal rig has been a popular rig. It's one that we have sold around the world but we're also selling it very effectively now to domestic contractors and I think you'll continue to see that happen. Our coil tubing and wireline group, we're having very active sales with -- with a lot of the major players, whether it's the [slumber jays] and others as we develop more and more nitrogen and coil tubing units and a lot of that will be for the domestic play as well as the international arena. So where -- where I think a lot of the capital was driven more internationally here in the past couple of quarters, I really think a lot of that is starting to come back into the -- into the domestic arena.

What I would like to do, though, is talk a little bit about some of the exciting things we are seeing around the world, because I think that, again, is going to help lead us into -- into different areas. And I think as you look out four or five years, it's really going to develop a lot of the growth that we're going to see with this Company. Starting really with South America, there's -- there's really two major plays there, and I'll also include central America in that. And Mexico, obviously, is a big player. I think [Pennex] is -- is proceeding along with some additional tenders in the Gulf of Mexico. Their doing a lot of things on land. Their refurbishing their rigs and their trying to -- to more or less kind of copy what you are seeing with a lot of the equipment that's being done in the United States which is really upgrade and become more efficient. I think that's going to continue on. Brazil, in -- really in the deep water arena, continues to be active and it's very active in a couple of ways. They're actually looking for some new builds down there and they want to really lock those in to local contractors. So I think it gives us an opportunity to expand our market base by being able to sell some semi submersible type packages to the local contractors down there as well as to support the U.S. based contractors that are drilling in that deep water. Additionally, the Brazilian market has -- is very significant for FPSOs, and today on an FPSO package, we can get as much as 15 or $20 million on that. And I think Brazil will continue to be a growth arena and it really is very -- very much of a focal point on the -- on the deep water.

North Sea is really starting to come back around again. Again, very mature oil field. But if we're also -- we're getting some indications that new platforms are going to be built and on those new platforms we think we're in good position to be able to put some -- some rigs out there. You're seeing an awful lot of refurbishment on what's going on. Things like cranes. You know, rig packages. Different things like that and you're also seeing the Norwegian outer continental shelf starting to become much more active. So I think in -- in that arena, you're going to see more opportunity as we go through the next -- the next couple of years. And then, of course, without question a lot of the Norwegian financing on the offshore business, which in -- which in fact, may not come back there but will go to other parts of the world. So that's a very active place for us, both on an operational basis and of course, on a marketing basis.

Middle East continues to be very, very active. Probably the more exciting areas, I think, over the next year will probably be North Africa as opposed to the absolute Middle East. I think the Algerians and Libyans are -- are very active in trying to both refurbish and restyle their rigs as well as bring in new rigs. In the past quarter we -- we -- part of our backlog is about a $20 million rig that is going to be going into Libya and I would suspect that when we have the conference call in the next quarter I'll be talking about some rigs going into Algeria. Those -- those are areas that are -- that are very hot. I think with Libya especially, you're looking in an area that's probably been a little bit neglected. Since we've -- now that we ended the embargo and a lot of the western companies are coming back in I think you will find that to be active. Needless to say Saudi Arabia, again, is a very -- very active place. I think you're -- you're continuing to see the new builds that are going to go into there. That will be an active arena over the next three or four years and probably well past that. Other than that, you have a lot -- the Kuwait -- Yemen is actually bringing in some new rigs. We'll have some tenders on those as the -- as the year goes on. But I think the Middle East overall will remain very active. Another very interesting thing about the Middle East is that it appears they're going to have shipyards that will be building some jackup with rigs also. We think that will be positive obviously for our business and for the industry to get a little more, geographic dispersion on where you can build the jackups. And I would expect that you'll see jackup packages ordered for the Middle East to be built there over the next couple of quarters.

Probably the more exciting place for us right is now Russia. As Clay mentioned we -- we made a little bit of acquisition over there. We've been very -- we wanted to do this for a long time. It's taken a lot of study, we had to make sure that we could find the right partners. A lot of issues that -- that are associated with law and things like that we wanted to make sure that we had right. But we're very excited. We have a -- we have a little operation now in Belaruz. We think that's going to lead to some other things for us over there. It's always been our strategy to be able to manufacture as much as we could as close to the oil fields a possible and it's also the strategy of our customers to try to get as much local contact. So having some operations in Russia is very important to us. Additionally what's going on, since you had the use of the natural gas kind of cutoff that you saw here in December as a political weapon, that's made places like Turkmenistan and the Ukraine be much more concerned about their own ability to -- to produce natural gas. That's provided some opportunity for us to sell a lot of equipment into there. We're actually tendering new rig packages to go into each one of those areas and I think that will continue on. And additionally you have the specter of the Shtokman Field in th Bering Sea. We've said before that looks like that's going to be about a $20 billion investment and we are very excited about getting an opportunity to be part of that.

And then, of course, I'll talk a little bit about Asia-Pacific. Needless to say Singapore is kind of the center of the world right now, when it comes to jackup with rigs. Both Keppel Fels and PPL continue to be very, very active in that a arena. I've said before that I would suspect that -- that type of activity will certainly carry on well through the end of this decade. I think that we're -- we're doing both -- we're doing two things. We're not only building new rigs but we're also replacing some of the older capacity and less efficient rigs that are out there. We're starting to see Korea now being the active player in the floater market, the semi submersibles and drill shrips -- ships that are being built will in fact, center around there. And of course, China, I won't go into it too much. Those of you that have heard me before know that we have about six different operations in China today. China will continue to be very much of a manufacturing base for us and also very much of a -- of a market for us to be able to do different things in there. So that is kind of a quick and dirty rundown of what we are seeing internationally.

Like to talk just a second about the backlog. As Clay mentioned it's a backlog of $2.3 billion. It's more skewed to the offshore today. It's about 76% offshore, 24% land. That is also about 63% international and 37% domestic. That's -- that's always kind of a -- a tough call for us to do that. We -- we've kind of broken that down as best we can kind of put some Kentucky windage on it, to get it there. But we think that gives you a pretty good indicator of where it's going. It's a very diverse backlog. You know no -- no single person, we have one customer that's around 10% but nobody's over that. The new orders this quarter were 900 million. That was a very robust quarter, and as Clay mentioned, what we are seeing in -- in the first part of this quarter is again a very active continuing interest. I think the backlog over the next couple of months is going to be driven by floaters. There's a lot of floater interest out there, be it either a drill ship or semi submersible. There continues to be a lot of jackup interest. And in addition to that, as I mentioned earlier on some the U.S. based land players are coming in. And when we announce our backlog probably at end of the first quarter, you will see a growth, I believe. And you will also see some additional activity in -- in the land business.

Finally, what I would like to talk about, as Clay mentioned, we've made about eight acquisitions. We're excited about all of them, but in particular I mentioned the one in Belaruz, which I believe is going to be, I think a very -- very significant one for us. And it's going to give us an opportunity to expand, I believe in other arenas in Russia. We continue to -- to produce new products. Clay mentioned some of the things from the Schaefer group. At OTC this year we'll have our rapid rig, which is kind of a little brother of the ideal rig. We'll have that on display but we continue to push new product development. We believe very, very deeply that the differentiation of the product and the ability to be much more efficient in drilling is what's going to create the future success for this Company. So that's kind of a quick run down. At this point, Marsia, I'd like to turn it back over to you for any questions our listeners might have.

[OPERATOR INSTRUCTIONS] James Wicklund, Banc Of America Securities

Hi, guys.

Hi, Jim.

The rig technology sequential increase of 12%, I remember on the third quarter call the -- we were all a bit surprised that you were at capacity and revenues were basically flat and the question at the time was, how much can you expand your capacity over the next 30 -- over the next year. And I think the answer was 30-40%. Does that 12% sequential increase represent that increase in capacity you've been working on?

Not necessarily, Jim. An awful lot of the 12%, as Clay pointed out, actually came from some of the noncapital -- or from the non backlog side of the business. Really our capital coming out of the backlog at this point is really driven more by customer delivery needs than it is on our ability to get it out. I think as we go into 2006 you'll see that number expand. But that -- we really, the capacity issues that we're talking about, we -- we're going to be able to expand those throughout the year. We're not too worried about that.

Okay and we don't really always care whether the revenues you generate are out of backlog or not as long as you generate them.

Right. We appreciate that.

There you go. So my point was really that backlog or not, a 11-12% sequential increase in -- in rig technology revenues after basically flat in the third quarter, that you have the capability -- that and that doesn't really represent the capacity increase you were talking about? I don't mean to be persistent, but nail that down.

No, I think we have a -- we still have a ways to go. And I want to stress that when you're selling capital equipment it will be volatile. And whether things ship on the last day of the quarter or the first day of the next quarter depends on where the revenue shows up, and so this is -- this is going to bounce around. But we -- we expect that this should continue to -- to trend up.

And the trend goes -- the trend goes up. Bouncing around is livable. On -- on pricing, I know Pete, we have talked about pricing on capital equipment. Let me -- let's talk margins for a second. On a land rig, you make $7 million, on a deepwater rig you'd make 135. Are there are significant differences today on margins on those revenues because of -- of mix or where it's manufactured?

If there are -- there are some mix issues, Jim. For instance, we're going to get lower margins on a lot of just fabricated stuff. If it's just steel and welding, generally speaking, you're going to have lower margins, much more competition. When it comes to things like top drives, iron rough necks, and components like that where there's a -- what I call engineered products we are going to get higher margins. And so it really is a blend. It kind of depends on what your total package is. When I talk about how we can get, $130 million on a semi submersible, al lot of that's going to be a buyout, which gets low margin. Other portions of it are going to be the engineered product, which gets a high margin. And it's -- it's very difficult -- I mean it would -- we -- we have it obviously split up here. Would be difficult to do it for Wall Street and say look at all the different things. That's why we just kind of give the general guidance on that of 22% flow through which is our target. But there are things that certainly we're going to get a much higher margin on. I think in -- in -- depending on where we manufacture it that's going to change things, too. Depending on FX issues. So I'm not -- not trying to hedge the question, but that's why --

I understand.

we have to stick with that 22% flow through.

On the 130, as a for instance, how much of -- of that is fabrication, ballpark, and I know it changes, versus engineered products?

Tough to Generalize.

It's very tough because there's just a lot -- I mean a semi submersible is -- is like building a house and it just depends on how you want that house built. But we -- if we did that [130] flows through, incrementally we expect to get the 22% out of it.

Pete, what keeps you up at night at this point in the cycle?

Questions from analysts.

Yes, but as long as you get to follow analysts you're all right. Seriously though at this -- at this point everything's great.

Its' -- it's execution, Jim. We have -- we've brought these two companies together and we have a commitment to customers and our employees, and we have to execute. What we have to do right now is deliver quality products that work on time. And I think if -- if anything keeps me up right now, it really is making sure that this Company produces and gets the product out door in the fashion that -- that we want to be known for and be accountable for that. That -- that's the biggest issue. Clearly we worry about the macro issues in the economy. We all -- we've all been in the business long enough, we know it turns on a dime. But given the backlog, where it is today, biggest concern is execution.

How do we judge how you're doing in advance of something? How do we judge you on execution other than in hindsight? Or should we?

I think you judge us based upon the continuing business that we are able to bring into it Company. You now, the levels of your business don't lie. If you are not executing, you don't get the business. And we have a lot of competition out there and people will go elsewhere if we're not -- if we're not doing what we are supposed to do.

Very helpful, guys, thanks, much.

Thank you,.

Thank you.

Michael Lamotte, J.P. Morgan

Thank you. J.P. Morgan. Clay, if I could just follow up on -- on the issues that impacted the margin and the right technologies this quarter. First of all, it seems a little odd perhaps to take a receivable reserve at this point of cycle given where cash flows are in the industry overall.

Well, yes, Michael, the reserve there was -- was pretty small and most of what I was referring to there were really inventory reserves on some old [inaudible] jobs.

Okay.

We've been -- we've been kind of merging business processes and general ledgers and pulling all of this together and these are some things that popped out at year end. They sort of at $6.5 million combined rose to the level that we felt like we need to -- to disclose them.

Okay and then on the -- on the inventory side, is -- is that just a function of the lumpiness of the business when you have -- I mean are we going to see that number really work down hard over the first quarter as what you prepurchased from a component standpoint yet shipped in Q1?

I think -- I think given that we have a $2.3 billion backlog with a very long life to it and so much -- so much work flowing in, I think inventory's going to continue to rise. And if you look back at our -- at our numbers --

I mean, I guess, inventory turn, more than just absolute level of inventory.

Yes, we are trying to be more efficient on -- with the inventory and get it out the door. But I will tell you that capital -- the capital equipment business is working capital-intensive and specifically inventory intensive and we have a lot of customers out there who are counting on us to have replacement parts and spare parts on our shelves available to support their drilling needs. We have a lot of work coming in the door that we're working hard to -- to convert into finished goods and ship to customers. We've been actively trying to buy a little earlier and buy a little smarter to -- to avoid getting -- getting stung by things like steel prices running up, which -- which effected both Varco and National Oilwell in early 2004. And so those things all tend to apply a little upward pressure on inventory.

If I look at full year '06, 12 months from now versus full year '05, obviously integration and facilities management was -- made inventory that much more challenging in a rising market as you are through integration issues is that going to play a significant factor you think in the inventory turns as we go through "06, as we are looking, I guess, a full year, full year?

Yes, I think -- I think so. You know, part of the integration involves consolidating and sort of rationalizing our product lines a little bit. We're emp -- specifically emphasizing certain -- certain product lines between the two organizations to -- to try to maximize margins and so I think that will effect, kind of, the inventories we need to support those product lines going forward. So I think that will have beneficial effect.

And would it be unreasonable to assume that you can get 100 to 200 basis points of -- of benefit in -- in your flow through with that kind of -- ?

Yes, you're talking about --

Inventory improvement?

I think so. You know part -- a portion of our consolidation savings are driven by expectations of better efficiency and in effect a portion of the $13 million we -- we felt like we captured this quarter came out of -- of running -- of consolidating product lines, running higher volumes through more focused manufacturing facilities.

Okay. And then, Clay, on PSS and pricing in particular, net pricing gains, you said were sort of mid single digit in -- in '05. Is that -- obviously you had some, materials inflation impacting the net effect in '05. As you go into next year is that accelerating?

Yes, people in particular are pretty tight in the oil fields. I think there are some -- some inflationary forces that are -- that are -- that are cropping up. We -- for instance, in the coating business we buy a lot of gas and we have some hedges rolling off so we're facing some inflationary forces there. The good news is, I think, steel prices have calmed down a little bit year-over-year. In our fiberglass business resin jumped up in the fourth quarter but looks like it is maybe backing off a few cents here in the first quarter. So kind of a mixed bag but I do think there's -- there's is risk of -- of further inflationary forces out there.

Okay.

Thanks Michael.

Thank you.

Jim Crandell, Lehman Brothers

Good morning, guys.

Good morning, Jim, how are you doing?

Good. First question do you think your quarterly order level over the last two quarters of 900 million plus do you think it is more likely, as you look at 2006, that that represents an unsustainable level and will likely retreat or a level that you think can and probably will go higher over the course of '06?

That was a tough question, Jim. Last quarter I was asked if we could get 900 again, and I said, gee, I didn't think so and we did. I think as you look throughout the year, which is kind of what I've always talked about when you talk about backlog. Because, again, we cut it out on a date certain and if somebody doesn't order a rig on the 30th of December and wait 'til the second of January obviously it didn't come in that particular quarter. I would say, what we are looking at today, we feel optimistic that we're going to continue to see a high level of orders. When we talked about people that come in here and they're talking to us about particular projects, be it big floaters, drill ships, jackups, big land packages, we think that there's going to be some sustainability to -- to a good order rate throughout '06. Whether or not I would -- I wouldn't say it's going to be 900 million a quarter. I wouldn't say it is going to be 800 million a quarter, but we do -- we're very optimistic that it's going to be fairly sustainable rate.

Okay. How much, Pete, if you looked at the last two quarters of new orders of 1.8 billion, could you give me an approximation as to how -- what percentage of those are new rig related?

I would say a very high percentage. I don't have that sitting right here. Because a lot of the way that we break things down, we'll have like 27 mud pumps, as an example, and 20 of those are probably going on new rigs and seven might be [refurb]. But just a kind of a gut feel knowing the business, a very high percentage of that is new rig related. There's some -- there's some fairly significant refurbishments, whether it be a semi submersible that's being made into the next generation, which is almost a kind of new rig type deal. But a lot of that is pretty well new -- new rig driven at this point, Jim.

Okay. Pete, on -- on it seems like at least a couple of occasions, maybe more, I read about [Ocker] winning contracts for new floating rig equipment packages. And realizing that you can't win them all, what do you think, if you look at the floating rig packages, equipment packages have been let out so far, where do you think you are in terms of market share on those?

We feel very good where we are. Probably the thing that we don't do as well as Ocker is issue press releases, and that's something, again, we kind of let our customers talk about it. But I will tell you we're -- we're certainly getting our fair share and I think the backlog is real indicative of that.

Do you think that -- is your fair share mean two thirds of the market or more?

You know, we -- we generally don't touch on market share too much, Jim. We -- we like our fair share.

Okay. Last question. Clay, I believe you said during the call that you expected your earnings sequentially to be down quarter-to-quarter and I haven't looked at the consensus estimates but I would imagine that the consensus number is up quarter-to-quarter. Could you elaborate a little bit more on that? And secondly, do you feel that consensus earnings estimates are still achievable with your earnings being down quarter-to-quarter?

Well I -- let me -- let me clarify that, Jim. I didn't speak directly to earnings. I talked about a couple of our businesses. [Inaudible] services and supplies and distribution having the potential for a little softening in revenue going from Q4 to Q1. Both of them just had super fourth quarters. And in distribution, in particular, a lot of flush, Gulf of Mexico sales related to the hurricane repair and cleanup activities. You know, maybe that -- that will hold up through Q1. Maybe not. Just don't know at this point. Also had some big line pipe orders going through there. On PS&S we have some normal seasonal items that typically affect our first quarter and so I'm just pointing those out. Pipeline, our pipeline business typically falls off a little bit in Q1, and that's because pipeline operators are moving so much gas and heating oil through the pipeline systems during the winter months that they don't want to affect that by doing [pinging] operations. Our fiberglass business, they're Chinese operations, we have two plants in China. And the Chinese operations are affected by the cold weather over there as well as the Chinese New Year. So and then to finnish it off our -- we had a big mill equipment sale in the fourth quarter which we're not expecting to repeat in the first quarter. So we have some -- it's a couple of topline things going into Q1 that are a little bit concerning. But I'm stopping short of carrying that down through earnings, or for that matter, commenting on consensus estimates.

Okay. That's all I had. Thank you.

Thanks, Jim.

Ken Sill, Credit Suisse

I'm with Credit Suisse. I don't know if I can ask it all in one question. Just wanted to follow up. I actually have two questions. To follow up on Jim's thing about the sequential guidance. So I understand the revenue being down, but if you look at the rig technology you won't have a repeat of -- well, theoretically shouldn't have a repeat of the account receivable and inventory write offs. And then on the large new crane, four million in cost, is that a -- kind of a one-time event or is that going to be ongoing as this product gets developed and delivered?

No, we think that's a one time -- both those are one time type events, Ken.

So even on a -- on a declining revenue that's 10.5 million of -- of profit that should pop back into the numbers for Q1?

That's -- that's correct.

Okay. And then just, trying to dig into the backlog and the potential out there. Could you guys review how many floaters you think have been ordered or will be ordered and how many have had equipment ordered, and kind of go through that for the jackups as well? I mean the land rig business, and there is a lot of debate on other 200 rigs coming to North America a year or more, we can -- we can make our own judgments of what the market share is, but we kind of -- I'm -- I'm interested in how much equipment has yet to be ordered that could still flow into the backlog?

I -- Ken, that is a -- that is a really, really difficult question. I kind of -- let me hit a couple of numbers for you. The number that is kind of out there on the street on jackups right now is about 60 that have been ordered. And we -- we won't dispute that much either way. On that 60, I would say pretty close to 80% of the equipment on those have been ordered. And some of those are, of course, options that are -- that are moving -- moving forward. I think on floaters, you're really talking about, on order right now, in the mid 20s some place. And if -- but there is a lot of other options out there that can kind of throw that number up into the 40 category. And I would say out of that 20 or mid 20s, you probably have about 20 of them that have had the equipment ordered or specified at this point.

And so on the new build, because every rig contract you talk to, is talking about a contract for new build deep water rig. So none of those essentially have the equipment ordered yet, the other 20ish or so that could potentially come?

Yes, I mean there's -- there's a lot of -- there's an awful lot of noise out there and activity and it's really -- it's a tough one for us to comment on because we don't know what has been announced publicly by some of the companies. You know, I -- I have told and I usually tell everybody this, we're -- we're kind of on the frontline of knowing what people are going to do. Because even if you don't want to use this, you're going to get us to bid and be the stalking horse. So we probably have, I think, a fairly decent view of the market out there. But at the same time we -- we have to let the customers comment on whether or not they going to go forward and some of this is just a scientific study and others are in fact projects that are -- that are the real deal. So that's why -- that's why there's always such -- such movement in these numbers.

Yes, and kind of to -- to tie it all up on the last question. The FPSO, the 15-20 million opportunity for NOV, that's kind of interesting. How -- how big an opportunity it that do you see there in terms of how much is in the backlog or how much could come, because that's obviously a growing business everybody's -- ?

Yes, there's -- there's a little bit in the backlog. Not that much. I think that really is a -- is a future business for us. That's one, a few years back when National Oilwell acquired Hydrolift, that was one of the -- that was one of the, kind of the unique things that we saw in that. Because I think the FPSO business, both in the -- if it gets established in the Gulf of Mexico and for sure in places like Brazil and West Africa it's going to be a very active business. That's a lot of cranes, [windlesses], different things like that that we're able to do through our [amflight] and Hydrolift group and we think that's -- that's a very positive future business for us.

Okay. Great. Thank you have very much.

Thank you.

Thank you. That concludes the question and answer session. Mr. Miller please continue with any closing remarks you may have.

Well, I would like to thank you all for calling in and we look forward to talking to you again at the end of the first quarter. Thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the National Oilwell Varco fourth quarter earnings conference call. If you would like to listen to a replay of today's conference call please dial 800-405-2236, with access code 11052193, followed by the pound sign. Once again, if you would like to listen to a replay of today's conference call please dial 800-405-2236 with access code 11052193 followed by the pound sign. You may now disconnect and thank you for using ATT Teleconferencing.