國民油井華高 (NOV) 2006 Q1 法說會逐字稿

Good morning ladies and gentleman and welcome to the National Oilwell Varco first quarter earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, Wednesday, April 26, 2006 I will would like to turn the conference over to Pete Miller, Chairman, President and Chief Executive Officer. Please go ahead, sir.

Good morning, with me in the room today is Clay Williams, our Chief Financial Officer of National Oilwell Varco, and I'm of course I am Pete Miller, the CEO. We welcome you to the first quarter 2006 earnings conference call. Earlier this morning, we issued a press release announcing that we had net income of $120.3 million, or $0.68 a share on revenues of a little over $1.5 billions.

Included in that is $0.06 of integration of stock base compensation cost and we will go into this bit more in greater detail when I turn the call over to Clay in a few minutes, we are very pleased with our results, and lot of hard effort and hard work by many people worldwide to accomplish this. We also announced this morning quarterly ending backlog of $3.2 billion, this is a record for our backlog, we actually took in new orders this particular quarter of $1.3 billion, and we have shipments of over $400 million, I think that's a real indicator of the excitement in this business today.

And I'm going to come back a little bit later and give you more of a operational overview, and also some more color on the backlog and a little bit of guidance as what we believe the backlog going to do this, in the second quarter. So at this point, I would like to turn call over to Clay Williams and have him give you a little bit of a financial overview.

Thanks, Pete and welcome everybody. Before we begin this discussion, of National Oilwell Varco financial results for its first quarter ending March 31, please note that some of the statements that we make during this call may contain forecasts, projections, and estimates including but not limited to comments about our outlook for the Company's business among others. These are forward-looking statements within the means 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 more detail discussion of some of the risk factors effecting our business.

Additionally, we may at time refer to results excluding certain merger integration, stock based compensation expenses, 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 maybe found within our press release, on our website as www.NOV.com. Or in our 8-K filings with the SEC.

Later in this call, Pete and I will answer your questions, but we ask that you limit your questions to two in order to be able to permit more people to participate in the call, and we thank you for that. National Oilwell Varco generated earnings of $120.3 million, or $0.68 per fully diluted share in its first quarter ended March 31,2006, on revenues of $1 billion 511.8 million. This compares with $101.6 million for $0.58 for fully diluted share in earnings in the fourth quarter of 2005. On revenues of $1 billion 377.4 million. The first quarter included $7.9 million in pretax charges related to the integration of the operations of Varco. Excluding these charges earnings were $0.71 per share.

The first quarter also marked the company's adoption of FAS123-R, and as a result we expensed options and stock based compensation totaling $6.8 million pretax or $0.03 per share. Excluding both options and integration charges, key one earnings were $130.1 million or $0.74 per fully diluted share, compared to $110.6 million or $0.63 per fully diluted share in the fourth quarter of 2005 on the same basis.

The merger between National Oilwell and Varco closed on March 11, 2005. Which means that the 70 days of Varco results in the first quarter of 2005 prior to the merger are not included in the Company's consolidated results.

In our quarterly disclosure since the merger, we've identified transaction integration stock based compensation charges including items such at severance, restructuring, equipment, and inventory rationalization, amortization of options issued to replace Varco options and and write offs of discontinued product lines related to the merger. We've also presented supplemental pro forma results as if Varco and National Oilwell had been merged throughout '04 and 2005 in our press release on our website and through our AK files, to better identify trends in our businesses, and to provide more meaningful comparisons.

Many of our comments will speak to the result on this pro forma basis, as we done on previous earnings calls, we tend to look at these internally to evaluate results as well. National Oilwell Varco performed very well during Q1. First quarter revenues improved 10% sequentially, and operating profit rose 20% sequentially to $212.5 million or 14.1 percent of revenue, excluding integration and options expenses for both periods. Compared to the pro forma first quarter of 2005, revenues were up 35 % and operating profit rose 92 % again excluding integration and options charges from both periods.

Flow throughs or the incremental operating profit generated for every incremental dollar of revenue produced were 26 percent, both sequentially and year-over-year on this pro forma basis. All three of business segments posted higher revenue, operating profit, and operating margins, both see sequentially and year-over-year. Importantly, all three posted excellent sequential flow-throughs.

Our company is enjoying the best market we've seen since the early 1980s, high commodity prices has spurred high levels of drilling activity around the world. People in rigs are being pushed hard to drill new wells to satisfy growing energy demand. As a provider of critical services and consumables, National Oilwell Varco saw a significant serge in demand within its distribution services and its petroleum services and supplies segments throughout 2005, and into the first quarter of 2006, as a result.

The revenue of these two segments are tied closely to increasing in drilling activity, and rising rig counts and demand provided an opportunity to raise prices over the pass several quarters. High utilization and pricing leverage resulted in excellent financial performance in both segments in Q1 2006. Our drilling contractor customers have also benefited from high levels of activity, and they are working, their fleet of drilling rigs at exceptionally high levels of utilization, on average, the worldwide fleet of rigs is about 25 years old, and like all mechanical equipment, rigs have a finite life.

The high levels of utilization coupled with deeper, hotter, more demanding well plans have stressed this tired fleet. Day rates for rigs have moved up sharply with high utilization which is improved the economics of adding new capabilities and technologies to old rigs, to building replacement rigs, and to adding new rigs outright. One relationally published report estimated that 2006 cash flow from operations for 9 major publicly traded offshore driller would total about $7.5 billion in 2006, and nearly $12 billion in 2007, based on first call estimates.

We are glad to see our customers doing so well. Our rig technology segment is exceptionally well positioned to help these operators upgrade rigs, replace rigs, and to build new capacity. We witness sharply raising demand for our drilling machinery in 2005, and began to benefit from opportunities to increase prices near the end of the year, and into the first quarter of 2006.

While pricing leverage for this segment generally lagged our service driven businesses by 4 to 6 quarters, as drilling contractors affected their own increases in day rates and gained confidence in the sustainability of this cycle, we are now pleased to report that we are experiences solid price increases. This is due to the strong economics underlying the investment decisions by drilling contractors in new iron.

We believe higher prices will fuel improving results from our rig technology group in quarters to come as new equipment is delivered out of our backlog. Further day rate increasing can be expected to provide additional pricing opportunities for us on the drilling equipment that we provide. Technology has advanced significantly since most of the existing fleet was built, and our continued sustained investment and technology to improve the drilling process during the lean years is certain paying dividends now.

The safety, reliability and efficiency of new rigs far surpasses most of the old rigs that work today, and ENP companies are demanding top performance from drilling rigs contracted at premium day rates. We are benefiting from high demand of several products which significantly improve the drilling process. Such as smaller, more powerful top drives, new pipe handling systems, iron roughnecks, AC technology, safety light liners, hex pumps and circulation systems among others. Additionally, experienced personnel are tight, in tight supply in the oil field, drilling contractors are faced with new challenges to attract and retain experienced crews, and newer more modern rigs continue to be the best places to work.

National National Oilwell Varco is well positioned as we enter 2006. We understand well that our customers count on us for the best technology, best people, and best service to keep operations running smoothly, we remain focussed on executing our critical mission for their benefit. Turning back to the first quarter results, we continue to see our integration efforts between National Oilwell and Varco proceeding well. We estimate that savings resulting from the merger slightly exceeded $15 million in the first quarter, in line with prior expectations.

We continue to rationalize and consolidate products into facilities to improve manufacturing efficiency in Q1, and are introducing cellular manufacturing in 3 major plants to drive further efficiencies. Revenues for or rig technology segment were $715.3 million for the quarter, up 11 % from the fourth quarter and up 32 % from the pro forma first quarter of 2005.

Operating profit excluding integration charges was $100.8 million, or 14.1 % of revenues, up from $80.5 million or 12.5 % of sales in the fourth quarter, and up from $61.3 million or 11.3 % of sales in the pro forma first quarter of 2005. Sequential flow-through or operating leverage from the four quarter to the first was 29 %, and first year, I'm sorry, first quarter year-over-year flow throughs were 23 %, excluding integration charges from all periods. The non-recurrence of fourth quarter charges, higher pricing, higher estimated cost savings from the Varco integration were partly off set by higher employee benefit cost and higher costs associated with purchase components.

Backlog for the rig technology group serged 39 % this quarter to $3.2 billion. Representing nearly a 4 fold increase since March 31, 2005. The first quarter order rate improved across the board, as the group secured orders for equipment for new jack-ups, floaters, lands rigs, and well service rigs as generally higher prices.

The $1.3 billion in new orders was up over 40 %, from the fourth quarter of 2005. Additionally, the order rate through the first few weeks of the second quarter has continued at a brisk pace. The offshore mix within the backlog rose modestly to about 78 % and the international markets continued to dominate the order flow.

At March 31, 2006, approximately 69 % of the equipment in backlog was destined for international markets and 31 % for domestic markets. Revenue from backlog improved 18 %, sequentially in Q1, and non-backlog revenue rose about 2 %. As we have explained on previous calls, our measurement of back lock orders generally applies a some what arbritary $ 250,000 cut off on orders. Whether individuals pieces of drilling machinery which fall below this cut off qualified a flow into backlog will depend on whether they are ordered as part of a larger package.

Additionally, most of the incremental growth in the backlog in recent quarters has been for offshore drilling packages, for the many new jack-ups semi submersible and drill ship rigs being constructed or undergoing major refurbishment. The customers constructing new rigs do not want to receive the equipment until they have fabricated a rig to put it on. There for, delivery of this equipment is typically tied to the construction schedule of the rig, which can take as long as 4 years to complete.

As a result, much of our backlog delivery extends well beyond 2006 and in fact we have commission and installation work out as far as 2010. We presently expect revenues from backlog will total approximately 1.8 to $2 billion in 2006. With record backlogs and improving efficiency, our outlook for this business for the remainder of 2006 continues to be very good.

But the nature of capital equipment shipments will continue to make quarter to quarter revenue changes a little volatile. We continue to expect normal long term flow throughs of 22 % for this group, and hope to achieve 15 % operating margins in Q2, driven by higher pricing and volume. Our Petroleum services and supply segment posted another terrific quarter. Generating $541 million in revenue, and $ 118.3 million in operating profit or 21.9 % operating margin, excluding integration charges from both periods. Revenue growth was 5 %, slightly in excess of the growth in the rig count worldwide.

The group generated 61 % flow throughs despite higher personnel costs, revenues grew 35 % compared to the pro forma first quarter of 2005, so substantially higher than the 15 % year-over-year improvement in the worldwide rig count. The year-over-year revenue growth generated 39 % operating leverage due to higher volumes and improved pricing in most areas. Strong results were broad based with most product and services up sequentially in year-over-year at higher margins. Pipeline inspection was an exception to this where Q1 seasonal downturns drove lower sequential results.

Mission Fluid King, Griffith Vector down hold tools, Brand solid control equipment and services and Quality tubing coil tubing all posted double-digit growth. Tube-O-Scope pipe inspection and coating operations posted very strong flow-throughs on higher pricing and volumes as well. Additionally, our sales of fiberglass and composite pipe were roughly flat sequentially as increases in sales to the oil field were offset by lower seasonal sales in China, and lower industrial sales, nevertheless, the fiberglass group posted higher operating margins in Q1.

Most products and services within the petroleum services and supplies group continued to press pricing in the mid single digit range each quarter, but the margin impacted these efforts is being mitigated somewhat 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 second quarter 2006 results affected by break-up in Canada.

In 2005, our petroleum services and supplies operations in Canada saw operating profit decline more than $10 million from the first quarter to the second due to break-up. We expect the impact to break up this year to be in the range of $0.04 to $0.0 5 per share. We continue to invest in the petroleum services and supplies group to satisfy the needs of our customer for drilling motors, solid control equipment, instrumentation systems and other machinery released to drilling and production operation to meet the rising demand we see in most oil field markets around the world. Once again, this quarter, about 75 % of our CapEx went into petroleum services and supplies. 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 about 30 %.

Our over achievement of this level the past few quarters has largely been the results of the very favorable market in pricing environment we are enjoying. The distribution services segment posted an exceptionally strong quarter, revenue improved 6 % from the fourth quarter, and 38 % from the first quarter of 2005, to $326.5 million. The group generated 32 % flow throughs on the incremental revenue as compared to the fourth quarter of 2005. Lifting margins 160 basis points to 6.4 %.

Compared to the first quarter of 2005, flow throughs were 15 % on the $90.6 million revenue increase. Q1 operating margins doubled, compared to Q1 of the prior year. This group has done a terrific job of improving efficiency and reducing costs of its products while expanding selectively into attractive markets. Most of the Q1 growth came from North America, with the mid continent, Texas and Canadian regions leading the way.

The Gulf Coast region saw sales ease slightly as Q4 sales in support of the hurricane rebuilding efforts slowed. Strategic purchasing lifted our base margins by about half a percent, and we benefited from mix as well. As a result of the strong performance, after tax return on capitol employee rose to 17 % this quarter.

We expect distribution group to continue to perform well throughout 2006, as we continue selective expansion into key international markets, strengthen alliances with customers and leverage our buyer power and IT infrastructure to keep cost low. We continue to expect long-term flow throughs for the distribution business excluding swings and mix and other factors to be around 10 %. Turning to the consolidated first quarter results unallocated expenses and eliminations were $27.4 million up $7.9 million from the fourth quarter, most of this relates to higher profit eliminations on inner segment sales which increased $6.9 million from the fourth quarter to the first. Additionally, Medical expenses and benefits were also up sequentially.

Reported GAAP operating profit per income statement was $197.8 million, including $14.7 million in option expense, and integration charges. Other expense was $3 million, up sequentially due to FX loss losses and higher bank fees associated with letters of credit to back customer prepayment on orders. Tax rate for the quarter was 33.5 %, up slightly from last quarter, due to higher income from higher statutory tax rate countries, mainly the U.S. We expect the tax rate for the coming year will be in the range of 33 to 34 %. Turning to the balance sheet working capital excluding cash in debt was $ 1 billion 693.1 million at the end of the first quarter, up about $86 million.

However, working capital on this basis as a percentage of annualized revenue fell from 29.2 % in the fourth quarter to 28 % in the first quarter. Higher inventory balances associated with the rising backlog were largely offset by larger customer deposits, on new orders, and more favorable billing terms on projects, which favorably impacted accrued liabilities. Accounts receivable increased $65 million but DSO fell due to higher revenues.

Capital expenditures in the quarter totaled $30.2 million down $7 million from the fourth quarter, which included a large investment in a new coil tubing mill, new consolidation accounting package related to the merger, IT investments and rig technology. We expect CapEx for the full year 2006 will be in the range of about $170 million, up about 40 % from the pro forma prior year. Depreciation amortization was $38.4 million up sharply from the fourth quarter due to credits recognizes last quarter related to Varco merger purchase accounting.

Cash total $263 million at March 31, 2006, up $53.6 million sequentially, debt total $839 million, and net debt or debt less cash totaled $576 million. Net debt to total capitalization was 11.7 % at the end of the quarter. Since January 1, we've closed 3 small acquisitions including our acquisition of soil recovery in Denmark, which solidifies our leadership position in the provision of thermal disoarption treatment of drill cuttings. Our operations in this area provide our customers with the ability to reclaim and recycle hydrocarbons from drill cuttings in several key petroleum basins around the world, significantly reducing the environmental impact of drilling operations. We currently operate 13 thermal disoarption plants around the world and provide support services to another 11. Consideration for the 3 transactions close totaled approximately $23 million.

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

Thanks, Clay. What I would like to do at this time is go over each one of our different operation at segment, give you some flavor for what we are seeing, kind of give you a little touring of the world, and open it up for questions. First I'd like to talk about our distribution group. They have done a fantastic job this quarter as Clay mentioned, we had operated profit of 6.4 % that's an all time high.

Have to go back to 1997 when the business was fairly robust to see us get into that 6 % level so I think the 6.4 is an indicator of the value they are bringing too their customers. A couple of the things that are happening in distribution that I think will continue to happen is we are getting a lot more attraction in the recognition of the total cost of ownership concept, it's not 3 bits in a buy, it really is a value added proposition in this business, and we are starting to see that as more and more of our customer tie us up into direct integration in which we can actually bring them savings and some real value added to this total cost of ownership. In addition to that, there's a lot of new contractors that are out there today, and we've been able to penetrate that very well, you look at some new offshore drillers and the land drillers and they see the concepts behind really being able to save money within the distribution group, and then finally, we really have the ability to turn on a dime in that business.

If all of a sudden there's a new play like the Fayetteville shell, we are there, and when you start to see the international arenas, there's more things going on in Mexico, we're there. We can move in very, very quickly, and we can become profitable almost instantaneously. So I think they have done a great job, we anticipate that business will continue to show good, solid results as we push forward through the year. I'd like to now talk about our petroleum services and supplies business. This is a very unique business, we basically have the leading names in almost every area that we're in, in addition to that, our customer base is everyone. I'm talking about EMP companies, national oil companies, drilling contractors and service companies.

So when people like Slumber Shea, Halliburton are doing well, we are doing well, because we are supplying them with products, when the drilling contractors are doing well, we're doing well, because we are supplying them with products that make it much more efficient, and the same thing with EMP companies. When you take a look at the efficiency, safety, rapid moves, things like that have to occur today on drilling rigs, we are uniquely positioned to be able to help people take advantage of that. As an example, you think about pressure losses on drill pipe. We are able to medicate allot of that with the coating through do through Tube-O-Scope

You look at all the pipe in the world, there's very little of that this does not get impacted by our Tube-O-Scope operation. When you think about pumping on oil wells are sucker rod business is probably the tops in the world, and were able to supply those sucker rods, inspected in great shape to be able to maintain the oil production that allot of the companies have. I can almost go across the board whether your taking about MV [inaudible] when -- their ability to make it that much easier to integrate back office operations with your drilling rig, with, whether you are talking about mission, with their capability ever being able to provide mud pump liners, valves and seats, quick change reliability, reduce the weight, make it a saver for the employees, with Griffith/Vector, our down hold motors, we have an asset management program with some of our biggest customers like Slumber Jack, that are able to provide them with tools that are getting the job done much more effectively, more officially, so not only is Slumber Jack being able to drill in a directional basis, and do things quickly for their customer, but we can now take care of those products and do them very quickly for our customer, too.

So as you can see across the board, those product lines, and when I talk about Bowen, and Quality tube, and our Star fiberglass pipe, these are all market leading names and because of the demand on efficiency today, customers are paying a lot more for drilling rigs, they want them more efficient, and we are positioned very uniquely to take advantage of that on an international basis, not just the United States, but all over the world. It's very much of an international footprint, and I think you can see from the results this quarter that it's very well recognized so that, we continue to see tremendous opportunities in that petroleum services supply area, and I think you'll see us concentrate a little bit more on in that area, too, hopefully on future acquisitions as we take a look at opportunities that are out there, it's very much of a core competency for us, and we feel very good about the progress that we are making and being able to differentiate our products in that particular part of the marketplace.

Now I'd like to go to rig technology. I'll spend a little bit more time here clearly because of some issues we have with the building backlog, you can see that every element of this business is hitting on all A. Or I guess, maybe all 12 cylinders, as you look at this, floaters, jack-ups, land rigs, mobile rigs, coil tubing rigs, work over rigs, everything is being sold, today there is a demand for all of these and that demand is in fact a worldwide demand.

What, we offer products that are top of the line, differentiated from our competitors, and we have the after market support for these products that's going to last for the next 20 years, so we are really in an unique position, and I think when you see the backlog clearly our customers believe that also, they are ordering from us, ordering at record levels, and we are able to perform and deliver when they need the particular products, and I'll come back to that delivery issue in a moment. Let me talk first about U.S. land. Clearly, I think most of you know U.S. land is very active today, there's various number of reports from what we would anticipate probably 150 to 175 new rigs going into the U.S. land market this year, and we are participating in all of that.

In some cases we have the complete rig, other cases we are providing components, but we are participating across the board with the people that are building those particular rigs. We think that activity going to continue on.

When you take a look at the demand out there, for gas when you take a look at what's happening, while there might be some choppiness that could crop up in the gas market in the lower 48, we've do believe that the continuing re, it's almost rebuilding of of capacity that's happening today, it's not only capacity additions about, you are getting rigs that are more competent, much more efficient, rigs that are out there drilling better than a rig that's 25 years old, so I think you are going to continue to see a build cycle that will probably work through any sort of choppiness in the gas market, On the offshore market for the U.S., you are starting to see the major players come into the new built market, clearly last quarter, Trance Ocean announced a drill shift, I think you've seen other of the equity players that are announcing drill ships, jack-ups and other rigs being built, there's a demand for those, and I think you'll continue to see that go on with the U.S. players. What I would like to do now is talk a little bit about what's going on around the world. Because, again, when you talk about the capital business, it is in fact an international business today.

As Clay pointed out on the backlog, 60 % of that, or 70 % of that is international going to customers that are outside of the United States. In the North Sea, the Norwegian Continental shelf has become an very attractive area for us there's refurbishment going on in the platforms in a that a reason, that those are aged platforms, thinking trying to increase production you the put, you have new cranes, you have a lot of new drilling equipment going on and we are uniquely situated to be able to take advantage of that, of course, we have very significant operations in no Norway,all through out the country, up north and in Bergen, so we are positioned to be able to take advantage of that market.

I think that's a market especially on the northern portion of the continental shelf, you'll start to see more drilling activity, I think some of the new build floaters will be going up in that arena to try to enhance productive capacity of Norway. Starting to see the same thing in the UK sector, there's improvement in the rig count there, some of of the U.S. based off shore drillers are talking about putting jack-ups in there at significant rates, and we are seeing a little bit more platform activity and I think in the next couple of quarters you'll see some new build platforms announced in that UK sector and of course were positioned to be able to take advantage of that. The Middle East and north Africa again very solid very exciting I like to tell people that the Saudi Arabian's they really don't care what the price of natural gas is in Oklahoma, they are going to continue on with their drilling activities, not only are they bringing in more rigs, and building rigs, but then the operation of those rigs, it's becoming more difficult drilling, they are doing things like multi lateral wells that haven't necessarily been done in the past, so they are looking for different type of rig, so not only are we getting the capital business in areas like this, but we are getting petroleum services and supplies business in these areas, we are positioned throughout the middle east to be able to take advantage of it.

Two areas in particular that are re active are Libya and Nigeria, north Africa, I think in Algeria they are continue to order new rigs, to build up the two state owned drilling contractors ENTP and [inaudible] there -- I think you'll continue to see that, as we go throughout this year, we will be a player in that market. This quarter, we sold a rig into Libya, we believe with all the tender offers that are out there in Libya, as you go into '07 and '08, you'll see more activity and demand not only for the drilling rigs but petroleum services and supplies. Those are two very exciting areas. I think the third element about the middle east that you need to understand is that also that's an area of rigs construction.

Recently, a shipyard their has taken their first order on 2 jack-ups we are supplying the equipment on those jack ups, they will be built in the middle east and be utilized in the middle east once they are completed. I think you'll see more of that type of activity, there's probably another shipyard there that's considering that. In addition to that, we manufacture a lot of drilling rig components in Dubai, were able to build things like mast and sub structures and put rigs together there that will give you a leg up on the competition, then we don't have the deliverability issue of having 40 days on the water able to do that in the middle east to get them delivered to our customers very rapidly. So I think the middle east is again going to continue to be a very, very great market and it's going to be for the foreseeable future.

This is certainly through the remainder of this particular decade. Russia is probably our most exciting arena right now. There's a interesting thing going on in Russia today where there's a lot of almost disintermediation of the vertical integration of these companies allot of the oil companies are getting rid of the drilling contractors as they are getting rid of the drilling contractors they putting them into private hands, and these private hands are now seeing they are going to have to reinvest, once the EMP companies get rid of their rigs then they tell the private contractors well your rigs not good enough to work for me anymore, so now you have to find different rigs, so we think that even if you say there might be a slow down in the domestic market on land rigs, the slack will probably be picked up in the Russian market.

Tremendous demand there, when you look at the new arenas like eastern Siberia plays, Lamalt Peninsula, these are areas that are going to take western type rigs, western time technology, I think the service companies will do well, our petroleum services groups will do well there, but in addition to that, we will be selling, I believe, over the next few years, a goodly number of rigs into this arena. In addition to that, the stockman field as each day goes by becomes more and more apparent, and open. We believe we are going to be a player, significant player in that, right now, they are talking about an investment of close to $20 billion in that particular field, and we would hope we could get our fair share. But we believe the Russian market is a market that's going to be attractive for the remainder of this decade also.

China, again, it's kind of an unique area for us, because not only is it a good market, but it's also a manufacturing base for us. As you look at that today, we have 6 different operations in China, we have a very large joint venture with our rig building capacity in there, we are expanding in some arenas in there, and again, lot of that goes into the domestic market where we ship a lot of that out into our worldwide marketplace. Chinese market itself, we sell a lot of rigs to the Chinese drilling contractors, and we also sell a lot of equipment that we make in the United States, things like top drives, SGR houses, iron roughnecks that we actually ship into China, I think that will continue to be a very good arena for us.

One of the neat things about China, too, is the ability to hire people and engineers. There's, if you're solely U.S. based company, there's a lot of trouble getting a lot of the employees that you need because the demand in a place like Houston whereas because of our operations in places like Norway, middle east and China, we can pull a lot of engineering and people talent -- and help you the to mitigate some issues that other might be facing. A new one that I'll throw in here is Korea when you look at the backlog build, clearly, we've got some floaters in there, and almost all of those floaters will be manufactured in Korea.

Some in China, some in out south east Asia, and Singapore, but Korea remains a very big player with Samsung, Hundi, these are very, very capable shipyards that are efficient, to we are expanding our operations in Korea, mainly in support of the ship yards in the building of the rigs that I've been talking about Singapore, epicenter of jack-ups, while they are doing floaters there, I think it will continue to be the center for jack-ups with Keppel Fels, PPL, and some players there. There's a new shipyard that's opening up on Tom island that will be building jack ups. As you look at the jack ups currently in there, we are talking about '09, 2010. Jack-ups much like the lands business, not only are you adding capacity but I think you are doing some things to replace capacity.

West Africa continues to be a good deep water place, I think the rigs that are being built will end up in that arena, but the unique thing there is that will be a good marketplace for our FPSO business. Right now, we can get anywhere from 15 to $20 million of business on any FPSO, and we their that will be a market that will again, as more and more of the deep water drillings done, that's a market that is a natural follow on. Finally, Latin America, probably the slowest part of the world.

However, you have pockets like Brazil, with petro brass, they wants to have basically local ownership on some rigs, will be a player in that, and you will continue to see some additions to backlog from those arenas. Mexico, I think is a pretty exciting place, we've done some things in distribution there, and we have a lot of equipment moving into Mexico as they expands some operations down there. As you look around the world, you don't see anything that makes you feel bad. It looks very positive, and we think it's going to continue to be extremely active in the for receivable future, and when he look at the backlog. Preponderance of it is going to be international arena.

Couple of things on backlog, we took in new orders of $1.3 billion, our total backlog today is 3.2 billion a 78% of that is offshore 22% land, 70% international, 30 % domestic, on the land business, 22 % land, about 60 % of that is in the United States, and 40 % of that is in the international arena. On the 78 % on the offshore, about 80 % of that is international and 20 % of that is domestic.

Our top 7 customers make up about 40 % of the backlog so you can see it's a very spread-out back log, lots of different customers in there. We believe that next quarter will probably see orders in the area of about a billion dollars. We think that, we are already off to a good start in the month of April, and we think that backlog should build, but if we can ship out north of 400 million, and bring in another billion so we ought to have about another plus 600.

Let me make a point, we've got back and reviewed the last five jack-ups that have been completed here have been, had our packaging on in the last, about 90 days. Everyone has been delivered on time, and basically, on budget, so the backlog, movement of equipment out of the backlog is more of a function of the ship yards and customers desires than our ability or want to get it out the door, we could move things out faster, but there's no need to do that in many cases, and as you look at what we've been able to do on on time deliveries, we are, we feel good about it.

Finally, I'd like to kind of end on a pitch for OTC. The offshore technology conference is next week, we will have new products there, I would like to invite anybody on the call to attend the OTC, if they get an opportunity, we will have a new permanent magnet motor top drive, we will have a new small casing running tool, going to have our two speed down hole motor, our small L XT BOP's, new pipe inspection tools, lot of new products, it's a life blood for us. It's the differentiator, it makes us different than the competition, it's what enables us to have great results. I'm very proud of what our people have been able to do. I will put one final plug in for the organization, we've been together now as National Oilwell Varco for a year, and I wants to thank every employee out there for the efforts Nevada put forth to make this transition, this merger go very well.

I'm pleased with it, I think the results today hopefully speak to that, and we are excited about what we are seeing in the future. So at this point, I would like to turn it over to you for any questions the callers my have.

At this time, we will begin the question and answer session. [OPERATORS INSTRUCTIONS] One moment, please, for the first question. First question is from Dan Tickering

Tickering Energy Partners. Good morning, guys. Pete, I want to understand the revenue capacity in the rig equipment business, you sorted indicated something in the 400-ish range in terms of delivery out of backlog. Clay talked about a billion 8 to 2 billion, that implies a pretty steep second half rate versus first half, and I just wonder about if you could help us with what you thief your quarterly delivery capability is in that segment.

Dan, I think, I was trying to give an around about number when I said 400 million, it will probably be more in the 450 to 5 range, and I think a lot of that, we're doing a lot of things on a daily base to enhance our ability to move things out the door, but frankly, most of it is based upon customer need, but clearly, we are going to be moving in the 450, 500 range, and I would suggest that as we get into the 500 range, we'll also start surpassing that and going into the 550, and even into the 600 range 689 again, we are doing a lot of different things in our plants, we've got some great people working on cellular type technology to make it for efficient, we've done some things on performing to insure we have parts that we need -- Doing more building to forecast today, just because of some of the concerns that we have about products, parts that we need.

Actually, I don't think that we're, our capability of getting suggest out of the door is as critical at our capability of getting parts in from the vendors, castings, forging, caterpillar engines, so we've got a lot of things going on, lots of front to make that an easier process, and I think you will see sharply increasing revenues coming out of that.

Okay. Then I want to make sure I understand the math. If we are sitting at 3.2 billion in backlog today, sounds like you think there's probably another 600 million or so, that to 600 million billed next quarter, that's, let's call it 4 for round numbers, we think we are going to sell maybe another billion-five or so out of that backlog. So I think, I'm thinking about 2.5 billion in backlog that's going to be in '07 and beyond type number. And obviously, future orders could let that growing. Where I'm going with this, how do we think about '07, and how much is in '08 and '09 at this point?

We are -- '09. I think your math, again, I haven't looked at it completely, but I think your close.

Dan, our scheduled revenue out of backlog in '07 is on the order of about a billion dollars, and '08, roughly 700 million, and a little bit in '09, and stretching out in 0/10.

Thank.

Next question from Scott Gill.

Simmons & Company, good morning.

Hey, Scott.

Pete, you were optimistic about your opportunities in Russia, I was wondering if you could help us gauge or quantify how about that opportunity is, first, with respect to the quarter, first quarter, how much revenue and backlog was attributable to Russia and where to do think that market can grow on a revenue backlog basis, say in 2007, 2008?

The sales into Russia in the quarter it was in the 17 to $20 million range, and it's a little lumpy, because a lot of that same of equipment will bounce around quarter to quarter.

And I think that there's really two answers, what's going in there now and the potential, and that's rely, I want to emphasize on the potential, as you look at Russia and rig fleet there today, it's not in very good shape, they have just come through one ever the hardest winters, if not the hardest winter on record. I think it was very, very difficult on the equipment that is there, we've gone people in there today repairing things that kind of fell apart when all of a sudden, you are talking about 60 degrees below zero, and quite honestly, we make great equipment, but -- But I would anticipate just, again, remember Clay's forward-looking statement.

But clearly, you've got a marketplace over the next 4 or5 years that can absorb 100 to 200 rigs very, very easily. And we think that that's probably going to happen because just the nature of what's going on in Russia today, they need better equipment and a lot more equipment, and quite frankly, they don't have the capability to do that of the we think we are positioned to do that. I think it's a positive market.

Also, contributing to our results here, few months ago, we acquired a business in Belarus, which is targeting FSU market, coil tubing and well stimulation equipment, and one of the exciting trends we see in that business, we are making a lot of frac equipment. -- So to see fracturing and well stimulation technology apply to that market can be exciting.

One final question, your margin expansion at PS&S first quarter versus fourth quarter was 210 basis points. Clay, can you give us a feel for how many of that 210 basis points with due to product mix, how much pricing and standard flow through?

It was predominantly pricing, Scott. This is really a pricing story, and the results that you saw in Q1 are really due to the hard work and efforts that have been put into all those brand names and businesses in the past 3 or 4 quarters, you run, you push a price up a little bit for that group, and you kind of have to wait for rigs to finish up and re spud or contracts to roll off. You are really seeing the results of big, big pricing initiatives across most all of our businesses in 2005, and we were able to do that because of the high activity level.

Okay. So safe to assume that's a sustainable level going forward and then some?

With the caveat that Canada break up hits that business hard, and so I think I wouldn't be surprised to see margins back off in Q2, but ex that, I don't see any reason to believe we can't keep margins up in this low 20 percent range.

Thank you, gentlemen.

Next question is from Robin Shomaker. State your company name followed by question.

Bear Stearns. Pete, I wanted to ask you on terms of the deep water and shallow water rig construction kind of -- Just your kind of typical sales per rig on each, or, minimum/maximum level of sales of a rig equipment on each new rig.

I think right now, when you look at some of the deep water rigs in the floaters, on drill ships in particular, we in some cases were as much as $175 million. That's well, we max out, I would say a lot were in the 110 to 120 range, but the drill shift probably offers us the greatest opportunities, and again, most of those are going to be 100 to 150.

On the float terse, depending on the size of the floater, opposite office we might be inasmuch as 35 to $3 million, and some indications up to maybe $100 million, so that's kind of the ranges, but they are big dollars, and on jack-ups, what what we are talking about are max jack-up take is in the close to $40 million, but on a lot of the jack-ups, we are in at 15 to $20 million. Hopefully that gives you some ranges there.

Yes. We can see the list of jack-ups under construction and floaters, and is, what would you estimate is the percentage of jack-ups and floaters that have not yet ordered the rig equipment packages that you would compete for?

The jack ups, I'm not going to give you an absolute number, because I don't have that sitting in front of me, and I don't want to give awe number, but the jack-ups for the most part, most of the equipment has been ordered. There's a few that are hanging out there, some options, but for the most part, what you'll hear in the future will be new announcements of jack ups and equipment will follow, but for the most part, I think things that are out there today have been well identified. Float terse, that's a different game, lots of not teers that have been announced where the equipment has not been ordered and other anything that happens on the floaters, is partial suites of equipment will be ordered today, and may not order of sub CBOP's, or the risers certificate until a later day. That's an on going thing, and I think more of those rigs are yet to come.

Great, thank you.

Our next question is from Jeff Keybert.

Citigroup. Good morning.

Good morning.

Just as your backlog commitments are going further out in the future, could you describe to us a little bit how you are managing them? I'm assuming your customers are looking for you to provide them with a fixed price. And the fixed delivery schedule. I talked a little bit about some of the challenges you are facing with your vendors. How are you managing that risk?

-- Our most almost all of that inventory growth was coach associated with back lock, we have some contracts July approximates in some contracts with regard to steel and other items. But we are just buying a little earlier in the process.

And the other thing that's a valid point here, Jeff, is that when we talk about say $100 million on a drill ship, that's not an EPC project. That is really a group of products that the total is $100 million, so we are selling the top driver for 1.5 million, selling the mud pump for 3 or $4 million, we are actually manufacturing those and we have a very, very tight control of costs on things like that, so it really is a lot of different, what I call stuff that kind of comes together and we're able, it almost is being handled on a case by case basis. With different foundries to help us with our top drives, with different machine shops to help us with the mud pump, so we are juggling that pretty well, and we have a real capable team that I think is taking care of that as we look to the future.

In addition to buying inventory outright, issuing purchase orders to buy stuff to our vendors pretty soon after we sign a contract.

If we would look at the 3.2 billion in backlog, what percentage of the costs associated with that backlog revenue would you say you have fixed either bye contractual or because you are contractual terms or because you are manufacturing it yourself and have control because of that?

Well, I think the biggest wild card in the cost equation is probably going to be labor, and we can't lock that down. I think that's probably our biggest exposure area. I think with regards to materials coming in, I think we are in good shape.

Okay. Thank you.

Thank you, Jeff.

Mr. Miller, I will turn the call back over to you for any closing remarks you may have.

Thank you, and we greatly appreciate everyone's interest. We look forward to talking to you again at the end of the second quarter, and thank you very much.

Thank you, sir. Ladies and gentlemen, this does conclude the National Oilwell Varco first quarter earnings conference call. If you would like to listen to replay of today's conference call please dial 800-405-2236 with access code 11057211 followed by the pound sign. Once again of you would like to listen to a replay of today's conference call please dial 800-405-2236 with access code 11057211 followed by the pound sign. Thank you for participating in today's conference and now you may disconnect.