國民油井華高 (NOV) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the National Oilwell Varco fourth quarter earnings conference call. During today's presentation all parties will be in a listen only mode. (OPERATOR INSTRUCTIONS).

This conference is being recorded Tuesday, February 6, 2007. I would now like to turn the conference over to Pete Miller, Chairman, President, and Chief Executive Officer of National Oilwell Varco. Please go ahead, Sir.

Thank you and good morning and welcome to National Oilwell Varco 2006 fourth quarter year end conference call. I am Pete Miller, the CEO of National Oilwell Varco and with me on the call today is Clay Williams, our Chief Financial Officer.

Earlier today we announced fourth quarter 2006, our (indiscernible) of $239 million or $1.35 per share on revenues of a little over $2 billion. For the year, we achieved earnings of $684 million or $3.87 to share on revenues of [a shade] over $7 billion. In addition to the above, we announced the year end backlog of just at $6 billion. This has been a great year for all of our businesses across the board and I'd like to thank the 27,000 employees of National Oilwell Varco for their tremendous efforts during this past year.

At the end of the day, this is a company of people. It is their thoughts, ideas, designs, inventions and hard work that really produced those results; and for that I am very, very grateful.

In a moment I am going to go over the operational review and tell you what we expect to see in 2007; but at this point I would like to turn it over to Clay Williams, who will give you a bit of a flavor of the financials and a little bit more of what we are seeing into the future.

Thanks Pete.

Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and full year ended December 31st, 2006, please note that some of the statements we make during this call may contain forecasts, projections and estimates including, but not limited to, our comments about our outlook for the Company's business. These are forward-looking statements within the meanings of the federal securities laws, based on limited information as of today, which is subject to change. They are 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 our latest Form 10-K that National Oilwell Varco has on file with the Securities and Exchange Commission, for a more detailed discussion of some of the risk factors affecting our business. Additionally, we may at times refer to results excluding certain merger integration, stock-based compensation expenses, and a certain estimated adjusted results as if National Oil Well and Varco had been merged during the first 70 days of 2005.

Further information regarding these may be found within our press release on our website at nov.com or in our filings with the SEC.

Later on in this call, Pete and I will answer your questions. We ask that you limit your questions to two in order to permit more people to participate.

National Oilwell Varco generated earnings of $239.2 million or $1.35 per fully diluted share in its fourth quarter ended December 31st, 2006 on revenues of $2.1 billion. Earnings were up 35% sequentially and up 133% from the fourth quarter of 2005. NOV's fourth quarter revenues improved 17% sequentially and 51% year-over-year. Operating profit was $381.2 million or 18.3% of sales, an increase of 34% sequentially and an increase of 133% year-over-year.

Flowthrough for operating leverage was 32% sequentially and 31% year-over-year. For the full year 2006 NOV earned $684 million or $3.87 per fully diluted share on $7 billion in revenue. Year-over-year revenues increased 42% from the $5 billion generated by both Varco and National Oil Well had they been merged for the full year.

Operating profit before stock-based compensation expense of $1.150.2 billion was up 106% year-over-year from combined Varco and National Oilwell operating profit in 2005, with certain merger adjustments as shown in our press release and year-over-year operating leverage or flowthrough was 29% on this basis.

Once again this quarter, all three of our business segments posted higher revenue, higher operating profit, and higher operating margins compared to both the fourth quarter of 2005 and the third quarter of 2006. These are very good results. They mark the first full year of the combined operations between National Oil Well and Varco.

Today NOV is one company, singularly dedicated to our simple mission -- providing the best equipment, services, and technology to the oil field.

Pete and I are grateful to have the privilege of working with many, many talented, dedicated employees and NOV's strong 2006 financial results are thanks to their hard work and smart management.

We enjoyed a very strong market in 2006. As rig activity continued to trend upward for the fourth year in a row and more customers learn to rely on NOV's global reach of products and services. After 25 years of capital starvation and the cannibalization of thousands of rigs, the world basically ran out of idle drilling equipment. That has led to record order levels for us and increasing prices across most of our businesses, and we remain upbeat about our prospects for 2007 which we enter with a record $6 billion in backlog.

Revenues from our Rig Technology segment were $1,136.5 billion for the fourth quarter, up 28% from the third quarter and up 76% from the fourth quarter of 2005.

Following the merger, we detailed for you many of the moves that we have undertaken to rationalize the combined manufacturing footprint between the two companies to improve efficiencies by combining National Oil Well and Varco production streams into more tightly focused factories. We have also discussed our efforts to expand our critical supplier networks and increase our production from China, Mexico and other low-cost manufacturing areas.

Last quarter, we told you about the many initiatives underway throughout our Rig Technology manufacturing operations to increase our throughput and efficiency -- techniques such as quick response, cellular manufacturing and lean operations. While we noted dramatic increases and output posted thus far and expressed our confidence in further growth, the Rig Technology Group far exceeded our revenue estimates during the fourth quarter which illustrates the power of these techniques.

Sales growth was broad-based for the group with revenues out of backlog posting 31% sequential gains and non backlog revenues growing 23%.

Shipments of ideal rigs and greater than expected progress on large offshore projects contributed to the growth. We also benefited from about seven weeks of results from [Rolagon] which we acquired during the fourth quarter. But mainly our folks worked very hard this quarter to get equipment and spares into the hands of our customers.

Rig Technology Group's strong profitability and margins demonstrate the efficiencies our manufacturing changes have produced, as well as the higher prices we have been able to achieve in this market. Operating profit was $227.3 million or 20% of sales, up 230 basis points from the third quarter and up 750 basis points from the fourth quarter of 2005.

Sequential flowthrough, or operating leverage, from the third quarter to the fourth was 28%. At fourth quarter, year-over-year flowthroughs were 30% excluding integration charges from prior periods. Backlog for the Rig Technology Group increased again this quarter, rising 12% from the third quarter to a record $6 billion, up nearly eightfold from the beginning of 2005.

We added $1.4 billion in new orders including about $133 million from Rolagon. Excluding these, new orders fell about 31% from the record $1.8 billion in orders we took in during the third quarter due mostly to three drillship packages booked in Q3. Backlogs for both land rigs and offshore rigs grew during Q4 and the mix was approximately 30% land and 70% offshore, and 75% international and 25% domestic at December 31.

Despite softening dayrates across North America, our backlog for domestic land rigs moved up 20% in the quarter. At December 31, our scheduled revenue out of backlog on the books totaled about $3.2 billion for 2007, $1.8 billion for 2008, and $1 billion thereafter. Flotation activities remains brisk mostly in international markets including platform rig upgrade activity in the North Sea, and land and offshore rigs for the Middle East, North Africa, India, China, Russia and the Caspian Region.

North America appears to be easing a bit, particularly in Canada.

Our moorings and crane business is seeing an uptick in activity, as several new FPSO pie plate construction vessel projects are being let, driving higher demand for knuckle boom cranes, motion-compensated cranes, windlasses and winches. Interest in new offshore rig construction projects remains high and several new shipyards are bidding new hulls to various building contractors.

We are pleased with our performance on the first of several jackups which have been commissioned. These are some of the most competitive efficient rigs available and have gone to work on time. As a result of our improving throughput from manufacturing, we are seeing quoted deliveries on drilling components level out from third quarter levels when they jumped sharply due to high demand over the summer. In fact, we can still deliver ideal rigs this year if you get your order in now.

We continue to secure orders with large downpayments and aggressive payment terms; and as a result, deposits from customers and billings in excess of cost -- a measure of customer financing -- rose to $1.1 billion at December 31st. This cash which ultimately will be invested in inventory for these projects dramatically reduces NOV's working capital and financing requirements and represents a strong commitment by our customers to see these projects through to completion.

Looking forward to the first quarter of 2007, we expect to see Rig Technology post another strong quarter in Q1, generally in line with its Q4 results.

Turning to our Petroleum Services and Supplies segment, once again the group posted record revenues and margins. Revenues were $670 million including about $13.5 million in revenue from NQL, in which we acquired a controlling share during the fourth quarter. We completed the acquisition of all of the NQL shares during the first week of the new year.

Petroleum Services and Supplies revenues were up 7% from the third quarter, despite a modest decline in the worldwide rig count. Revenues were up 31% from the fourth quarter of 2005, compared to an increase in the rig count of only about 4% year-over-year. This group has consistently posted higher revenue gains than the rig count for the past several quarters, which illustrates the value of the technologies it brings to drilling and production operations.

Our new technologies make a powerful impact on oil field operations and continue to gain acceptance with new customers. For example we manufacture around half the world's coil tubing in this group. Coil tubing is used to hydraulically fracture and stimulate wells and deepwater coalbed methane wells.

NOV is the leading provider of fiberglass pipe to the oil field used in corrosive oil field environments and we are the largest provider of thermal desorption technologies used to claim drill cuttings waste and recycle oil-based drilling fluids. We are the largest independent provider of drilling motors for horizontal, directional and performance drilling applications. We provide over 500 satellite communication systems for rigs, including e-mail accounts for drillers and tool pushers.

Over 700 rigs have our auto drillers on board which dramatically improve their drilling penetration rates. Over half the rigs in the world use our drift tools to measure hole deviation. Our Mission Group manufactures sophisticated power sections for drilling motors. It keeps most of the world's mud pumps working smoothly with high-quality liners, pistons and rods. Under our Tuboscope brand, NOV is the world's largest provider of inspection internal coating services for oil field tubulars and drill pipe.

In each of these services, NOV is a pre-eminent leader dedicated to providing the best service, the best products, and the best technologies to keep our customers' operations running smoothly. And our customers are buying.

The Petroleum Services and Supplies group has posted 11 consecutive quarters of rising revenues. Margins have been moving up crisply as well thanks to the hard work and tight management of our dedicated employees who make this business go.

Operating profit was $166 million or 24.8% of sales, a 200 basis point improvement from the third quarter of 2006 and a 500 basis point improvement from the fourth quarter of 2005. Operating profit flowthrough was 51% from the third quarter and 41% from the fourth quarter of 2005. Solid topline growth in Petroleum Services and Supply came despite sharply lower demand in Canada, where several operators have announced cutbacks. Within the group the largest sequential sales gains were posted in downhole tools, excluding the NQL pickup due to a large product sale destined for the Middle East and Latin America.

High demand for new drill pipe, most of which are Tuboscope operation coats and very strong shipments of pipe inspection equipment into international pipe mills, also led to significant sequential growth in this area. Most other units posted higher margins, particularly Mission, and most saw single digit sequential growth.

Fiberglass pipe sales declined slightly following a record level of Q3 shipments on large projects destined for Chad and Kazakhstan and instrumentation sales declined slightly with fewer package sales and slower Canadian activity. But nevertheless both our fiberglass pipe manufacturing operation and our rig instrumentation operation turned in terrific performances in 2006.

Business remains good but we are a little cautious in our outlook for Q1. Large shipments of downhole drilling tools and mill inspection units in Q4 may be difficult to repeat in Q1. While we achieved pricing improvements in several products and services during the fourth quarter particularly in international locations -- which provide about 44% of the group's revenue -- we are generally finding price increases more difficult to come by in this market. In particular, Canada is by far the most competitive market we face but we also -- it has also been one of the most inflationary oil field markets that we served over the past two years.

In the U.S. pricing and activity remain stable for the moment but poor weather across much of the U.S. during January will likely take a toll on many of our operations. During Q4, we saw older rigs laid down in the U.S. but most if not all seemed to be replaced by new efficient fit for purpose rig NOV supplies which kept the rig count roughly flat since August. We believe that some of these older recently idle rigs may be pressuring rig dayrates in the U.S.

Pipe inventory in our domestic yards has been moving downward, following a reduction in activity by mills and pipe processors in the U.S. in Q4 which has not yet picked back up. International business for the Petroleum Services and Supplies groups appears strong on all fronts and our pricing in these markets continues to march upward unabated. We expect to shift underutilized assets from North America into these higher growth areas in the coming months and remained guarded about the outlook for North America.

Overall for the first quarter we are forecasting Petroleum Services and Supplies revenues to grow modestly with roughly flat margins, as our business shifts from North America to overseas.

Turning to our Distribution Services segment, we once again posted record margins for the fourth quarter in a row. Margins improved to 7.8%, up 60 basis points sequentially on record revenues of $370.5 million. Margins were up 300 basis points from the fourth quarter of 2005. Revenues improved 5% from the third quarter and 20% from the fourth quarter of 2005. Operating profit was $29 million, representing very strong 21% flowthrough from the third quarter of 2006 and 23% flowthrough from the fourth quarter of 2005.

International distribution sales drove most of the improvement as new strategic alliances in Mexico kicked into full force, and margins and volumes in Brazil increased. Our strategic alliances have created tremendous opportunities for growth for our Distribution services segment. These arrangements provide benefit to our customers by leveraging our purchasing organization and tightly integrated ERP system to reduce the cost of stocking and supplying rig consumables.

We benefit by capturing higher volumes, resulting in larger discounts from our suppliers. With $1 billion in annual purchasing power and a global network of supply, they can provide tremendous quantities of rig supplies from low-cost manufacturing areas. We have built a powerful competitive advantage in our Distribution group.

Once in place, the strategic alliance provides us a great platform of stable business around which we can open new locations. We have expanded around the world by following our customers' rigs into new regions and grown our North American business by capturing much more of our partners' spend.

As a result our international distribution operations have grown 64% over the past two years. Our domestic operations are up 74%. The group is also selling more MRO supplies to legacy Varco organizations following our integration, which further increases our leverage through greater volumes.

Sales and margins in Canada grew modestly in Q4, helped by the addition of pumpjack engine work to our mix, and expense reductions in response to slowing activity.

In Q1 we expect to see the business down slightly due to weather issues across the U.S., continuing activity softnesses in Canada and unknown recurrence of some international project work booked in Q4. Further margin expansion from here will prove challenging but full quarter cost reductions in Canada may provide a little upside.

Turning back to National Oil Well Varco's consolidated fourth quarter income statement gross margin improved to 27.3% compared to 24.9% in Q3 and 22.6% in Q4 2005. SG&A increased 18% from Q3 but remained about flat as a percentage of sales. Year-over-year SG&A was down as a percentage of sales from 10.1% to 9% in Q4.

Interest expense rose $2 million from the third quarter due in part to interest rate movements on some swaps that we have on some of our debt and the tax rate was up about 1% to 34.5% as we reconciled through our year-end actuals of 33.9%, about the same rate we expect in 2007.

Unallocated expenses and eliminations on our Supplemental segment schedule were $32.9 million, up $1.2 million sequentially due to higher intersegment sales, profit elimination and incentive accruals offset by favorable movements and other items.

Options and stock-based compensation expense, which is not included on the Supplemental schedule, was $8.2 million -- up modestly from the third quarter. We expect this to increase to the range of about $11 million per quarter in 2007 as we began to expense new stock-based compensation awards.

Turning to the balance sheet, working capital -- excluding debt and cash -- was $1.3 billion at the end of the fourth quarter, down 14% or $223 million from the third quarter. (technical difficulties) 17% higher revenues. Working capital on this basis as a percentage of annualized revenue fell to 16% in the fourth quarter, down from 22% in the third quarter. Our inventory balances and receivables associated with the rising backlog in revenue were more than offset by customer deposits on new orders, and more favorable billing terms on projects which favorably impacted accrued liabilities.

Goodwill increased $194 million from the third quarter, due primarily to the acquisitions of Rolagon and NQL. Capital expenditures in the quarter totaled $61.8 million, up $5.9 million from the third quarter. The largest increase came in Rig Technology. For the year we spent $200.4 million in total which was 25% higher than the depreciation and amortization recognized in the year.

Depreciation and amortization for the quarter was $41.9 million, about flat with the third quarter. Cash totaled $957 million at December 31, up $171 million sequentially, despite spending $338 million in cash on acquisitions during the quarter.

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

Thanks, Clay. I am going to try to give you a little bit of an overview of what we believe we are going to see over the next year, but before I do this I would ask you to tattoo on your hand Clay's disclaimer about the fact that we can't really read the future. We feel pretty good about it, though. And let me tell you I think there are five basic themes right now.

The first one is rig building will continue. I don't think there's any question about that. As we look at the marketplace out there, we see the opportunities. It is going to continue onshore and offshore. Offshore it's going to continue in every element be it platform, jack up or semisubmersible or the drillships themselves. While it might slow down some simply because of shipyard capacity, it will continue and I think that is one that we are very assured of.

The second element I think that's the basic theme is international market is where it is that. I think the North American market, while there are some good things happening there, clearly is a mature market. I think the growth that we are going to experience is in the international arena and I will talk to you in a moment on a couple of places that I think are going to be very exciting in the next year.

Third element is deep water. You should take a look at deep water. There is a lot of excitement surely in the investment community, but the fact of the matter is, we are building the deep water rigs. And those are rigs that not only are we building them that we are going to deliver in '08, '09 and '10 but there are also rigs that we are going to support both through our Petroleum Services and Supplies business and our rig equipment business for the next 20 years.

It is an exciting market and it's one that I don't think anybody has really got to define yet enough as to how many rigs are really going to be needed.

The fourth element? It is all about technology. Leading-edge products are going to win. If you are doing things that are going to enhance the efficiency of drilling rigs, if it can enhance the efficiency of drilling wells, you are going to win the game. And in a moment I will talk about some of the things that we are doing across the board that are very, very important to that.

Then, finally, especially in the United States, it is all about unconditional plays. You know you are really talking about shale wells, you are talking about the Barnett Shale, the Fayetteville Shale, but I think the interesting thing is don't think that these shales only exist in North America. I think as we go out a few years, you are going to see a lot of these same unconventional plays be done in Siberia, be done in places in the Middle East, be done in places like Argentina.

You know we take a look at what some of the geography and the geology is all about, you can see that these types of plays are all over the world. I think you'll learn them here and be able to transport that technology overseas.

So that's kind of -- those themes, we believe, are what is going to drive the business in '07.

Now I would like to talk just a minute about our Distribution business. As Clay pointed out they had a great quarter. The margins are very significant. I think what this really tells you is that it's all about the total cost of ownership model.

We have been in this for a long time. It is not about three bids and a buy. It is about, how can we save money for our customers? And that total cost of ownership is what is absolutely the most important. We are following our customers overseas. Our ability to be able to ship product, to understand international logistics, and to be able to get the right product to the right place on time I think is critical.

And for that reason I think you'll continue to see our Distribution business prosper and grow internationally, where we really like the marketplace much better because, quite honestly, it's less competitive than you might have in a place like western Oklahoma. And our Petroleum Services and Supplies business, as Clay pointed out, we have got the market leading names.

The other thing that we have is the international infrastructure. That allows us to be able to take products that we develop here, be able to put those into that international matrix and be able to expand our offerings all throughout the world. As you take a look at what is going on today, there is a lot more international manufacturing of drill pipe. That is great for us because we can then put up facilities that can inspect that drill pipe and coat that drill pipe through our Tuboscope operation anyplace in the world.

When you look at what we do with fiberglass pipe -- we manufacture that in China. We can go anyplace in the world, be it a shipyard in Singapore or Dalian and be able to provide the product that those shipyards need.

Clay mentioned (indiscernible). We have the best communication system for rigs throughout the United States. You can also take that same system and put it in a place like Siberia and be able to really develop the same sort of products and opportunities that we've got in the United States. So when you look at this in the international arena, we are really well positioned to take advantage of that.

Finally in the capital equipment, I think really what plays to us is our plethora of products. We can supply the things that you need across the board. You know, when you really look at building a rig you want to be able to have one supplier supply that. You want to have integration and then today, when you look at the amount of electronics involved, it is unbelievable.

I am beginning to think that we are a high-tech company. I wouldn't mind that multiple but at the same time, when you look at the things we are building it is all about PLCs. It's all about electronic controls and it is about this equipment being able to talk to each other and we think that that is something that nobody else can match today.

And also, the annuity that we get whenever we put the product in the field. You know, if you go back to the razor and the razor blade. We are going to be supporting these products for the next 20 years just like we spent the last 20 years keeping these companies alive by being able to support the products that we have in the field. So those things, we think, as I give you those five basic themes it really plays well to what we are doing in all three elements of our business.

What I'd like to do now is just talk real quickly about a couple of places around the world that we think are exciting.

You have heard this, probably, through any of the conference calls you've listened to over the last couple of weeks, be it (indiscernible), a Smith, a Halliburton, whomever but, clearly, Russia is a good market breast. The interesting thing, politically, the Russians want to own the oil and gas in the ground. I think that happens around the world be it Venezuela, Russia -- anywhere.

But what they want to be able to do is, get that oil and gas out of the ground and they do look to Western companies like ourselves to be able to provide the expertise to do that. The thing that is interesting today in Russia, it is kind of hitting on all eight cylinders. You have got coiled tubing units, you've got workover rigs, you've got slant rigs, you've got large rigs and you have offshore rigs. Now while projects there move at somewhat of a glacial speed, still the opportunities in the country I think are probably some of the best around.

In addition to that, as I've mentioned on other conference calls we've actually started manufacturing some in the Belarus which gives us a little bit of a homegrown flavor that I think puts us in a better position to be able to take advantage. But I think over the years, you are going to find that the Russian market is one that is going to be extremely attractive for all the service companies.

One quick anecdote. We just sold a top drive into one of the major operators in there. They put it their first well and they saved ten days. That is what technology is going to do. I think I could explain that a lot of different ways. But that is just one quick anecdote showing what is happening.

China. Again, I think what China does -- and here is a model that I believe National Oilwell Varco does better than anybody. We basically go into places like China and Russia and the Middle East and we can make the basic iron that we need to make. The iron that takes a lot of man hours put into it and being able to do that very efficiently. I think you've seen that in the numbers.

We take the technology and we build that in other places and import it into there, into their own market. So not only do we manufacture in places like China and get the basic equipment out of there but we can push the high-tech equipment like top drives, iron roughnecks, pipe handling systems, electronics in there. So we get the double whammy of being both a great manufacturing platform and a good marketplace for us.

Currently we have six facilities there. Our Langzhou facility is -- that's our joint venture -- is doing quite well. We are excited about the things that are going on, both on land and offshore. I think over the next year to two years, the Chinese market and the South China Sea in particular will become a more attractive offshore market for us. And I think you'll see some rigs sold into those areas.

Middle East reminds very robust. Again, one of the neat things about the Middle East today is some of the shipyards that are opening up there in which they are opening jackup rigs. Those rigs will eventually go to customers in the Middle East. I think it is a real attempt to make sure that their infrastructure and their manufacturing stays very viable and we are positioned very well to take advantage of that situation.

In addition to that you are seeing a lot of rigs still being brought into areas. And when I mention the unconventional plays, I think you're going to see more and more unconventional type work being done in the Middle East to enhance their oil and natural gas production.

North Africa, again, stays a very positive situation for us. I think what you are going to see in North Africa is, they are looking to southern Europe as being the supplier of natural gas. Because of that you see in places like Egypt, Libya and Algeria a continuing demand for land rigs. We will sell more into there and you are also going to see a little bit of an offshore movement, but the ultimate market for a lot of that product is going to be into southern Europe. You see northern Europe being supplied by Russia. I think southern Europe will certainly come out of that particular arena.

Want to talk just a moment about the North Sea. I don't really talk much about what we do in Europe, but I have to tell you, we have got very expensive operations in Norway. And this is really our center of excellence for a lot of what we do electronically and hydraulically. It is a center of excellence for control systems and for our [craneage], in many cases.

In France we have the pre-eminent producer of jacking systems and mooring systems and our BLM operation in Nance, France. In Manchester, England, where we manufacture our mono pumps and we do our routers and [stators] for our downhole tools and then up in Aberdeen where we support a lot of the operations, we redo drilling equipment. We refurbit and we support the North Sea.

So very extensive operations there and the neat thing about it is that it is allowing us to really expand in the North Sea, where there is a lot of platform work going on and where there's things going on on the Norwegian out of Continental shelf.

Then, finally, I just want to talk for a moment about North America. Really it is about the unconventional plays. You have rigs moving out of the Gulf of Mexico and wells that used to be drilled out there now have to be exchanged with wells that are being drilled in the Barnett and Fayetteville shale. That is some tremendous opportunities for us, be it in downhole tools, be it in pipe expansion inspection, be it in instrumentation, be it in supplying new rigs.

There are 1700 rigs approximately working in the U.S. today. Is that the right number? I would offer up probably not. I think you might have had more than that especially if you are replacing Gulf of Mexico wells with unconventional plays. It is cold around the United States today. We see a lot of natural gas activities so the real question becomes, how soft will the market get? But it becomes very, very rapidly self corrective because you take a few rigs down, that gas production slows down, and all the sudden you are going to need them back up and running. So we think unconventional plays will be where it's at.

I want to talk just a minute about the backlog. As Clay mentioned it's about $6 billion. That's 75% international, 25% domestic. On the land versus offshore, it is a 70% offshore backlog, 30% land and as you break down the offshore that's 90% international, 10% domestic and on the land it is 40% international and 60% domestic.

So that gives you a little bit of a flavor. Again it goes back to my basic themes, It is about offshore. It is about deep water. And it's about international.

So that really kind of sums up what we would like to say today and at this time, I would like to open it up for any questions that our listeners might have.

(OPERATOR INSTRUCTIONS) Marshall Adkins.

Company name, Marshall Adkins. First question, Clay, did you memorize all those product lines you just recited or are you actually reading that?

I've been living and breathing them for ten years.

Very impressive. Very impressive.

They are tattooed on his arm, Marshall.

More to the point, obviously, Rig Tech, huge quarter. Way above what any of us were thinking. How much of the upside was pricing versus efficiency improvements?

We certainly had better pricing in our backlog as we've alluded to. I think the topline story here, Marshall, is really one of efficiency. We got way more bills and shipped out the door this quarter than we frankly expected. And it is a real testament to how well a lot of the changes that that Group have made in their manufacturing operations. The impact of those changes on the business.

Have you squeezed all you can out of that?

No. I think that's a race without a finish line. And that is one where we've got a great group of people that are just absolutely incredible about being able to change processes. And it is one where you just keep getting incremental gains and incremental gains and incremental gains.

And it is important to us, too, because quite honestly pricing is ephemeral. I mean at the end of the day you can lose pricing real quickly if the business goes the other way. What is not ephemeral, though, are these process changes. And if we can maintain our efficiency and maintain our ability to produce at lower costs, we are going to keep the numbers where they need to be.

Pricing may be ephemeral but talk to us directionally about where pricing is going? Is backlog still moving into higher priced stuff?

Yes. Yes, we are -- I think what you'll see coming out of the backlog will be some better pricing. The concern you do have, though, is that as you push forward in any uptick like we have, you do start getting -- while you have a lot of productivity gain you also are going to have some inflationary issues associated with it and especially in the people aspect of things.

But I think there's better pricing in the backlog right now and we continue to pressure pricing to the ability that we can.

I assume what you mean by that is your pricing improvements are outpacing your cost increases?

Yes. We are seeing cost increases but we probably have done a little better job of managing those than we expected. You know, there was a lot was a lot of inflation throughout the oilfield last year and a lot of movements, in particular in high strength steels that we buy. A lot of the more exotic alloys, nickel moved up substantially over the last year. But the more conventional steels appear to have calmed down a little bit. So we probably realized a little bit of upside there.

Great job. Thanks.

Geoff Kieburtz.

Citigroup. Can you get out the crystal ball for a moment, Pete, and just sort of address the question of sustainability? I think Clay mentioned that the bidding activity in Rig Tech is still very robust. But as you kind of look at the landscape maybe taking a five-year horizon, where do you think that backlog starts to plateau and maybe starts to come down?

I think one of the things that clearly we are in is the retooling aspect of this business. We have said this for a long while. You take a look at the average age of the rigs out there and it is still very significant. I think that the newer rigs, clearly, are the desirable rigs by the operators. You look at some of the drilling contractors that are doing better. It's because they have new rigs with high technology.

So I think you are going to see that push out. We have to replace rigs. You know the rig fleet's older. I think the new jackups, you look at the leading edge dayrates that those jackups are getting when they come out. You look at the demand for deepwater rigs.

So we think there's going to be a robustness to the continuing retooling of this industry for the foreseeable future. And that goes out more than just one or two years.

Now the issue on backlog becomes a little bit different simply because we are churning out a lot more today and we are putting pressure on our people to churn out even more as we go to the future. So I think at some point you have to take a look at the monster you are feeding and just you'll have just kind of a natural leveling off. I think you can also have a situation where you can even see a little bit of a dip, simply because people might have backed off from ordering for a quarter and after a quarter it might dip and then you'll see it take off again.

So I think it will still stay very strong. I think it'll give a lot of transparency to this Company. It will let you guys see what we're looking at into the future. And I do think we are retooling the business for a sustainable time.

And on the prior question in terms of the trends in Rig Tech pricing and Rig Tech costs, can you characterize the margin in the backlog today relative to the margin in Rig Tech's performance in the fourth quarter?

Yes. It's definitely higher and the overall expectation is that it should continue to trend up. Now I will point out that a lot depends here on mix and our margin across the various components that we offer in Rig Technology very pretty substantially. But our overall expectation is that it should continue to trend up.

You know this last quarter we saw a 230 basis point uptick in margins. I don't expect to be able to achieve that level of margin improvement, going from Q4 to Q1. A lot of that was driven just by the much higher volume. You know 28% of volume growth carries a lot of intrinsic operating leverage with it. So very pleased with the uptick in the volume level this quarter. Q1 is going to be a little tougher to post improvements on that.

And just broadening to all three lines of business, the incremental margins that you showed in the fourth quarter. Let's focus on year-over-year incrementals. Do you think those are sustainable?

Measuring point-to-point incremental changes is a dangerous business. We have a lot of businesses that intrinsically have very high variable margins, very high operating leverage. Small changes in mix can really swing those numbers widely. If you want to talk year-to-year, I think that's probably a more -- a steadier level of measure.

Well, full year to full year if you look at your full year incrementals in '06 versus '05 and look into '07. Are they sustainable at that level?

I think at PS&S it is going to be a little bit challenging there. Year-over-year we had 39%. That's going from '05 to '06 kind of pro forma fourth the Varco National Oilwell full year results in 2005. We had a very good pricing environment in 2006 and we are still getting price improvements across many of our businesses in PS&S. But North America is definitely much more subdued now than it was in '06.

So I think posting another 39% incremental year-over-year number going from '06 to '07 is going to be a little more difficult. If you will recall in '05 when we first came together, we were providing guidance on flowthroughs for Petroleum Services and Supplies, more in the 30% range which is reflective of the average contribution margin across our products in that group.

But Rig Tech?

Rig Tech. Last quarter we talked about something in the high 20% range and this quarter we posted 28% sequential operating leverage in that group. And I think year-over-year there, I'm looking here it was about 30%. Kind of in line -- I think that is probably a good measure.

We have a lot of structural iron and heavy iron that we moved to Rig Technology that, as you know, doesn't carry quite as high of margins. Things like mud pits and derricks and sub structures, just harder to get a margin on. We have a lot of pass-throughs. We buy a lot of diesel engines, compressors and those sorts of things.

Offsetting those though are our higher margin products. Our top drives. Our control systems, pipe handlers, rackers. That sort of thing. So a lot depends on mix there, too.

Daniel Henriques.

Goldman Sachs. Good morning and congratulations.

My question is, in terms of the incremental orders how -- where -- who do you think will be the key players and where do you in terms of Rig Technology demand who do you think will be the key drivers for the demand in 2007?

It's really going to be in the international arena. And I'm not going to list the name of the customers because my competitors are liable to be listening out there. But the fact of the matter is I think we have a tendency to look at the U.S.-based equity players. And we go "Okay, if they are not doing something, maybe there's not something being done."

But in fact I think you'll see a lot of NOCs. I just came back from Russia. I visited with [Gasprom]. We are pushing ahead on some tenders there that could very well go to the Stockman Field. They are doing a lot of things offshore. I think they will be a player. When you look throughout the Middle East, some places in North Africa. There will be players. There's players in southeast Asia.

So I think that the real driver over the next year, when it really comes to some of the offshore equipment, we will be in the international arena.

Going back to the pricing question. There is a lag between you raising prices and you seeing that in your income statement. The 20% margin we saw this quarter where -- kind of where are you in that process? Are you kind of in the middle-sized price increases, early '06. Where are you in that process with the 20%?

On the land rigs you are actually in a -- pretty well into it because there's a quicker churn on land rigs. Same thing on like workover rigs and the like. On offshore rigs it's early in the process simply because if we take an order for an offshore rig today, we probably won't start seeing a revenue come out of that for, depending on the type of rig, as much as nine months to 12 months. But the land rigs and that is one of the reasons we give you the what's onshore and what's offshore because the land rigs -- they really are going to churn through the system much more rapidly.

And in the 2007 should the offshore rigs increase the percentage of your total revenues in Rig Technology?

It probably should. I don't have the exact breakdown but I would say intuitively it probably should increase a little bit as we go into '07 and '08. However, as you go into those you also have some openings for land rigs. As Clay mentioned earlier, we could if you want to order an ideal rig we can still get it to you this year.

So while the crystal ball today says it will be more offshore then, you'll see some more land rigs churn into it at that point.

On that, how should we think about the impact of the margins on the incrementals of that mix shift towards offshore?

I think it will be positive. You know if you recall a year, a year and a half ago we were guiding towards kind of low 20% range incrementals in this group. And we have been beating that the last couple of quarters with something approaching 30%. A lot of that in addition to price is kind of the mix shift towards the offshore.

Then, final question, Pete. Some quarters you provide some guidance and try to help us with orders for the current quarter. Would you share with us your thoughts for orders in the first quarter?

Have I done that in the past?

A couple of times.

I actually, it becomes a tough call. I think we had $1.8 million, $1 billion worth of orders two quarters ago, $1.4 billion this quarter. I think this quarter was impacted clearly a little bit by things like Christmas and Thanksgiving and the holidays.

I would say this. What we're looking at on the order book and prospects is still pretty robust. The question becomes one of timing. I would say this. Over the next six months it is going to be a very, very solid quarter flow. Over the next 60 days, I don't know that I could say that quite as aggressively. However, it could very well be.

Okay. Thank you.

If that didn't equivocate enough I don't know what could.

Jim Wicklund.

Jim had to step away. This is (indiscernible) Banc of America Securities. Had a question on your competition in Russia and China. What are you seeing on the -- in terms of competition from indigenous companies out there?

I think the real key to any competition when you look at indigenous companies goes back to one of my basic themes and that is technology. You know at the end of the day, if you are talking about building mud pits or if you are maybe looking at a certain type of substructure or a building. They are there and they're able to do that.

The differentiator is your ability to put the high-tech equipment out there, to have electronics, to have AC technology, to have quick-moving rigs, to have self-elevating [masts], things like that. And I think given that, we are in pretty good shape right now. We feel real comparable with our ability to compete very effectively.

Give you an example. We have shipped over 114 top drives into China. We have done that over the last -- it's been a period of time, extended time but the fact is we don't get a whole lot of competition in things like top drives there. We are not going to get a lot of competition on those sorts of things in Russia. Where we will get the competition is going to be on the basic items. However, given the model that we have in manufacturing we are going to do that internally.

So I think we feel very comfortable about where we sit in our competitive situation with them.

Just a follow-on add-on. On the acquisition front seems like you guys are -- your producing balance sheet looks great. What are we looking for in-store for acquisitions in 2007?

We are hoping to do more. We had a good year in 2006. We spent cash approaching $400 million on acquisitions. NQL and Rolagon, we announced last quarter. We continue to look at a lot of opportunities in that area. And that is our preferred application of cash. I think it's something that NOV executes on very, very well. So we are pleased with the kind of the outlook in the transaction pipeline right now.

There's a silver lining to the uncertainty on the horizon with regards to the North American activity outlook. It's that it's made producing environment where the bids and the (indiscernible) can converge and we can find good deals. So we are hoping to put more cash to work in '07 through acquisitions.

But to put a perspective between Varco and National Oilwell over the past ten years, between both companies, we've done about 140 transactions and, really, it's that effort plus investment in good organic growth opportunities that have built all these leading market positions that we have today. So we are hoping to continue to employ that strategy going forward.

Great quarter. Thanks.

Jim Crandell.

Good morning. Outstanding quarter. Pete, is $1.4 billion a level of new orders that you think you can average for '07? And in answering that, can you talk about in a little bit more detail, sort of the number of semisubmersibles and jackups or let's say floaters and jackups you may see out there during the year?

Jim, we try to stay awake from absolute numbers simply because we are looking, a lot of the things that we're talking to people about today some will come to fruition. Some won't. We always put a little bit of a factor on it. As we look at probability we might say, "This one seems more like a science project. This one seems like it is a reality."

I would say this. The last year has been very positive when you look at the order flow. I think by definition you would expect it to taper off some. Now I don't think it will taper off to a large degree but I think the reason it will taper off isn't so much as the demand will change as much as people will slow down a little bit, simply because the shipyard capacity on the big projects isn't there.

I think one of the issues you face today, as an example, is there are people who want to build a deepwater rig but they don't have the necessity to order it today. The urgency that some other folks might have six months ago because they can get the ship yard for another three or four months anyway. Now they will go into the ship yard and start working on an option and then come to us and start working on it.

So the long-winded answer is I'd hate to put a number on it. However I believe when we look at our models, when we look at what is out there, we think there's still an awful lot of opportunity as we go forward into '07. Will it equal '06? Especially the latter half of '06? I can't say that for sure. But I think it will still be very positive.

I mean maybe on the jackups and floaters you can comment on how many units roughly that you are in discussions with or that you are aware of that could happen in the next year?

Now come on. If I told you that, my competition would all sit out there and say we have got to factor this in.

You don't have to give me the exact companies you are speaking with. Just the numbers.

I don't really have the numbers sitting in front of me, but it is a goodly number.

Pete, I was really impressed with the revenue number on the rig equipment side. And I almost didn't think that you had the ability to have that level of revenues. Are you reaching capacity in some of your critical manufacturing facilities? And if so how much are you investing for more in those businesses?

One of the interesting things, if you take a look at our manufacturing model -- and I think this is probably one of the things that is underappreciated is we are able to move things all of this world and so even if you have a capacity issue maybe up here in northwest Houston, we can move things in Langzhou, China; we can move things into Edmonton, Canada. We can move things across town to [Galena] Park and be able to take advantage of that. So at National Oilwell Varco, capacity is a dirty word. We basically -- it's dynamic. We can get things done and I think you can see that as we push forward.

So I really believe now where there are some elements that there are certain things that we are bumping up against some issues on; but our guys are extremely creative in finding ways to get around most of those issues. So we are -- if you want to make some orders that we are still taking them and we feel real comfortable about our ability.

The last thing we want to do is make a commitment to a customer and not be able to deliver on it. But the way we put our manufacturing profile together, we can move things around and get them done very quickly and we think that you'll continue to see some growth in that area.

And capacity is not really an issue in your big Chinese facility?

No. As a matter that we've added a little bit of roofline there which is anathema to me but we went ahead and did it anyway. And we did at a very good price. You asked about capital. One of the things that we've done we have done some really good rifleshot things on capital equipment. On things like machine tools. The process changes that Clay talked about earlier. We put some investment into the facilities there to do that.

One additional thing, we are building a new facility up north of town in Houston that is going to take care of a lot of our service. And that should be done in the first half of this year. It is about a 350,000 square foot facility in which we will rebuild and refurb and also have our spare parts systems up there. One of the things we have learned is you don't want to rebuild and refurb at the same facility you want to manufacture. It creates some inherent inefficiencies.

So I think those things that we have made some investments that I think will really help us out as we go through '07 and into '08.

Pete, if I wanted to order a U.S. land rig today, what would I be quoted in terms of delivery time?

We could have (indiscernible) in the fourth quarter and I will have our sales guy call you when we get off the call.

The orders that you have gotten for U.S. land rigs -- I assume all the orders that you talk about are firm orders. But have you had any of your customers back away that you thought that they were orders for U.S. land rigs?

No. I think Jim what you're talking about today we've got to retool the industry. I think there's some folks out there that have ordered some rigs. Clearly they have some rigs that might be stacked but they also know they have to have the best rigs and the best rig is the newest rig with the best technology. So we are really not too concerned about any order cancellations at this point.

Nice going. Thank you.

That does conclude the question-and-answer session. I will now turn the conference over to Pete Miller for the concluding comments.

Thank you very much and thank you very much for listening in. We look forward to talking to you at the end of the first quarter. Thank you very much.

Thank you, Sir. Ladies and gentlemen, this does conclude today's conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 with access code 11081961 followed by the pound sign. (OPERATOR INSTRUCTIONS) You may now disconnect and thank you for your participation today.