國民油井華高 (NOV) 2007 Q4 法說會逐字稿

Welcome to the 2007 annual earnings conference call.

I would like to turn the conference over to Mr. Pete Miller, Chairman and CEO. Please go ahead, sir.

Thank you, [Sol]

Welcome to the fourth quarter and full year conference call for National Oilwell Varco. I am Pete Miller, CEO, and with me is Clay Williams, our Chief Financial Officer.

Earlier today, we announced fourth quarter earnings of $377 million or $1.05 per fully diluted share on revenue of $2.66 billion, and we announced full-year earnings of $1.34 billion or $3.76 per fully diluted share on revenues of $9.79 billion. These are both record results for us and we're very pleased with them. In a moment I will turn it over to Clay, and he will provide more color on the numbers and our results.

In addition to our earnings we announced quarter ending backlog of $9 billion. During the quarter we took in a record $2.2 billion of new orders. I will expand upon this backlog or these backlog numbers a little later in this call. I am very pleased with both our financial results and our backlog growth. We appreciate the confidence our customers have shown in us and the tremendous efforts of our 30,000 employees to achieve these results as well as the continued support of our worldwide network of supplier partners.

At this time, I would like to turn it over to Clay to give you comments regarding our financials.

Thanks, Pete.

Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and for the year end December 31, 2007, please note that we - - that some of the statements 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. This are forward-looking statements within the meaning 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 the latest Form 10-K, form S4 and Form 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information may be found within our press release, on our website at www.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 participation.

National Oilwell Varco generated earnings of $377 million, or $1.05 per fully diluted share in its fourth quarter end of December 31, 2007 on revenues of $2,659 billion. Earnings per share rose 3% sequentially and rose 54% from the fourth quarter of 2006. NOV's fourth quarter revenues improved 3% sequentially and 28% year-over-year. Operating profit was $575 million, or 21.6% of sales, an increase of 5% sequentially, and an increase of 51% year-over-year. Flow-through or operating leverage was 37% sequentially and 33% year-over-year.

For the full year 2007, National Oilwell Varco earned $1.3 billion, or $3.76 per fully diluted share on $9.8 billion in revenue. Earnings per share adjusted for the stock split improved 95% on 39% higher revenues year-over-year. Operating profit was $2 billion, up 84%. Operating margins for the year expanded 510 basis points to 20.9% and year-over-year operating leverage or flow-through was a very strong 34%. All three of our operating segments produced record revenues in 2007.

National Oilwell Varco and Grant Prideco announced on December 17, 2007 that the companies had entered into a definitive merger agreement pursuant to which National Oilwell Varco would acquire all of the outstanding shares of Grant Prideco for a combination of cash and NOV stock. The transaction remains subject to various conditions including approval by regulatory authorities and approval by a majority of Grant Prideco stockholders. On January 7th we filed our application with the U.S. department of justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and have been in discussions with the D.O.J. regarding the proposed transaction since the failing.

At this time a few minor questions still are outstanding. These questions do not merit a second request, however, the D.O.J. does need more time to answer these questions. Therefore, this morning, in order to give the D.O.J. more time to evaluate the transaction we have pulled and are refilling our application under Hart-Scott-Rodino. This will restart the HSR waiting period and facilitate the D.O.J.'s desire to better understand the transaction. We are confident that these issues will be resolved shortly and that the transaction will be approved given the NOV does not compete with Grant Prideco in its businesses.

On January 28, National Oilwell Varco filed an S-4 registration statement for the NOV shares to be issued together with a proxy statement and prospectus for Grant Prideco shareholders. We do not know precisely when the SEC will permit these to become effective but we nevertheless, expect the transaction to close sometime in April, 2008 and remain very enthusiastic about the prospects for the combined business as we enter the new year. We urge shareholders to read our public filings for more information about the transaction.

Turning back to NOV's fourth quarter performance we continued to execute well. Efficiently fabricating highly sophisticated drilling rigs, delivering great service and technology and pressing forward into new promising international markets. We are pleased to once again announce a record level of new rig orders and backlog and we are glad that the drilling contractors we serve continue to trust NOV with their critical rig building project. They count on National Oilwell Varco to deliver safer, cleaner, more efficient ways of finding and developing new sources of oil and gas. Our secret weapon in this effort, the factor that convinces Pete and me that we will continue to succeed in this endeavor are the dedicated NOV professionals who keep the oil patch running smoothly around the world.

I know many are listening to this call today, and I want all of you to know how grateful we are for the super job that you did in 2007. We also offer our thanks to our vendors for their excellent performance this past year, and we want our employees, suppliers, and customers alike to note just how excited we are about 2008.

Here's why we are excited. The world needs to build a lot of rigs and we have just the team to build them, and it's a growing team. We are pleased to announce that we have opened the first of three innovative training programs, the NOV Technical College in Norway to support our Rig Technology group. We expect to open two more, one in Houston and one in Singapore later this year, at a total cost of nearly $30 million. All three will immerse bright energetic students in an intensive 6 to 12-month course in the science of maintaining, repairing, installing and commissioning the sophisticated equipment and technology NOV provides. Our goal is to expand the number of rig service technicians available to keep the growing numbers of high-tech rigs working efficiently.

At the time of the the merger between National Oilwell and Varco we had a little over 400 service technicians available to service equipment, and in the three years since this workforce has grown to nearly 1,000. Over the next year or so, we expect to recruit and train new technicians to bring our workforce up to about 1,400. And the NOV Technical College will help us do this along with institutionalizing a means to steadily improve the skill set of all of our technicians. NOV is committed to developing the skills of its valued employees and customers alike.

In 2007 we trained nearly 1,700 drilling contractor personnel including 150 U.S. land contractor employees who received training in our new state of the art mobile training lab, which brings NOV instructors to the field. These initiatives represent a sustained commitment to grow and enhance our deep pool of talent. This effort will help us manage raising demand for commissioning work associated with 165 offshore new builds underway.

So far, our track record on getting these rigs out of the shipyards to spud has been very good. We have completed the installation and commissioning of 22 rigs since the merger including the first floater the [standard draw max 1] which was delivered early. We are presently performing I N C operations on another 23 rigs in 13 different shipyards with 180 NOV technicians. Once these new rigs spud they will need on going maintenance and refurbishment support.

2007 marked the year we opened a 400,000 square foot aftermarket service center in Houston to keep these rigs supplied with critical spare parts and refurbish the high-tech equipment they employ. This initiative began to pay dividends as we saw significant growth in aftermarket revenues and Rig Technology which contributed significantly to the margin expansion and high flow-through for the group. Total nonbacklog revenue for Rig Technology grew 11% sequentially, entirely due to higher aftermarket sales.

Our Houston aftermarket facility also served to concentrate our equipment refurbishment businesses and extract them from operations where we manufacturing new equipment. This has [freed] up machine tools and other resources in our new equipment manufacturing plant effectively increasing capacity there and making them more efficient by accelerating our cellular manufacturing and quick response manufacturing initiatives which are underway in about a dozen locations. The margin expansion you've seen in our Rig Technology financial statements over the past several quarters demonstrate the success of these manufacturing initiatives.

We're expanding elsewhere around the globe. This quarter we invested in additional manufacturing space in the Middle East completed a number of expansion projects in domestic manufacturing plants and opened a new assembly facility in Norway. Looking forward, we expect to open another aftermarket support facility in Singapore later this year.

NOV also continued to invest in new and better ways of drilling in 2007. We are launching new rigs for high ambient temperature desert drilling conditions and a specialized rig designed for Latin America where our ideal rigs and rapid rigs continue to gain acceptance. We are lucky to have some of the best, most experienced drilling technology mines in the business on the NOV team. And our rig technology engineers and scientists applied for or won 49 patch for their innovations last year. Rig Technology group won $2.2 billion in new orders during Q4, including major packages for four deepwater floaters. Orders eclipsed last quarter's record levels by nearly 13% and lifted backlog to a record $9 billion.

A little over $5 billion is scheduled to flow out as revenue in 2008, and most of the rest in 2009. The backlog is 88% international and 12% domestic and 85% offshore and 15% land, reflecting strong interest in building offshore rigs for promising new deep water basins like Brazil's Santos basin where Petrobras has announced two major discoveries in its many months. We think this news together with recent advancements and reliably seeing through salt for seismic processes and drilling through salt with [rubber stirables] and oil base mud will fuel further industry interest in deep water new builds. As a result, our bid activity remains brisk as it has for 12 straight quarters.

Last quarter we spoke about declining demand for new land rigs in North America where a land rig backlog has fallen by about half from peak 2006 levels. This quarter the domestic land backlog stabilized and we are seeing and hearing of a lower level of stealth building where in land contractors are acknowledging the success of high tech fit for purpose rigs in the domestic market. Old tired iron must and will be replaced even at day rates that are considerably less heroic than those in 2006. Contractors are responding to competition from better rigs that consistently post meaningfully higher day rates and utilization. And NOV is here to help.

Demand for land rigs for international market is exceptionally strong and we are seeing considerably higher interest in high-tech rigs for these markets. We believe operator experience with higher technology rigs, these of the old mechanical rigs will continue to pull more of these into the marketplace. Q4 saw 22% growth in our international land rig backlog at several international customers placed firm commitments.

To recap, we expect to continue to sell into three important trends in the rig fleet worldwide. The secular buildout of additional deep water capabilities, the retooling of the jackup fleet with new or more capable rigs and the replacement of tired old land rigs both here and abroad with smart new technology. And as a reminder 73% of the world's fleet of floating rigs are more than 20 years old, and 84% of the world's jackup fleet is more than 20 years old. As the great old rocker, Neil Young put it, "Rust Never Sleeps."

Now, lets turn to operating results for Q4. Rig Technology generated $1,594 billion in revenue, $411 million in operating profit in the fourth quarter, yielding an operating margin of 25.8%. The group generated sequential flow-through of 51% and year-over-year flow-through of 40%. Sales rose 5% sequentially and 40% year-over-year. Sales that of backlog increased 3% and non backlog revenues increased 11% sequentially. Both were up in margin with revenue from backlog coming through at higher margins due to good cost control on offshore new builds and non backlog revenue benefiting from favorable mix of significantly higher sales of spare parts and repair services offset by lower component sales into the western hemisphere land market.

Looking forward to the first quarter of 2008, we expect to see Rig Technology revenues grow in the mid single digit range but at more typical flow through in the mid to high 20% range resulting in margins comparable to Q4. We also expect another good quarter for bookings particularly for offshore rigs but are unlike to surpass the $2.2 billion in orders won in Q4.

The petroleum services and supply segment generated $818 million in revenues in the fourth quarter, an increase of 2% from the third quarter and a 22% increase from the fourth quarter of 2006. Operating profit was $189 million down $4.4 million from the third quarter. And operating margins were 23.1% down 90 basis points from the third quarter. Year-over-year flow-through were 17%, below the group's average of the past few years.

Several factors contributed to the lower margins including a softer North American service market where drilling contractors are reducing purchases and applying more pressure on pricing which led to lower purchases of expendables and services across a number of product lines. We also see U.S. drilling contractors pulling expendables and spares off older stock rigs and reducing their major rig refurbishment projects resulting in a decline in overall U.S. sales for the group in Q4. Canada benefited from modest seasonal improvement but pricing remains under pressure, which limited flow-throughs for the group there.

International sales growth was strong but at lower margins due to costs associated with several international expansion initiatives. These include the costs associated with two new Tuboscope plants opened in China and the opening of a 200,000-square foot manufacturing facility for downhole tools in the Middle East, a new motor service in relined facilities in the Far East. Additionally flooding in Mexico, higher costs in our European inspection operations and unfavorable mix of fiberglass pipe and mill equipment sales and modestly lower coiled tubing sales were only partly offset by higher sales of downhole tools and instrumentation equipment comparing Q4 to Q3.

Moving into the first quarter we expect continued broad international growth to offset a modestly weakening North America picture. Specifically, we foresee higher sales of power sections and rotors and stators for downhole drilling motors to be offset by inspections declines due to rolling off some large riser line pipe and mill equipment projects. Also fiberglass pipe and fishing tool sales are forecast to be down, resulting in an overall petroleum services and supplies revenue and margins that we expect to be roughly flat with the fourth quarter.

Our Distribution Services segment also faced margin challenges in the North American market in Q4. Group revenues were $366 million up about 1% from the third quarter due to international growth and some seasonal improvement in Canada which were partly offset by lower U.S. sales. Year-over-year sales were down modestly as international growth failed to fully offset declines in North America. Operating profit was $20.9 million and operating margins declined to 5.7% down 120 basis points from the third quarter.

The fourth quarter saw higher severance and restructuring costs in Canada, and the U.S. business saw lower margins on a combination of mix in price and volume. Domestic drilling contractors are bidding out more of their MRO contracts broadly and pricing appears to be weighing more heavily on their purchasing decisions. International growth was solid from Q3 to Q4 but flow-throughs were low as NOV expanded its Middle East operation and invested in new expansion locations in Thailand, Egypt, India and Angola.

Overall, for the full year 2007, distribution services grew international business 22% but Canadian declines completely offset this. Nevertheless, the group did a great job building out the foundation for future international growth. Looking into the first quarter we expect the distribution group to post modest margin improvements on roughly flat revenue as international growth and seasonal and cost improvements in Canada are expected to offset continuing pressure in the U.S.

Turning back to National Oilwell Varco's consolidated fourth quarter income statement SG&A increased $21.5 million from the third quarter and rose as a percentage of revenue from 7.6% to 8.1% due to higher incentive compensation accruals and IT expenses and the reclassification of certain expenses from cost of goods sold. Higher interest expense was more than offset by higher interest income driven by higher cash balances. Other income declined $17.7 million sequentially, due primarily to FX losses on the revaluation of unhedged accrued liability balances on projects in Norway.

For the full year, National Oilwell Varco had FX losses of $7 million down from $21 million in 2006 despite dramatically higher volumes, as we improved our systematic hedging of FX exposures. Other income was also affected by higher banking fees associated with letters of credit on customer deposits.

The fourth quarter tax rate rose slightly from the third quarter to 32.7% and we ended the year at 33.3% slightly below our expected rate of 34%, due mostly to favorable manufacturing tax credits in the U.S. We expect our rate to run in the range of about 33% in 2008, as benefits of lower statutory rates in a handful of countries will be partly offset by higher income tax rates from our Chinese operations. Unallocated expenses and eliminations on our supplemental schedule were $45.9 million, down modestly from the third quarter. Depreciation and amortization was $58.5 million in Q4, up $2.1 million sequentially due to higher CapEx and full quarter impact of Q3 acquisitions.

Our December 31st balance sheet employed working capital excluding cash and debt of $1,878 billion at the end of the fourth quarter, up $68 million, or 4%, from the third quarter, and about 17.7% of annualized fourth quarter sales. Inventory rose $323 million and costs in excess of billings rose $150 million, but these were partly offset by higher accrued liabilities and billings in excess of cost. Customer financing of our rig projects in the form of prepayments and billings in excess of costs totaled $1.9 billion at December 31st, up over $800 million from the prior year.

Cash flow from operations was $437 million in the fourth quarter, and $1,165 billion for the full year. FX was $74 million in Q4 bringing our full-year CapEx to $252 million for 2007. CapEx increased sequentially due largely to the Middle East and China expansion initiatives discussed earlier. We expect 2008 capex to run in the range of $320 million. NOV spent $324 million in cash for acquisitions during the year closing eight acquisitions. Our cash balance was $1,842 billion at December 31st, up $356 million from the third quarter, and our debt totaled $891 million, up about $45 million due to debt incurred by an international joint venture in which we own a majority interest used to finance international acquisitions.

Now let me turn it over to Pete for his comments.

Thanks, Clay.

What I like to do at this point is just kind of give you a little bit overview of what we're seeing operationally, and kind of take you to some of the spots around the world where we think that the business is going to be very nice over the next year. When you really talk about 2008 for us operationally, it's going to be a story of about five things. The first one is a lot of continuing repositioning of assets. As clay pointed out earlier, we've moved a lot of international distribution systems out, we've done some things with downhole tools to reposition tools and that's going to continue because these are going to be a secular growth areas that we don't see declining any time soon.

Continuing on will be continuing to prep for our deep water operations. We're building most of the deep water rigs in the world today. And the neat thing is we're going to be supporting those rigs for the next 20 years. And as we look to the future, we're making sure that we have the assets in place that can take advantage of doing that. We are going to continue new product offerings. We have many new arrows in our quiver, and we think that this is going to help us expand operationally as we go throughout the year. We are going to continue making our operations more efficient.

In our QRM process, the things that we've done, a lot of the improvement that you see especially in the drilling area while some of it is pricing, an awful lot of that is the efficiency that we've created. As we've said before, we like to have that efficiency because that's the gift that keeps on giving.

And then finally, we are going to continue to deliver the rigs on time that we've committed to our customers. So that really - - those are the five things that we're emphasizing operationally this year.

In our distribution area, Clay kind of pointed out that we're following our customers. We're going international. I think while in the short term that incurs some expenses as you see, in the long-term it really positions ourselves to be able to take care of our customers in a much better way. And distribution we're also leveraging off our new build. Much of the backlog that we have, those rigs are going to need support, and we're able to do things with these customers and really create a new business model.

You've heard us in the past talk about what we've done with Scorpion. And we see the opportunity to do that with many of the drilling contractors that are coming out of the shipyards today. So, we believe that really is going to be a positive area for us. And again, we're going to be emphasizing the deep water areas. Clay mentioning Angola and other areas where we're opening up distribution facilities to be able to take care of the rigs that we're building for those areas.

In our Petroleum Services & Supplies area, it's going to be a lot about new products, things like our Mdtotco rig sets 2.2 that helps our customers be able to really develop and get information on a much more timely basis and to be able to have much more efficient operations. In our Brandt operation we'll continue to emphasize our support of deep water. As we look at the deep water range coming into the gulf of Mexico, we expect to be able to put many of our Brandt equipment and service on those rigs to be able to take care of them in the future. In our mission operation, a lot of it is to be efficiency, continuing to push out our QRM and continuing to drive down our costs. And in addition to that many new mud pumps are going out or hedge pumps on these offshore rigs and as that happens we'll have the products out of mission to be able to support those.

In our Tuboscope operations, we'll continue to expand internationally. Clay mentioned our facilities in China, and also what we do with riser as you look at the raise there will be coming out in '08, '09, and '10 that will be associated with much of the deep water that we're seeing. So again, a lot of operational efficiencies but a lot of positive things that we see out there for both distribution and Petroleum Services & Supplies. In our drilling operation, as we mentioned earlier, we took in over $2.2 billion worth of new orders. We think that reflects the confidence that our customers have in us as well as the continued secular increase and especially the deep water rigs.

In particular, as I go around the world one of the things I would like to talk about is Russia. Those of you that have been on this conference calls before have heard me talk a lot about Russia, my excitement about Russia and in particular the stockman field. Well, I'm happy to say we took our first orders for two semisubmersible rigs that are going into the stockman field. Then in the fourth quarter backlog it will be north of $400 million, and I think they're going to be many more of these and we are positioned with our very good partner [Samsung] to be able to expand the operations that we're doing there. One of the neat things about that, we go back to back to distribution for a moment, as we put these rigs into places like the stockman field we're going to be open up facilities to support those rigs both on a maintenance basis and an on an MRO supply basis. So we're excited about it.

After this call, in a couple days I'm leaving for Russia, so I can thank our Russian partners and customers over there for the opportunity to do this. And I think this is kind of the opening of the floodgates of the things that we think are going to happen in Russia. We're excited about it. I think a lot of the land contractors are starting to expand. I know, [Weather Ford] is going over there, neighbors says rigs going to be there to support them. We're also going to be selling new rigs into Russia.

So, when people talk to me and they say what's the area you're most excited about, I also said prospectively Russia, and now I'm going to say it's there. We are starting to see it and you are going to see our revenues increase that arena.

The Middle East and north Africa continue to be very good places for us. Clay mentioned the increase in the international land rig business that we have and a lot of that is going into both the Middle East and north Africa. We are opening up facilities in those areas to support these rigs both in our distribution while really in many more ways our downhole tools, our Tubescope, our Brandt, everybody really is moving into these areas quite aggressively, so that we can take advantage of the things. We've been there for a long time, what we're doing now is expanding our opportunities in these areas. I think the Middle East will continue to be a solid arrest reb nay for us well into the future and I'm talking well into the next decade.

One of the more interesting areas for us right now, South America measuring. The seismic rig count in South America went up about 43% last year and I think where seismic goes drilling is going to follow. Now, we've been very successful in getting some new land rigs into Mexico, into Argentina and to other areas in South America. I think it's going to be a pretty neat place for us. And of course, I don't need to tell anybody on this call about Brazil because I think with the things going on in the Santos basin, Brazil will continue to be quite an exciting area for us as we go into the future.

India and China both continue to be very good. In India we've taken some jackup orders in the past quarter. And in China we continued to utilize that as a base not only of manufacturing but also of many of the product going in there. It continues to be a wonderful arena for many of the shipyards and the new rigs being built there as well as our high-tech equipment such as top drives. So, I think those will continue to be great areas.

And then finally, and I want to talk for just a moment about North America. Clearly there's some challenges but I will say this. North America has always in the long term provided good things for us. I think you'll continue to see a lot of technological advances made when you're looking at things like the Barnett and Fayetteville Shale, they'll continue to do things for us that will enable us to, number one, learn a lot here, have good business here, but then take those learnings into the international arena.

We continue to be very bullish, I think in the long term in North America. Are there some head winds short term? Sure, but we'll get through those. I think those of us that have been in this industry for long time unfortunately know how to handle these head winds, and we'll do that well, but I think in the long term North America will turn up and be a very positive arena for both the development of new products and for our businesses that we can expand and make them scalable worldwide.

So that's kind of a quick tour. Clay did a very good job of kind of telling you some of the other things that we're seeing around the world, and at this point what I'd like to do is open it up for questions that some of the callers might have.

Thank you, Mr. Miller. Ladies and gentlemen, we begin the question-and-answer session. (Operator Instructions) We do ask that you limit your questions to two questions. Our first question comes from the line of Michael LaMotte with J.P. Morgan.

Thanks. Good morning, guys.

Good morning, Michael.

Good morning, Michael.

Quick question on supporting new builds, Pete. Is there any way that you can quantify what you think the aftermarket opportunity is for each of these new builds on a support mode?

Michael, that's a great question and it's one that we've had a lot recently, and my commitment is I'm going to try to do that over about the next six months. And let me tell you why I'm saying that. In the past, we've built some of these rigs but we don't quite have the same data because things were done a little differently, and the equipment in many cases wasn't as advanced as what we're putting out there today. As Clay pointed out earlier, we delivered the first big new floater which was the Stena Drill MAX, and that was delivered a little early, as a matter of fact in December, a great looking rig. And we are going to try to use that a little bit as a proxy, so we can give a little bit more detailed data on what that support is. I will tell you this. It's going to be good and it's one that's going to be positive, but I'd hate to quantify it right now.

Okay.

Michael, I might add, too, there were a bunch of offshore rigs that were built in very late 1990s and in 2000 that went out into the field, and what we're seeing on some of the generations of technology introduced with those new rigs is that they're now starting to come back for refurbishment. They've been out working six, seven, eight years, and so we have some major rebuilds that we're seeing rising now for things like pipe racking systems and other components that went out with that way. So that's another good indicator that there are good things ahead with these new rigs.

Are those full-blown replacement components, or is it refurb on spare parts?

No, it's refurb, so there's a lot of spare parts and repair services that go into - - These are multimillion dollar refurbishment tickets.

Okay. I'm impress, Pete that four deep water floaters going in bounds fourth quarter versus five in Q3, and orders are up, obviously that's the - - I assume, that the desert rigs for the international market is a big component of that. What's the value now of a desert rig?

Yes, those things kind of [belt] bounce around a little bit Michael but in some cases it' going to be well north of $30 million. It's just kind of depends. Each one of the desert rigs is kind of a rig on its own self and so, depending on what the customer wants. We have like a higher floor in some cases, might be go from being a 30-foot floor to a 40-foot floor which adds to the cost. And they do that because of different pressure control issues. And in some cases the mast is longer. It goes from 152 to 156 feet. But I would say $30, $35 million in there for a typical desert rig is a pretty good number.

Pretty good number. Okay. And last one for me, the steel prices appear to be back on the raise a little bit. Do you have any sort of cost inflator protections in the contracts that are in backlog? Any thoughts on it?

The primary, we do in some of our contracts but the primary way we manage that, Michael, is to place orders for the steel very early after we get the customer signed up on our contract, so we sort of try to do back to back contracts as quickly as we can. But, yes, we are hearing talk about higher steel prices in 2008. I know there have been some flooding in Australia that impacted supplies of coking coal, there are some concerns about supplies of iron ore and cost of iron ore, you get a weak U.S. dollar, and all those things that 'm pretty sure is going to conspire to raise stell prices in the coming year. What we're hearing is anywhere from 5% on up to 15% for - - depending on the grade.

Okay. Great. Thanks, guys.

Thanks, Michael.

Our next question comes from the line of Robin Shoemaker with Bear Stearns.

Good morning, Pete and Clay.

Good morning, Robin. How are you doing?

Good. You've done a good job in recent times of keeping us abreast of your quoting activity, and you've continued to say it's quite brisk. I just wonder if you could update us on the deep water, the jackup and the land rig arenas with regard to your quoting activity and what you're seeing in early '08.

It's quite brisk. Actually what we're seeing, Robin, is really still a very active quoting arena. It's kind of been interesting because as you look at land we could have gone back a couple years ago and there was probably much more quoting going on in North America than versus international and today that's kind of flipped.

However, having said that there's still quoting going on in North America. We continue to sell more component-oriented type things in the lower 48 as an example. The deep water business continues to be very good. We continue to have quoting activity that probably is not dissimilar to what we've had in the last six months. And I've continued to say on the jackup market, I've said all along that when the jackups get delivered there will be more jackups ordered almost on a one-to-one basis.

And If you look over the past quarter, it's been like that. We took some jackup orders in this quarter and we continue to have very good inquiries into the jackup arena. So, I feel very comfortable that the quoting activity is positive.

The issue you always have is quoting and determining what might be a science project and what's real. But for the most part, I think we're pretty good at figuring that out. And then the other thing on quoting is ultimately especially in the international arena it takes a little longer. So what quarter does some of the orders fall in might make a difference. I think you look in the third quarter, we did 1.9, in the fourth quarter 2.2. If you look in the second quarter we did less than that. But that really, we were quoting stuff in that second quarter that fell into this.

So, long we did answer to tell you and we still feel very good about the quoting activity.

Yes. Okay. So I assume these quotes are for jackups and deep water are for the 2011 rig delivery time frame?

Well, actually the jackups must be earlier than that, Robin. Most part I think the jackups are really in a round of two-year time frame, and maybe in some cases less depending on the shipyard, but for the floaters for sure you're looking out into 2011.

Yes. Okay. And just currently your composition of backlog is between international, domestic, and on shore and offshore, I think you've given us that figure previously.

Yes, it's 88% international, 12% domestic, Robin, and it's 85% offshore and 15% land unchanged from the last quarter because of the surge in international land buying that we saw in the quarter.

Okay. Great. Thank you.

You bet. Thank you.

Thank you, Robin.

And our next question comes from the line of Marshall Adkins with Raymond James.

Good morning, guys. Let me drill down a little bit more on the floater market. Last quarter you discussed some of the announced new builds and kind of the ones that hadn't been booked. Can you give us an update, Pete, on what we're looking at there in terms of what's been announced relative to what's been booked?

You know, at this time, Marshall, I would probably assume that about - - I don't have the exact number, but I would say the majority of the announced have been booked. There are still some of the announced that have not been booked, and I think again, that kind of comes down to a timing issue. Clearly, if you've heard something announced in the first quarter it wouldn't have fallen into our $2.2 billion that really was cut off on the 31st of December. So, I would say the majority have been booked but there's still a lot out there. And there's also some out there that have not been announced. And those are ones that we work on every day.

Sure. So of the announced ones, and I'm just kind of throwing out a ballpark, maybe four or five that have not been booked? Is that just a fair ballpark number?

I think that's fair, yeah.

Okay. Clay, give me - - you talked about backlog next quarter with bookings being down modestly. You also talked about spare parts business really improving. Can you give me a little more color on the spare parts business? Talk about the trends there going forward. Should we expect the spare parts business to continue becoming a bigger part of the overall business?

Yes, absolutely. That's our plan, and that's why we invested in this big facility in Houston and then have follow-on investments overseas as well in that. And, you know, we pulled in spare parts from around the Houston area for probably half a dozen locations into that facility, and that's been underway since last summer, and I think what we saw in Q4 was the impact of kind of getting that squared away and then increasing our shipments out of that facility to better service our customers. We also saw higher spare parts shipment out of our Norwegian operations.

A lot of those had to do with initial stocking of some of the new rigs going to work and as you're aware, there's going to be more and more new rigs delivered in '08 and '09 and so, we'll continue to see that favorably impact our spare part shipments. But I think the longer term kind of secular trend here is that the nature of the equipment going to work on these new rigs is different, and requires a little more OEM care and feeding and participation, and that the offshore drillers and that the owners and operators of these sophisticated bigger land rigs are more likely to come back to the OEM for help on this. And that's in contrast to many of the 25 and 30-year-old rigs across North America and elsewhere in the U.S. where they're not necessarily going to come back to the OEM but go to machine shops somewhere.

This new stuff you can't do that. There's embedded PLC chips and networks and technology there. It's also much more highly engineered and the nature of the new wells that these rigs are drilling are way more complex and they get - - they seem to get more complex every day. And so, this equipment is being pushed harder, so all of those things we think are pointing to a spare parts business that should continue to move up into the right.

Very insightful. I will - - I know you're [surprise] to follow directions and I'll limit it to two. Good-bye.

Thanks, Marshall.

Thank you. Our next question comes from the line of Scott Gill with Simmons & Company.

Yes. Good morning, gentlemen.

Good morning, Scott.

I guess, kind of along the same lines, Clay, when you're talking about these non capital equipment sales out of the Rig Technology segment up 11% sequentially, how much of that is kind of considered secular or organic growth and how much of that do you think was just due to seasonality in the quarter?

I think it was more - - I don't think it was seasonal, and as much as we did have a help stocking up new rigs going to work that were coming out of shipyards and going to work and a big offshore rig will soak up $3, $4 million of spare parts, so we had some of those coming in. And certainly the outlook for more rigs coming out of the shipyards is good, so we think that will continue.

Okay. And then my last question, again, when you look at the order flow for 2007, over $7 billion, of that, Pete, how much of that was attributable to deep water rigs?

Oh, I don't know, but I've got that number off the top of my head, Scott. We basically - - I would say the majority of it is. As you take a look, when we talk to folks about our potential, if you look at a land rig of course, depending on the type of land rig, it could be as much as 30, 35 million. If you look at the jackups we could put 190 million Jackup we could put 50 million on it.

And of course, when you look at the deep water rigs today, if we go all in on one it could be almost 300 million. So you kind of - - the majority of that number is in deep water simply because of the size of the order that we're getting on those.

What I heard you say earlier your quote level is unchanged for deep water and I guess what I'm kind of wondering here as we see in each quarter you kind of say well, I don't expect to repeat that order size. With all Q4 at $2.2 billion, Q1 at $1.9 billion, what changed between Q3 and Q4 that caused that extra 300 million of orders to flow through?

Oh, it might have just been my natural conservatism. I'm not sure. Again Scott, I think what happens here and we try to explain this a little bit, a lot of what you're seeing out there is just order timing and quite frankly, I was very pleased with the fourth quarter. I mean, sure it has got to be, but when you think about the fourth quarter in a normalized basis, it's only about a nine of 10-week quarter because you really have a lot time off for Thanksgiving and Christmas. And a lot of these orders, these are fairly complex deals and we don;t put them in our backlog until the contract's signed. And so, in some cases, we don't know if it's going to be in the first quarter, or the second quarter.

We're looking at some things today that I would hope would come in the first quarter, but I'm not sure they will. The contracts could extend out and it might not get signed until the first week of April, which means then that it won't fall in Q1 or won't fall in Q2. So, we're reluctant to kind of pin that number day on, simply because the movement of that and , of course, we've cut our backlog off on a very date specific. It's the last day of the quarter, if the order is not in it it doesn't come in. So that's one of the reasons that we kind of equivocate a little bit there and say here in one hand it's this on the other hand it's this. And that's why we like to talk in context of the order - - the flow of tenders and bidding is still pretty

Okay. Well, things sound great. Thanks, Pete.

Thanks, Scott.

And our next question comes from the line of Kurt Hallead with RBC Capital Markets.

NOV is online therefore they're in the Q&A.

Okay. Kurt Hallead here.

Hey, Kurt.

I think the question I got for you guys is, you've been pretty consistent with your comments on the jackup market. We've seen a big surge in orders here obviously over the last few years for offshore rigs in general. Pete, in your estimation, do you think we're going to see, whatever it was, 180, 200 offshore rigs over the next three years? Is that pace going to continue? Is it going to trail off? And do you think, in that context, is the dollar value per rig going to continue to increase, so even if the volumes come off a little bit you're still going to be able to book some pretty decent backlog and order value numbers?

You know, Kurt, it would be very difficult to say that the next three years would equal the past three years on that number of rigs. I think the real issue out there today is going to be what's really needed in the deep water arena, and I think as you take a look around and you see some of these bigger discoveries, like Tupe and other things that are going down in the Santos basin, and then what you see off of West Africa, continued discoveries in the Gulf of Mexico, I think the real question becomes, how many deep water rigs do you really need? My guess is it's a lot more than we think.

I think the other side of the coin is on the jackups especially is the retooling of the industry, and then the repositioning of jackups into places like the Persian gulf which I think is going to need a lot more jackups as the drilling contractors I'm sure have probably told you. So, I would be hesitant to go on the record with an absolute number. What I will say is we continue to expect that you will see a very brisk activity in the offshore arena.

Since you did reference it in terms of being deep water be more than what we think, so what are we thinking on the number of deep water rigs that are going to be needed? What's the number that's out there that you've seen?

Well, you know, there's a lot of varying numbers, and I would never - - we kind of internally have our own proprietary expectations on that. And I think there have been a lot of people that have been all over the map on it, but I would say if you take a look at something like Tupe, I think that Petrobras has given a pretty significant number on the number of rigs that they need to develop that particular field.

And the thing about a lot of these deep water wells is that they aren't the type of wells that you're just going to knock down the way you can knock down a Barnett or Fayetteville Shale well. They're going to take a lot of time. Because it's not even the drilling as much as the flats on the case and the running, [wiring] and everything else that take up so much of the time landing a BOP. So, we think the world is still going to need a significant number of deep water rigs.

You referenced Russia as kind of being here and now. What kind of market size, what kind of market opportunity either in terms of number of rigs or dollar value of rig opportunity do you see in Russia, and how does that compare to maybe what happened here in the North American land rig market between '05 and the peak and latter part of '06?

I think the Russian market is going to be really positive. I mentioned the two semisubmersibles. The fact is that the two semisubmersibles guarding the branch seas aren't really deep water rigs because that's not a deep water basin as much as it's a harsh environment basin. Really going to be some challenging drilling up there but I think there will be continued demand for rigs like that, and again, that's more into our fairway because you're talking - - you could be talking $150, $250 million, depending on the kit that would go on a rig like that from us.

So, I think the offshore side of Russia will continue to look very good, and then on the land business today, you're seeing some of the western contractors move rigs in. As those go in, some of them are new, some of them have to be heavily refurbished, I know both neighbors and weatherford are moving rigs in. And I think that potentially, you could clearly see that equaling what we've seen in the lower 48. Just look at the base numbers. The United States is four time zones wide. Russia is 11 time zones wide. You look at just the land that could ultimately be explored, and I think that can potentially be an exciting market for land rigs.

Is that dollar value per Russian land rig in a $30 to $35 million range or more? Is it more, is it less?

No. It would be a lot less. It's probably much more of - - if you look at a Rocky Mountain type rig, just winterization, the actual type of rig itself wouldn't be dissimilar to a typical U.S. rig with the exception being the winterization. So, that's more in the 10 to 12 to $14 million range.

Great. Thanks, Pete.

Okay, Kurt. Thank you.

And our next question comes from the line of Dan Pickerring with Tudor Pickerring & Co. Please go ahead with your question, sir.

Good morning.

Good morning, Dan.

Pete, during 2007 in the Rig Technology business you showed consistent ramp in terms of your ability to deliver product, so revenues grew each quarter through the year. You're consolidating facilities, you're doing a lot of things on the manufacturing side. Should we expect that we just continue to see a steady quarterly progression on the top line for you guys in '08?

I think you will certainly see a progression, Dan, but it can't be - - you kind of get the law of big numbers here. We've done a lot of awfully work. Initially you had some low-hanging fruit, and then now you just kind of - - the iterations gets smaller and smaller. I think our people continue to do a fantastic job and I think you'll continue to see growth. However, I think that the growth - - to think that the growth would be similar to what it's been in the past would be tough to do, because when you double up on something, it's tough to double it up again.

Sure. I tend to think about moving already to think about '09 for you guys. You had orders in the quarter of about - - for the year, averaged at about $1.7 billion per quarter on average in '07. Do we - - can we manufacture and deliver at that rate by the end of this year?

Yes, I'm not going to commit that we'll be there by the end of this year but that's certainly in the right - - we're getting pretty close.

So that's the right ballpark generally in terms of that, right?

Right.

All right. And then, Clay, the question for you on margins, I want to make sure I understood your comments. As it regards the nonbacklog revenue which we're kind of calling aftermarket. I realize it's not all aftermarket, but I understand the trend, which is more. That was about 29% of the total segment this year. I guess what you're saying is that's probably at least the same amount in '08, and that has a positive margin impact as we move forward. Is that right?

Yes, the aftermarket business generally is a little bit accretive to our margins.

Okay. So, in other words, Q4 margins weren't a fluke? They're sustainable in Q1, I heard you say that, but it sounds like they're sustainable as we step through '08.

Yes. But bear in mind, Dan, we have been guiding towards incremental flow-throughs in the high 20% range, given an average mix of things that we sell, and we're not backing off that guidance.

Okay. Thank you, guys.

Thanks, Dan.

And our final question comes from the line of Chuck [Binarbino] with Goldman Sachs.

Hi, good morning.

Hi, Chuck.

Just another question on margins this one more on the PSS segment. You talk a little bit about international expansion starts as kind of holding back the margins there in the quarter. Is that something that will continue to carry forward here? You talked a little bit about 1Q '08 but I guess longer than that, is that something that really makes it difficult to grow margins going forward?

On the specific project that we talked about, yeah, some of those will - - those items will drift a little bit into Q1, but remember, Chuck, we're committed to the international business and growing that business over the long hall, so we expect even more initiatives to get launched as we move further into 2008, and as is typical when you start up an operation in a foreign market you typically experience a little head wind as we get that going. So, yes, I think we'll kind of continue to have some of that out there.

Okay. Then one - - is it something that you expect to really, in '08 - - do you expect more expansion in '09 to better prepare yourself for the growth?

We hope so because that means we've got - - we continue to be enthusiastic about the turns obviously we're going through our '08 capital budgeting and planning exercises, and so we've paid a lot of close attention to our '08 opportunities. But we continue to do the sale in '09, that means they're working well and we're still very, very optimistic. And, frankly, where we sit here in early '08, that would be our view on '09 as well.

Thank you.

Thanks, Chuck.

Mr. Miller, at this time we have no additional questions. Please continue with any closing remarks.

Thanks, [Al,] and I appreciate everybody listening in. And I look forward to talking to you at the end of our first quarter. Thank you very much.

Ladies and gentlemen, this concludes the 2007 annual earnings conference call. If you would like to listen to a replay of today's conference please dial 303-590-3000, entering the access code of 11106227 followed by the pound sign. This does conclude our conference for today. Thank you for using ACT Teleconferencing. You may now disconnect.