國民油井華高 (NOV) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the the National Oilwell Varco earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded today, Wednesday, April 30, 2008. At this time, I would like to turn the conference over to Pete Miller, President, CEO and Chairman. Please go ahead, sir.

Thank you, Miciah. Good morning. Welcome to the National Oilwell Varco first quarter 2008 earnings conference call. I am Pete Miller, President and CEO of National Oilwell Varco, and with me on this call today is our CFO, Clay Williams. Earlier today, we announced earnings of $398 million or $1.11 per share on revenues of $2.68 billion. This compares to years ago earnings of 276 million, or $0.78 per share on revenue of $2.17 billion. We are very pleased with the start to what we expect to be an excellent year. Additionally, we announced new capital equipment orders of $2 billion, which increased our backlog in our Rig Technology Group to $9.9 billion.

Clay and I will provide more color on this backlog in a moment. Also after the quarter end on the 21st of April, we closed on the Grant Prideco acquisition. We are excited about the prospects of this business and would like to welcome all the Grant Prideco [inaudible] and [Excel Systems] employees to the the National Oilwell Varco family. We are delighted to have you join us. At this time, I would like to turn the call over Clay and have him give you some color on our results. After he's finished I will come back and give you a little bit of an operational overview, and then we'll open it up for questions. Clay?

Thanks, Pete. Before we begin this discussion of National Oilwell Varco's results for first quarter ended March 31, 2008, please note 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. These 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'll refer you to the latest Form 10-K National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of 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 Web site at www.now.com, or in our filings with the SEC. Later on in this call, Pete and I will answer your questions which we ask you to limit to two in order to permit more participation. National Oilwell Varco generated earning of $398 million or $1.11 per fully diluted share in its first quarter ended March 31, 2008, on revenues of $2.7 billion.

Earnings per share rose 6% sequentially and rose 42% from the first quarter of 2007. NOV's first quarter revenues improved 1% sequentially and 24% year over year. Operating profit was $569 million or 21.2% of sales, an increase of 33% year over year but a 1% increase sequentially. Year over year flowthroughs or operating leverage was 27%. As Pete mentioned, National Oilwell Varco completed its $7 billion acquisition of Grant Prideco last week. Pete and I are excited about the very bright future that lies ahead for our customers and employees alike as a result of this important strategic step. The merger furthers NOV's vision of being the manufacturer to the oil field, supplying critical hardware, industry leading technologies and comprehensive service to oil and gas operations. To our new NOV employees from Grant Prideco who may be listening, let me tell you how delighted we are that you're part of the NOV family. Welcome. Later into my remarks, I will discuss financial results from Grant Prideco's first quarter and update you on our integration efforts.

Starting with the second quarter of 2008, we will begin reporting Grant Prideco's four main operating units -- Drilling Products and Services, ReedHycalog bits [IntelliServe] and [Excel Systems] within our existing Petroleum Services and Supply segment following a FAS 131 review of the results and our post-merger organization. Under purchase accounting rules, we will pick up only a partial quarter of Grant Prideco results in our Q2 financial statements, specifically the operating results from the 70 days between April 22 and June 30. To help assist you in your modeling, we will later today post on our Web site a pro forma set of historical financial statements by quarter for the combined company, including the expected effect of additional depreciation and amortization burden associated with the step up of Grant Prideco's balance sheet. This estimate of the step up is subject to change as we complete our detailed reevaluation of its assets and liabilities over the next year in accordance with purchase accounting rules. Three-points of note regarding the acquisition. First, we intend to continue Grant Prideco's past practice of recording results from our joint venture with [inaudible] Alpine and Austria as equity earnings rather than consolidated earning and profiting profits. This joint venture supplies green tubes to our Drill Pipe manufacturing operation. Second, we will continue to pursue the closing of Grant Prideco's previously agreed sale of its TCA, Atlas Bradford and other tubular technologies and services to Vallourec. We expect to close this later in Q2 and will treat their results as discontinued operations in our Q2 financial statements. Third, to finance the cash portion of the Grant Prideco acquisition, we expanded our revolving line of credit to $3 billion, on which we drew a little over $2 billion last week.

We will receive approximately $800 million in cash consideration from Vallourec upon closing the TTS transaction, and after taxes expect to net a little over $500 million, delevering the National Oilwell Varco somewhat from where we are today. Importantly, we received a very attractive interest rate and are currently paying about 3.6% on the incremental debt. As I mentioned, I will work through Grant Prideco's Q1 operating results a little later, but first let me review National Oilwell Varco's Q1 results. Overall, National Oilwell Varco performed well in its quarter ended March 31, 2008, continuing its excellent track record of efficiently and safely fabricating the highly-sophisticated drilling rigs the world needs. Demand, particularly for deepwater floaters from Brazil and other markets continue to be strong, and National Oilwell Varco generated orders of $2 billion in Q1 for its Rig Technology segment, including five drill ships and one semisubmersible rig. Strong orders lifted our backlog to a record $9.9 billion, up another 10% sequentially. We expect orders will continue to be strong into Q2. 2008. given that we have already landed a couple of deepwater floaters only a few weeks into the quarter, and several more discussions about floaters are continuing, which bodes well for the remainder of the year. Land rig inquiries, both international and domestic, are up sharply; but surprisingly, our backlog for land equipment dipped slightly in Q1. Nevertheless, customer enthusiasm for NOV technology continues to build in our opinion due to the greater operational success of the modern A.C. powered electronically controlled rigs we sell.

Therefore, we believe that contracts for more new land rigs will start to flow soon, particularly for Latin America, the Middle East, Russia and the Caspian region. Most incremental domestic demand is focused on shallower rigs with small footprints for the Appalachia region. Across the worldwide land market, we are bidding literally dozens and dozens of rigs. Pressure pumping equipment declines have contributed to the lower land backlog at March 31. Demand dropped sharply this quarter as North American pressure pumpers are curtailing expansion plans in the face of sharply lower pressure pumping prices and following significant capacity expansions over the past few years. Nevertheless, we believe that this remains a high secular growth area in the long run, and we expect to resume shipments into this market after the new equipment is absorbed and as new shale plates kick in with incremental demands. Canada is back to buying units after a year long hiatus, and international demand remains steady, specifically for China. Our outlook for North America has improved sharply, owing to much brighter mood amongst gas drill letters, who are seeing substantially improved gas prices, both in the U.S. and Canada. Ancillaries for rig equipment and oil field services for North America, particularly for shale play such as the Marcellus, Haynesville, Bakkin and others, has jumped, and we believe the seconds half of the year looks very bright. Near term, the seasonal break up in Canada will suppress Q2 financial results, but Q3 and Q4 look much better.

As a reminder, last year, National Oilwell Varco saw its overall Canadian revenues decline 26% from the first quarter of 2007 to the second quarter, sequentially impacting earnings by about $0.04 per share. Moving and casing inventories in North America continued to tighten during Q1, as Chinese imports rolled out and as continued strong levels of drilling depleted OTCG stocks. As a result, pipe prices are rising and we are hearing from our pipe mill and pipe processor customers of their plans to step up product. The overall rising demand for oil field services across North America is permitting us to raise prices across most product lines. However, we are also facing rising costs. Fuel prices are up sharply worldwide, particularly for higher grade alloys. While higher oil prices benefit our customers in the long run, energy is a large component of what we build and a large component of what we buy from our suppliers. Inflation is taking a toll on our workforce too, and we are continuing to face rising labor costs. Overall price improvements in our service businesses will be required to hold margins flat, but we are guardedly optimistic that we are squeeze out additional margin improvements, mostly by continuing to get more efficient at what we do. Overall NOV's international sales were up slightly this quarter, but choppy. Rig Technology overseas sales continue to rise to meet the demands for more rig iron, and distribution's international expansion initiatives produced growth, but our PS&S international sales were down slightly sequentially, offsetting these gains.

Excellent double-digit sequential services revenue growth in the Middle East, where we've recently expanded, failed to overcome lower sales in the North Sea and Continental Europe due to weather, and lower sales in the Far East due to project delays. Latin America is picking up as we are rigging up on new service jobs currently. We posted solid sequential gains in this region too, particularly in Argentina. International expansion initiatives we discussed last quarter continued, and we expect to continue to invest in the start up of a number of these for at least the next few quarters. Now let me turn to segment operating results for Q1. Rig Technology generated $1.6 billion in revenue and $406 million in operating profit in the first quarter, yielding an operating margin of 25.3%. The group generated year over year flow through of 36% on 31% revenue growth. Sequentially, sales were roughly level and operating profit declined slightly. Importantly, we see the flattening revenues and margins as a momentary pause in this business and expect to resume mid single-digit sequential growth and slight margin expansion again starting in Q2. Specifically, Q1 saw nonbacklog sales rise 15% sequentially, but sales out of backlog decline 4% sequentially, largely offsetting the gains in services and smaller capital goods that don't run through our backlog. Within the Q1 revenue from backlog of $1,132,000,000, offshore project revenue continued to rise as expected, but we shipped fewer work over rigs, well stimulation units, power swivels and mud pumps, leading to the overall revenue had a decline of 4% compared to Q4.

Based on projects on the books at March 31, 2008, we expect revenues out of backlog to resume its quarter by quarter growth, in total about $4.4 billion for the remaining three quarters of 2008, or $4.2 billion for 2009, and the balance $1.3 billion scheduled to flow out in 2010 and beyond. Orders received after March 31 should layer in on top of these schedule revenues. Our $9.9 billion ending backlog for Rig Technology at Q1 is now 90% international and 10% domestic, and 88% offshore and 12% land. The Rig Technology segment continues to wrestle with rising costs, particularly steel -- up 5 to 20% depending on the alloy and the source and FX related costs. But our efficiency initiatives such as QRM and broad outsourcing have helped us maintain margins, which have remained stable on newly won projects. The steady completion of older, lower market commercial equipment rolling out of backlog, rising manufacturing efficiencies, higher volumes and absorption and modestly higher prices on spares leads us to expect overall margin improvements in 2008 for the segment. Execution for the group remains strong. We have delivered 24 offshore rigs so far this cycle ,and we are presently performing installation and commissioning operations on 20 more.

As with all construction -- as with all complex construction projects, we have had a few hiccups but they have been very few and we are grateful for the excellent job our folks are doing for our customers. Petroleum Services and Supply segment generated record results in both revenue and operating profit in Q1. Revenues were $830 million, up about $12 million or 1% sequentially and up 20% year over year. Operating profit was $195 million, up $6 million from the fourth quarter, and operating margins were 23.5%, up 40 basis points from the fourth quarter, and flat with last year. Operating profit flow throughs were 49% sequentially and 18% year over year. Sequential improvements in margins were driven by surprisingly single strong seasonal improvements across North America. Our Mission business saw greater sales of drilling expendibles like pump liners and valves. This business was pressured in previous quarters by inventories of these being cannibalized from idle rigs leading to pricing pressure; but the good news is that these excess inventories appear to be dwindling. Mono sales of downhole motor powered sections jumped this quarter, due to higher demand for motors to support horizontal drilling. Horizontal and directional drilling continues to steadily gain share as a percentage of total drilling across the U.S.; and along with pressure pumping, is a critical factory in driving compelling economics of the shale gas plays unfolding in North America. NOV's down hold tools and Mission businesses are well placed to benefit from this trend.

Our Tuboscope Pipe Inspection and Coating business also posted solid sequential gains worldwide, and our Fiberglass Pipe business benefit from a large sale of pipe into the tar sand in Canada which led to good margin improvements there. Rig Instrumentation performed well in Q1 on all fronts, but Solid Control Services and Equipment declined slightly on lower equipment sales and rough North Sea weather, offset by an acquisition in the on-site power generation business. We expect it to pick back up as new zero discharge drilling regulations kick in in the western U.S. later this year and on higher shale play volumes across North America. Q1 sales of coil tubing declined sequentially due to lower demand from pressure pumpers in the U.S. and higher steel costs for pressuring margins there. Moving into Q2, we expect modest growth in revenues for the Petroleum Services and Supply segment in the mid single-digit range before the addition of Grant Prideco businesses, which began to flow into the segment on April 22. Specifically, improvements in [inaudible] Solids Control and Mission are expected to overcome a sharp seasonal Canadian break up effect. Those business units are pushing pricing again, but face rising costs which leads us to expect margins to remain roughly stable.

Our Distribution Services segment revenues were $366 million, level with the fourth quarter of 2007 and up about 4% from the first quarter of 2007. Operating profit declined $2.1 million sequentially to $18.8 million, and operating margins were down 60 basis points from Q4 to 5.1%, and down 200 basis points year over year. Seasonal revenue gains in Canada failed to fully offset revenue declines in the U.S. from Q4 to Q1. Competitive pricing pressures in both countries continued to mount. Generally lower rig day rates have led many domestic drilling contractors to bid out more of their daily MRO supply spend, reducing margins. In the U.S., the group saw fewer supplies being sold ito well hook-ups in the Rockies during the quarter; and in Canada, the royalty tax changes are causing some Alberta gas drilling to shift towards southeast Saskatchewan. Canadian operations continue to restructure and the group recently raised delivery pricing to improve margins, which remain below acceptable levels. International revenues increased in Q1 owing to the opening of several new DSEs in recent quarters, most notably in the Middle East. Africa and Asia Pacific also posted strong quarters, partly offset by softer sequential results in Venezuela and Europe. Also associated with international expansion initiatives continued through Q1, and the group will be opening new DSEs in Brazil, Norway, Libya and India in Q2. Looking into the second quarter, we expect Canadian break up to reduce results there but U.S. international improvements to make up the shortfall. Margins are likely to be roughly flat.

Turning back to National Oilwell Varco's consolidated first quarter income statement, consolidated gross margins were steady, just below 30%; but SG&A increased $11.7 million from Q4 and rose as a percentage of revenues from 8.1% to 8.5%, due principally to higher payroll taxes on incentive compensation paid in Q1 offset by reductions and other items. Interest expense improved $3.5 million due to lower debt levels through the quarter. Debt declined $148 million due to our repayment of senior notes at maturity and the repayment of a joint venture loan in China. Interest income declined despite higher cash balances in the quarter, due to a sharp reduction in interest rates. Since we used most of our cash last week in the Grant Prideco acquisition and since interest rates are down, we expect most of our interest income to disappear appear in Q2. Our other income line has had a lot of movement the past two quarters, mainly from foreign exchange impact, which make up the largest portion of this line. And we benefited from a large swing to the positive this quarter. Last quarter, Q4 '07, we had an FX charge related to Norway, where we had significant growth in work in progress and accrued liabilities related to projects there. This quarter, we made an accounting determination that our Norwegian operations are now U.S. dollar functional, and made the conversion from the kroner to the dollar. Our kroner cash holdings benefited from a $15 million FX gain before we converted them to dollars in Q1. Adding to the other income Q1 turnaround were a sequential reduction in bank fees and minor gains on sales of fixed assets.

Now that the FX conversion in Norway is complete, we expect the other income line to quite down in future quarters. The Q1 tax rate fell slightly sequentially, benefiting from net positive discrete items which brought it in below the 33% that we had expected. We expect our tax rate to be in the 33% range through the remainder of the year as we pick up operations from Grant Prideco. Unallocated expenses and aluminum on our supplemental segment schedule were $51.5 million, up $5.6 million sequentially on higher payroll taxes paid in Q1 on incentive compensation. Depreciation and amortization was $61.5 million in Q1, up $3 million sequentially due to higher Capex and a full quarter impact of Q1 acquisitions. Our March 31, 2008 balance sheet employed working capital excluding cash and debt of $1,833,000,000 down $45 million from the fourth quarter, and about 17.1% of annualized first quarter sales. In aggregate, accounts receivable inventory costs in excess of billings roses $528 million from December 31, 2007, but these were offset by accounts payable, accrued liabilities and taxes and billings in excess of costs totaling $618 million since December 31. Cash flow from operations was a record $603 million in Q1, and levered cash flow was $460 million. Capex was $54.3 million in Q1. Expect 2008 Capex to run in the $400 million range, including Grant Prideco, for the remainder of the year. Our cash balance was $2,139,000,000, up $298 million from the fourth quarter, and our debt totaled $743 million as of March 31. I'm also very pleased to report that NOV's corporate credit ratings was raised last week by both major ratings agencies in view of our strong financial condition. At this point, let me take a moment to speak to operating results from Grant Prideco for its quarter ended March 31st. Overall, the business generated a solid quarter, highlighted by record results in its ReedHycalog unit and improved margins in drill pipe. Revenues for the Drilling Products and Services segment were $285 million in Q1, down 8% sequentially but up 3% year over year.

Operating profit was $114 million or 40.1% of sales, up 50 basis points sequentially and down 70 basis points year over year. Production volumes were down sequentially due partly to lower Chinese production due to a higher mix of sour service pipe and the New Year holiday. Overall lower production, though, was offset by higher prices per foot, up about 4%, and rising price of premium pipe. Drill pipe orders improved sequentially to the highest level since the first quarter 2007, but nevertheless fell a little short of revenue shipped out of backlog. This led to Q1 ending backlog for the group of $662 million, down about 11% or $79 million from the December 31, 2007, backlog of $741 million. I'll note that Grant Prideco's last reported backlog in its 2007 10-K included $42 million in products booked in its continuing [Excel] business systems, and excluded backlogs associated with discontinued operations in TTS being sold to Vallourec. Expect that Q2 sales will be up slightly, but higher raw material costs will drive margins down before the additional depreciation and amortization from purchase accounting. We are also cautiously optimistic that drill pipe orders will continue steady through the next couple of quarters. Grant Prideco's ReedHycalog segment reported very strong results with record revenues in Q1 of $171 million, up 6% sequentially and up 13% year over year. Operating profit was $55.4 million or 32.3% of sales, 640 basis points higher than Q4 and 210 basis points higher than the first quarter of 2007.

Operating profit improved $13.6 million sequentially and $9.6 million year over year. [inaudible] and coring revenues benefited from very strong results in Canada, partly offset by lower sales in the Eastern Hemisphere due to weather and late start to the year by NOCs. Margins improved sequentially from Q4 due to the consolidation of 4-bit manufacturing facilities into a new state-of-the-art factory in Conroe, Texas. The costs associated with this move adversely impacted operating result in the second half of last year, but the costs of the move are largely behind us. Looking forward into Q2, we expect revenues to decline about 10% in high decrementals, even before additional purchase accounting depreciation and amortization due to the effects of the seasonal breakup in Canada, but believe the business will perform well through the second half of 2008 as the North American drilling environment improves. Equity earnings from the Voest-Alpine joint venture were $15.8 million in Q1 a decline of $9.7 million or 38% from Q4. Operating result were impacted by lower OCTG pricing and higher raw material costs; but the primary reason for the decline was a large consolidating elimination entry of profit on green tubes held by Grant Prideco in inventory.

We expect that Q2 JV earnings will be up slightly as this profit and inventory elimination declines. [IntelliServe] posted a $5.5 million operating loss on modest activity in Q1 and we expect similar results in Q2. We are beginning the process now determining ways in which NOV can help support the launch of this promising new technology; but the timing for meaningful revenues from [IntelliServe] remains uncertain at this point. Nevertheless, we are encouraged by inquiries we have received from operators and service companies about [IntelliServe] and we believe it has a very bright future ahead. Finally, let me conclude with a few words about integration. We are pleased to report that we are on track to capture the $40 million in annual consolidation benefits we estimated we would achieve when we first told you of the merger in December. Our corporate groups were integrated last week, and most of the cost savings will roll in quickly. Operationally, we are integrating the products from the two organizations and are very enthusiastic about our combined outlook. We both serve the same customers. Working up from the bottom of the a typical drill string in a horizontal or directional well, Grant Prideco's bids are literally connected to NOV downhole drilling motors, shock subs, jars and non-mag collars. These are in turn -- are attached to Grant Prideco reamers, drill collars, heavy weight and drill pipe, which is in turn connected to an NOV top drive hanging from an NOV traveling block connected to an NOV crown mounted in an NOV derrick. Directional drillers specify and select the bit, the downhole drilling motor, the non-mag collars and the reamers to drill a smooth curver to hit geological targets efficiently.

As of last week, we provide the industry's most complete package of these critical components to drill complicated horizontal, directional and multilateral wells, an offering that will enable to us provide superior customer service. Drilling contractors purchasing NOV rigs also buy Grant Prideco drill pipe. Grant Prideco drill pipe customers also by coating, inspection and hard banding services from NOV. NOV's two dozen drill pipe centers around the world repair worn out tool joints, recut Grant Prideco premium threads and apply proprietary hard banding to Grant Prideco manufacturing drilled pipe. As a long-time service provider to Grand Prideco, NOV has watched it steadily strengthen its leading position as the provider of highly engineered drillpipe solutions. We've also watched as horizontal drilling extended reach wells, deepwater drilling, multilateral drilling and increasingly complex well pads, have taxed drill pipe capabilities leading to larger diameters, dual upset, high slip [inaudible] drill pipe designs, premium high torque connections and improved [inaudible], all proprietary advancements pioneered by Grant Prideco. Higher stress and strain on drill pipe as a result of its being pushed to do its design limits by these emerging styles of drilling have shortened its life on average and made it much more of an expendable than in years past. We are pleased to have the worldwide leading provider of this highly engineered drilling tool as part of our offering, and believe it enhances the level of service that we can provide to our customers. Now let me turn it over to Pete.

Thanks, Clay. What I want to do at this time is just make a few brief comments about operations and kind of what we are seeing in the world, and then we will turn it over to a Q&A. Basically, there re some themes out there today that I think are dictating what's going to happen to our business over the next three or four years; and quite frankly, it makes them very exciting. I think the first ones are the shale plays. And you take a look at these nonconventional plays, where there's the Barnett, the newly announced Haynesville, the Marcellus up in the East or the Bakkin up in the Dakotas. These are very exciting for all of our businesses. When you take a look at it, when we talk about our bits, our drill pipe, our downhole tools, our Mission products, our Grant products, our MD Totco products across the board, they are actually going to go on these rigs and they are going to be utilized to be able to drill these unconventional wells. Further to that though, and I think which is really what's exciting today, is I think there's going to be more of a land rig demand in the lower 48, because you have to have some fit for purpose rigs. Specifically, you look at something like the Marcellus. You are in there up in the Appalachia mountains and it takes a different type of rig to be able to drill on pads.

It's going to be a different type of rig that's up there today, and we are already seeing the excitement this is creating with a lot of our contractor friends in the United States, and I would offer up that the land rig building in the lower 48 is going to improve dramatically this year. You know, it was interesting. In October, it looked like it would be a very slow year and many of our customers were telling us they wouldn't buy for a period of time; and in the past six weeks that's changed very dramatically, and that really is a direct result of these shale plays. And also remember this, these shales are not just in the United States -- they are all over the world. And I think at some point in time the technology to do these is going to be transported and it's going to be exported outside of the United States and we are positioned quite well to be able to take advantage of this. I think the second big thing, clearly, is deepwater. If you take a look at what we are doing in our backlog, a lot of that are deepwater rigs being built in Korea. Already this quarter, we've signed up more deepwater rigs. We do not see an abatement of this right now. The world needs deepwater rigs. I think when you take a look at the basins that are around the world they are going to continue to be plays where the majors are going to want to be involved with them. They are going to continue to be areas where the NOCs are going to want to continue to drill deepwater, and I think the demand for those rigs will continue; and quite frankly, I think we offer the best technology for those rigs.

But even more importantly, once these deepwater rigs go into service -- and specifically, we put a few of them in service here in the last three or four months -- they are really going to be just like the shale plays. They are going to add to many of the things that we do operationally, whether it's bids -- again, downhole tools, distribution across the board. As a matter of fact, one of the deepwater rigs going out here in the next few months is going to have one of the rig stores from our distribution group on the rig. And we anticipate that's going to happen well into the future. So these are going to be operations that are going to continue to pay annuities to National Oilwell Varco as we go well into the future. Not only do we get to build the rig, but we get to support the rig and support the drilling of the wells that those rigs do. I think the international strength is going to continue. And when you look at the price of oil, needless to say, that means that a lot of people, a lot of countries are trying to improve their reserves, and we have positioned ourselves with our template -- currently we are in 49 countries, we have over 700 locations worldwide. And this allows us to be able to do things that a lot of folks cannot do by being able to support the products and services through this international arena. I will come back in just a minute and talk in particular about a couple of places we are very excited about.

I think technology is going to continue to be a theme that's going to play very well to the things that we do, when you look at these deepwater rigs, the specific fit for purpose land rigs. We have the technology that's able to do things. When you look at drill pipe. When you look at [IntelliServe]. Drill bit, you look at the things that we do with MD Totco. It's all about technology. We'll continue to push that, and we think that's going to really differentiate ourselves well into the future and I think you will see these results bode well for 2008 because of this. Execution, Clay mentioned this earlier, we take a look at what we are able to deliver, we will continue to execute well. We've opened up some new test stands for different products that will help us get more out the door as we advance through this year. We are going to continue to have rifle shot investments that are going to enable us to be able to hit our customer's demands. And we feel very comfortable that we are able to execute this close to 10 billion -- I wanted to make sure that I got that 10 billion in -- we wanted to do make sure that we can execute that flawlessly.

And then finally, one of the things that we are kind of interested in and we are seeing right now with many of the new contracts being signed by existing rigs, there is probably going to be more of a demand for refurbishment and upgrades this year. A lot of these rigs are signing up for projects in which they need new equipment, whether it's a new string of riser, whether it's new types of subsea DOPs, iron rough necks, top drives, or whatever, they are putting a greater demand on these rigs. So we think we will even see an improvement in the refurbishment and upgrade as we move forward. Internationally, we continue to see a lot of excitement in Russia. You've heard me talk about that many times on these calls. We think that will continue to be a great business. They have a tremendous demand right now for land rigs. We are looking at many different opportunities to bid on those over there. Last quarter, I mentioned that we had won the Shtokman Field, the first group of semisubmersibles that are going in there. And I'm very pleased to say that's going along very well. I think there will be more opportunities there, and I'm excited about what we are doing. The Middle East and North Africa continues to be an area that's very active. I think will you see the Saudis increase their rig count even more. You are seeing more and more offshore operations there.

We've positioned ourselves in Dubai with our downhole tools, with our distribution, with our [inaudible] group, with just about every group that we have, to be able to support the operations throughout that area. I think you will see more nonconventional drilling in that and that's going to be an area that will continue to be really exciting. Brazil, don't need to say much about that. I think everybody knows what's going on in the deepwater arena there. It's been very positive for our industry, and I believe will continue to be for well, well into the future. And then finally, the one area I'll talk about is the lower 48. When I talk about those shales, we are getting more and more excited about that. I think you'll see the continuing increase in the rig count through the year. But more specifically, the fit for purpose rigs that I'm talking about and the tremendous demand for the products and services that we have to be able to drill these nonconventional wells that will be drilled into these shales. Overall, we are very excited about the business. I mentioned the backlog earlier. It's $9.9 billion. We continue to have a very, very robust bidding cycle in place. We continue to look to the future very positively. And I think overall, we are in very good shape to take advantage of what we believe is a very exciting worldwide oil and gas business. So at this time Miciah, I would like to open it up for any questions that anybody might have.

Thank you. (OPERATOR INSTRUCTIONS) And our first question is from Jim Crandall. Please state your company name followed by your question.

Jim Crandall from Lehman Brothers.

Good morning, Jim.

Pete, the first question is can you comment on your expectations for orders for floating rigs and for jack-ups going forward? My recollection is that you were looking over the next two years for 18 to 24 floating rigs and jack-ups maybe a bit less than that. Can you talk about that, particularly in light of the continued strength here this quarter and maybe next quarter in new floating rig orders?

Well, Jim, what we've kind of said all along -- and I will start with the jack-ups -- basically we believe that just about every time a jack-up gets delivered there will probably be another one ordered. That's been reasonably consistent over the last year, or couple of years I should say. And I think it will probably continue on. As with anything, there will be some lumpiness, but I think last quarter or a couple quarters ago there were six or seven jack-ups announced, and that really is a technology play. I think will you see a lot of these jack-ups are not necessarily additives as replacement jack-ups into the market. So we think the jack-up market will probably stay pretty steady. It's not going to spike up so much, but it will stay steady. I think on the floater market what we've seen has been a continued demand for these floaters.

When you look back at what's been ordered over the past couple of years, I would suggest that -- I'm not sure that I would stay exactly with the number you're talking about but I wouldn't be far off of that. I think one of the interesting things about the floaters is that now we are actually talking to folks about floater that is can operate in 12,000 feet of water. And so it's not so much that they are going to be adding it as much as they are going to be floaters that are out there that can differentiate themselves from the floaters that are currently there, and I think that technology is what's going to try that a little bit. And it really is because all floaters aren't the same. You know, a 400-foot jack-up is a 400-foot jack-up, but these floaters, some of them can only go in 5,000 feet of water, some are 7500, some are 10,000, and now we are talking about 12,000. So I think it will continue to be a good market.

And how many of the floater orders that you got or if you want to include the couple in this quarter, would you say you got the entire package for?

Well, we are doing real well on that right now. About the -- we have been -- I think I told people in the past if we get the maximum on these floaters it's about 300 million. Generally, when we don't get the maximum it will be the subsea BOP, might be the riser system or something like that. Normally, the rest of it though we are able to get. But we've been doing real well in that category. And especially with one of our shipyards in Korea Samsung, we do very, very well in that regard.

And my second question, Clay, is for you. Clay, if you look at Grant Prideco, what would you expect now taking into account cost savings, operating performance, et cetera, would be the net effect of Grant Prideco on your EPS over the second half or over the rest of this year and look out into '09 as well?

Well, Jim, we think we have got great thing ahead and are excited about it; but as a matter of policy, we don't give NOV earnings guidance, and so I am going to refrain from giving a specific number. But we believe it's a pretty exciting deal and that within that is just a great fit between the bid business that Grant Prideco brings to our own downhole pools business and then within drill pipe we believe we have a fair amount of insight into that business through Tuboscope and where the drill pipe is becoming much more of a consumable as well. And so we think there are good things ahead.

Okay. Thank you very much.

Thanks, Jim.

Thank you. As a reminder, please ask one question and one follow up and requeue for additional questions. Our next question is from Collin Jerry with Raymond James. Please go ahead.

Hey, good morning, guys. Just a follow up on the backlog question -- and I apologize if I missed this -- did you give us how many floater packages were in the order flow this quarter?

There were six total.

Six total, okay. And an interesting thing that you mentioned, Pete, on the refurbs and the upgrades going forward this year, any kind of venture or guess as to what the revenue opportunity there is? I imagine it's going to vary drastically per rig, but what doing the opportunity on a per rig basis for some of these floaters coming into the yard would be?

Well, I think that really does vary dramatically Collin. It just depends on what the specific job is. I can thinking of a couple off the top of my head that's going to be very significant because we are already taking a look at some of the demands and they need a lot of stuff. Others will be a little less, and I'm not sure -- if I told you a number, I'm not sure it would be too meaningful in the long run. But it really is kind of a neat deal right now because so many of these jobs are going to need different types of equipment and the contractors are taking the opportunity that if they are going into a long-term contract they want to make sure that they get that equipment on early. So I do believe it's going to be a real positive development for us as we go through the year.

Yes, a lot of that equipment will be specified, too, by the E&P customer.

That's right, okay. Well, that's helpful. I guess my follow up is the rosier outlook for North America. You spent a lot of time on that -- the shale plays obviously increased in land demand. Would you care to venture a guess how many incremental land rigs we could add to the fleet in the next 12 to 18 months, whether it comes from you or somebody else? I'm just thinking from a demand perspective what are contractors maybe thinking they're going to need over the next 12 to 18 months?

You know, Collin, I would never venture to guess on that. You'd hold me to it -- what can I say?

We are here to help. We will take as many as we can.

I think it's going to be, though, Collin, there's a lot of things that are impacting this marketplace right now and I think again what I talked about the Marcellus shale, you look up there and they need a certain type of rig. You talk about different pad drilling. You know, pad drilling takes a different type of rig than many rigs today and I think the technology that people are seeing -- and again, you look at [inaudible] as an example, and they are keeping all their rigs very active because they have some of the higher tech rigs. So I think there is going to be a demand there. We are starting to see it improve pretty significantly, and that's the reason I mentioned it. And I think it is going to be a very positive market for us as we move forward.

So it sounds like we are kind of in the early stages and we will see how that maybe unfolds and maybe you will have a little better guidance in the next couple of quarters as to how we see that play out.

Yes, and I think it all depends on things like the Marcellus and the Haynesville and some of these kind of come into play, and clearly they are going to be dependent on the price of natural gas, too, and you guys know a lot more about that than we do.

I would argue with that.

But if you take a look at that, I think the speed with which those plays play out will really dictate the demands for rigs.

All right, thanks a lot, guys.

Okay, Collin.

Thank you. Our next question is from Kurt Hallead with RBC Capital Markets. Please go ahead.

Thank you, good morning.

Hi, Kurt.

Decidedly, I know you guys have always been very optimistic about the business, but it seems like there's been even an incremental shift in tone here clearly. Pete, you have a lot of different elements here that are kind of driving the outlook on the Rig Technology side. And I figure when you put them all in a bag and shake them up and you compare them to maybe where you were a year ago, two years ago, on the prospective orders, are you -- you think you are able to hold things flat or do you think that you can actually start to reaccelerate on the order front when you look at the different mix?

Well, Kurt, I think actually there are some positive things happening. I mean, I think if you look at what's going on the last three or four years, we kind of had a process that was started by jack-up rigs and then you had some land rig business come into it and then later you had the floater business come into it. And today you are probably seeing a lint of lessening on the jack-up business, but the floater business continues to be very good and I think the land business appears to be picking up a little bit. And so we kind of think we are in a pretty good mode right now that's going to continue to see a demand for the products that we have. Now, having said that, you also have a lot of big numbers. We were starting three or four years ago with a backlog that was $1 billion, building it up to close to 10, and then today you have a backlog of 10 and you kind of go, okay, what are we going to do to keep feeding into that? I think we are going to keep feeding into it. I feel very good that there's a lot of stuff out there today and I think the biggest change today are when you look around the world at some of these discoveries in deepwater, and those deepwater discoveries are going to need a lot of rigs to develop them. And I think you see it with the announcements of people like Transocean with long-term contracts, and some of the others -- the sea drills of the world that are out there. So we are still very bullish about the worldwide demand for the products that we make.

And then you guys discussed the strategic fit of the Grant Prideco businesses into what you are doing. You guys have referenced the benefits that you are going to get derived from the cost savings. Any stab here on what kind of revenue synergies you can derive from the acquisition?

It's a good, good question, Kurt. We are optimistic we are going to get some additional incremental sales, but it's never been our style to quantify those or to put them out there publicly. I do think, though, we have got an excellent track record on businesses that we've acquired and we point to that, I think we've done a good job maximizing and optimizing those synergies. So again, I just couldn't say enough about how got fit is between Grant Prideco's products and NOV',s products and so we think there's good things ahead.

Okay. Thank you.

Okay, Kurt. Thanks.

Thank you. Our next question is from Dan Pickering with Tudor Pickering Co. Please go ahead.

Good morning.

Hey, Dan.

Good morning, Dan.

I wanted to look at the Rig Technology business. Clay, it looked like Q1 was a little bit light of kind of where you had indicated it might be in the backlog side of the -- backlog from revenues on your fourth quarter call, and yet it feels like you are sort of taking up the rest of the year. So I'm just wondering did we have some things that slipped out of Q1 into the back quarters, or did business just pick up enough that it looks like we are going to accelerate through the rest of the year here?

Yes, that's exactly what happened, Dan. We had some things that didn't shift, and it was really the equipment that we recognize revenue on completed contracts basis that was down. The projects revenues where we recognize revenue on a percentage of completion basis continued to move up exactly as we planned. We do think that's kind of a momentary slow down here this quarter.

So no execution issues, more just timing issues?

Right, right.

Okay. And then question two, Pete, I wondered, you mentioned the Marcellus and Appalachia several times. Could you just -- what is your product offering for that market? Is that a standard thing for you? Would it be a new rig that you develop? How do you attack that market?

Actually, what we are doing right now, Dan, is we are working with a couple of specific customers and really developing a new type of rig. It's actually -- when I say a new type of rig, I mean it's really going to be one that's going to have a footprint and a design and a deliverability when we move it that's going to allow it to go in in smaller pieces -- if you go up into the Marcellus, a lot of the roads up there you have the switch backs, you have got a lot more issues in the Northeast about weight on a bridge. You are going to have a 60,000-pound limit. You are going to have to have trucks that can turn on these switch backs. And so we are working with these customers to really develop a rig that can drill in that area very effectively, move fast and be able to drill multiple as wells from the same location. So it really will be kind of a new concept. That's just from the capital side. The other side of it, though, is really what it means to our services business, our Petroleum Services and Supplies. Because again, when you start talking about the things that we do with Tuboscope and downhole tools and the bits and pipe, it's really going to utilize a lot of the products that we have there. I'm really excited about the Marcellus. I think it's an area that's mature, but because of the different technologies that the industry has developed, I think it's going to be an exciting play and clearly, we expect to be -- with some of our new design technology -- to be a big part of it.

Thank you.

Thanks, Dan.

Thank you. Our next question is from Scott Gill with Simmons and Company.

Yes, good morning, gentlemen.

Good morning, Scott.

Hey, Pete, you talked a lot about technology and, Clay, you mentioned rising steel costs. And I know you've given us the kind of revenue per new build rig opportunity before, but this morning on upstream you see where there's a billion dollar floater rig being built for the arctic. Can you just kind of refresh us, what is your revenue opportunity now for deepwater rig considering all these things? And if you could contrast an arctic style rig to maybe one that we are seeing in more benign environments like Petrobras in Brazil?

I think, Dan, what you are looking at today, not a standard but maybe a 10,000-foot deepwater rig that we are looking at for normal places around the world, our revenue opportunity is about $300 million, Scott. I think that's kind of -- that's up a little bit from where we've been in the past and in some cases, in a lot of cases, we get the entire 300. On an arctic rig and when you start talking about $1 billion, depending on the design of the rig, many cases a lot of that money is going into the actual design of the rig itself on the pontoon so that it can withstand all the ice flows associated with what you have there. It's not so much different on the topside, because once you get to the topside it's really just about winterization. We do that on a lot of rigs up in Alaska already. But it's more about how can the pontoons and the floating systems withstand the ice that's going to be created there. So that's where you see a lot of the incremental cost associated with that, which we wouldn't participate in.

Okay. And on these land rigs -- for example, the Marcellus shale, can you give us a feel for what the revenue per rig opportunity is for those built land rigs?

I think it can be anywhere from $8 to $12 million in that area, depending on what the final design looks like, maybe a little bit more.

So cheaper than your ideal rigs, correct?

Yes, because they are smaller rigs for the most part. And in many cases, the smaller rigs, less steel,less cost; so they would be a little bit smaller in that regard.

If I could squeeze one more quick one in as a follow up to Dan's question, Clay, on your guidance when we look at Rig Technology and you look at the revenue that's supposed o come from backlog, it looks like at least the backlog sales will be much greater than kind of the 5% that you gave for the overall segment. As a matter of fact, they should be well into double digits. Is that mostly going to be in Q3 and Q4, or is that going to be somewhat disconcerted guidance for Q2 here?

Yes, Scott, it ramps up through the year quarter by quarter.

Okay. Thank you.

You bet. Thanks, Scott.

Thank you. And our next question is from Roger Read with Natexis Bleichroeder.

Hey, guys, it's Jeff, good morning. I wanted to ask a little bit about the Russian land market. Could you characterize the types of lands rigs you are shipping into that market and whether they would be more garden variety standardized or you're looking to build more fit for purpose rigs there?

You know, in the Russian market, it's really [panaplay] of a lot of different thing. In some cases you have got some bigger rigs depending if you are in the southern part of the market there, you can do as much as 2,000-horsepower rigs with winterization, and the you go into parts of eastern Siberia and you are dealing with much smaller rigs, things that are maybe a Cabot 900-type rig, which in some cases are trailer mounted. But you're seeing a little bit of a demand for just about every type of rig in there. There's places like in the Yamal Peninsula that they want to have rigs that can drill to about 14, 15,000 feet, and then if you get into places like Kazakhstan they want to have rigs that are 20 and 25,000 feet. So really what you see in the Russian market is kind of an array of products, and not that much that's fit for purpose. They are fairly standard rigs with the differential being you are going to have a significant amount of winterization on them.

Okay. Great. And then a follow up in the Saudi market, it sounds like anecdotally on the grounds things are humming along pretty nicely for you. Can you comment a little bit about what they've said recently in terms of reevaluating their major products once Alcarez and Manifer are done with? It doesn't sounds like that's what you're seeing?

I think what we are seeing is probably a continuation of wanting to expand what they are doing. I think many times what's going to be said maybe publicly versus what's being done is not necessarily the same, but we continue to see at least an interest in what they might be able to do to take a look at continuing to drill wells. Because I think for the Saudis, what's more important than production is having reserves. ,And I think to develop those reserves I think they will continue to look at the type of equipment and things that we do to be able to develop that.

Okay. Thanks very much.

Thanks.

Thank you. We do have time for one more question, and our final question is from Michael LaMotte with JPMorgan. Please go ahead.

Thanks, good morning, guys.

Good morning, Michael.

Clay, one for you, just following up on the cost side. You mentioned labor as inflation. We all know what's going on on the material side. Can you remind us sort of how, A., how you are hedged sort of materials wise and what your purchasing schedule looks like relative to your deliver schedule? And then, B., on the labor side, I'm wondering how much of that squeeze is really X. pat labor and dollar related, and maybe could we see some relief on that front over the next 12 months if the dollar strengthens?

Both good questions, Michael. First on the hedging, when we win a contract, we very aggressively get out and place purchase orders with our suppliers to make sure that we've got material costs locked in. And that's not instantaneous, so we'll have a few months there where we do have some exposure on things moving. But by and large, we recognize the potential to have margins erode because of higher costs of what goes into these projects. So we get out and move pretty quick to the try to get that down and locked in. On the labor side, yes, we have very extensive international manufacturing operations, and so a lot of the cost inflation that we are seeing on the things that we are making is really the translation of pounds and kroners and other currencies around the world back to dollars. And FX has really taken a toll, and that's kind of a side story on that we are hearing the same thing from our drilling contractor customers, that when they go to get bids on building these new rigs in foreign shipyards, the foreign shipyards face the same effect. It's just costing more to build things in [inaudible] and [inaudible] dollars than it did a short while ago. The meltdown of the dollar is definitely having an impact on our business.

Okay. In terms of quantification, I mean is it costing you 100 basis points, 200 basis points -- is there any measure or gauge that you can give us?

It's hard to measure -- we measure costs every day, and we are seeing it in standard cost rolls, and again on some of our standard products that were made overseas; but what we are trying to go is very aggressively offset that with pricing, so the pricing is moving up but the net/net is -- I don't think you are going to see a lot of price driven margin expansion.

So the balance I guess is sort of -- the balance with focus on efficiency is the way we should think about margins going forward?

You bet, just trying to keep up with cost increases.

Okay. And then the last one for me, just with the credit market turmoil of the first quarter, I know you've got some speculative rigs in the backlog and that you've been very good about getting prepayments, and your working capital is certainly not an issue. Do you see any risk in the backlog related to credit related issues?

No, it's -- not in our backlog. In our existing contracts we are very -- have a lot of confidence that our customers are credit worthy, and as you point out, we get very good payment terms so we don't get exposed from a working capital standpoint. I will add, though, in addition to FX we have a group of customers that rely on structured project financing for their project. So as we work through these projects and put these bids out there that particular group of customer is facing a little more headwinds with regards to securing financing for these projects. So that's -- incrementally it's getting a little tougher for them.

Okay. Great. Thanks, guys.

Thanks, Michael.

Thank you. And at this time, I would like to turn the call back over to Mr. Miller for any closing remarks.

We appreciate everybody calling in today and I'd also like to invite everybody to stop by our booth at the Offshore Technology Conference next week. Thank you, and we'll talk to you at the end of the second quarter.

Thank you. Ladies and gentlemen, this does conclude today's conference call. If you would like to listen at a replay of today's conference please dial (303) 590-3000 with access code 1111-1568. We thank you for your participation, and you may now disconnect.