國民油井華高 (NOV) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the National Oilwell Varco fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Loren Singletary, Vice President of Global Accounts and Investor Relations. Please go ahead, sir.

Thank you, Laray, and welcome, everyone, to the National Oil Varco fourth quarter and full year 2008 earnings call. With me today are Pete Miller, Chairman, President and CEO, and Clay Williams, Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and full year ended December 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 the risks and uncertainties, and actual results may differ materially.

No one should assume that these forward-looking statements remain valid later in the year. I refer you to the latest forms 10-K, 10-Q, and S4 National Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussions 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, or in our filings with the SEC. Later on this call, Pete, Clay and I will answer your questions. We ask that you limit your questions to two in order to permit more participation. Now I'll turn it over to Pete for his comments.

Thanks, Lauren, and good morning, everyone. Earlier today, National Oilwell Varco announced fourth quarter net income of $585 million, or $1.40 a share on revenue of $3.8 billion. Included in this number is a pretax charge of $20 million, or $0.04 a share for transaction costs associated with our, earlier this year in April, merger with Grant Prideco. For the year, we had revenues of $13.4 billion and net income of $1.96 billion, or $4.90 a share. Our year-over-year revenue growth surpassed 20% and our year-over-year operating profit growth was 29%. This was a very good year for National Oilwell Varco.

Backlog for capital equipment at the end of the quarter was $11.1 billion, as net new orders for the quarter were $724 million. While this is the first quarter in 14 quarters that our book to bill has been less than one, it was a solid order rate given historic economic challenges that the world is facing since the end of September. I want to thank all of our wonderful employees for the hard work and dedication that they had in achieving the stellar 2008 results. This could not have been done without this tremendous work force. I'll come back in a minute or two to discuss more on the operational color, but at this point in time, I would like to turn the call over to Clay Williams to give you some color on our earnings and what we're seeing as we probe into the future. Clay?

Thanks, Pete. National Oilwell Varco posted outstanding results in the fourth quarter, generating record earnings of $1.40 per share on $3.8 billion in revenue. These results included $20 million in transaction costs, related to the Grant Prideco acquisition, excluding these fourth quarter earnings were $1.44 per diluted share. The fourth quarter capped a terrific year for National Oilwell Varco, which saw the Company earn nearly $2 billion in net income, or $4.90 per share on revenues of $13.4 billion. Excluding transaction costs for the full year earnings would have been $5.08 per share for 2008. Fourth quarter operating profit was $856 million and full-year operating profit was $2.9 billion.

Excluding transaction-related charges, Q4 operating profit was $877 million and operating margins were 23%. Operating leverage, or the incremental operating profit flow-through was 29% on the 5% revenue growth sequentially, excluding transaction charges from both periods. National Oilwell Varco acquired Grant Prideco on April 21, 2008, and began booking the incremental results for these operations as of that date pursuant to US GAAP. In order to provide more transparency and comparability, we continue to disclose additional pro forma results for our combined operations in the supplemental disclosure schedule in our press release and on our website, which has summary operating data by quarter back to the beginning of 2005.

These results include the expected ongoing impact of purchase accounting PP&E and intangible step-up for the transaction and prior periods, and exclude inventory amortization and other one-time transaction charges to make them apples-to-apples and to help you in your analysis of historical trends. Compared to the pro forma combined fourth quarter of 2007, fourth quarter 2008 revenue increased 20% and operating leverage was a strong 32%. Full year 2008 pro forma operating profit was $3.1 billion on $14 billion in revenue, which grew 20% year-on-year. Full year pro forma operating leverage was 30%. NOV finished 2008 with a very solid balance sheet, owing to our exceptionally strong cash flow from operations, which totaled $2.3 billion during the year.

This, together with the second quarter completion of the sale of certain Grant Prideco businesses, enabled NOV to completely repay the $3 billion in cash consideration required for the Grant Prideco acquisition. As a result, our $2 billion revolving line of credit that we set up and completely drew down in April, is now completely paid off and available for us to use again over the next four-plus years. Cash at December 31 totaled over $1.5 billion and debt totaled $874 million. Substantially all of our debt is due between 2011 and 2015. So at this point, we do not expect to go to Washington, DC and ask for TARP funds. We are pleased to have such strong financial footing, during a time when worldwide economic activity is slowing sharply. The current crisis began as a seizure of credit markets and candidly, 90 days ago, we were hopeful that oil and gas business, where most participants are reasonably well capitalized, would be spared.

However, the past 90 days, slackening demand for oil and gas has driven commodity prices sharply lower testing the economics of many development projects, particularly heavy oil and gas projects in North America. Consequently, rig counts, particularly in North America, have plummeted, and we are seeing operators here curtail operations sharply. Reactivity moved down mostly late in the quarter, and was generally led by smaller vertical drilling programs, which are less revenue intensive for us and others. However, more revenue intensive horizontal drilling, particularly in the shale plays, has begun to decline sharply, too, and we expect activity to decline further through the first half of 2009, primarily in North America.

Interestingly, we believe the lag in the decline in horizontal and directional rigs in North America, reflect the comparably stronger economics these projects exhibit, and underscore the importance of directional and horizontal technologies, and their growing role in the overall energy equation. The decline in activity is expected to drive revenues from our petroleum services and supplies sharply lower in Q1. But at this point, we expect revenues to roughly stabilize here for the remainder of the year. Margins will also decline sharply, perhaps into the high-teens, given the high intrinsic operating leverage embedded in our portfolio, exacerbated by the rising pricing pressure that we are seeing in this segment.

Similarly, our distribution services business is expected to decline in both Q1 and again in Q2 before stabilizing. As a reminder, both of these segments are closely tied to drilling activity around the world, they will feel this downturn first and most acutely. While we are hopeful for a second half 2009 recovery, we are not yet planning on this for these units.

In contrast, we continue to expect another year of strong performance from our Rig Technology segment, where we forecast sales to be up slightly in 2009 versus 2008. Q1 results should significantly exceed the prior year's first quarter, but likely decline slightly from Q4 and continue to decline slightly through the remainder of the year, owing to softening demand for pressure-pumping equipment and land-drilling equipment in North America.

However, our $11 billion backlog will continue to swamp the equation, as we methodically work through the dozens of offshore rig construction projects we have underway, driving a fairly steady $1.3 billion in revenue per quarter out of backlog. Overall margins for the group are expected to hold roughly steady in the mid 20% range. Despite challenging few quarters ahead, 2009 could very well be the year for NOV to shine. Last quarter, I discussed the financial power embedded in the construction of NOV, roughly half of our sales from rig activity and half of our sales from capital equipment. Both are driven by oil and gas, but they are phase shifted by a year or two.

Our forecasts for the coming year bear this out, and we expect the momentum of a large backlog to drive strong results from our Rig Technology group, at a time when PS&S and distribution are declining. Although we expect earnings to be down year-over-year, the Company still expects to post reasonable results overall and enjoy continued solid cash flow, as we build new equipment, and as some working capital winds out of the services businesses. We think that strong, worldwide, oil-field activity driven service franchises, back-stopped by a strong worldwide provider of capital equipment with solid orders to execute over the next couple of years, make for a powerful financial combination that can handily weather the cyclical ups and downs of the oil business. Now I want to take a few minutes and update you on our backlog for large capital equipment for the Rig Technology segment.

As our press release notes, we secured orders for new equipment during the fourth quarter totaling $724 million. These additions are net of $95 million of contracts we removed from our backlog due to payment defaults or negotiated cancellations, which I will detail for you in just a moment. We recognize revenue out of backlog of $1.466 billion, up 8% sequentially, yielding a book to bill of slightly less than 50% for the quarter. This resulted in the first decline in our backlog since National Oilwell and Varco merged in early 2005.

Significantly, though, in spite of the most challenging credit environment in decades, orders for new equipment continued to flow in, including packages for three new jack-ups and one new floater during the fourth quarter, together with a wide variety of replacement and upgrade equipment that we typically sell to keep the fleet of rigs working around the world. The December 31, 2008 backlog was 90% international, and 10% domestic, and 14% land, and 86% offshore. The ending-land backlog of $1.5 billion was down $324 million, but still well above mid-2008 levels.

Since the close of the quarter, we have secured orders for two additional small jack-up packages and remain optimistic for orders for the coming year. Underpinned by significant need for new deep water drilling assets for the Santos Basin in Brazil, we believe that it is entirely possible for NOV to secure orders in the range of $3 billion to $4 billion in 2009, provided Petrobras executes its current plans. While orders in this scenario would be down from $7.3 billion won in 2008, they would continue to provide a very healthy base of business, in addition to the $11 billion we carry into the new year. Notably, most of our recent offshore customers are pursuing government-backed trade financing to anchor their shipyard projects. Particularly [GIEC] in Norway, which is considering doubling its lending framework to 110 billion kroner, EXM in Korea, and Cynosure in China.

We have a handful of customers who have faced significant financing pressures in the last 90 days, and we are working with some to modify payment and timing requirements to keep their projects moving. We have two land rig programs, where we have agreed to push back deliveries and payments to accommodate our customers' needs. These have been accomplished without the need for NOV to modify its pricing or other commercial terms other than timing, and generally makes sense for our operations and here's why. In addition to preserving the work for future periods, it permits us to execute these projects in a more measured workman-like fashion. That's good for costs and margins. Think back to the topic we've addressed on these calls repeatedly since 2005.

Execution of the crushing pile of orders raining down on NOV for new drilling assets, we have executed exceptionally well, but in so doing, have relied heavily on outside suppliers, fabricators, contract laborers and others at higher marginal costs. Our own employees have worked exceptionally long hours at time-and-a-half overtime to get equipment out the door to meet the pressing needs of our customers. With pressing needs, not quite so pressing anymore, NOV can undertake these projects in a much more efficient manner, with less reliance on higher marginal cost resources and less overtime. In short, stretching deliveries permits us to execute a little more efficiently to catch our breath, and in certain instances, we've agreed to do that.

As I referenced earlier, we now have one offshore rig project and a number of smaller component orders in default on their contracts or in negotiations to cancel. These total $95 million, and we were paid $13 million in cash on these, and all were removed from our backlog during the fourth quarter. We have recognized no revenue or profits on these. Additionally, we have another $364 million of backlog work at risk, where we have collected in the aggregate $93 million in cash against revenue recognized of $41 million. These include five offshore rigs, where we have suspended work at the request of two customers, who are actively pursuing buyers or additional financing for these with our assistance.

Two of the five have contracts and buyers for the projects, with whom we are negotiating terms. We told you about four of these five offshore rigs last quarter as having operations suspended. So incrementally, during the quarter we halted work on one more. Also within this $364 million of at-risk contracts currently in the backlog are five land rigs, where we are in discussions on cancellations earned. I will stress that in the aggregate, we remain cash ahead on all of these. The other 97% of our backlog continues to hum along well. As our operations personnel execute smartly and efficiently. So far this cycle, we have delivered 41 offshore rigs on time, on budget.

As a result of timing and backlog adjustments, we are forecasting revenue out of backlog for 2009 to be down slightly from the guidance we provided on our third quarter call to about $5.2 billion in 2009, roughly in line with the $5.3 billion, we shipped out of backlog during 2008 and well above 2006 and 2007 levels. Specifically, we foresee revenue out of backlog in Q1 to be in the $1.3 billion range, as I mentioned earlier, but if our forecasts hold for both production and orders, we would nevertheless expect to begin 2010 with a backlog in the range of about $9 billion. At present, we have $4.7 billion in revenue scheduled out of backlog for 2010, and a $1.1 billion balance in 2011 based on backlog amounts as of December 31, 2008.

Despite the near-term challenges, we are confident that the world will build many, many more rigs in the coming years. The fleet remains old and tired. The US still derives three-fourths of its energy needs from oil and gas, as do many countries. The 452 offshore rigs born 25 years ago or more, recent announcements of rig retirements do not surprise us. With the IEA saying that oil production will soon be declining 9% per year, the world will turn to new offshore frontiers to replace these declines. We are unaware of anything that will drill an offshore well, other than an offshore drilling rig.

Now let me turn to our segment results. Rig Technology generated $2.1 billion in revenue and $557 million in operating profit in the fourth quarter, yielding an operating margin of 26.7%. Revenue out of backlog improved 8% sequentially, helped by turnaround after Hurricane Ike in the third quarter, and non-backlog revenue was up 10% as well. After-market sales were 27% of total revenue -- total segment revenue and grew 4% sequentially. Non-backlog capital shipments jumped 23% sequentially. Sequential operating leverage or flow-through was a strong 35%. Compared to the fourth quarter of 2007, revenue grew 31% at 30% operating leverage. For the full year, Rig Technology posted sales of $7.5 billion, up 31% at 32% operating leverage.

Broadly, the North American and Russian land rig markets are showing the most weakness, as we move into the first quarter, with demand for drilling equipment from Latin America and the Middle East largely continuing strong. Recently delivered Rapid Rigs and Ideal Rigs, are working very well in four Latin American countries, prompting interest for additional units from IPM projects. Our offshore prospects have a decidedly NOC flavor to them, in addition to the 28 potential floaters that Petrobras has stated that they need. While North Sea drilling activity is expected to be down, we are seeing rising interest in upgrading platform rigs and cranes in this market and expect a solid 2009. Recent pricing pressure has been most acute in the land rig market, with some pressure on jack-ups, but we are also seeing falling steel and production costs and improvements in FX to help offset.

Installation and commissioning of ongoing rig construction projects is proceeding well, with approximately 500 NOV personnel assigned to 22 rigs under way currently. We expect to peak, in mid 2009, at 38 rigs being commissioned simultaneously. Sales of well intervention and stimulation equipment surged this quarter to record levels, as shipments to Russia and the Middle East, exceeded expectations, driving record margins. However, we are seeing a sharp curtailment of orders for coiled tubing and nitrogen equipment for North America and Russia. China orders and wire-line equipment sales continue to remain relatively strong into the first quarter. NB Tyco benefited from instrumentation sales into China -- I'm sorry, into India, to help offset sliding demand for rental equipment in North America.

To reiterate, we expect Q1 2009 results to be down just slightly from Q4, due primarily to slowing coiled tubing and nitrogen vaporization equipment sales. The petroleum services and supply segment generated record revenues of $1.4 billion in the fourth quarter, up $77 million, or 6% from Q3. Operating profit was $341 million, and operating margins were a solid 24.6%. Sequential leverage or flow-through was 15%, below our long-term average for reasons I'll touch on in just a moment. Pro forma for Grant Prideco year-over-year Q4 sales grew 5% at 58% flow-throughs for the segment.

The quarter benefited from a high level -- very high level of drill pipe shipments, which drove a record level of revenue for the Grant Prideco drill pipe business for both the fourth quarter, which benefited from the turnaround of Hurricane Ike, and for the year. However, margins declined from the third quarter, due to 8% higher steel costs in Q4, as we used much more third party supplied green tubes, due to a scheduled mill shutdown at our Voest-Alpine mill. We expect to see drill pipe steel costs continue to rise into the first quarter, but should fall thereafter. Drill pipe margins were also adversely effected by mix in the quarter, specifically we had a lot less large diameter premium pipe, and a lot more API, NC 50 pipe to alliance customers. That drove revenue per foot down. Overall, demand for drill pipe is slowing, and we expect sales to be down significantly in 2009, new strings of premium pipe for new offshore rigs notwithstanding.

Our other petroleum services and supplies businesses also posted strong results in the fourth quarter, particularly our mission multiplex pump and valve sales and our quality coiled tubing business. We continue to align our new ReedHycalog Bits business, which also posted a record year in 2008, with our Downhole Tools business, to jointly tackle the needs of our directional and horizontal drilling customers in this area, and are progressing well to share manufacturing and sales resources. Sequential revenues for both were up. IntelliServ picked up a couple of more jobs during the quarter, lifting results, and we are anxious to close the joint venture we announced with Schlumberger last December, which is pending regulatory review.

Pricing across most of our service businesses is under pressure, with 5% to 15% reductions common in North America, but remain relatively stable so far in international markets. We are just now beginning to see lower steel costs in some of the product lines we manufacture, down perhaps 10% on recent orders, but expect steel to decline further as economic downturn worsens. On the cost side, we are redeploying assets in personnel, reducing overtime, shifting production from suppliers to in-house facilities, and where necessary, adjusting our work force. For the full year, petroleum services and supply segment generated $5.3 billion in revenue and $1.3 billion in operating profits for 24.4% margin, including pro forma Grant Prideco for the full year.

The 6% year-over-year pro forma growth, flowed-through 35% additional operating profit. Overall, we expect North America to continue to bear the brunt of the economic and activity downturn for at least the next few quarters. During the fourth quarter, we saw the Mid-Continent Rockies and West Texas areas hit the hardest, but lately we've seen the Barnett area also come under pressure. The Gulf Coast and Haynesville seem to be holding up reasonably well, while Canada is likely to be challenged through the remainder of the year. Internationally, Russia seems to be the most depressed, while the Middle East, Latin America, and the Far East remain relatively stable.

With about 54% of fourth quarter sales from petroleum services and supplies from North America, sliding rig counts are expected to drive large double-digit declines in revenues from Q4 to Q1 of 2009 at steep decrementals. Distribution services had another solid quarter, posting 8.8% margins on sales that were down about 3% from the third quarter. Revenues for the group were $483 million, and operating profit was $42 million in the fourth quarter, and operating leverage, or flow-through, was 9%, in line with the group's long-term 10% average. Compared to the fourth quarter of 2007, revenues grew 32% at a very solid 18% flow-through. The US came under pressure in the fourth quarter, as operators began laying down rigs and curtailing rig reactivations and rig-up activity.

US decrementals were higher than normal, due to rising pricing pressures on top of lower volumes. The Mono Industrial business also fell with slowing industrial activity, but operating profit remains stable, due to cost reduction initiatives. Canada was up modestly in revenue, but significantly up in operating profit compared to the third quarter due to cost reductions made in prior periods. Distribution ramped up a record year in 2008 at an extraordinary 7.3% operating margin, which is outstanding for this business. Revenues were $1.8 billion, up 24% year-over-year, at 10% leverage or flow-through.

Our international growth initiatives, including NOV's unique rig store concept, paid dividends this year and this quarter as our international DSCs posted strong double-digit growth for both the year and the sequential quarter. Looking forward into the first quarter, we expect sales to fall at double-digit declines, owing to the sharp decline in rig count in North America, which accounts for a majority of sales for distribution. Decrementals are likely to be higher than our average of 10% due to rising pricing pressure across the region and reduced supplier rebates.

Turning back to National Oilwell Varco's consolidated fourth quarter income statement, SG&A increased $22 million sequentially, due mostly to higher sequential incentive compensation accruals, but remained roughly constant as a percentage of revenue at about 8.7% of revenue.

Interest expense declined $4 million as we repaid debt associated with the Grant Prideco acquisition. Our credit and other income declined $4 million due mostly to FX swings. Equity income from our Voest-Alpine joint venture decreased $4 million as we booked a purchase accounting adjustment related to our investment there. Excluding this adjustment, NOV's income from the JV was actually up about $5 million sequentially due to higher margins in OCDG in line pipe sales. Unallocated expenses and eliminations in our supplemental schedule, which is pro forma for Grant Prideco for all periods were $63.5 million, up $8 million sequentially due to higher incentive compensation accruals at year end and higher inner unit profit sales eliminations, offset by other favorable movements in other items. The tax rate was 32.6% for the quarter, and 33.5% for the year, and for 2009 we expect the rate to be in the range of 32% to 33%.

Depreciation and amortization was $118 million in Q4, excluding transaction-related inventory step-up charges and Q4 CapEx was $114 million. Full year CapEx was $378 million, and including the full year of Grant Prideco, would have been $412 million on a pro forma basis. We expect 2009 CapEx to be in the range of $350 million, EBITDA in the fourth quarter was $1 billion.

Our December 31, 2008 balance sheet employed working capital, excluding cash and debt of $2.4 billion, about flat with Q3, and equaling 16% of annualized revenue, consistent with recent prior quarters. DSOs improved slightly from Q3 and we are watching collections closely. Customer financing of projects in the form of prepayments and billings in excess of cost, less costs and excess of billings, was $2.3 billion at December 31. Cash flow from operations for the fourth quarter was $588 million, and Q4 CapEx of $114 million yielded free cash flow for the quarter of $474 million. Now let me turn it back to Pete.

Thanks, Clay. I would like to make a few brief comments on what we're seeing operationally out there. Just to give you a little bit of a color, and I doubt much of this will be much of a surprise to the people on this call. Clearly, the weakest area that we see in the world right now is North America. I think the North American rig count is declining very, very rapidly. Interestingly, though, the decline as Clay pointed out in his comments, is really one of the type of wells. If you're drilling, kind of strictly, vertical wells, many of those rigs have come down very rapidly. You've seen it happen at places like Oklahoma and West Texas. The shale wells have held up reasonably well.

While we expect there to be reductions in the shale wells, the interesting thing is, many of the products that we sell in these shale wells, really are at much greater volumes than we sell on more traditional wells. So the decline is not linear many times. It's actually less than that. But there's kind of one nice thing that's happening, and I think it's something that will come back into play later. Many of the rigs that are going to be -- that are going to stop working today in North America won't work again. You know, for the first time you're hearing drilling contractors use the word retirement. They are actually saying we are going to retire some rigs. We are not going bring some of these rigs back.

And the inevitable upsurge again, that will occur, I won't give you the year or the time, but it will occur when you start seeing rigs picked up; it's going to be the newer type of rigs that we put into the system recently. There's going to be a greater demand for those rigs, and quite frankly, we're going to be here to help with that demand. So we, we think in the short-term, while there's pain, in the long-term, the demand for the type of rigs and the technology that we have will be there. I think our market leading names, whether it's Tuboscope, our distribution business, ReedHycalog, those types of businesses prosper more in downtimes than some of the people that don't have quite the market leading name. So we think there's great opportunity out there, even in a bad market.

You know, we kind of are excited about the prospects of it being a weak market, because we think the business model that we've used to build this company, allows us to withstand downturns better than many others because we are in fact a complete full-cycle play. Whether it's in the early-to-mid-cycle and our distribution and PSS of late cycle, which you're seeing in the backlog, we think is going to carry a lot through. So while North America's going to be challenging, I think some reasonable spots will be shales. And also, a lot of the deep water rigs that we're building today are starting to show up in the Gulf of Mexico.

And as those work, there's going to be a demand for our proprietary products to take care of the equipment that's on those rigs. They are highly technical, and we think a lot of things are going to be positive for us, when we look at the work that we can do on these rigs, and the support that we're going to be able to give our customers. Yes, it's going to be challenging, no question about it. I think North America is really going to be the biggest challenge in the world. Internationally, though, and I want to talk about that for a moment, that really is where it's going to be a better market. We believe you will see a decline internationally. It isn't going to be anywhere near as great as what you have in North America. And again, it's going to be very regionally directed.

We think that the North Sea is going to slow down. You've heard other service contractors talk about that. Kind of the neat thing for us in the North Sea, though, is when it does slow down, many of the platforms that are up there take time to refurbish their equipment and upgrade. We have -- we announced not too long ago, a frame agreement with Stout Oil to be able to go in and refurbish and upgrade a lot of the equipment that they have on a lot of their platforms located in their producing areas. So we think some of this down time that might be associated with the lack of production, is going to provide opportunity for us to refurbish and rebuild rigs.

We think Saudi Arabia will slow down. I think when you look at, they are kind of taking the brunt of the OPEC cuts.

However, other places in the Middle East, specifically Kuwait, Oman, and even Iraq are looking to build new rigs. So we believe you'll see some opportunity there, especially in the land rig business, and these are very expensive land rigs. When you start talking about the desert-type rigs that they use there, they could be as much as $30 million or $40 million each. We're seeing inquiries coming out of there, and very serious inquiries, so we believe that parts of the Middle East are going to be very positive. Brazil will continue to be a positive. I think when you talk about stimulus packages and other countries, they are looking at how can they stimulate the things that increase employment, and how can they stimulate the things that increase their financial viability, and generally speaking, in many of these areas that's the financial sector.

When you look at what Petrobras has announced, we're cautiously optimistic that many of those rigs will in fact come to fruition and we're positioned very well to be able to take advantage of that. And that's one of the reasons, as Clay pointed out in his comments, that we continually expect orders coming in throughout the year and orders of a meaningful size that will leave us with a good backlog as we exit '09. We're positioned very well to take advantage of this. Mexico, I think will continue to be an interesting place and especially in the IPMs. I think a lot of the service companies that do the IPMs are going to need the type of equipment that we provide, be it bits, drill pipe, or drilling rigs that are going to be able to help them support these IPM projects. North Africa is another area that we think is going to be very positive.

I think geo-politically, you'll see some of the issues associated with all the natural gas of Europe coming out of Russia this year, and kind of the shutdowns in a very cold time, and you look at some of the gas lines that can come under the Mediterranean and enter Southern Europe and then go up into the other areas. I think you're going to see Algeria, Egypt and most specifically Libya, want to increase their capability of being able to produce natural gas. They all are inquiring about the type of rigs that we build that can help them do this. So there's some real, there's some real positive spots out there, and for the most part, we feel like the international arena is one that's going to give us some opportunity. We have built the company over the past few years to take advantage of that. As we've looked at many of the acquisitions we've done, we've tried to do them overseas.

We have positioned ourselves with plants that can take care of the overseas demand. We think places like Russia will clearly be slow. However, we do have some customers there that are financed much better than others, and we can see where some of these customers will utilize this opportunity to go ahead and bring in some new equipment to position themselves for the future. The shipyards around the world, we think many of them will be looking very closely at support from their governments, and also some sort of financing of many of their customers. You know, we are very close with the major shipyards of the world, be it Samsung, be it Keppel FELS, be it Daewoo, Hyundai, and we think that we'll continue to see a goodly amount of business coming out of these areas, as they utilize their stimulus packages to try to make sure that they can go ahead and build additional rigs.

So while we certainly understand the softness in the business, most especially North America, we think the softness will not be quite as acute in the international arena, and we are uniquely situated to provide, provide the opportunities that those folks are going to need for the equipment that they are going to need.

Now, let me talk about a couple things individually. Clay's talked some on them already. We are seeing a reduction in costs. We think at some point in time that will manifest itself, and so even if there are in fact pricing pressure, we believe some of the pricing pressure will be mitigated in cost. We also have a very diverse manufacturing base that allows us to be able to put manufacturing into areas that give us the best efficiency and the lowest cost. We're going to continue to invest in our people.

We've opened up technical colleges around the world. We're going keep those open. When you take a look at the way we built up this Company, we've brought in a lot of great people. We've trained them. And to let a lot of people go, and then bring them back in later, pay severance packages and then have to retrain, can be very expensive. So while we certainly are always going to size our operation pursuant to what the revenues are, we also are going to ensure that we maintain the best possible people that we can because ultimately, you'll see an uptick in this business and when that occurs, I think the companies with the best people and the properly trained people are going to gain the most. We're going to continue to invest in technology.

As we look at what's going on out there, the next generation of bits, the things that we've done with IntelliServ, our continuing advancement on different types of Downhole Tools, and quite honestly, our ability to create more rigs that are more efficient and have less people on them we think are very important, we will continue to do this. We're blessed with a good balance sheet. I think that balance sheet is going to allow us flexibility to take a look at what we can find out there that will help build us through the future. This Company, really in many cases was built on bad times. We are able to find great deals. We're able to take those great deals and put them into our template, our international template, and really expand earnings on a real basis, and we want to make sure that we take care of that. Most of our customers today have great balance sheets. They are just like we are.

And I think what you'll see in many cases, is going to be a shift away from, maybe new rig construction to really component upgrades. Our top drives, iron roughnecks, pipe handling systems, new control systems, you'll see a lot of these be put on rigs, not necessarily buying a new rig, but bringing rigs in, refurbishing them, making sure that they can compete with the brand-new rigs. So we think that will continue to happen. As you see rigs come down, when you take a look at the rig components, historically there's been a lot of cannibalization, but today one of the interesting things is many of the new rigs have such equipment that you can't cannibalize it off the old rigs. And I'm talking rig equipment specifically.

Because when you look at these control systems, when you look at the way we build AC draw works versus DC draw works, the way that you're looking at some of the mud pumps, it's not like it was in the mid '80s when every rig looked the same and you pulled a piece of equipment off and put it on. So I think the cannibalization, while there can be some, will not be quite what you've seen in the past. We're excited about the aftermarket. We're putting a lot of these new highly technical rigs out there, and I think that aftermarket is going to provide some great opportunity, and provide the annuities that we talked about for a long time that will continue to support us. And finally, other areas such as that we don't talk about much, but cranes, very specific pieces of equipment like that, we've got a great position in. Some of that will go into the industrial arena. A lot of that will go on drilling rigs.

So we believe very strongly that the business model we put together puts us in a nice position to be able to take advantage of a downturn. I think the, I think the acquisition opportunities are going to be pretty nifty, and so overall we think we're very well suited to be able to handle whatever's going to happen. If the question comes to me, "what's going to happen?" I can tell you the only thing I know, is I don't know. And we're positioning ourselves to be able to take care of whatever the market is going to be able to provide us. I would like to tell you it's going to be a short-term downturn. I don't know that. Is it a long-term downturn? I don't know that either. I will tell you this, we think the biggest issue is demand. It's not necessarily supply of product.

It's the demand of product. And demand turns on a dime, and supply turns on millions of dollars in a long time. So we think that when the demand does turn, the companies that have positioned themselves well have the best employees and the best products will prosper, and I feel like we're in that position. So that's really kind of a quick rundown. I think Clay gave you good color. Appreciate the, some of the things that were said there. And what I would like to do right now, Laray[sj1] is to open it up to any questions that our customers might have.

(Operator Instructions) Our first question comes from the line of Jim Crandell. Please state your company affiliation followed by your question, and please limit yourself to one question and follow-up question. Please go ahead, sir.

Yes, Barclays Capital. Very good quarter, guys, and excellent rundown.

Thank you, Jim.

Thanks, Jim.

Thanks.

Pete or Clay, could you elaborate a little bit more on Brazil and the order picture there? It seems if we're to achieve the $3 billion to $4 billion possible, I guess in new orders, that Brazil could be a huge chunk of that, maybe as much as over half of incoming orders. Can you talk about what the potential is? Do you think the potential is there for Brazil to execute on the remainder of their 12-rig programs? How do you see that being financed, and how do you see that overall picture unfolding?

You know, the announcement earlier, I think it was last week from the board of directors of Petrobras, where they came out with $174 billion budget, I think it's a five-year budget. It was up 55% from the preceding five-year budget, to me that says resolve that they are going to move forward. Previously in 2008, Jim, as you're aware, Petrobras indicated the need for first -- they indicated a need for 40 deep water floaters to drill to mostly the Santos Basin and develop the sub-salt resources that they have discovered in that Basin.

The first tranche of those were issued as letters of intent-- about a dozen floaters. Behind that, there's another 28 floaters. And I don't think Petrobras, and I'm careful not to speak for them, but I don't think they backed off of that estimate of the need for floating rigs, and everything they have done point to a lot of resolve in moving forward with that. So we're hopeful with the announcement just last week, which I think also, included the statement that their program's pretty healthy down to pretty low oil price, indicates that they are going to move forward.

And I think the other thing on that, too, Jim, is that we've invested pretty heavily in infrastructure down there, and I think Brazil is going to want a lot of local content, and we're positioned to be able to take advantage of that. As with anything like this, I think there's always timing issues, but we're pretty bullish on the fact that they are going to continue to move ahead, and I think Brazil realizes that oil and gas is very, very important to their economy. And we're even seeing some movement on land, actually with Brazil, and they have come in and looked at things like Rapid Rigs and Ideal Rigs to be able to drill more gas wells on land. So we're pretty confident that they are going to push forward.

Okay. Just as a follow-up to that, I was wondering if, you could again just to focus on the question in Brazil, can you remind us, Clay or Pete, of those, the 12-rig additional tranche, how many rig equipment package orders you've gotten so far? My recollection is three, but maybe update that. And is there any way you could be a bit more specific on what you think about the overall financing down there? And to get back to my earlier question, it seems like Brazil has the potential of being, I mean a $2 billion country for orders this coming year.

Yeah, we'll be careful not to quantify it or get more specific than that, Jim. But I will confirm, we announced this last quarter, that we had won 3 of the 12 that were in our backlog. There was also a fourth floater that we won in the third quarter, which was essentially a Brazilian spec-rig to serve that market. And we'll tell you, that those customers and others are trying to progress the financing of those rig projects, and specifically talking to a lot of the export/import agencies around the world that I referenced in my earlier comment. So we're optimistic they are going to be able to make that work.

Okay, thank you.

Thanks, Jim.

Thank you.

Thank you, sir. Our next question comes from the line of Marshall Adkins. (Operator Instructions) Please go ahead.

Raymond James. So I just want to get this clear, Clay. You are not taking TARP funds?

I can confirm that, Marshall.

Actually we're doing that to protect our pay, Marshall.

I understand. That's -- that's not my question. My question's this. And I'm going to ask you to go out on a limb here because I know you all really enjoy that. North America, if I recall, you know, roughly 50/50 mix last year. If you had to look towards '010, and I don't want any specific numbers, just kind of generically, is North America a third of your business or a quarter of your business? You know, looking out to '010?

Yes, I'm not -- I'm going to stop short of projecting on '010. I will tell you, Marshall, that in 2008, North America was 58% of our petroleum services and supply segment and 75% of our distribution segment, and that's where we had the most concentration. Rig Technology total sales in North America were only 25%, so it's much more of an international focused business.

So blend of mix, close to 50/50?

Blended mix is actually 41%.

Okay.

Total out of North America. And that of course is brought down by the rig component.

Right, right, okay.

And I would say, Marshall, that as we push forward, that number will be reduced. And that's by design. We've said for a long time that North America is very much a mature oil field. And while we certainly like generating cash out of North America, a lot of the growth, I think a lot of the acquisition opportunities that we look at today will be in the international arena.

That was going to be my follow-up question. You did hit, Pete, on kind of -- that you built this company during bad times and -- but can you give us a little more direction? I mean your balance sheet's strong. What direction are you heading acquisitions? I mean you mentioned international, but just give us a little more color there.

I think that there's a few things we like to do. If you take a look at the actual drilling rig itself, there's not a whole lot more we need on it. There's still some things we like, and I think the other thing is there's a lot of international companies that are very highly technical that invent a lot of things, and we find we can go in and buy those at a very decent price, but be able to put that in our marketing machine and expand the, the revenues very, very rapidly. So I think on the rig side, definitely we're looking at better technology, things that we can put into the system rapidly. I would say, though, most of what we would look at internationally is really on the petroleum services and supply side. I think that's an area that we've grown very dramatically over the years. We've got, I think, one of the best suites of Downhole Tools all the way from the bit up to the rig floor.

We think there's other things that we can add there that are pretty interesting, that we can supply our big customers like a Schlumberger and Halliburton. And so I think you'll see more emphasis on that. I think the expansion of what we do in our brand operations, a lot of solids control. There's a lot of neat things there. We have a lot of thermal absorption to take care of cuttings, so I think you'll see an emphasis on technology in the rig side and different products and expanded service on the PS&S side. And of course distribution, we're seeing some good success in expanding internationally and we'll look for local-type operations to be able to enhance our offerings in that regard.

Perfect, guys. Thank you.

Thanks, Marshall.

Thank you, sir. Our next question comes from the line of Robin Shoemaker. (Operator Instructions)

Thank you. Citigroup. Hi. Clay, wanted to just ask you a little bit about your backlog discussion and projections. It just seemed quite a bit better than what I was thinking it might be. You have the $11 billion backlog. You deliver $5.2 billion, and yet you end up the year at $9 billion. And I realize these are just some kind of projections you've made, but does -- and clearly Brazil is a key factor as you mentioned in achieving that kind of projection. But does -- are you assuming there, that these Brazilian contractors such as Delba Shyheem, who have these 10-year contracts with Petrobras to build rigs, but are unable to find financing, that in fact they are able to find financing and those rig orders go through?

Well, Robin, I'll reiterate what I said earlier. We're optimistic that with the help of a number of sovereign governments around the world that are stepping into the fray that generally our customers will find financing. As is our long-standing policy, I'm not going to make any specific comments about any particular customer out there, but directionally, that's where the group is going. GIEC, which is the government import/export credit association in Norway, just announced a few days ago, that the government is proposing to more than double their lending framework to 110 billion kroner. I think this time last year it was only 50 billion kroner, so there is a concerted effort amongst a number of governments out there to stimulate their economies by stepping up and financing some of this stuff. We work closely with the import/export credit agencies to document local content in these things, and so we're very aware of the financing activity amongst many of our customers and, frankly, think the odds are good that they will find financing.

Okay. So then my follow-up would be then on Grant Prideco, the drill pipe business basically the -- can you talk about the visibility of drill pipe order-book, especially beyond the first half of '09, and whether you believe we will be with all the idle rigs sitting around seeing quite a bit of surplus drill pipe removed from idle rigs impacting the drill pipe sales very significantly as we get later into the year?

Yes, we do see a pretty sharp falloff in drill pipe sales in the coming year. Not surprisingly, it's a very cyclical business with regards to North American rig count. And what you have in the drill pipe business, is when rigs start getting laid down, drilling contractors will pull strings off idle rigs and put them to work on busy rigs, so you have this little bit of cannibalization phenomenon that we're very, very aware of. So that will take a toll in 2009. What will help us, though, is we expect steel costs to decline, which will help kind of stem the margin impact of that a little bit. We also know that there are a number of very large offshore rigs that are going to be delivered into the market in 2009, 2010. Those rigs tend to buy multiple strings.

They tend to buy premium strings. They tend to by big landing strings that are large diameter, five and seven-eights, six and five-eights inch pipes, much higher metallurgy, premium threads, and so for us, it's a much more attractive sale because it's a much higher margin piece of business. So you see this mountain of offshore rigs that are coming into the marketplace. They are all going need strings and pipes. We had a lot of visibility into that, and that market's going to remain pretty solid.

And then lastly, behind all of this, Robin, despite the normal cannibalization trend with cyclicality, behind the drill pipe business is a very steady multi-decade phenomenon, where the style of new -- the new style of drilling with horizontal wells, higher weights, higher torques, much longer extended reach sections, has really surpassed the capabilities of a lot of API commodity-type drill pipe. And is really -- we're seeing the markets gradually shift towards more premium pipe, and where API commodity pipe is being used, it's being worn out faster.

The rigs are pushing the drill pipe beyond kind of its design capabilities to drill these more exotic horizontal wells. When you take drill pipe and bend it around a 90-degree bend, you really put a lot of stress and strain on it, so we think this is a temporary thing. 2009 will be challenging in drill pipe, but the long-term secular trend of using larger premium pipe, premium threads, higher torque, higher weight handling capabilities is all very much intact and we're going to benefit from it in the long run.

Okay, thank you.

Thanks, Robin.

Thank you, sir. And our next question comes from the line of Bill Sanchez. (Operator Instructions)

Howard Weil. Thanks, good morning. Clay, I was hoping you could go back and address the backlog and risk number. At this point, given how far I guess along we are in terms of the credit troubles and the first hints we've seen of cancellations of rigs, is that $364 million as you see it, kind of, worst case at this point, or could we see that grow here over the coming quarters?

Well, I've been surprised a lot, Bill, probably as you have and everybody has been on the last couple of months. Never say never, but I will say we scrubbed the backlog pretty hard and, while it could grow, we certainly don't see it growing materially beyond this. Most of the stuff we have in our backlog is a little further advanced. Many of these projects at risk, as you know from the numbers, earlier I mentioned we only recognized $41 million in revenue on $364 million. So it's kind of early days in those projects.

Once a rig is 70%, 80%, 90% complete, you know it's going to get done. So -- but this right now, I think this is a realistic estimate. I'll also stress, too, Bill, we're -- the majority of this, we're working with these customers to find buyers for these projects and actually meeting with some success. So, I wouldn't tell you that it's a sure thing that this $364 million is going to drop out. We're just highlighting it as being at risk based on our analysis.

I have a lot of CEOs on speed dial, Bill, that say if anything falls out and it looks pretty interesting, give us a call. So there's interest out there. The world needs deepwater rigs. We know that. And I think if some of these things were to fall behind a little bit, there's a lot of buyers in the wings that are kind of licking their chops. They would like nothing more than to be able to get a rig in 2010 or 2011, as opposed to having to wait out to 2013 or 2014. So we're pretty comfortable with what we've got. We've kind of said that all along, and we hope we gave you a little bit more color today to prove that fact.

Sure, you do. I was hoping you could give an update, I know in the second half of last year, you were starting to receive orders for your new Drake rig in the Marcellus, could you give us an update on where that stands and is that still a potential bright spot for you here in '09?

Yes, it is. We will deliver, I think, the first Drake Rig this quarter. We've kind of put it on fast track. We're pretty excited about it. We think the things that it can do, will be very positive and we're also very bullish on the Marcellus. I think it's too early to say, but I think as the Obama Administration gets into energy, they are going to discover that one of the things that's a fairly quick, very clean and very plentiful resource is natural gas.

And so we think you could see some things that will be positive for natural gas, and the neat thing is, with our Ideals and Rapid Rigs, and Drake Rig, especially in the Marcellus, we're well positioned to be able to help satisfy that need. I know you've seen some of the figures on some of the big wells coming out of the Marcellus, and clearly, the Haynesville's producing a lot of gas, and the Marcellus has had a couple of wells up there that have produced some fairly eye-popping numbers. So we're on track with it and I think the customers that we've sold it to at this point in time are pretty excited about it.

Thank you for your time.

Okay. Thanks, Bill.

Thank you, sir. Our next question comes from the line of Dan Pickering. (Operator Instructions)

Hi, Dan Pickering, Tudor Pickering Holt. I get it, two questions. So when we look at kind of the baseline orders, Clay or Pete, I mean historically, when there weren't a lot of new rigs being built offshore, I think Varco NOV was kind of running at $800 million to $1 billion level, in terms of just kind of ongoing orders. Has anything changed in that time period? Should that number be a little bit higher, kind of, organically without a new build?

Well, two things. The accounting has changed because Varco used to report a different backlog basis, which was everything, and we sort of scaled that back now to the orders beyond $250,000, so it's not really an apples-to-apples comparison if we go back prior to the merger, Dan.

Okay.

Secondly, yes, I think things have changed. Generally, we are replacing more mechanical black-smithed equipment of 1970-something, with equipment that has a lot more embedded electronics and much, much tighter machine to tolerances, and a lot more hydraulics or electric motor actuated, sort of, motion in it. All that stuff requires a lot more OEM care and feeding, and probably, frankly, does a much better job, is much more efficient, much more fit-for-purpose, but it probably gets worn out faster because rigs are, you have much -- you don't have quite the safety margin designed into rigs, and so that I think drives probably, a higher level of organic support for the fleet from NOV period over period. Hard to quantify, but that's what I would say.

Okay. So, the billion from a while back feels like a decent baseline then?

Yeah, the guidance we're providing is in that close to a billion range.

Okay, thank you. And then, Clay, you mentioned your view for PSS was a fairly sharp decline, first quarter versus fourth, and then flattening out from there. What's the driver of the flattening out process, given rig count probably declines again in Q2? How do you offset that decline?

This is basic -- Dan, the guidance that we're providing is based on the most recent budget that we rolled up last week, and believe we're going to be able to offset some of the Canadian breakup decline that you've seen in the second quarter. Our exposure in PS&S to Canada is we do have some exposure, it's not that great, last year it was only about 9% for the full year. So you see a little bit of that effect. But we see some other specific things going on, including a lot of excitement in South America, which we believe is going to offset that.

Okay. So it's basically international offsets domestic?

Right.

Right.

Thank you.

Thanks, Dan.

Thank you, sir. And, ladies and gentlemen, that does conclude the question and answer session. I would now like to turn the conference back over to Mr. Miller for my closing remarks. Please go ahead, sir.

We would like to thank everybody for listening in today, and we look forward to talking to everybody again at the end of the first quarter. Thank you so much for your interest.

Thank you, sir. Ladies and gentlemen, this concludes the National Oilwell Varco fourth quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter pass code, 11124801. (Operator Instructions) Have a pleasant day.

[sj1]To be consistent with above.