國民油井華高 (NOV) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the National Oilwell Varco 2009 first quarter 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)

I would now like to turn the conference over to Mr. Loren Singletary. Please go ahead, sir.

Thank you, David. And welcome, everyone, to the National Oilwell Varco first quarter 2009 earnings conference call. With me today are Pete Miller, Chairman, President, and CEO, and Clay Williams, Chief Financial Officer. Before we begin the discussion of Natural Oilwell Varco's financial results -- David? Operator? Are you on there?

Hello? Before we begin this discussion of National Oilwell Varco's financial results for the first quarter ended March 31, 2009, please note that some of the statements we make during this call may contain forecasts, projections, 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 upon limited information as of today, which is subject to change. They are subject to risk and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Form 10-K National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release on our website at www.NOV.com, or in our filings with the SEC.

Later on 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, Loren, and I hope you're all on here. We just got some strange feedback on the call, so I hope you're able to listen to me. And again, we appreciate you calling in here today. Earlier today, we reported net income of $470 million, or $1.13 a share on revenue of $3.48 billion. This compares to a net income of $1.40 a share and revenues of $3.8 billion in the fourth quarter of 2008 and net income of $1.11 a share on revenues of $2.7 billion in the first quarter of 2008. Additionally, we reported a quarter ending backlog of $9.6 billion after taking in a net $240 million of new orders during probably what is historically one of the most difficult economic times in the world economy.

I'll provide more color in a moment regarding our operations and backlog in this call. These are very challenging times economically throughout the world generally and in the oil and gas business specifically. However, with challenges come opportunities, and at National Oilwell Varco, we are positioned to take action through these difficult times to become an even stronger company as we look to better times in the future. We will avail ourselves of opportunities and have a wonderful balance sheet that puts us in a position to be able to do things that are going to strengthen the company throughout this downturn. At this time, I would like to ask Clay to provide more color on our results.

Thanks, Pete.

National Oilwell Varco reported earnings of $1.13 per diluted share on $3.5 billion in revenue for the first quarter of 2009. Q1 earnings and revenues declined sequentially, as rig counts and oil activity fell in every major market around the globe, as our customers retreated in the face of increasingly bleak economic news. The company's financial results for its first quarter of 2009 tell a tale of two businesses. A backlog-driven rig technology segment continued to grow nicely, up 5% sequentially, with, again, exceptional execution at strong flow-throughs, but our rig-count driven petroleum services and supplies and distribution services segments declined sharply, as the industry shed an average of 700 operating rigs from the fourth quarter levels, down about 21% worldwide. Overall revenues declined 9% at 48% decrementals from Q4 to Q1.

Year-over-year pro forma comparisons were better. Consolidated revenues increased 10% at 17% operating leverage, driving an 8% improvement in operating profit. On a GAAP basis, NOV's quarterly earnings increased $0.02 per diluted share from the first quarter of 2008. Lately we've heard others talk of the Q2 bottoming in North American rig counts, referencing incrementally less terrible news as marking a second derivative inflection point, signaling that we are near the bottom, but in all candor, we do not know. What we do know is that a recovery, a return to prosperity is never a question of if, but when.

We do know that a recovery's on the horizon, perhaps as early as late this year, but we don't know when it will happen. In the meantime, our customers are suffering, and industry is undergoing an extraordinary breath taking unwind of a steady five-year buildup in activity. It's a cyclical business that can bite and right now it's biting hard. But it never bites forever. Volume declines and ferocious price pressure are evident in our results in the first quarter and unfortunately we see more of the same continuing in Q2. Even if activity rebounds in the third quarter, we are likely to see a lot of pressure on our margins, as contracts roll off and as we reprice to lower spot pricing, typically 10 to 30% lower than last year.

2009 will continue to be very challenging. We're just glad that it's almost one third over already. Operating profit of $720 million declined 18% sequentially during the first quarter, excluding Q4 transaction charges, but improved 8% year-over-year as compared to the pro forma first quarter of 2008. Operating margin was 20.7% compared to 23% in the fourth quarter and 21% in the pro forma first quarter of 2008. Operating flow-through or leverage was 48% sequentially and 17% year-over-year. The sharp decrementals on the revenue declines from Q4 result from a combination of volume declines, which typically run about 30% for petroleum services and supplies and 10% for distribution, coupled with pricing pressure.

Unfortunately, cost reductions in such a downward vortex simply can't keep up fast enough to sustain margins, but nevertheless, future periods will benefit from cost reduction measures we're taking. Our operations are responding appropriately and resolutely, tackling the difficult task of reducing costs and infrastructure with prudence and urgency. Overall, we recorded expenses for salaries, wages, overtime, contract labor, travel and entertainment and outside services that were down by $66 million from the fourth quarter to the first quarter, due to initiatives executed by our operations since late last year. Additionally, we are currently offering enhanced retirement benefits under a voluntary program to our long tenured employees. Expect to record a charge in the second quarter related to this program. The size of the charge and the impact on our P&L will not be known until we determine how many employees accept the offer, and we will report the results to you in our next earnings release. Importantly, we are reducing costs prudently and thoughtfully with a view towards maintaining flexibility to ensure we can continue to service our customers well.

In the cyclical world of oil field services, you seem to always be driving your business one direction or the other. You're either trying to grow like crazy to meet sharply rising demands of your customers during periods of growth or you're too big and urgently trying to cut costs, as rigs are being laid down. Driving infrastructure and associated costs up urgently and down urgently as the market dictates are necessary survival skills in this industry. Our team has shown amazing resourcefulness through the expansion cycle of 2004 to 2008, growing production five, six and seven-fold for many of our products. But in late 2008, we shifted gears and moved crisply to the far less fun task of adjusting costs down to a far more subdued marketplace. Pete, Loren and I have an abundance of confidence in the capabilities of the professional men and women of NOV who manage our businesses in both arenas. They know what to do in both arenas.

As a result, National Oilwell Varco will continue to skillfully navigate whatever obstacles the market deals with, and emerge stronger and better positioned strategically when the inevitable upturn arrives. And it will arrive. The world industrial base is critically dependent on the precious commodities of oil and gas. Because of this, we take the long view. This downturn is all about opportunity. It liberates us to unleash initiatives and big bold news that simply are not possible when our factories and operations are running 24/7.

The prosperity of the last few years narrowed our focus on getting more products out the door, which necessarily directs management attention to the short-term task of pushing out the last marginal product. A slowdown with the slack resources and lower utilization it brings actually liberates us to think about, to plan, to execute broader initiatives, like shifting again our production footprint to improve our overall cost structure. In concrete terms, this means we expect to use this newly found flexibility to reset our manufacturing footprint to drive production to lower cost areas and to redirect outsourced production with marginal vendors back into our own facilities. And we can do this at a time when it's not disruptive to our customers.

NOV will invest for the future. We continue to train our people to prepare for the upturn. We will step up efforts to push out QRM, cellular and lean manufacturing techniques through our operation. We will find and execute attractive acquisitions, all to better position us to take care of our customers.

NOV is built for all kinds of weather. We carry into this downturn a rock solid balance sheet by design, which boasts $2.2 billion in cash, and less than $900 million in debt, all with very long tenure. Our $2 billion revolving line of credit is undrawn and carries a very attractive interest rate. Our diverse mix of early cycle and late cycle oil field businesses smooths earnings and cash flows through the natural cyclicality of the oil field. Q1 saw the company grow cash by nearly $700 million. Since March 31, we have put over $300 million of this to work in exciting new acquisitions, and we hope to invest nearly $100 million more in another acquisition in the next few weeks.

The financial design of NOV enables us to act on the extraordinary opportunities, both internal and external, which this downturn will bring. Demand for new drilling equipment slowed sharply in Q1, as we recorded net new orders of only $240 million, down two-thirds from $724 million booked in the fourth quarter. Gross orders were $272 million and cancellations, about which I'll provide additional color in just a moment, were $32 million. Reduction out of backlog was excellent at $1.7 billion, up 15% sequentially, as our rig technology group continued to deliver excellent equipment on time and on budget. We delivered 10 offshore rigs this quarter, bringing our total to 54 so far this cycle. The low 14% book to bill ratio in Q1 caused backlog to fall 13% sequentially to $9.6 billion. We expect revenue out of backlog to start trending down in Q2 and to be about $3.8 billion through the remainder of 2009, bringing the year's total to about 5.5 billion. In 2010, we expect $4.7 billion and in 2011, we see about $1.1 billion, all based on projects on the books at March 31, 2009.

We also entered this downturn with unprecedented visibility and an awful lot of work to do. The quality, if not the size of our backlog, continues to hold up reasonably well, despite duress in the financial markets. The $32 million we removed from our backlog was predominantly coil tubing and pressure pumping equipment ordered by North American customers. Last quarter, we noted that we considered about $364 million of our backlog to be at risk. We now see this to be about $380 million, up slightly from last quarter. We continue to negotiate with these more troubled customers to arrange for the sale of these projects to others, or otherwise find a solution that will permit them to move forward. We've been paid $93 million in cash on these, but have recognized only about $41 million in revenue against these orders.

Despite price concessions, not many drillers are buying new equipment in the first quarter. Choosing instead to defer purchases of bread and butter capital units and spares and cannibalizing equipment from idle rigs wherever possible, so suffice to say the head winds we face are a little more stout than they appeared last quarter. This is evident in our non-backlog revenue for rig technology, down 18% sequentially and in the expendables we make and sell and petroleum services and supplies and distribution services.

Nevertheless, we expect orders for rig technology to improve as the year unfolds, and as we stated last quarter, much of this depends on Petrobras executing its reported plans. We continue to work with drilling contractors who are targeting the deep water Brazil market to secure financing for new floaters through government trade agencies and progress has been slow, but steady. We also continue to bid a variety of land rig projects into Latin America and the Middle East, and for some of the IPM projects that are being tendered.

Last call, we talked about the possibility of achieving 3 to $4 billion in orders in 2009 and we still believe this is achievable with a little luck. While we know orders will be challenging in the short run, we also know that Russ never sleeps, and that the task of retooling the world's fleet of rigs is slowly, quietly rising in urgency. There are billions of barrels to be found and produced in deep water basins, which will drive the fortunes of the world's major oil companies in the coming decades. When the economic tsunami subsides, NOV will stand ready to resume our critical mission, with a core team of talented, dedicated professionals up to the challenge.

Now let me turn to our segment operating results. Rig technology posted an exceptionally strong first quarter, generating $2.2 billion in revenue, and $606 million in operating profit in the first quarter, yielding an operating margin of 27.6%. Sequentially, 5% higher revenue was due to higher shipments out of backlog, up 15%, offset by lower non-backlog revenue, down 18%, mostly due to North American land drillers and pressure pumpers shutting off purchases of both capital items and spares. Compared to the first quarter of 2008, revenues improved 37% and margins increased 230 basis points. Operating profit flow through was 44% sequentially and 34% year-over-year.

Most regions are seeing lower interest in new rigs, with many previously active projects in Russia, the North Sea, and the Far East being tabled, pending economic clarity. However, we continue to work projects throughout Latin America and the Middle East, albeit at a more measured pace than before. Demand for equipment across North America, both drilling and completion units, has dropped to about zero, despite price concessions, but we continue to see relatively stable demand for wire line units and certain other well servicing equipment destined for international locations. Commissioning activity remains very robust, with several hundred employees engaged in installation and completion operations on 30 rigs and 13 shipyards around the world. This activity is expected to continue to grow through the year as we ready the rigs we are building for spud.

Operationally, we are taking this opportunity to reset our manufacturing footprint, to move outsourced production back into our plants, and to move products to lower cost operations. The downturn will let us catch our breath and tackle initiatives that simply weren't possible over the past few years. For instance, we are now moving much of our spending for gears from outside suppliers into a business we acquired a couple of years ago, which until now was too busy to handle all of our needs. Our FM 529 plant has been reorganized to enhance flows and efficiency, and we are driving still more standardization into mud pumps and SCR houses through our IQ2 process to reduce manufacturing costs.

We have consolidated certain well stimulation equipment manufacturing operations in the Mid-Continent, and we also continue to develop new product offerings for our market, like our new Drake rig design, which specifically targets shale plays like the Marcellus, where maneuvering rigs around tight turns, under low bridges and onto very small drill pads is challenging. The first version of this rig is expected to spud its first well in the second quarter. We're seeing rising inquiries from a broad spectrum of customers for our new drilling instrumentation and data capture products, which optimize drilling operations. As market leader, NOV understands well its responsibility to remain at the forefront of drilling technologies and techniques and we have for years honored our commitment to the industry to steadily invest in new and better technology for our customers, despite business cyclicality that is sometimes gut wrenching.

Looking into the second quarter, we expect to see rig technology revenues drop in the high single digit range at high decrementals as pricing and volume pressures begin to mount. We nevertheless expect margins to remain in the mid-20s through the year, owing to the strength of our backlog for this group. Our petroleum services and supply segment posted revenues of $1 billion in the first quarter, down 27% from record Q4 sales of $1.4 billion. Operating profit was $164 million, and operating margins dropped to 16.2%. Sequential leverage or flowthrough was 47%, owing to a one-two gut punch of price and volume declines. Compared to the first quarter of 2008, revenues fell 23% at 50% decrementals. Substantially all of our product lines posted double-digit sequential declines, with the North American rig count in free fall and pressure in a number of international locations as well, notably the North Sea, Venezuela, Russia and China.

Drill pipe was our hardest hit product, as drillers pulled strings off of idled rigs to meet their dwindling operating needs. Drill pipe volumes dropped sharply after a record fourth quarter, and pricing has suffered, too, particularly in lower end commodity pipe. Premium pipe demand for deep water and specialty strings is holding up comparatively better, but is also under some pressure. Due to scheduled mill shutdown in our Voest-Alpine plant, we purchased higher priced green tubes from third party suppliers late last year, which continue to run through production. We expect some relief on the cost side of this business in the second half, as lower cost green tubes begin to run through our P&L and as we temporarily idle some weld lines.

Our inspection business saw a sharp decline in pipe processing operations, as mills shut down to wrestle with growing OCTG inventory gluts, and our coating plant efficiencies are beginning to suffer from lower volumes, shorter runs, and more plant changeovers. Sales of downhole tools and bits also fell sharply as rigs went idle in the first quarter, which is opening up the possibility of closer integration between these products to improve efficiencies and sales coverage, and we continue to move forward steadily with efforts to upgrade our motor and jar rental fleets with newer high performance designs. Also, within petroleum services and supplies, we're optimistic that we will be able to close our previously announced Intelliserve joint venture with Schlumberger this quarter, pending regulatory clearance.

Last quarter, we were hopefully we would find a level of stability following the Q1 drop in petroleum services and supplies overall, but it appears to us now that revenues and margins will continue to decline through the second quarter, as certain international projects are getting off to a slow start and as pricing pressure has been much greater than expected. Overall, for petroleum services and supplies, we expect low double-digit sequential declines in revenue at decrementals in the 40 to 50% range in Q2.

Distribution services was also hit hard by the downturn in rig count, mostly in North America. Both the US and Canada posted large revenue declines, but these were partly offset by significant growth in international sales, where we have methodically invested over the past few years, which came in at good incrementals. Our rig store concept, which we discussed on prior calls, appears to be gaining momentum. Another bright spot is in this business is our mono business, which despite lower sequential revenues, posted record margins in Q1, owing to manufacturing efficiency initiatives and high demand for Artificial Lift products into Latin America. Marriage of this group with our extensive distribution store network, spanning over 200 stores, is working very well and is is expected to provide additional growth opportunities.

Revenues for the distribution services group were $408 million, down 16% from the fourth quarter, but up 11% from the prior year. Operating profit was $25 million, and operating margin was 6.1%, down 280 basis points from Q4's record. Operating profit flow-through was 24%, much higher than normal for this business, due to severe price pressure across the board. Looking forward into the second quarter, we expect distribution services revenues to decline somewhere in the mid teens range, at decrementals in the 15% range, higher than our long-run 10% flow-through level due to continued price pressure.

Turning back to National Oilwell's consolidated first quarter income statement, SG&A declined $13 million sequentially, as decreases in salaries and wages, T&E and other costs were partially offset by higher bad debt accruals and legal expenses in the quarter. SG&A was 9.2% of revenue in Q1 compared to 8.7% last quarter. Equity income from our unconsolidated joint venture with Voest-Alpine grew $12 million sequentially due to higher OCTG sales and a stronger dollar. We expect this to fall in Q2 due to the softening pipe market.

Other expense on our income statement swung from a $9 million credit in Q4 to $36 million debit in Q1 due to a $26 million FX charge in the first quarter. The first quarter FX charge was mostly due to adjustments made to our hedging positions in Norway, where our largest ledger is US dollar functional, but where we incur substantial periodic costs in Norwegian kroner and Euros, which we hedge back to our functional currency on a forecasted basis. During the first quarter, we revised our forecast nonfunctional currency expenses downward and debited our resulting overhead position. This was an exceptionally large FX impact in the quarter that we don't expect to repeat, but given our extensive international operations, we will always have some level of foreign currency exchange volatility impacting our income statement. Our fourth quarter income statement benefited from the net FX gains, giving rise to the sequential swing.

Additionally, we incurred higher bank fees mostly associated with letters of credit we issued against large down payments and progress billings from our customers, which also adversely effected the other expense line in our income statement. Unallocated expenses and eliminations on our supplemental segment schedule, which is pro forma for the Grant Prideco acquisition for all periods, were $75 million in the first quarter, up $11 million due to higher legal expenses and higher payroll taxes on Q1 incentive compensation, partly offset by savings in other areas. In particular, legal expenses were up as we charged off costs associated with M&A activity, following our adoption of FAS 141 R, that would previously have been capitalized. Tax rate was 32.5% for the quarter, and we continue to expect 2009 to remain in that range.

Depreciation and amortization was $116 million in the first quarter. CapEx was $79 million. Expect 2009 CapEx to be in the $350 million range. EBITDA was $827 million in the first quarter. Our March 31, 2009 balance sheet employed working capital, excluding cash and debt of $2.2 billion, down about $300 million from Q4 and equaling 16% of annualized revenue, consistent with prior, recent prior quarters. We saw some deterioration in collections in certain areas in the quarter, so we are aggressively pursuing collection efforts and vigilant for any potential customer payment problems, but overall DSOs remain stable.

Customer financing on projects in the form of prepayments and billings in excess of costs, less costs in excess of billings, was $2.1 billion at March 31, down slightly from the prior quarter, due to the high level of revenue out of backlog. Cash flow from operations for the first quarter was $785 million and less Q4 CapEx of $79 million yielded free cash flow for the quarter of $706 million. Now let me turn it back to Pete.

Thanks, Clay. What I would like to do at this point is just talk a little bit about our operations and also give you kind of a quick overview of what we're seeing around the world. And there's some basic themes. I'm going to reiterate a few of the things that Clay's already mentioned.

Basically when you talk about our distribution and our petroleum services and supplies business, a big part of what we're doing today is we're going to be improving the efficiencies throughout the organization. We're going to be doing a lot of insourcing. We are starting to see raw material reductions. We're starting to see some things come across the board on steel that I think will be positive and we'll try to parlay those to our advantage as we move forward. And you'll also see continued international expansion by us in these areas. While the international market is a little softer, it's still not anywhere near as soft as what you see in North America.

We're also going to continue to rifle shop the shale plays. I think as you look around the United States, the Haynesville and the Marcellus will still be able to continue to pick up some steam. We also think you're going to see some international shale plays. And as those shale plays manifest themselves, we want to be able to take advantage and move some of our operations into those arenas. Currently in the distribution business, when you take a look at the margins, we're still able to achieve in a down market, we're very pleased with that, and I think our rig store concept is continuing to gain a lot of momentum, especially when you see many of the new rigs that are coming out.

In our petroleum services supply business, we continue to integrate very effectively the things that we've done with the Grant Prideco acquisition and our downhole tools today, we're able to offer the complete array of bottom hole assembly from the bid, from the under gauge items that were brought in through Grant Prideco to the downhole tools we already had in the legacy National Oilwell Varco. We think being able to put these products together really has a very compelling value story to our customers and we're excited about the opportunities that are arising. Also, because of all the new rigs that we built, as you take a look at the deep water, you're starting to see many of these rigs coming into the Gulf of Mexico. I think we'll be able to parlay as these rigs run much more of our PS&S business into expanded business out there.

Our tube scope operation continues to work very well in being able to integrate the lifecycle management of drill pipe. We've got a lot of interesting things on the table, like RFID chips that are going to be able to monitor a lot of what we do, so we feel very, very good about the positioning that we've been able to do with these and distinguishing ourselves in the future. Also, for any employees that might be listening in, I would like to welcome all the Anson folks who are now part of the PS&S group, predominantly out of Newcastle in England, but also all over the world. We're glad to have you as a part of National Oilwell Varco and we think you'll be exciting about the things that we're doing.

Now, on the drilling side of the business, I would like to talk about the same sort of themes. Today what we're really talking about , continually there will be new rigs built. One of the things it looks like we just about signed up a drill ship. We kind of hope to have it in the first quarter, but these things move a little bit slower today because of financing, but we'll probably have it all done by the end of the month. That would have substantially increased the 250 we talked about earlier, but again, it's all a question of timing and we feel very positive that things are going to happen and I'll talk a little bit more about that in a moment when I go around the world.

But what we're going to be seeing I think much more in the rig technology group, a lot more components, sales, lot more refurbishment as opposed to new rig-type sales, lot of repair and maintenance. Again, we're going to be doing a lot of the same things I talked about earlier, insourcing, efficiency initiatives, cost reduction, and then we're also looking at the, lot of the products that we want looked at quite as closely in the past, which would be FPSOs and well intervention type vessels. Also in the rig technology group, we have another new addition, and that's the ASAP acquisition that we made in Holland. And for those ASAP folks listening in, we would like to welcome you to the National Oilwell Varco family.

Now, let me real quickly kind of give you a tour of the world. Interestingly enough, I'll start in Brazil. That, that clearly is going to be the area where we're most excited about. The Brazilians continue to push forward on the deep water play. We're positioned very well to take advantage of that. We have great relationships with all of the predominant contractors down there. They also are working very closely with many of the top shipyards in the world, Samsung, Hyundai, Daewoo, folks that we have great relationships with, and we've built a lot of rigs with, so we're excited.

We believe that you're going to continue to see the Brazilians push forward on many of the initiatives that they have. I think that their stimulus packages down there are going to work very effectively and I think they are going to work to the advantage of us as we push through the year. So as you look at what's gone on, you know, this particular quarter, the order intake wasn't quite what we had anticipated. However, we also have come through probably historically one of the toughest periods, and quite frankly, the market was almost paralyzed in December and January. We're starting to see that free up some, and we're guardedly optimistic about what we're seeing as we push forward. But Brazil is going to be a large part of that.

Also, throughout Latin America, another spot we're very encouraged by is Mexico. We're encouraged there, also because of the IPMs with some of our good customers like Schlumberger and Weatherford that are getting them, but also because we believe that PEMEX will actually buy new rigs to participate in that themselves. So we think Mexico's going to be very positive for every one of the business lines that we have in the -- throughout National Oilwell Varco. Other parts, I think Argentina will show a little bit more vibrancy as the year moves on. I think Latin America in general will be a good spot.

Now, throughout the rest of the world, it's kind of interesting right now. It's clearly slowed up a lot, but in the parlance of Washington, in many parts of the rest of the world, there are a lot of shovel-ready projects. Places like Russia right now, they are having issues, but I think you'll see a pretty quick bust out of that, and given where you think the price of oil might go, I think the Russians have many, many shovel-ready projects to go. Many of the things that we've talked about are on hold. It takes a very quickly can they bring them off of hold. So in the long-term, we're still very excited about Russia.

In the Middle East, I think there's some nice places still going on. Kuwait continues for very aggressively go after some rigs. I think you'll see things in Iraq, which would be very positive. And then Northern Africa. Egypt really hasn't slowed down much at all. Algeria has put a few projects on hold. But again, I think they have a lot of shovel-ready projects that are going to be ready to go and we're positioned to be able to take advantage of those. We're guardedly optimistic again that the Middle East will be a nice area.

In China, we're starting to see a few of the fruits of the stimulus package there. I think that what you're going to see is the Chinese will do some things with their infrastructure that are going to increase their demand for oil, which overall I think for the economy in general or for the oil business in general is going to be a positive development. We continue to have a lot of different operations in China, very excited about some of the projects as we push into late 2009 and early 2010 as we get toward the end of the year. So I think throughout the world, the real issue is going to be shovel-ready. It's going to be projects that when they are ready to go, we have to be on the doorstep to be able to take advantage of them, and we feel very good about that. The key, again, when we take a look at backlog, is really going to be Brazil, but we feel very positive that the things that the Brazilians are talking about in fact are going to come to pass.

So that's kind of a quick overview. It gives you kind of an idea of what it is that we're doing. We feel very comfortable with our backlog at this point, as Clay's mentioned. Predominantly, it's an international and an offshore backlog, and we think as we go through the year, you'll continue to see additions to the backlog, not quite to the $2 billion levels we've seen in the past per quarter. But still it's going to be positive, and it's going to give good transparency and visibility as we look out into the future.

So with that, David, I would like to turn it over to you and ask if any of our listeners have any

Thank you, sir. (Operator Instructions) Mr. Geoff Kieburtz, please respond with your company name followed by your question.

Thanks, it's Geoff Kieburtz with Weeden. Pete, can you elaborate on what kind of luck is required to you get to $3.5 billion in orders this year?

I think when we talk about luck, Geoff, what we're really talking about is the viability of the financial community. I think some of the things, and also, it's one of timing. What you have today in this environment is probably a more protracted negotiation timeframe. I mentioned earlier the drill ship that will sign up here imminently that we thought we would get in the first quarter. A year ago, we would have hit through that pretty quickly. But because of the protracted timeframe, making sure that everybody's got the financing, making sure that we in turn get our down payment in house before we put anything into the backlog, those timing issues require a little bit of luck just on the cutoff dates, if you will.

We cut off everything on the 31st of March. If something moves into the second or third of April, then it says, well, gosh, we didn't get enough first quarter, moves into the second quarter. And I think also it means that there has to be a little bit of financial viability out there. I think some of the governments are going to have to step up to the plate with some of the assurances that they will, like Peak and Norway, some of the other places that they will ensure and guarantee some of the financing that's there.

That's really the type of luck. We don't think it's luck that is unprecedented. It's just going to be moving a little bit more quickly that it appears it is right now.

And there's less urgency wrapped around the process right now, Geoff, and part of that is, as Pete just mentioned, lot of our customers are pursuing government-backed financing on these projects and the agencies that he just referenced require a lot of documentation and things just tend to move a little more slowly. So that it's just grinding at a more methodical pace than it was last year.

I think you've mentioned that you've been working particularly with the backlog. The customers that represent the backlog at risk, you've been working with them to help you arrange financing and help them work through their problems. Have -- in that experience, have you seen things getting better, or is the system still kind of gummed up here?

Jeff, I would say we're seeing it getting a little better. I think that, I think there's a little bit more money that's available to folks today. I think you know it just from what you look in the financial community. If you tried to finance anything in December and January, you were probably out of luck, but today you're starting to see a few things free up. And so I think I would say clearly from late December, January to today, things have improved, and I think the psychology's improved, but I also think the financial markets have improved a little.

In terms of the backlog that's at risk now, you said $380 million, can you characterize the composition of that in terms of the way you talked about backlog, say, international, domestic, land, offshore or possibly not even in drilling equipment itself?

Yeah, it's predominantly offshore rigs, there's a handful of jackups in there, one floater, and then kind of a variety of various odds and ends for people that were buying components to go into, mostly into land rigs.

Okay, and last question, are you expecting working capital to be positive or negative contributor to cash flow this year?

I think it will continue to be a positive. It was in the first quarter, and I think as I just guided down on revenue across all three segments, I think it's going to continue to move down through the, as the year develops. One of the challenges we have in the short run is we had such long lead times and a lot of the components that we buy, a number of our businesses had to place orders out into the future, so we still had raw materials and things coming in in the first quarter, so the inventory ended up being roughly, I think it was up just slightly, but call it flat. And the businesses where it trended up was generally because purchase orders placed some time ago that were still coming in. I think those kind of get out of the woods. I think we certainly slow down buying a lot on the inventory front and I think it will go down a little bit more in Q2.

Great, thank you.

Thanks, Geoff.

Thank you, sir. And Mr. Jeff Spittel, please state your company name followed by your question.

Sure, Jeff Spittel, Natixis Bleichroeder. Good morning, guys. First question, appreciate the comments about Brazil. If you could talk a little bit more, we started to hear out of Petrobras and in the press a bit about additional orders for floaters. Appreciate that things are a little bit bogged down in terms of financing for that initial wave of 12, but could you give us a again sense I guess in terms of timing and what the outlook is for the plans behind that initial package of 12 floaters.

I think the initial package of 12, Jeff, continues to move forward. There's some issues there. I think, again, financing and things like that, but I would -- as I look at that today, I would say probably the vast majority of those will come to fruition here at some point in time in the near future. The second part, of course, is what Petrobras themselves have put out, which is a May tender that's going to be for another group of of rigs and we think a lot of those rigs will have some Brazilian content and other things, but they are also working very closely with a lot of the worldwide shipyards which I mentioned earlier and the comments to kind of help them work through some of those issues.

So we believe those things are in fact going to come to pass, too. I mean what it really looks like is that the Brazilian government understands the importance of Petrobras to their basic financial security within the country and I think you'll see them step up to the plate and I do believe most of the things that Petrobras wants to do will in fact come to pass. Having said that, there's also a question of timing and, you know, when you're dealing with a lot of, especially a lot of the NOCs, you're dealing with a little bit more bureaucracy, things take a little bit longer, and so I, I -- we're very comfortable and confident things are going to occur. I'm not as confident on the exact timing, but I think things are pretty positive in that arena.

As a reminder, too, Jeff, we announced we won three of the 12 backlog in Q3 of last year and have a couple others that we're still working hard with those customers to try to get financing on those.

Okay, and then if we could switch gears over to the land market, principally in North America, could you talk about, people are obviously going to be cannibalizing drill pipe and consumables as the rig count has continued to fall through Q2 here. Could you talk about comparing that process versus some of the prior downturns, and what effect the proliferation of the shale plays has had on that process this time, if it's different or if it's not?

Yeah, it's a tried and true practice when the business cycle is down, our customers are pretty energetic about pulling consumables and expendables off of rigs that go idle. It's not just drill pipe. It's mud pump liners and centrifugal pumps and a whole myriad of things. We're seeing it across our business. I guess the difference as you point out, there's a lot more horizontal drilling going on and so we think that makes the average rig running a little more drill pipe consumptive, because it now will tend to be drilling a horizontal well, which burns three drill pipe faster.

Interestingly here in the last quarter or two, we've seen non-vertical drilling, directional plus horizontal rise above the 50% mark in the US markets, now about 60%. Horizontal rigs are down only about 37%, whereas vertical rigs are down more like 60%. So it's evident that the economics of these plays, the economics of drilling horizontally appear to be surviving the economic stress a lot better. And so -- but, you know, in spite of all that, when the rig count plummets 51% from peak to where we are now, demand for drill pipe has gone down and we certainly felt that in our business.

Okay. Thanks, guys. I'll turn it back.

Thank you, Jeff.

Thank you, sir. Mr. Bill Herbert, please state your company name followed by your question.

Thanks. Good morning, guys.

Good morning, Bill.

Pete, getting back to Q1 orders and attempting to bridge that with the guidance, and let's just stick with the $3 billion kind of low end of the range, so if the math is right here, you're going to have to average about $900 million a quarter going forward in order to meet the lower end of that range. Walk me through, if you will, how much of that is contingent on Petrobras and what is non-sort of Petrobras-related opportunities?

Well, I think, Bill, I won't get, I won't get too specific in the sense of, giving you numbers.

Okay.

But clearly, we would expect a portion of that, and a good portion of that, to be the deep water rigs that would come out of Petrobras. And as you take a look, first off, $900 million a quarter's absolutely right math mathematically. That's just not the way it always happens, though. You could have $500 million quarter and a $1.4 billion quarter, something like that. But if you take a look at some of these Petrobras rigs, you're talking, let's say roughly speaking, $200 million to $250 million per, and as we look at a few of those, you can kind of do the math and think, well, if you picked up four or five of those, what that would mean for you.

There's still a lot of land business that I mentioned earlier in the Middle East. Some of those land rigs there are much greater than you would have, for instance, you might sell a rig in the United States for $13 million, but by the time you dot things you need to do for desert-worthy rigs, or even north slope type rigs, you're up to 30 to $35 million. Also, it's not just Petrobras looking at rigs. We mention Petrobras simply because that's the one that's out there and most of our shareholders are pretty cognizant of what's going on there. But there will be others that will in fact order some new rigs, be they floaters, semisubmersibles, drill ships and/or I think some jackups, believe it or not.

The fact of the matter is there's still a lot of stuff that's out there that we're working on. When you look at the tender offers that we have today, it's still pretty substantial. Our folks are working very, very hard and diligently in getting a lot of quotations and bids out there. I think the reality of it becomes just one of timing. We're not despondent at all about where this is going, and I think the nice thing is that with a $9 billion, $9.6 billion backlog that we have today, we can withstand a quarter like we just had and not really miss a beat in what we're doing in our rig technology group and when the orders start coming in, I think you'll see the, as the rig count goes down, at some point you'll start to see the build of a 1 to 1 book to bill ratio.

If I'm not mistaken, when you provided that guidance, you always had envisioned a relatively back end weighted affair in order to hit that number.

Yeah.

So if that drill ship had in fact landed in Q1, you probably would have been tracking relatively closely to your original expectations, correct?

Yeah, much more closely, that's correct.

Okay. And is the drill ship, is that a Petrobras-related opportunity, or is it something else?

It's a Petrobras-related opportunity.

Okay. And then just generally speaking, you've recently consummated a couple of acquisitions. I think you've been amongst the most sort of demonstrative about putting your balance sheet to work and investing in this part of the cycle, which is absolutely the right thing to do. I'm just curious, you mentioned a subsequent $100 million opportunity that you're about to close on. Paint for me, if you will, the landscape of opportunity you're looking at above and beyond what you've already done and what you're about to do.

First, I'm not going say, other than what I've already said about the upcoming transaction because it hasn't happened yet, but secondly, beyond that, we have another half dozen or so fairly well developed opportunities that we are considering, mostly international, mostly private, that aggregate to be another couple hundred million dollars and then beyond that, we've got some larger opportunities that typically kind of move through our process a little more slowly, a little more closely negotiated, and economically, the larger the deal, generally the less compelling the economics.

Right.

Not surprisingly. But -- and I would stress that this isn't atypical. We've ramped up our efforts to make acquisitions as the business started cycling down. We took steps in October, November last year to add some staff in this area and resources in this area and really send our folks on the road to find more things. And so we, we always, as you know, always have a pretty good backlog of acquisition opportunities we're looking at, but we very consciously stepped that up. Where we are now in the process is starting to see hopefully the front end of this come through. I'll stress, as I always do, none of these transactions are ever closed until they are closed.

Sure.

They fall apart in the 11th hour sometimes, but we really try to approach this statistically, get a lot of conversations going and make informed decisions about that opportunity set based upon a statistically meaningful sample size. So that's kind of what we're seeing out there. And finally, Bill, let me -- I'll wrap up my answer by telling you that we're really not seeing very many distressed opportunities.

Okay.

There may be a perception out there that a lot of people are suffering. Generally a lot of folks in oilfield services learned a long time ago not to push their balance sheets too far. So I think of particularly private companies entered this downturn with pretty strong balance sheets, they're not being pushed on by their banks, and generally the folks we're talking to view the sale of their business really as sort of the handoff of that business to NOV so that we can take it to the next level.

Okay. So just to wrap up, I mean the punchline to me, Pete, what I sort of derived from our dialogue here, is that, you know, you had a meaningful opportunity that you thought was going to close in the first quarter in terms of an order, slip into the second quarter, but be that as it may, your order evolution is pretty much tracking as you thought when you form late the guidance in the first place. I mean is that correct?

Absolutely, yeah.

Okay.

And we wouldn't -- we're still pretty consistent with that right now, Bill.

Great. That's very helpful. Thank you, guys.

Thanks, Bill.

Thank you, sir. Mr. Brad Handler, please state your company name followed by your question.

Thanks. Good morning. It's Credit Suisse.

Hi, Brad.

Hey. I guess I'll stick with the order discussion as well, please, although I think, I think Bill just tried to put it into some perspective. But is the message -- then we'll move on. Is the message that it's not really a little bit of luck, but it's the same guidance as what you have been trying to illustrate all year?

No, let me be clear. We need our lucky to improve over the luck we've had over the last couple of quarters. The rig count plummets 51%, we don't really view ourselves as particularly having good luck lately.

Yeah, right. That makes sense. I've gotten the sense that up until fairly recently, there was a little bit more conviction than what we heard in your prepared remarks, so I'm just trying to feel that out.

Oh, I wouldn't parse the words too much. I mean, again, we, we like what we see into the future. I think the -- when we talk about luck, luck is probably much more of a timing issue as opposed to -- we know there's a lot of things that are going to be done, but it really is a question of just timing.

Okay. Well, that's helpful. Glad -- wait, wait--

We're not sure what's going on here. David? I'm sorry, go ahead.

Maybe we're clear again. Okay. Couple of elements within that, though, please, just to help us understand it. If I understood it right, maybe half of that outlook came from the upgrade in refurbishment process, perhaps by existing contract drillers taking advantage of a little bit of down time. There was obviously some element of that not happening in the first quarter. Maybe that's not so surprising. But what's the visibility on that part of your order book?

It's actually, Brad, it would be less than half. I mean we need to have some big offshore rigs come our way to hit the guidance. But in answer to your question, yeah, we saw kind of a first quarter paralysis that we think is in the cannibalization process going on, but that only lasts for so long and the -- Pete's comments earlier were referencing the fact that these guys are going to have to get back to buying. You're going to have rigs come into the shipyard to take advantage of that downturn and they are going to refurbish equipment and buy spares and upgrade components during that window.

Okay, very good, just a couple of more if I could squeeze it in. I apologize. I know it's a lot. What implication does it have for you if Petrobras in fact, with the 28 upcoming rigs, kind of mandates in some sense, and I'm curious for your thoughts on it, but mandates that it is sort of local production driven, if you will, local manufacturing? Does it take away from some of the opportunities for you, or does it not affect your outlook?

No, it really doesn't affect us too much at all. I think when you talk about the local content of that, Brad, what you're really talking about are the shipyards and hulls. It's not dissimilar to what you see -- when we go to Korea today, you have the Koreans build the hulls, be it a drill ship or a semi submersible, and we put on the drilling package. And you'll see the same sort of thing that would happen in Brazil. I think it's more driven around being able to build the hulls, put those down there and then have folks like us come in and be able to bring the drilling packages in. And we'll do some local content. We've got very, very extensive operations throughout Brazil and Macao, as a matter of fact, we just opened a training facility in Rio de Janeiro to be able to train a lot of the people that are on the rigs that we're putting in there, so we'll work very closely with them, but that should not have any negative implication at all for us.

Okay. That's helpful. And then just lastly in, what is still out there, as you're trying to push it to the finish line, are you getting pressure put back at you to lower prices?

Heck, we get that in the best of times. These are tough negotiations all the time and I've been in the business for 30 years and never have I had anybody just take the price I gave them without negotiating. So I would expect that we'll continue to see fierce negotiations all the time.

Presumably those negotiations become a little bit more relevant in the current environment. Are you seeing, and is it fair to assume that we start to, you know, you mentioned 2 to 250. It was 250 to 3. Is that some indication of perhaps where pricing kind of needs to go to help push some of these projects along?

No, that's probably more of a function of FX changes and raw material changes.

Okay. Thanks for your answers, guys. Appreciate it.

Thanks, Brad.

Thank you, sir. Mr. Jim Crandell, state your company name followed by your question.

Morning, Pete and Clay.

Good morning, Jim.

Pete, Weatherford and Schlumberger were good customers of yours. If they were to do a lot of the IPM work in Iraq, in your opinion, would they need a lot of newer rigs, or are older rigs sufficient to do a lot of the field development that will be required there?

I think it would be a combination, Jim. It would totally be dependent upon what the particular field was, but I think what we've seen in Iraq today is there are some fields that you can probably use some existing rigs, which I think each one of those companies would be able to come up with, but there's other fields that are going to have a little bit more, I think the requirements are such that you would probably want to put a new rig that was more fit-for-purpose in there, so I think it will be a combination of factors.

Okay. Second question, Pete, can you give me an update on what the potential -- or project that you're working on now that are not progressing because the customer is detaining you, have there been any additional ones since the last quarter, or is it pretty much the same situation?

Jim, the $32 million we relieved out of our backlog were projects we sort of gave up on. And then we had another group of drilling equipment. It was loose odds and ends that came into that bucket. So it went from $364 million at the end of Q4 that we identified at risk to about $380 million this quarter that we've identified at risk.

Do you think those projects, Clay, project or projects that involve new rigs -- or most of them would be continued by a major oil company and that they would not be careful, they would just transfer ownership at a present time to a new, more financially strong company?

One of the offshore rigs has a customer out there and we're working to try to get that, you know, find somebody to go ahead and complete that rig. The others are a little more speculative.

Okay. Activity in Russia, Pete, and Clay, certainly has fallen precipitously here the last six months, but one or two companies are now saying it's bottomed and should start trending up. Do you see that reflected in your interest in new rigs in your business?

Probably. I've heard, and I wouldn't disagree with some of the folks who have said that they think it has bottomed and it's moving up. There's one or two of the more, I think well financed companies there that we continue to have some very, very fruitful conversations with and I think we'll probably sell some things under this year.

I think it's probably going to be more towards the latter part of the year before we see some meaningful improvement there. But as I kind of mentioned earlier, the nice thing about it is we've already had pretty in-depth discussions with a lot of our customers there and much of what's going on there is shovel-ready. It's just a question of I think financing and the price of oil and whether or not the folks want to push forward. But I think when they do decide they want to do it, it will be something that will happen fairly rapidly.

Okay, and last question, you're obviously very close to what's going on in Brazil. Do you think it's possible if the deep water rig market loosens up that a meaningful portion of Brazil's 42 rigs will be gotten from existing rigs that are already out there, but that are idle. The number of new rigs could come down, maybe even measurably come down from those 42?

I'm not too sure on that, Jim. I think what you've got right there, there's so many specific items about these rigs that are so much -- what's the water depth? And I think we have a tendency to look at deep water rigs and kind of just all in one class when in fact a lot of them can do things quite differently. And I think that the Brazilians are probably pretty intent on pushing ahead with a lot of the stuff they have got in their plans right now to build. So while some could be displaced, I'm not sure I would say it would be meaningful.

Okay. Thank you very much.

Thank you.

Thank you, sir. And ladies and gentlemen, due to time constraints, that is our final question. I would like to turn the call back over to management for closing remarks.

Thank you very much for calling in. We look forward to talking to you again at the end of our second quarter. Thank you very much.

Ladies and gentlemen, this concludes the National Oilwell Varco 2009 first quarter earnings conference call. If you would like a replay of today's conference, please dial 303-590-3000, and enter access number 11128066. ACT would like to thank you for your participation. You may now disconnect.