國民油井華高 (NOV) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the National Oilwell Varco second quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Loren Singletary, Vice President Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Thank you, and welcome, everyone to the National Oilwell Varco second quarter 2009 earnings conference 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 second quarter ended June 30, 2009, please note that some of the statements we make during this call may contain forecasts, projections and estimates including but not limited to comments about our outlook for the Company's business. These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Form 10-K, 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 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 will turn it over to Pete for his comments.

Thanks, Loren, and good morning. As Loren said I'm Pete Miller, CEO of National Oilwell Varco and welcome to our second quarter 2009 earnings conference call. Earlier today we announced earnings of $220 million or $0.53 a share on revenue of a little over $3 billion. Included in this result are some unusual charges of approximately $224 million pretax or $0.37 a share. In a moment, Clay will discuss these charges in detail.

Additionally we announced new capital orders of $615 million an increase over the $270 million announced in the first quarter. Also we announced discontinued orders of approximately $100 million in the quarter with the solid backlog of $8.7 billion. We will also discuss this backlog in greater detail in just a moment. We continue to build on a strong balance sheet and position the Company to with stand the current challenging times and prepare for the opportunities that the future will ultimately present. In a moment, I will come back and talk a little bit about the operations and give you a worldwide overview of what we are seeing. But at this point I would like to turn it over to Clay to provide more background on our quarter.

Thanks, Pete. As Pete mentioned, National Oilwell Varco did earn $220 million or $0.53 per share on $3 billion in revenue in its second quarter ended June 30, 2009. Broadly, we saw excellent execution of our rig technology group once again in the second quarter posting sequentially higher margins on lower revenues; however, our second quarter results in both petroleum services nd supplies and distribution services declined due to falling rig counts and increasingly fierce pricing pressure in North America partly offset by relative strength and stability in certain of our international markets.

I will get into these market forces a little more in a moment but first I would like to note that our second quarter GAAP results do reflect a number of charges which bear addressing. First, we recognized $147 million pretax or $0.23 per share aftertax impairment charge on our carrying value of trade names acquired in our Grant Prideco acquisition which we closed in April of last year. This is a noncash charge which arises from a retesting of all of our goodwill and intangible assets during the quarter in view of the deterioration in the rig count.

Second, we recognized $56 million in pretax charges related to acquisitions made in the quarter and the results of a voluntary retirement program offered to our long tenured employees. These totaled $0.09 per share after tax. $10 million of the $56 million of this are transaction charges arising from legal due diligence and other costs associated with acquisitions that were previously capitalized under GAAP but which now must be expensed under FAS 141R. The voluntary retirement program charge of $46 million pretax is half in cash and half accrued retiree medical expense and option expense. The voluntary retirement program was completed during the quarter and is expected to result in annual savings of approximately $33 million per year. We have broken out the voluntary retirement program costs separately because it is a large discreate program in effect for a limited period only which was specifically approved by our Board of Directors. We do not typically break out other operating severance restructuring charges other than those specifically related to acquisitions but I will tell you that these were about $12 million in the second quarter up from $7 million in the first quarter.

Third, we recognized $21 million in additional tax provisions related to our reconciliation of our tax return in Norway, which we filed during the second quarter, to our tax accrual. The taxes result from gains on dollar denominated nonmonetary accounts recognizable for tax purposes when these were translated into kroner in our statutory accounts, at the lower kroner FX rates, seen in late 2008. This discrete item drove our tax rate from 32% to 37% in the second quarter, impacting it by about $0.05 per share. We expect the rate to drop back into the 32 to 33% range for the remainder of the year, and our hedging exposure going forward. Excluding these three items, earnings were $376 million or $0.90 per share and operating income was $589 million or 19.6% of sales.

Consolidated revenues declined 14% sequentially and 13% year-over-year. And operating profit decramental leverage was 28% sequentially and 44% year-over-year excluding impairment, transaction and retirement charges and including a four quarter contribution from Grant Prideco during the second quarter of 2008 on a pro forma combined basis. Our retechnology backlog declined 10% sequentially to $8.7 billion, as we shipped $1.434 billion out as revenue during Q2, booked $616 million in new orders, and canceled and removed $108 million from the backlog. We expect $2.5 billion of the backlog to flow out as revenue during the second half of 2009, up slightly from our last forecast. $4.7 billion to flow during 2010, and the $1.5 billion balance to flow out in 2011. Currently 12% or $1 billion of our backlog are for land equipment and 88% or $7.7 billion are offshore. About 74% or $6.5 billion are major offshore, new build projects and $1.2 billion are offshore replacement and upgrade equipment. Only 8% of the backlog is for the US with the rest going overseas.

The second quarter backlog cancellation mostly pertains to a semisubmersible package destined for Brazil for which our customer was unable to secure financing. Concurrent with relieving this from our backlog we booked a $16 million gain from the down payment. Total cancellations since the late 2008 downturn had been $235 million and total orders have been $1.7 billion. We are encouraged that some of our customers are beginning to see a little fall in the credit markets and our Q2 bookings include a drill ship package for Brazil that finally secured financing patly with the help of government export finance agencies. In particular trade finance assistance from Korea, Norway, China and other countries are expected to play an increasingly important roll in the financing needs of our customers. We are encouraged to see steady if somewhat slow progress on this front. Nevertheless, financing is the biggest obstacle between us and new orders with banks pushing for higher fees, higher interest rates and higher levels of equity in new projects. Reluctance by majors and NOCs to sign up long term contracts makes securing financing doubly challenging for drilling contractors these days, Brazil notwithstanding.

As of June 30, we estimate about 4% or $320 million of our backlog is at risk for cancellation, and continue to assist these troubled customers in their efforts to secure financing or make alternative arrangements to continue the projects. These alternative arrangements do not include reducing the price by the way. Cash received on these projects totaled $115 million so far, far less than the amounts we have spent on these projects. Our order outlook for the remainder of the year is good but has evolved into a distinctly hockey stick shape. We expect orders from three main sources.

First, 11 of the original 12 new build rigs launched via letters of intent from Petrobras, about a year ago are proceeding in various stages of construction or financing. Half a dozen of these new floaters continue to seek financing and remain unbooked by NOV competitors. At this point we expect to book a portion of these late in the year. Second, NOV and its competitors have been working with Petrobras on specifications for another 28 rig equipment sets for floater new builds it would like to have constructed in Brazil. While progress has been slow, Petrobras in both words and actions is clearly committed to securing more deepwater drilling assets to develop its massive Santos Basin discoveries and we remain optimistic that tenders will be issued before year end. Third, we are working with other established drillers on a variety of deep water floater projects for other markets, including West Africa, the Far East and Arctic locations. All of these potential deep water prospects are in addition to land rig and jackup inquiries for the Middle East, Caspian, and Latin America, platform upgrade opportunities in the North Sea and wire line equipment worldwide. We don't expect much in the way of orders from pressure pumping or drilling markets in North America for the foreseeable future but have had a modest increase in pressure pumping inquiries in international locations.

On the deep water rig front, favorable FX movements lower steel prices, discounts we are offering, and rising price competition from increasingly hungry shipyards are cutting the all in price of rigs by 15 to 20%. Nevertheless, outside of Brazil, drillers are moving with far less urgency than was the case between 2006 and 2008. Given the higher availability of shipyard slots, even as their fleets get another quarter older and another quarter rustier. As a reminder, 74% of the worldwide jackup fleet and 61% of the worldwide floater fleet are more than 25 years old, like a lot of baby boomers these are approaching retirement. In the meantime, execution by rig technology group on our healthy current backlog book remains excellent. Installation and commissioning of new rigs continue extremely well with five offshore rigs delivered this quarter and 59 offshore rigs delivered so far this cycle just shy of 10% of the fleet size when all of this building started four years ago.

Our service businesses faced far more challenging market conditions and were severely impacted by price competition particularly in North America where rig counts fell 29% from Q1 in the US and Canada endured an unusually difficult break up season witnessing 47% year-over-year rig declines and 73% sequential rig declines. Pricing dropped as much as 30 to 40% across many product lines in North America. International markets held up better, with pricing down 5 to 20% as the rig count inched down about 4%, nevertheless our PS&S group was able to post 9% sequential international gains about half of which came from acquisitions.

International distribution sales dropped following a strong first quarter artificial lift sale into Latin America. Many of the consumables we sell through petroleum services and supplies and distribution services are down sharply, as our drilling contractor customers cannibalize idle equipment from stacked rigs rather than place purchase orders with us for new equipment. As they slash operating and capital expenditures in the face of lower day rates. Therefore, current demand for these does not necessarily reflect actual worldwide consumption and demand should pick up concurrent with the recovery in the rig count.

We do not see a meaningful recovery in North America this year, but are nevertheless convinced that steep shale gas decline curves and oil prices above $60 are likely to fuel at least a modest rebound in 2010 provided economic activity doesn't take another leg downward. Cost cutting efforts across the Company continue through the second quarter but were unable to offset sharp pricing declines. SG&A declined 10% sequentially despite three acquisitions flowing in for most of the quarter.

As we discussed last quarter we are performing some heavy lifting during this downturn. Driving in source, driving to insource more through our internal plans to improve absorption, consolidating facilities where needed, pushing cellular manufacturing and lien manufacturing techniques through our manufacturing locations and executing consolidation opportunities with recent acquisitions. For example our rig technology group has rolled out an initiative to speed order fulfillment by driving more standardized product configurations and improving process flows on items such as mud pumps and blowout preventers. We also continue to evolve our manufacturing sources to higher productivity plants. All this can be disruptive to our operations but is candidly easier and less risky to accomplish as business slows. We do not believe pricing pressure has stabilized but we do expect cost cutting initiatives already enacted and underway will help stabilize margins in the third quarter. Our acquisition team has been busy and we are pleased that NOV acquired three companies during the second quarter including leading manufacturers of wireline and flow line equipment and a business to complement our solids control operation.

We currently have a number of discussions underway with additional acquisition candidates and hope to close additional transactions later this year. In a cyclical business like oil field services acquisitions are less risky during a down market than when times are booming. I'll stress again that NOV is exceptionally well positioned and well capitalized to execute investment opportunities during this downturn. With nearly $2.3 billion in cash a $2 billion revolving line of credit, a book of business totaling nearly $9 billion, and an awful lot of experience at integrating acquired companies. While 2009 will continue to be a challenging year we have enormous confidence in the smart decisive leaders running our businesses and we are grateful for tremendous job they do.

Now I'd like to turn to our segment operating results, rig technology posted revenues of $1.917 billion in the second quarter, a decrease of 13% from the first quarter and flat with the prior year quarter. Operating profit was $536 million yielding a record operating margin for the group of 28% due in part to the gains on the canceled semisubmersible package. Excluding this item margins were 27.2% down slightly from Q1. Decramental leverage or flow through was 25% from the first quarter and 30% sequentially excluding the cancellation gain. Revenue had a backlog of $1.4 billion fell 15% sequentially as both project revenues and discrete capital unit sales fell proportionately. Aftermarket sales and services which is about two-thirds offshore and one-third land declined 3.6%sequentially and nonbacklog capital sales were down 5.6% from the first quarter.

Generally our sense is that most drillers hit the brakes hard in the first quarter reflectively stopping both new capital expenditures and nonessential operating expenditures, and that these were slowly returning to more normal levels during the second quarter. This is admittedly anecdotal and time will tell over coming quarters. In addition to Brazil demand for equipment for the Middle East, IBM projects in Mexico, and upgrade projects for North Sea platform cranes and wrenches remain steady to slightly improving, and we are seeing rising interest for equipment to Iraq. Interest in frac equipment for China picked up late in the quarter after a nine month lull, and wireline equipment demand has remained steady throughout.

Instrumentation sales and rentals were down with the North American rig count and the completion of a large sale into India in the first quarter. We also secured a significant order on workover rigs for Russia during the second quarter and are seeing great performance from the first of several new Drake rigs we have sold into the Marcellus shale and other markets.

Looking into the third quarter, we expect to see roughly flat rig technology revenues at lower margins due to the nonrecurrence of the Q2 cancellation gain and a modestly lower aftermarket mix. The petroleum services and supply segment posted revenues of $913 million in the second quarter down 10% from the first quarter of 2009, and down 27% from the second quarter of 2008. Operating profit was $96 million, and operating margins dropped to 10.5%. Sequential leverage or flow through was 67%. Excluding the acquisition impact petroleum services and supplied revenues declined 13% sequentially at 55% flow through resulting in a more severe margin contraction than we had expected due to more pricing pressure than forecast in our base business. Year-over-year, the group saw revenues decline 27% at 60% decramental flow throughs.

Sales and rentals of down hole tools and bits, deposit pipe, coil tubing -- and coil tubing saw large double digit declines while other products were down only modestly from the first quarter to the second. Virtually all products and services posted sequential drops in North America which declined to less than 50% of the group's mix during the second quarter in the aggregate. However, international sales increased in absolute terms by 10% sequentially due to strength in Latin America and Europe. Drill pipe sales were roughly flat sequentially but margins improved on a better mix of premium high torque pipe and lower costs. Sales of other expendables suffered from vigorous cannibalization of equipment by hungry drilling contractors off of their growing stacked rig points. The seasonal break up in Canada when road bands go into effect that prohibit movement of heavy rigs during the spring-thaw drove the rig count there down 73%, which led to 46% lower sequential sales in Canada for the PS&S group.

We expect a modest recovery in Q3 led by southeast Saskatchewan and rising interest in the Montney, Horn River shales and BC. Our forecast for petroleum services and supplies point to a modest third quarter decline in revenues, the slight seasonal recovery in Canada and increases in certain international markets will only partly offset lower drill pipe sales and further pricing declines. Margins are expected to remain roughly flat.

Distribution services generated $305 million in revenue in the second quarter down 25% from the first quarter, and down 28% from the second quarter of last year. Operating profit was $10 million, and margins were 3.3% representing 15% decramental leverage from the first quarter, and 13% from the prior year quarter. This group has achieved good success over the past few years increasing its international presence which now accounts for 32% of sales but still derives 68% of its sales from North America which softened considerably in the second quarter. Given this we are pleased with the 3.3% margin this group was able to post in the second quarter which was achieved through diligent attention to cost and efficiency and achieved in spite of 2 to 3% pricing concessions made across the United States.

Overall North America declined 31%, but international sales fell too, down about 19% due to weakness in the Far East where a large rig up job was pushed out to Q3 and lower artificial lift sales in Latin America. The group continues to modify its store network to expand coverage of the emerging Marcellus, Haynesville and South Texas Eagle Fork shale plays while also expanding its presence in Brazil, Mexico and Central Asia. Looking forward in the third quarter we expect distribution services revenues to improve in the mid single digit range, at roughly flat margins as additional price pressure offsets normal volumetric operating leverage which is historically run in the 10% range.

Turning back to National Oilwell Varco's consolidated second quarter income statement, overall revenues declined 14% and gross margins were down 80 basis points from the first quarter to the second. SG&A declined $31 million sequentially and overall operating profit declined 46% including impairment transaction retirement charges and declined 18% excluding these. Equity income from our unconsolidated joint venture with [Vost Alpine] declined $12 million sequential to $16 million, and is expected to continue to fall down to about break even levels in Q3 due to lower OCGG pricing and a scheduled mill shut down in August. Other expense on our second quarter income statement was $38 million, which was $2 million higher than the first quarter, contrary to my guidance last quarter we again booked substantial foreign exchange charges to only $29 million in Q2 from two primary sources Norway and the UK.

In Norway, like last quarter we reversed some overhead positions related to large, multiyear rig construction projects managed through our operations there. In the UK, we saw adverse movements in the pound sterling which affected both our unhedged operations there and our new acquisition. As I have noted in the past given our extensive international operations we will always have some level of foreign currency exchange volatility.

Unallocated expense and eliminations on our supplemental schedule which is pro forma for the Grant Prideco acquisition for all periods were $53 million in the second quarter, down $22 million sequentially and up $4 million year-over-year. High second quarter legal and litigation expenses compared to both periods were offset by lower overhead and incentive compensation accruals in the second quarter. As I mentioned earlier we expect the Q2 37% tax rate to drop back to the 32 to 33% range for the remainder of the year. Depreciation and amortization was $122 million in the second quarter and CapEx was $64 million down $15 million sequential. We expect 2009 capital expenditures to be in the $320 million range, down about 10% from our prior guidance. EBITDA was $689 million in the quarter excluding transaction, retirement, and impairment charges down 17% sequentially.

Our June 30, 2009, balance sheet employed working capital excluding cash and debt of $2.5 billion up $270 million from the first quarter due mostly to lower accrued taxes and payables and lower customer prepayments. Working capital in this basis equaled 20.5% of annualized revenue up 16% from the prior quarter. DSOs were up slightly as the $289 million decline on accounts receivable include an offset by the $471 million sequential revenue decline. Customer financing on projects in the form of prepayments, billings in excess of cost less cost in excess of billings was $2 billion at June 30, down $132 million from prior quarter due to lower customer prepayment accounts. Cash flow from operations for the second quarter was $414 million, and less second quarter CapEx of $64 million yielded free cash flow for the quarter of $350 million. At this point let me turn it back to Pete.

Thank, Clay. At this point I would like to make a few comments about our operations and then I will turn it back to you guys for whatever questions you might have. I think that the overriding theme is going to be, cost containment and cost control. We clearly understand what's going on in the marketplace today. I mean as Clay pointed out, we know what is happening in North America, and I would caution everybody that while we think we are at the bottom, the bottom does not mean going up and I think you could very well be looking at fishing along the bottom for a period of time. I think the other thing that Clay pointed out is that pricing pressure remains. I think we can mitigate the pricing pressure with the things that we've done in our cost containment but I think to believe that prices won't go down any further is probably a shade naive at this point because that happens in this kind of environment. I hate to throw out the I've been in the business for 30 years card but I am going to throw out the I have been in the business for 30 years card and whenever we think pricing has hit the bottom it continues to defy you and go down even further. But we believe we are positioned well enough to take care of that.

There are some green shoots. I will take about those green shoots in just a moment but first I'd just like to talk a little bit about what we are doing in our operations. In distribution I think we continue to control our cost very well, but more importantly, we look for novel and new ways to do business. We are looking at our most creative and enlightened customers and we're finding out ways that we can help them really modify their logistics chain while at the same time being able to eke out a profit on our own.

We are also looking at our suppliers and vendors that we have and we are looking to develop more long term relationships and programs, that will actually withstand just a downturn like today but even be very beneficial for us when business does turn around. These guys are doing a great job of finding new ways to do business. Our petroleum services supplies arena, it really again is about cost control. We are starting to see some raw material decreases. As we go forward it will be positive but more importantly we are really emphasizing the integration of our products. If you look at our down hole tools and rehype a lot, and our ability to be able to talk about the entire bottom assembly, as opposed to just talking about discrete products. While we continue to sell the discrete products were we are really pushing hard is the integrated products and really aftermarket support of that. We are doing the same thing in our brand operations with solids control and in our drill pipe operations between Grant Prideco and Tuboscope. We are offering more and more integrated services that allow our customers to get better control of their costs in the long run.

In our rig technology business it is about executing the backlog that we currently have and I think as you saw the results for this quarter they're doing a very good job on that but it is also about new products. Clay mentioned the Drake rig. The Drake rig has had a very successful run up in the Marcellus. We are going to be building more of those. It really is a rig that has a worldwide application as you look at shale plays around the world. I will talk about those in just a second but we are excited about our ability to do certain things. I think also the other thing you will see out of the rig technology group will be an increase in the business of rig refurbishments and enhancements. We are already seeing discreate sales and pipe handling systems to go on rigs that don't have them. In the North Sea you are seeing a lot of refurbishments for some of the older rigs that are up there. We continue to see some very good business that's going to come out of that.

Let me just look a little bit in the international arena and talk where we do see some green shoots. As Clay mentioned in Russia, we sold some workover rigs this quarter. It's the first sale in there for a period of time and I think you'll -- while I don't believe Russia is going to explode with business, I think other the next few years you will see a steadily rising business and that seems to be substantiated by some of the other oil service companies that are doing business in there.

One area that's very exciting today is the Middle East. We continue to see an improvement in our operations there, just this morning we took an order for a land rig in the Middle East for about $16 million. So, that is a good way to start a conference call. I got about ten minutes before we crank it up. We are starting to see that in places like Oman, Kuwait, Saudi and the UAE I would expect over the next couple of years for all those to be very vibrant places. Iraq will ultimately awaken a little bit, some of our customers have started moving equipment in there now. We will be supporting and it will be our equipment that's going in. So we think while it may not explode and I don't mean that in a bad way, it may not pop as much as we might like initially, I think in the long term that's going to be a great play. Mexico as you have seen with many of the service companies you have the IPMs that are going on down there, not only are the service companies there but you will start to see some indigenous companies that will become involved in those IPMs. As that happens we are positioned with both manufacturing and distribution, and down hole tool support to be able to take care of that for a lot of folks.

I won't talk too much about Brazil. I am sure we will get questions on that but obviously that is an area I think for the entire oil field to be very excited about, I think the things that metro, and the other Brazilian companies have are going to be very positive as we go forward. The North Sea, again, I mentioned that earlier, we are seeing some refurbishments there that I think are positive for our businesses and we will continue to see some action there. I think in the Norwegian outer Continental shelf as you go a little bit further North and some of the other areas, West Shetlands, you will probably see some improvement in operations there. So we are, overall in the international arena we feel pretty positive and especially considering what you are seeing in North America.

While we expect not much to happen in North America you will probably see a rig count increase in the Canadian area just because of the time of the year, but I think to see any big bounce, there's really too many variables out there, the primary one being what's going to happen to the general economic environment. We've had probably the coolest summer in almost ten years, and without the economic improvement the demand for natural gas is lacking for a period of time.

We will talk just a second on the backlog, Clay pointed out what was in there. I think one of the more interesting things too, as we go forward we will probably see a little bit more inclusion of things like FPSOs and well intervention vessels and we are still very, very optimistic on our opportunities to add to the backlog as we go through the remainder of the year. Our acquisition philosophy right now we have a very strong balance sheet and I think our philosophy is really (inaudible) we have to take a look at what's going to be out there and we have the capability of being able to seize the moment. And if we do that, one of the more interesting things is as you come out of a downturn with the acquisitions that we are able to make, it really gives us much greater acceleration of profitability and revenues as we go to the future. So, overall, a tough environment today. But I have to thank the people of this Company for the hard work, their dedication, their commitment to new products and I think we are going to weather the storm as well as anybody can possibly weather it. So at this point, Christine, I would like to turn it back to you for any questions that our listeners might have.

(Operator Instructions) The first question comes from Roger Reed from Natixis Bleichroeder. Please go ahead.

Good morning, gentlemen.

Morning, Roger.

I guess the Brazilian awards would be the most interesting thing to us. We understand the story with the ones continuing to look for financing, but the sort of incremental 28 orders from Petrobras, give us an idea of exactly how involved, to the extent you can you are in terms of negotiations with them financing opportunities. Would that be be strictly Brazilian built rigs or does this also include the greater risk of owning public out there?

Roger, the -- obviously a lot of effort going into that, and just to fill in the rest of the picture, about this time last year, Petrobras started off by saying they needed 40 rigs, and soon thereafter issued letters of intent for 12. So these are the incremental 28. And everything that Petrobras has said and done since that point has indicated that they I think are very serious and committed to putting those rigs in place. We have since then seen a big melt down obviously in the credit markets which has kind of gotten in the way of a lot of people's plans but nevertheless have worked closely with that customer on developing technical specifications for those rigs. Along the way I think they have been under some pressure to build many, perhaps most of these rigs in country in Brazil and I think that candidly has probably slowed us both down a little bit in terms of actually winning orders for these. And they're still wrestling with that issue.

It is clear to us that they want a significant amount of work done in Brazil by the shipyards. We, as you know, have a large operation in Brazil. We have close to 700 employee, bust we don't manufacture necessarily a lot of our joint equipment there. We think that most of the in country construction work that is going to be done is going to be performed by the shipyards with regard to the hulls. So we are optimistic that tenders are going to start flowing later this year, and hopefully some of these 28 drilling packages show up in the backlog. That's part of the booking plans and important part of our achieving the 3 billion to $4 billion in orders that we think we are going to get this year.

Okay. And then my unrelated follow up, TS&S obviously a lot different pricing international versus North America, I know Pete you said it is tough to predict where pricing goes. But as you look in the international arena based on some of the things you talked about the IPM projects et cetera, are you under the impression that pricing is at least moderating its declines internationally if not finding a bottom or that if, let's say oil stays at the level it has been in maybe we have seen all of the pricing declines we will see there?

I think, Roger, that's a fair statement. I believe that we probably are moderating in the decline. The other thing is that we are also kind of catching up in the cost containment arena and so the two kind of work together. So I am not sure that you will see a really a much of a decline in the actual margins that we see and I think we are, hopefully will be flattish at this point but you will continue to see people put pressure on the pricing. I mean that pretty much goes without saying in this industry. But again when you first kind of go into a downturn it takes you a little while to catch up on the cost containment side but once you catch in cost containment side you can help to mitigate the issue. I think we ought to be flattish on the margin side.

The fact that a lot of the work done in international markets, too, are done on longer term contracts. So you have less pricing on spot generally. So that has helped mitigate the pricing pressures here in this downturn.

Okay. Thank you.

Thanks, Roger.

The next question comes from Bill Herbert from Simmons and Company. Please go ahead.

Hey guys.

Hi, Bill.

Hey, Pete, with regard to trying to get a grip on normalized orders if you will, if there is such a thing in this environment, but as we are sort of kind of cascading here along the bottom, as you referred to earlier, one drill ship package and then a sere release of additional opportunities, and inbound orders yields call up something slightly north of $600 million, is that how we shall be thinking about normalized orders in this environment going forward, one day package coupled with the usual assortment of this, that and the other yields, something along the lines of $600 million in orders per quarter?

I think first off, when you say normalized orders I am just assuming you're smiling because I'm not sure I have ever figured out what normalized orders were but as we look at this, Bill, and we dissect it internally, if you look at this quarter you had 600 plus, with one fairly significant drill ship in there. That leaves you with about 350.

Right.

And that 350 probably is a reasonable normalization given where we are today. That 350 just includes a bunch of stuff, new canes, new top drives, new pipe handling and presuming that that stuff is kind of a go forward type deal, and then you start adding in a couple of land rigs here and there that are project oriented and then you look at what we believe are going to be some of the floaters and different things that coming out, that really does kind of push you to the, to a little bit different number. So you have the 350 plus plus plus, and that's really what we are kind of banking on, as we go through the remainer of the year.

Great. That's helpful. Secondly, with regard to the order guidance of 3 billion to $4 billion, I am wondering if a better way to look at this as opposed to getting hung up on 3 billion to $4 billion this year because so much is contingent upon timing,, financing et cetera is really to think about Petrobras' needs going forward and the fact that you guys seem to persist in thinking that that clearly is going to get done or have a high level of confidence in doing so. And whether or not these orders manifest themselves within the next two quarters or the next three to four quarters, it doesn't really matter ultimately that business is going to be there?

Right. Bill, I couldn't have said it any better myself. I mean at the end of the day, we have to have an arbitrary cut off. We talked about this a lot. Our backlog cuts off on first of July.

Right.

And cut off in the first of October. And if an order comes in any time after that, while we love it, we have to report the cut off date short of reporting a backlog everyday which quite frankly we are not going to do, it is impossible when you take a look at the timing we are making our best guess and we're hoping why can't these things fall in. But I think the way you put it is very well done. The fact of the matter is this stuff is going to get done. Petrobras has to have these rigs, whether they order them in the next three months or the next six months, in the long term, isn't going to impact us that greatly as we go forward into 2010 and 2011 but it will impact the future. We are going to continue to try to give you guidance as best we can on when the orders will come in but rest assured they will come in and rest assured they will be there in the future whether or not they make it by the first of October, or the first of November, or the first of December we are pushing hard to get that done but the fact is they will come.

Great. Thanks, guys.

Thanks, Bill.

The next question comes from Jim Crandell from Barclays. Please go ahead.

Morning Pete, Clay.

Hey, Jim. How are you doing.

First question t go back to Brazil, it struck me that during the quarter that (inaudible) announced they had gotten financing for two of the rigs in Brazil and then one other of those rigs changed ownership during the quarter. Were those rigs in your backlog before this quarter took place or are those still hanging out there?

Jim, we are already probably deeper into talking about specific projects than either Pete or I are comfortable doing. So we have long tried to stay away from talking about specific projects and specific customers. I think the big picture here and I appreciate you pointing this out is that there has been progress made on the financing front. A lot of hard work has gone into these by these drilling contractors and our own people, good support efforts from the various trade export finance agencies around the world. So we are seeing some progress on that front. But we did as we mentioned win one large drill ship package in the quarter, from one of those customers, who was able to secure financing in Q2.

Okay. So to go to a more general question, can you see deep water new build waters the balance of this calendar year ex Brazil and if so, do you think that they were more likely to come from India or China, other NOCs or IOCs?

Jim, you will see some more. I think that clearly we all talk about Brazil an awful lot because that is kind of the elephant in the room but the fact of the matter is we are talking to other folks today about things like Arctic rigs. We are talking about rigs for the West Africa area for Southeast Asia and we continue to do that. And it is a combination of folks that do that. We are talking to regular international drilling contractors, we're talking to IOCs and we're talking to NOCs. It really is across the board, you are talking to different shipyards, whether you are talking to shipyards in China or some of the bigger shipyards in Korea. We are talking to shipyards in the Middle East about some of these things.

So it really is a little more than just the Brazilian operation. I know that again we talk about Brazil a lot but we pretty much have to. But the fact is that there's a lot of excitement in other areas, that maybe won't manifest themselves in the next quarter but they will certainly come across over the next 6 to 12 months.

Everybody is running into the same problem, which right now there's only roughly 70 rigs in the world that can hold 6,000. These are very scarce resources and Petrobras with the Santos Basin discovery obviously has very large rig needs but they're not the only ones, there's a lot of Frontier deep water basins out there left to be explored and developed. So that is, the fundamental driver here is very, very solid.

So there were some reputable drilling contractors out with (inaudible) generation rigs being constructed that are available going forward. So do discussions with IOCs relative potential new rig orders, are they more specific in that they are looking for more specialized rigs, or are they -- or why would they want a new build versus if they can get one that's coming on that's currently available in the first half of 2012?

A lot of what you are seeing out there, Jim, is very much project specific. But also, what you have is a lot of people that want a rig designed exactly to their specifications, and they're going to go out and they're going to push hard to get it but a lot of it is very much project specific. It might need a couple of things there that some of the existing rigs don't have. I think it points out something I have talked about for a long time. A rig is not necessarily a rig. People have a tendency to look at the rig number in the aggregate when in fact the rig capabilities on a lot of these rigs differ very, very greatly. Even on the -- when someone says well, I've got a 6,000 per water depth rig they're not all quite the same. So that's why you continue to see the interest in these very discrete projects.

One final question, Pete, if I could. The extent that this Globetrotter design catches on with maybe NOV and others on the customer base, how does that impact your potential for rig equipment orders on a per rig basis?

I think, Jim, the Globetrotters are ready to put a lot of equipment on, and we will be watching it very, very closely. I will tell you this. We have been in the rig design business for a long time. We like what we offer our customers. I think the numbers pretty well indicate that our customers like what we offer our customers. There's always new stuff out there, and we watch it closely. We will participate with it as best we can. But I don't think it is going to optate the need for the type of rigs we are building right now.

Okay. Thank you.

The next question comes from Joe Gibney with Capital One Southcoast. Please go ahead.

Thanks. Good morning.

Morning, Joe.

I want to touch a little bit on the non Petrobras of your rig, Pete, you mentioned a little bit of inherent strength there, the $350 million figure, frame, top drives, (inaudible), et cetera, can you comment a little bit about what your incremental on the jackup side, assuming there are no jackup packages booked this quarter, but maybe you referenced the age of the jackup fleet moving into a refurb scenario. But can you just comment on incremental opportunity sets that you are seeing out there on the jackup side?

Yes. That is correct. We didn't have any jackup packages booked in Q2, probably worth noting I think every quarter up until this year we've had jackup packages on though much of the build book that has been underway for the past few years remains uncontracted. Since the quarter close, we've had a little movement on the jackup front and we have a couple of other folks we are talking to. So, it is not dead out there on the, with regards to jackups.

And, Joe, I continue to believe that the jackup business is one that while it may be a little oversupplied at a point in time, I think what you are going to see is a replacement and the type of jackup rigs that people are demanding. You are saying they're continuing to find work for a lot of the newer jackups and we have been on the jackup retooling for quite some time, and that is not something that is going to die any time soon. I think that's clearly going to be something into the future that will be positive for us.

Okay. And thin in terms of your -- on the rig tech side, some walk up work that doesn't fall into backlog revenues not out of backlog, and Clay you intimated there, you commented that maybe a little more softness on the aftermarket, lower aftermarket mix sequentially. Broadly speaking are we seeing some stabilization here in the aftermarket work over the next couple of quarters and looking at 2010, any purse strings loosening and doing ancillary service work as a sort of stabilizer, do you see this bleeding a little bit further back half of the year?

I think so, Joe. I kind of referenced this in our comments, but our sense is that when we got into the first quarter, you saw plummeting day rates and a lot of very dark outlook for the global economy broadly, and a slowing of economic activity, a lot of our drilling contractor customers put out edicts, stop spending, stop spending OpEx, stop spending CapEx and that affected both our order book for new capital equipment orders along with spare parts and services and other things that we sell which show up on their P&L as operating expenditures. As we move through the quarter we think we're starting to see a little bit of improvement there. Even our outlook calls for aftermarket to be down a little bit in Q3. It has stabilized. I think our Q1 number, I don't recall the precise number but it was down on the order of 18 or 20% and this quarter was down about another 4%.

We are calling for another little slide in Q3 but we think that we are finding a bottom here. We also know more so on the PSNF side bit this probably extends to rig as well that a lot of these customers are getting very energetic about pulling equipment off of stacked rigs and redeploying it on rigs that are working in order to avoid expenditures here in the short run. And that works so long as rig count doesn't go up and once it starts to move up before those rigs can go back to work most drilling contractors have to spend money to reoutfit them with spare parts and consumables. So we think that's entering into the fray here as well.

Helpful. I appreciate it. I will turn it back.

Thanks, Joe.

Thanks.

The next question comes from Collin Gerry from Raymond James. Please go ahead.

Good morning, guys.

Hey, Collin.

Just a bigger picture question, the latest Reed Census I think it showed about 3,000 rigs in the US if my figures are correct, what is your sense on how, what percentage of those really don't come back into the rig market when eventually the rig count does start moving up?

Well, Collin, I get in trouble with all my customers whenever I opine on this. So I will tell you this. I think it is pretty evident out there today that the rigs that are continuing to work and the rig that the operators want are the, they're the best technological rigs. Take a look at who has the highest rig counts and where they're going. I think you will continue to see that the contractors are going to want to upgrade their rigs as best they can because that's what the operators demanding. We have always said the contractors don't retire rigs operators do. I think a lot of the rigs that are stacked out today won't see the light of day again. Now if one of my customers said that's wrong then I would agree with my customers. However I kind of stand by where I am right now. I think it is pretty clear that the industry wants upgraded rigs.

Collin, I will approach the question from the other angle which is how many of those are new AC power electronic control, quick move rigs and we think that number is about 450 that have been added over this latest build cycle. There's probably another 350 maybe 400 rigs that are new, but they're older designs and don't really incorporate the modern technology that makes those new rigs so much more efficient.

Okay. That is helpful. Another bigger picture question, last quarter we talked about a lot of projects being shovel-ready. Oil has picked up here obviously. I guess do you think, do you get the sense we are at a point you start seeing international work getting underway and I am thinking of it in the context, Schlumberger the other day was saying that it is really going to hinge on where oil prices end the year and that 70 might be the right target to look at. How do you see things playing out?

I think that 70 would certainly be a right target. Here is the problem, Collin. I think that it is not so much what the price is at a point in time. It is what the expectation level is. And it is not dissimilar to stocks, you guys know a lot about how you pick stocks and it's not about necessarily what you have done in the last 20 minutes it's about what you expect over the next year.

The determination on project go forward is really somebody saying back, and saying, okay I am looking at the economy, I think we are seeing some green shoots, I think the economy is going to improve. If the economy improves, ergot you are going to need more energy, ergot the price of oil will probably go up. That's got to be the calculation that you make as opposed to whether oil is $70 on a certain day. Oil was $70 about a month ago, and we are in the 60s now. If it goes back up to 70, clearly that's positive for projects but I think it really has to be what is your expectation on the go forward. And if your expectation is that the economy isn't going to improve and if oil prices aren't going up you are probably going to be hesitant to go forward with things. That's the way we see it and until there's some more clarity on that, you won't see people pull the trigger quite as rapidly as they have in the past.

That's helpful. It sounds like the underlying thing there might be stability in oil prices and the direction may be more important than the spot number where we are right now?

Absolutely and if you can ever define stability in oil prices get me a job.

Okay. Last question for me on the technology front it has been awhile since we got an update on Intelliserve, what is the latest development there and where in the stages we are in developing that product?

Technically Intelliserve continues to perform very well. It was actually down just a shade in Q2 from Q1 and like everything else in the oil field it is seeing projects that we were queued up to run that technology on, move out to the right and run into some delays but the technical performance remains very very strong. For anyone listening not aware, Intelliserve is the wired, proprietary wired drill pipe that effectively offers broadband from the rig down to the bottom of the hole and is a real step change in terms of data communications with what's happening down hole and we are very very excited about it. We were pleased that the early adopters of this technology which includes a handful of major IOCs and NOCs are coming back for a lot of repeat business. So our order book reflects satisfied customers, coming back and deploying it on new projects. So we feel pretty good about the outlook for the business. We did announce a few months ago, we entered into an agreement with Schlumberger on a joint venture they're going to buy into an ownership position in Intelliserve. And we have not yet closed that but we expect to close that some time in the next few weeks.

Okay. Great. I will turn it back. Thanks, guys.

Thank, Collin.

There's time for one last question, the final question comes from Jeff (inaudible).

Thanks very much. Pete, last quarter you said you thought that we'd get $3 billion worth of orders this year with a little bit of luck. How would you characterize your opinion or probabilities on that outcome today?

Well, I think we are still there. I mean as Clay pointed out in a lot of his comments and I followed up on later, Jeff, we, it is more of a hockey stick but that is to be expected. I think as you go into an environment like this, two years ago we were closing deals pretty quickly because everything was moving so rapidly today. There's a lot more conversation around contracts, prepays, dotting the Is and crossing the Ts and what might have come to fruition very quickly in the past is taking a little bit more time today. One of the things that's nice for us is we have great visibility into the market. We are talking to our customers and we know it is a science project and what is not and as a consequence of that is we are pretty confident. The only real question becomes one of timing, and how quickly can you get the deal closed as opposed to the way you've done in the past? So we are still optimistic about our projections on that, Jeff.

So you're -- if you had given us a probability three months ago your number today would be unchanged?

Yes, absolutely.

And you mentioned that the backlog we may see orders coming in to the NOV backlog over the next few quarters that are not rigs. I think you mentioned FPSOs and some other stuff. How much of the current backlog is not rigs?

About three-fourths of the backlog, Jeff, $6.5 billion are major new build rig projects. The remaining, it is actually relatively, I'm not sure how to characterize because it is not necessarily whole rigs but it's a lot of rig equipment. I think what you are driving toward is nonrig equipment?

Correct.

Okay. That's a little bit of a guess here but maybe on the order of $0.5 billion or so.

So it's a very small number as a percentage right now?

Right.

Right.

And I guess just last question, since I have the opportunity, how do you expect pricing on new orders over say the next 18 months or maybe more importantly, how do you expect margins on orders that you take in the next 18 months to compare with what you are producing today?

I think they will probably be on the capital side, you are liable to see a little bit of movement downward but I don't think it is going to be anything that -- clearly when you are doing capital equipment, it is not like the, it is not like the PS&S or the distribution business. We are not going build capital equipment for practice. If we are going to build it we are going to build it to make a profit. And most, almost all of the capital we do, Jeff, is done to order. It is not done to inventory. So if we take an order we are going to make sure that there's, that the potential of making a decent margin on it. When we sell something we sell it one time. It's not some cost where we can rent it now for the next 10 years. So we are, while certainly there will be some pricing pressure, it is nothing like you are seeing in some of the day-to-day type businesses.

Yes. We are also as we mentioned on our prior comments we are using this opportunity to reduce our costs and become more efficient. We have also been helped out by a stronger US dollar than where we saw the dollar through much of '07 and '08. That gives us a little more latitude on that front too.

Right. Great. Thanks very much.

Thank, Jeff.

This concludes the Q&A portion of today's conference. I will now turn it over to Pete Miller for additional comments.

Thanks. Thank you all for listening in today. We look forward to talking to you at the end of the third quarter. Thank you very much.

A replay of today's conference is available by calling 888-843-8996 and enter the pass code 24794996. You may also access the webcast recording at www.NOV.com. Thank you for participating in the National Oilwell Varco second quarter 2009 earnings conference call. This concludes today's conference.