國民油井華高 (NOV) 2010 Q1 法說會逐字稿

Welcome to the National Oilwell Varco first quarter 2010 earnings conference call. My name is Kim and I will be your operator for today's 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 of Global Accounts and Investor Relations. Mr. Singletary. You may begin.

Thank you, Kim. And welcome, everyone, to the National Oilwell Varco first quarter 2010 earnings conference call. With me today is Pete Miller, Chairman, CEO, and President of National Oilwell Varco, and Clay Williams, Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results, for its first quarter ended March 31, 2010, please note that some of the statements we make during this call may contain forecasts, projections, and estimates including, but not limited to 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 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, we will answer your questions which we ask you to limit to two in order to permit more participation. Now I will turn the call over to Pete for his opening comments.

Thanks, Loren, and good morning. Earlier today we announced first quarter 2010 net income of $422 million, or $1.01 a share on revenue of $3.03 billion. This compares to net income of $394 million or $0.94 a share in the fourth quarter of 2009 on revenues of $3.13 billion. We are very pleased with these results and they speak to the outstanding execution of performance of our great employees as they continue to provide the best products and services to our customers. Clay will expand upon these numbers in just a moment. Additionally, we announced new capital equipment orders of $618 million and a quarter ending backlog of $5.4 billion. I will speak a little later in this call about our operations and the backlog more in depth, but at this time I want to turn the call over to Clay.

Thanks, Pete. National Oilwell Varco generated first quarter 2010 earnings of $422 million, or $1.01 per fully diluted share compared to $0.94 in the fourth quarter of 2009, and $1.13 per share in the first quarter of 2009. Included in these results are $38 million or $0.09 per share. Where the Bolivar was recently officially devalued against the US dollar. $27 million of this charge relates to the devaluation of monetary assets NOV has in country and the $11 million balance was the write-down of receivables in view of deteriorating conditions there. Excluding this devaluation charge, first quarter earnings were $1.10 per fully diluted share, up 15% from the fourth quarter of 2009 earnings excluding $0.02 in transaction charges last quarter and down 3% from the first quarter of 2009.

This was a great result for the quarter which arose from the highest operating margins posted by NOV since late 2008 along with a little help from an ascending North American rig count in the first quarter. Consolidated revenues were $3 billion, down $102 million or 3% from the fourth quarter. And down $449 million or 13% from the first quarter of 2009. Operating profit excluding devaluation charges was $648 million, or 21.4% of sales. Despite the sequential revenue decline, operating profit rose $26 million from the fourth quarter. All three segments posted higher sequential margins, without benefit of significant sequential sales growth for any of the three. There are two big reasons for this.

The first is experience. We continue to steadily navigate our way up the learning curve on complex offshore rig building projects. Those of you who have followed our Company for many years will recall that in 2005 we began to highlight two long simmering challenges that the oil and gas industry would face in the coming decade, namely a land and jack-up rig fleet that was nearing the end of their useful lives and the need to build out a substantial deepwater fleet to implement new deepwater drilling technologies. Our retechnology team set about restructuring our manufacturing footprint, urgently implementing quick response and cellular manufacturing technologies to cope with the onslaught of business which followed. They standardized product designs and gently steered our customers toward consistency in rig layouts. Now that we have successfully executed the construction of dozens and dozens of land and offshore rigs, our teams have skillfully and successfully navigated the many complexities of rig construction. Their unparalleled experience in rig making manifests itself in efficiencies and lower cost. As a result, they posted a record margin once again, above 30% in the first quarter. That candidly exceeded our expectations in view of the lower revenues we expected.

The second big factor in the quarter were lower operating costs across the board. As we noted in earlier calls, the volatility of Oilfield Services necessitates quick response. You're always either too small as drilling and demand rise quickly, or your operations are too big when activity plummets as it did in early 2009. Quarter by quarter throughout last year, we detailed for you our many initiatives to reduce size and cost in view of depressed market conditions. The improved margins in the first quarter are a direct result of the traction achieved through these initiatives. Two factors in the quarter, experience and cost reductions, signified NOV's successful assent of the steep learning curve and resulted in outstanding margins. Demand for rig equipment was broad based this quarter with $618 million in bookings, roughly in line with last quarter. We booked three jack-up packages, a handful of land rigs, lots and lots of top drives for land rigs and a slew of pressure pumping equipment for both North America and international markets. No floater packages were booked but we continue to pursue several opportunities around the globe, the largest being a massive tender underway for Petrobras in Brazil.

Revenue from backlog of $1.506 billion were down slightly from Q4 and we had cancellations, adjustments and change orders further reducing the backlog by $71 million. Leaving a capital equipment backlog of $5.447 billion at March 31, 2010. Down 15% sequentially. We expect about $3.7 billion of these existing orders to flow out as revenue through the remainder of 2010. $1.4 billion to flow in 2011, and the balance thereafter. Backlog we consider at risk declined to a little over $200 million at the end of the quarter. Presently, 13% of the backlog is land, and 87% offshore. And 9% is domestic and 91% international. The Petrobras tender for 28 floating rigs to develop its massive Santos Basin oil finds has been delayed slightly. The original tender deadline of early March has been extended by 60 days due to the two dozen clarification circulars issued by Petrobras's commercial and engineering organizations.

There are many interested parties. Shipyards, equipment providers, drilling contractors and answers to their many individual questions are provided to all participants through the public circular pronouncements to maintain a fair tender process and a level playing field. Additional time has been provided by Petrobras for all participants to work through these clarifications and further delays are possible, but not expected. At NOV, we have been busy refining our plans to achieve local content requirements and the extra time has increased our confidence in our ability to comply. Equipment packages require 20% local content on the first few vessels, rising up to 50% later in the build program and we are actively expanding our on-the-ground operations, joint ventures and supplier relationships to get there. We are aware that some of you are anxious about as yet uncontracted capacity entering the deepwater rig fleet over the next couple of years, that the supply of floating rigs may exceed demand. Let me offer a few observations.

First, Petrobras is the most active driller in the deepwater space and arguably the most knowledgeable. Second, Petrobras has found more reserves in deepwater than anyone. Third, Petrobras is well aware of the supply of deepwater rigs and of new rigs coming to market. In fact, they are the sponsor behind much of the rig building going on today. Fourth, Petrobras and its partners have as yet only explored a little more than a quarter of the Santos Basin, about 16,000 square miles out of 58,000 or 28% has been leased. Fifth, perhaps most remarkably, Petrobras based on limited exploration on the Santos so far is actively tendering 28 new deepwater floating rigs. Which, once contracted, will be the largest rig order ever in the history of our industry. Not only are they moving forward with this extraordinary tender, they appear to be willing to finance a larger portion of it, announcing a few weeks ago that they are prepared to acquire up to four sets of seven drill sets each to get to 28 rigs. And the local content requirements are clearly designed to put their country in the deepwater rig building business. That's a pretty bullish statement on the future demand for deepwater rigs by the most knowledgeable deepwater driller.

The facts together with the actions of the largest and arguably most knowledgeable market participant point to greater deepwater rig demand in coming years The shift to deepwater rig building to Brazil will certainly carry some challenges. Brazil was the world's second largest ship builder in the late 1970s and has numerous shipyards presently. These will require capital and upgrades and modifications and additional expertise but these challenges are manageable. For NOV it is possible that some of these orders will start to flow into our backlog late this year but we believe now that 2011 bookings are more likely for the bulk of them. I'll also add that we expect orders to be staged given that we are not bidding to Petrobras directly but rather to shipyards and drilling contractors and their contracts with us and their competitors will follow the Petrobras orders. Throughout this process we remained optimistic that NOV will play a key role in providing the sophisticated drilling technology Petrobras needs to achieve its goals.

Now let me turn to segment operating results. NOV's rig technology segment generated revenues of $1.9 billion in the first quarter down 5% sequentially and down 14% compared to the first quarter of 2009. Operating profit was $581 million, yielding operating margins for the group of 30.8%. Year-over-year detrimental leverage or flow-through was low, only 8%, and sequentially operating profit increased $15 million despite the $91 million decline in revenue. Project margins drove most of the increase. Our favorable cost experience on completed rigs is applied to remaining estimated costs on ongoing projects. And as a result, we are seeing margins rise above our original expectations. In essence, we are benefiting from the best of both words, executing projects priced at high levels in 2007 and 2008, being manufactured in a much softer economic and in some instances deflationary environment.

Additionally, down sizing in certain portions of our rig technology manufacturing infrastructure in the second half of 2009 contributed to the stronger margins as well. Non-backlog revenue declined in the first quarter, due to declines in small capital equipment that don't qualify for our backlog, i.e. individual orders less than $250,000. First quarter well intervention and stimulation equipment revenues declined after strong fourth quarter shipments, but orders for this equipment both domestic and international surged late in the quarter from high pressure pumping demand as we foresee a strong finish. So we foresee a strong finish to the year for this product line. In particular, the massive shale play frac jobs are consuming equipment at a rapid pace and shifting to larger diameter coil tubing strings to frac wells and to drill out plugs. The good news for National Oilwell Varco is that the large diameter coil tubing usually requires new units and we're the largest provider of these coil tubing units worldwide. Rig technology aftermarket spares and services remained relatively flat sequentially.

A couple of other observations about the quarter. Modern AC powered electronically controlled rigs continue to extend their lead on-shore. We continue to sell components and complete rig packages into international markets like Iraq, the UAE and Latin America and North American shale markets where day rates for these highly efficient drilling machines are rising. A related trend is the virtual requirement for Top Drives on land rigs to go to work which produced extremely strong Top Drive bookings for National Oilwell Varco in the first quarter. Offshore rig sales have remained muted although we did win three jack-ups in the first quarter. Financing remains an issue for many smaller customers and larger well capitalized customers are awaiting term contracts from oil companies before they commit. In the meantime, we are seeking to expand our presence in other markets where we can win more than $20 million in equipment sales on a typical project. Riser pull systems, offloading system, spread mooring systems and cranes.

The rig technology group commissioned four new floating rigs and four jack-ups during the first quarter and installation and commissioning activity will continue to rise for the next quarter or two. We are presently at work on 32 rigs across 15 different shipyards around the globe. So far this cycle NOV has delivered 80 new offshore rigs.

Looking into the second quarter of 2010 we expect rig technology revenues to decline again in the mid-single digit range, yielding operating margins in the high 20% range. The petroleum services and supply segment generated total sales of $923 million in the first quarter of 2010. Down $13 million or 1% sequentially from the fourth quarter, and down $91 million or 9% year-over-year. Operating profit was $113 million or 12.2% of sales, up about 80 basis points from the fourth quarter. Operating profit increased $6 million despite the revenue decline. Strong North American rig activity led to solid results across most service businesses within petroleum services and supplies but sequential sales gains in several product lines were offset by sharply lower drill pipe sales as expected. Double-digit sequential revenue gains in down hole tools and bits drove exceptionally high incremental profit and higher margins as this product benefited from several cost reduction initiatives implemented last year in its manufacturing plants.

Large gains in bit sales, hole opening tools, motors and coring products in Canada and the US arose from rig count gains and customers replenishing depleted inventories. US and Canadian solid control services also posted strong sequential gains led by shale plays which are more equipment intensive than conditional drilling programs. Both down hole tools and solid controls saw declines in Latin America and Europe, partially offsetting the sequential gains. Mission drilling expendables also posted strong double-digit gains as rigs went back to work in North America and replenished spares and XL systems saw higher demand out of the Americas leading to double-digit sequential sales increases for that group as well. Tuboscope posted roughly flat sequential results as higher pipe processor activity in the US was offset by lower international pipe coating activity and lower mill inspection unit shipments. Oil field composite pipe sales for fiberglass systems failed to offset lower industrial sales but the group posted higher margins nonetheless and saw its backlog increase on large international project wins destined for shipment later this year.

Coil tubing sales were roughly flat but the outlook is brightening as North America customers steadily shift towards larger diameter tubing for shale frac jobs. All groups are expecting higher steel costs to begin to flow in through the remainder of the year, owing to tight iron ore supplies to the mills and fiberglass pipe operations are seeing resin costs jump sharply. Which will add some cost pressure as the year unfolds. Drill pipe revenue fell more than 30% sequentially and high decrimentals owing to a mix shift back towards more traditional weights and grades mitigated somewhat by higher unit volume driven absorption and lower steel cost on green tubes ordered several months ago.

Price per foot has trended down with the mix and is likely to decline further in the second quarter as the mix of pipe sales in China, a very price competitive market, rises due to orders which rolled over from the first quarter. However, the group posted much stronger sequential order intake, as land drilling contractors reentered the market after a long hiatus. The first quarter book-to-bill ratio significantly exceeded 100%, which led to an increase in backlog for drill pipe, the first since the third quarter of 2008. And point to a potential recovery in drill pipe sales late in the year, albeit on a lower margin mix.

Orders for strings for new build offshore rigs have resumed after a first quarter pause. Interestingly, for NOV, the shale plays appear to be utilizing a higher mix of high torque premium connections which should help with the mix going forward. Overall stronger US and Canadian activity and generally weaker international markets led to a geographic shift for PS&S revenue. North America accounted for 56% of the segment's first quarter sales, and international markets which constituted the majority of the group's 2009 sales, accounted for only 44% in the first quarter. We expect this to go back the other way in the second quarter, owing to the seasonal breakup in Canada and strengthening in certain international markets.

Looking into the second quarter of 2010, we expect revenues and margins to be roughly flat. Canada will decline due to seasonal breakup and high detrimental and drill pipe margins will decline on roughly flat revenues owing to mix, offset somewhat by rising margins in our well site services group. Sales for distribution services were $334 million in the first quarter, up 1% sequentially, but down 18% year-over-year. Operating profit was $11 million, and operating margin was 3.3%, up about 90 basis points sequentially. Incremental margins on small sequential sales gain were 100% and detrimental margins on a year over year revenue declines were 19% due to generally lower pricing year-over-year. The strong margin gain in the first quarter came largely from double-digit volume increases in the US, largely in shale plays and oil drilling areas, and from increased well hookup jobs. Margins for the group were further helped by large rebates from suppliers during the quarter related to the large uptick in activity in North America and the higher volumes resulting.

Canada also posted sequential sales improvements at good incremental profit and Industrial products posted higher margins despite lower sales but nevertheless from a challenge due to weak economic conditions. International sales declined sequentially due to lower sales in Mexico, and lower artificial lift revenues, only partly offset by sales into new rigs being outfitted in the Middle East. During the quarter the group installed two new plunger lift systems which are generating a lot of interest in Canada. For the second quarter we expect roughly flat distribution services revenues and modestly lower margins on reduced supplier rebates with seasonal declines in Canada offset by improving international prospects.

Turning to National Oilwell Varco's consolidated first quarter income statement, overall gross margins were up 80 basis points from the fourth quarter to 32.1%. And SG&A declined $33 million, to 10.7% of sales. Equity income in our Voest-Alpine joint venture was $6 million, up from the fourth quarter on higher casing and green tube sales and a stronger dollar. Other income was $11 million favorable related to exchange rate movements for the Norwegian Kroner. The tax rate for the first quarter was 31.9% and we expect the rate to go modestly lower in the 31% range through the remainder of 2010 due to a forecasted higher mix of lower tax rate jurisdiction income.

Unallocated expenses and eliminations on our supplemental segment schedule was $57 million in the first quarter, down $2 million from the fourth quarter due to lower compensation accruals. Depreciation and amortization was essentially unchanged from the fourth quarter, at $127 million, and CapEx declined to $31 million. We expect CapEx for the full year to be in the range of $300 million. EBITDA excluding transaction restructuring and devaluation charges was $797 million in the quarter, up 9% sequentially and down 4% year-over-year. National Oilwell Varco's March 31, 2010, balance sheet employed working capital excluding cash and debt of $3.3 billion, up $540 million or 19% sequentially due primarily to the $492 million decrease in billings in excess of cost and customer prepayments. This increased working capital to 28% of annualized sales in the quarter. During the first quarter, cash flow from operations was $95 million, cash spent on one acquisition totaled $46 million, and our ending cash balance was $2.6 billion.

Now let me turn it back to Pete.

Thanks, Clay. Listen, I just want to make a few brief comments about our operations and some things that we're seeing around the world and then what we'll do is we'll turn it over to you guys for some questions. But last call we really talked about six predominant themes that we're seeing throughout the industry and they really kind of held forth I think even with this quarter. Basically they've been the inventory replacement. We talked about a lot of the rigs that were stacked out early, took all their inventory, utilized it, sort of the latter part of 2008, eating up existing inventory. Today, that's gone. That's one of the reasons when you look at our distribution business that we've been able to stay fairly vibrant in a tough environment. When you look at our competition, we're doing quite well, vis-a-vis then. I think a lot of that has to do with inventory replacement. Clay mentioned our mission. Operation. Same thing there. So that inventory replacement is really helping both the distribution in our petroleum services and supplies business.

The second big one, big theme is shales. I can talk about shales for a long, long time. They impact everything that we do. We're opening up new distribution facilities throughout the United States in different plays. In our PS&S group, when you talk about bottom hole assemblies, bits, Clay mentioned the drill pipes due to scope, they're all impacted directly with that and we're also making very specific rigs that deal with these shales, things like the Drake rig and the Ideal rig which we're utilizing. The other thing that's pretty interesting about shales now you're starting to see more of an oil play come to shales too. And so it's not just gas but the oil. You look at places like the Eagleford up in Wyoming and you're starting to see that -- and the Bakken of course and that really plays well to a lot of the things that we're doing.

One of the comments I've heard on some calls has been well on the international shale plays, you don't have quite the same infrastructure so they're going to be slower. What I would also tell you, though, is we actually helped build that infrastructure so we're here to help and make those international shale plays about as vibrant as we can possibly get them. Third, obviously deepwater development. Clay mentioned Brazil. I won't go into that too much here and I'm sure you'll have some questions regarding that but there's deepwater development all over the world. When you're talking about the arctic, when you're talking about West Africa, many different places that we're doing it.

But also interestingly, Clay mentioned our interest in FPSOs and as you have deepwater development, it really is very much B follows A and I think as you develop more and more, you're going to be developing that with FPSOs. So we're excited about our opportunities and then today we can put as much as $20 million on that. So not only is it going to be a deepwater development where we put the deepwater rigs out there. But we also think we can play a very large role in the FPSO development when it goes on. The fourth thing that I've talked about a lot is obsolescence. A lot of the older rigs really aren't going to be working too much anymore. We talk about this a lot. We think that the industry got a pretty good start over the last three or four years of retooling but we think it has a long ways to go and we're encouraged by that. We've gone through a pretty tough 18 months and yet we're kind of coming through this thing with flying colors and I think with awfully good results so we think this obsolescence thing is going to continue and we think you're going to see more new land rigs built. When you look at some of the orders we have here a lot of those were international land rigs and for the reason that they want the best stuff available and we're doing a lot of repushing on that too, changing over the electronics and other things.

The fifth one is technology. When you take a look at the technology that's out there today, people want the best technology. I'm going to talk in just a minute about some new products that we have but an awful lot of the things that were ordered this past quarter were the new technology type top drives. They're reliable. They're redundant. They're monitors so you can work on them much easier. People are actually switching out some of the older top drives to get to the newer top drives. And we think that sort of technology is going to continue on. There's no doubt about it. And the final theme is international expansion. And not only expanding internationally but as do you that, you have you to make sure that you have some sort of local content. I think that's becoming more and more a requirement, not only in the Brazilian situation but as we look around the world, when we're selling equipment there's a lot of good reasons to have local content. You look at the Middle East, a lot of the land rigs that we're selling in the Middle East today we actually build in Dubai.

That does a couple of things. Number one it gives us a great labor force there. Secondly, the actual delivery of those is really shortened from when they're built in a place like Houston or Edmonton. If we could do that in Dubai we probably knock 45 days off the ultimate delivery which really helps the customer be able to get that rig into the -- into operation for them. I think those six themes really kind of hit the nail on the head. They continue to be the overriding themes in this industry and I think they'll push us into the future and we're able to really satisfy the needs on each one of those.

Let me talk about the international market for just a moment. I think an area that we're starting to see some decent signs of life is Russia. We're excited about the opportunities there. We recently opened up a new facility. And I think that we're looking at some good M&A opportunities over there. Again, kind of comes back to some of the local content but we're starting to see some money free up over there to develop both oil and gas plays that they've had on the table for a long time. The Middle East continues to be a very vibrant spot for us. I think you've heard on a lot of the other calls about Iraq. We sold some new rigs that will ultimately go into Iraq. We have a facility in Kuwait that's able to service the Iraqi oil field quite well. We think potentially over the next two or three years, the Iraq oil field is going to be an exciting one. Kuwait continues to be very positive for us and we're starting to see some very good things in Saudi Arabia and other ports of the Middle East, so I think that's going to continue on. You've heard on other calls that we expect the international operations to expand over the next few years and we're right there with that.

And then finally, in the international arena is Brazil. Clay gave you a very good description of that. I think that we're excited about the opportunities that are down there and interestingly enough, not only are there opportunities there offshore, but there are also some good land opportunities and we recently have broken ground on a new fiberglass pipe facility that we're building in Recife. We think Brazil is going to be a pretty exciting area for us. That's kind of a brief rundown what we're seeing internationally.

Final thing I want to talk about, we're going into OTC week next year, the offshore technology conference and the lifeblood of any organization are new products. You've got to continue to evolve. You have to make sure that you're offering the industry what they have and we're going to be showing a lot of new products at OTC but a couple of the more interesting things I'll just mention here. One is the integrated drilling intelligence that we're doing. We've got the unique capability of controlling everything that happens on a rig. We've got all the equipment that we're controlling through our cyber based systems and now we're able to tie a lot of the down hole systems into that through our ADS. So it's really kind of a cool system and then we look at Intelliserve there with I'll it's really going to give us -- I think some great opportunity to give our customers the most efficient operating system out there, very quickly.

Kind of a cool little product that we've developed recently is called the Stan transfer vehicle, STV and that's really something that we hang a land rig and it really is a pipe handler. We're beta testing it in the field right now. I'm kind of excited about some of the things that it's going to do. It's going to be one of those things like an iron roughneck, that's really going to be an add on that's going to make the industry a lot safer and make working on the rig a lot more pleasurable. Then finally, one of the things that I think is really going to be impactful for our customers is drill pipe life cycle management where we're actually able to embed a computer chip or a ruby if you will into the drill pipe and be able to give our customers what the complete life cycle of that drill pipe is. That sounds like it's not high tech but it really is. This is the holy grail on drill pipe that people have been looking for for about the past 30 years. I think we're just about there and I'm excited about this. We'll be showing some some of these things at NOTC this year. That really is a quick overview. At this point, Kim, I'd like to turn it back to you and see if any of the callers have questions.

Thank you. (Operator Instructions) At this time, we have a question from Kurt Hallead from RBC. Please go ahead.

Hey, good morning.

Hi, Kurt.

I'll start off with the most obvious of obvious questions as it relates to the Petrobras orders. You guys seem very confident about the prospect of the bidding going in in May and not necessarily being delayed again. Can you give us some backdrop to that high level of conviction as to why you think it won't get pushed out to the right again? And then could you give us some benchmarks just that we can look for that would give us some indication as to whether it's going to go through or potentially get delayed again?

Kurt, obviously anything could happen and it could potentially get moved more to the right. But we feel pretty confident that they want to get these tenders in and they want to be looking at them and I think that that's important for them. I think that most of the questions have been answered at this point in time. And I'm talking specifically really about the ones going into the Brazilian shipyards. I think those are the ones that we're spending a lot of time concentrating on right now and my guess, -- and it is clearly a guess. I'll put a caveat here. They're not going to come out tomorrow and say hey, we've extended another two weeks. The fact is we don't feel that way right now and the signals that we're getting is that they will go in in the mid-May time frame. I think once those are in, I think they're going to be a lot of clarifications. There's a lot of specific processes that the Brazilians have to have legally. Have to be able to have everybody be able to take a look at it so you can see if everybody's bidding the same thing technically. There's different issues like that.

So my guess is there will be a couple of months that are going to be involved about clarifications, whether or not everybody's kind of bidding apples and apples or apples and oranges and I think ultimately as we look into the second half of the year, late into the third quarter, we'll start to get a better feel as to when we think they might come back and ask for additional clarifications. I don't think they'd ask for a complete retender but they could do things like that but I think as we get into the fourth quarter we should be looking at either orders being placed or being fairly imminent at that point. And again, I'm going to put a caveat on that. Obviously, I'm not in the inner workings of Petrobras but we've got very close connections down there and that's kind of our best feel at this point.

And then my follow-up would be the margin performance just exceptional, so well done on that front. So with the backlog declining the way it is and the prospect of in the very near term, call that next one to two years, of maybe the rig tech backlogs not getting back to where it was in 2008, kind of begs the question, can you drive as much to the bottom line on a lower revenue base given this learning curve as we move forward? What would be your take on that?

I think we're actually demonstrating that now, Kurt. If you look at rig technology, the revenues were down year-over-year double-digit and in spite of that margin was substantially higher so what you're seeing is a very finely-tuned machine now working on lower volumes and generating great margins. As I pointed out in my opening comments, though, to be fair, the backlog that we have now still reflects pricing. Pricing was pretty buoyant. We've come under a little pressure lately so it's not quite as good but it's still solid and we have a lot of confidence in the ability of our team to execute these orders and post a really strong margin.

As a cycle evolves here, the prospect of you doing some add-on businesses, bottom line is can you generate as much of an earnings -- as much earnings power in this upcoming cycle without $12 billion of rig tech backlog. What would be your take on that, Clay?

We've been in that kind of dollar per share range, even with the downturn. I mean, our backlog -- our starting backlog this quarter was 6.4, 112, it was $6.4 billion we're generating good earnings, over $1 a share. So I think the machine's running well. Obviously, we recognize we need to reload with backlog but again, the largest tender that we've ever seen in this industry is due this year and we like our chances. And I'll add, it's not the only thing out there. We're talking to other operators as well about other opportunities to build rigs.

Okay. Great. Thank you.

Thank you, Kurt.

Thank you. Our next question comes from Jim Crandall from Barclays. Please go ahead.

Good morning, guys. Great quarter.

Thanks, Jim.

Pete, I know you don't like to talk about specific orders but given the attention and potential size of this order, could you give us some kind of indication where that might stand?

No, Jim, I don't like to talk about specific orders.

You're so expansive on Petrobras. I thought you would maybe want to talk about Delta.

Petrobras is expansive in their own right. What we do is if our customers talk about it, we talk about it. If they don't, we don't. But I know there's a lot of interest out there on it, Jim. But it would be imprudent for me to make a direct comment about what they're doing. I would say this, though. We're excited and it's not just the Petrobras tender that's out there today that's available to us. So there's other things that could potentially happen.

Okay. Pete, in addition, I guess you talked about Brazil. Could you talk about the other sort of potential sources for new deepwater rig orders on India, China, the Arctic and maybe how major oil companies might feel about ordering new rigs over the next year or so?

Absolutely. Good question, Jim. I know that we talked about that a little bit in the past and I think that's one of the things that people have to realize is that while Petrobras clearly is the one that everybody wants to talk about, there's still a lot of activity going on around the world. And there's a lot of deepwater necessity around the world. Arctic in particular, you've heard some drilling contractors talk very openly about that and I think having rigs that are capable of drilling in the Arctic, they're different animals and you can't take something out of the West Coast of Africa or the West Coast of Brazil and move it into the Arctic and so we're excited about some opportunities there. I think if you look at the outer Continental shelf of Northern Norway, we're actually working with stat oil right now on an engineering contract to design a rig, very specifically for that particular area.

The India area I think in particular is pretty exciting. And as you take a look at some of the deepwater that's off the West Coast of India -- and the other interesting thing there is unlike West Africa and Brazil, those waters aren't benign. They have typhoons. They have -- it's much more like a Gulf of Mexico type operation and so the rigs themselves have to be a little stouter and a little bigger so I think that's another area that's exciting. South China sea, you're seeing more opportunities there, offshore Australia. People are looking at a slimmed down version of drill ships to. Not only are we talking about the big. Also some of the smaller ones that are going to be more for the development once these big fields are discovered. So we think there's a lot of potential out there for things like that and we're excited about it and while it all might not come in the next quarter or two, we think over the next couple of years you're going to see a goods in-flow of opportunities like that.

Okay. And final question, Pete. What do you think of the prices paid recently to do acquisitions or let's say large acquisitions and how do the prices paid sort of influence your thinking on not only the prices paid but also because of those, the prices that companies may want, how does that influence your thinking about doing acquisitions at this point in time?

Well, there have been some nice prices paid. Actually, that doesn't impact what we offer. What it does do is it impacts what the folks that we're offering think we're going to offer. We stay pretty disciplined. I think that we have an awfully good track record of that and we're not -- everything we do, we want to make accretive immediately. We want to kind of stick with the criteria that we have and that makes it difficult sometimes. However, we've still got an awful lot of opportunities out there today, Jim. As we look at those, we probably have as ming things that we're working on right now as I can recall us having worked on in the past and I'm excited about it. We're still able to close deals. I mean, I can't -- you know, I can't pass judgment on what other people have paid but I can assure our shareholders that we're going to stay very disciplined and we're going to try to continue with the same sort of track record that we have. And we'll be successful. I mean,s there's no doubt in my mind. We're patient. We can ride things out. And we'll get the targets that we have on our scope.

I'll add too, Jim, we're not afraid to roll up our sleeves and tackle acquisitions that need a little fixing. And in fact, a couple of the acquisitions we did last year came in at pretty dilutive margins and we're not afraid of that and have acted to kind of turn around projects under way. We've done that consistently through many, many years and have a lot of confidence in our managers to execute on that well. And we're in many ways looking for targets wherein we're a strategic buyer and that's one of the things in addition to our infrastructure, our reputation, our global footprint, the willingness to tackle some businesses that are let's say challenged means we can get really, really good deals that offer good returns for our shareholders.

Okay. Great to hear. Thanks, guys.

Okay, Jim. Thank you.

Thank you. Our next question comes from Robin Shoemaker from Citi. Please go ahead.

Thank you. Clay and Pete, I wanted to ask, on the noncapital piece of rig technology, we can kind of see the revenues there kind of drifting down as markets decline, sort of running $500 million, $600 million a quarter in '08, $400 million, $500 million a quarter in '09, starting on $380 million in the first quarter. So what could you tell us about the noncapital, the aftermarket business in rig technology?

Yes, first, Robin, most of that non-backlog revenue is aftermarket. And the aftermarket's actually fairly stable. It was call it flat sequentially from Q4 to Q1. Volatility that you're referencing there is largely the non-aftermarket piece of the business. These were smaller capital goods. We have, by necessity, we have a pretty arbitrary cutoff of what goes into backlog and what doesn't and we cut off orders at $250,000, if they fall below that, $250,000 threshold, they don't hit the backlog so they go through non-backlog and it's that piece that's very volatile and it just depends on which side of that line orders will fall in a particular quarter. So you've seen that sort of non-backlog capital equipment business, they don't go up 5-fold quarter to quarter and then retract. We saw a big contraction this quarter. The aftermarket business, it did drift down from '08 but we remain pretty bullish on it. It's been pretty stable through '09 and into the first quarter of this year. Rig counts have recovered. And as we add new floating rigs to fleet we think we're going to see growth in the aftermarket business.

That's what I was anticipating. So we should see it going forward. Just going back to your comments on the drill pipe business, Clay, seems like you did -- you exceeded 100% on book-to-bill. Do you have a sense of now of how much inventory of drill pipe is on the ground or on stacked drilling rigs, how much has been worked down? And is there a potential for the kind of surge in drill pipe sales, very pronounced surge that we've seen in previous cycles?

I think there is. We can't quantify it exactly, Robin. Those inventories are held by drilling contractors around the world but what we think we're seeing here is the increase in North American rig count has driven consumption of inventories of drill pipe up, and that means we're kind of burning through that inventory. Then the other phenomenon we're seeing is kind of the flavors of drill pipe that are on the ground out there may not be the best flavors for the. That's why we're particularly excited about the interest we're getting from customers on the high torque premium connection that's are going into the shale plays. So it's not just a matter of the volume of drill pipe on the ground but it's also the flavor of the drill pipe that's out there.

Okay. That's good. Thanks a lot.

Thanks, Robin.

Thank you. Our next question comes Geoff Kieburtz from Weeden & Company.

Clay, I'd just like to pick up on that last subject. You lost me a little bit in your discussion about the drill pipe margins. I thought you said that the mix was getting more negative, that is, more ATI pipe, but then you commented on the shales requiring the high torque connections. Could you just walk through what you expect in terms of drill pipe margins?

Yes, Jeff, the difference I think is the difference between revenue recognized in the quarter and orders flowing in. We're seeing orders flowing in reflective of the more higher interest of premium connections and versus sales going out in the quarter, more reflective of a traditional mix. If you recall, our comments late last year, drill pipe held up really, really well, despite a low backlog and the reason for that is it was mostly sales of strings into these new offshore rigs for heavy pipe, premium pipe, high tensile strength, high torque connections and those carry a very good margin. What we saw in the first quarter in terms of shipments, and this was in line with our guidance last quarter was a shift toward a more traditional mix of ATI pipe and that did in fact occur in the quarter so margins were down in that a pretty good clip. Our group did a good job offsetting that. It's lower margin pipe but it's higher sort of piece count moving through the factories and so that helped us on the absorption front and we're also -- we're using lower priced green tubes which help us on the cost front in the quarter.

Okay. So the drill pipe, though, was the primary reason we saw revenue down sequentially in PS&S?

Yes, absolutely. It was a very sharp decline, as I mentioned in the comments, over 30%, close to 40% sequential decline.

That should become a positive to PS&S revenue trends?

Yes, I think as we work through the next couple of quarters with the orders picking up, if the rig count remains high, which is certainly question mark, and as the builders of these new offshore rigs come back to the marketplace and buy strings to outfit those rigs, those are all positives. We've got our fingers crossed for a recovery late this year and so far so good.

And then on the rig tech margins I think you said in your guidance that you expect the margins to pull back to the mid-20% range in the second quarter?

High 20s, Jeff. We're kind of upping our guidance on that a little bit. We've been as I mentioned very positively surprised with favorable costs on projects that we've executed over the last few quarters and we've had $30 million, $40 million of positive cost experience kind of hitting quarter by quarter. So kind of resetting our guidance on that. We think Q2 should be in the high 20% range despite -- we do know volumes went down this quarter, revenues went down this quarter for rig technology, going to go down again in Q2. But kind of resetting to a higher margin level.

If I could just ask one last question, Pete. You obviously don't want to talk about orders in terms of specific customers and so on. Wonder if I could get from you a sense on generally, if you look out over let's say three to five years, you pick the time period, what do you think the average capital equipment orders in rig tech are going to be?

Jeff, if I answered that I think my General Counsel would run in here and behead me right now.

I know you don't have a great experience with forecasting orders here, but--.

Well, Jeff, it just goes back to -- we like where we are. We like our strategic position in this industry. We've consolidated. We've made sure that we're somebody there that has an integrated package that we can offer people. We think the industry continues to need what we have. We've gotten a good start on retooling the industry and we've been talking about retooling the industry for 10 years. And it's coming to pass and so I like where we are. To make any prediction on that, if I gave you dates, I wouldn't give you numbers and if I gave you numbers I wouldn't give you dates. So again, we just like where we are strategically and we think that the industry still needs an awful lot of stuff over the next five or 10 years.

You think '09 will be the low point for the next five years?

You know, you tell me what's going to happen on the general economy. I mean, I would ask you are we going to have another meltdown like we had in '08? Are we going to have -- our fear is not so much where we are today. I mean, an 84, $85 oil, the vast majority of our backlog that we created was created at a much lower oil price. The fear I have is what happens in the rest of the world? Is the EU going to rescue Greece? Is there going to be a prolonged recession in Europe? Do we have a double dip recession in the United States? I mean, if you can answer all those questions, I'll answer yours.

We'll take it up later.

Okay.

Thanks.

Sounds good.

Thank you. Our next question comes from [Collin Gerry] from Raymond James. Please go ahead.

Hey, good morning. I just got a couple quick ones. Clay, you touched on the M&A margins being a little bit dilutive on the -- at first. You all made quite a bit of M&A last year. Could you maybe talk to us about how the integration is going there and maybe how that affected the quarter?

Well, I mean, I think great news all the way around. The integrations are going just according to plan and any of these acquisitions, Collin, we always run into some negative surprises we didn't expect. We try to out as much as we can during due diligence before we close but inevitably you hit some stumbles along the way and I'm pleased to report the businesses we acquired. Good contributions from those acquisitions and a couple, particularly done late in the year and the one that we did in the first quarter was a process, so we've got tight integration plans that we put together before we close and then we stick to them after we close and so far, so good. I can't stress enough the importance of experience in this area. We've got business unit managers across the Company that have done many acquisitions who have successfully integrated many businesses and it is a very challenging undertaking, but one that our folks really know how to do well.

Yes, I guess that's kind of what I was getting at. You all arguably have a better track record than anybody on that, so just as I look at the quarter, you all did some M&A relatively recently. I was wondering if margins were somewhat diluted by that. As we look out going forward, you have a rebound effect.

The answer is yes, but not in a big way, Collin. I will tell you that margin improvement within acquired businesses is baked into the guidance that I give in the second quarter and so it's all sort of accounted for there. But yes, there was a little effect in Q1. But for us, this is an ongoing process. We do M&A pretty much every quarter. I think in the last four years we've done 38 acquisitions, we spent about $8.5 billion total including Grant Prideco acquisition. So every quarter we hope to have acquisitions fold in and consolidation exercises and that's kind of a long-term growth strategy.

Okay. And last one from me. Pete, you've been talking about Russia with somewhat of a cautious optimistic tone for the last few years. It sounds like you're getting a little bit more bullish there. If I listen to some of the other service companies, sounds like that's a 2011 event. Maybe give us a little bit more color on what you're seeing out of Russia and how you see that market evolving over the next couple of years.

We kind of like what's going on there right now. I think as you take a look at it, probably other people when they're talking about 2011 probably are talking much more about hitting full stride. We're starting to get some equipment orders in there. We're starting to get some clarity around some M&A opportunities. We mentioned that we opened up a new facility at. It's doing a lot more for us with our down hole tools. We've got a little Company that we bought not long ago. We think wee we see some expansion opportunities over there. But it's more I think that it's finally opening up a little bit. We're sensing a freeing up of funds to do things. The Russians were hit pretty hard when we had all the economic downturn of late '08 and I think they're really kind of coming out of it right now pretty well obviously, 84, $85 oil isn't hurting that so we're starting to sense that there's some real deals now that are on the able and will start to manifest themselves in 2010 and clearly will be picking up speed by 2011. So we kind of like what we're seeing over there right now.

All right. That's it from me. Thanks again.

Thank you. Our next question comes from Roger Read from Natixis.

Hitting more on this deepwater stuff, since we haven't hit it hard enough. As you all talked about the pricing issue, the backlog today, you've got kind of the '07, '08 peak pricing in there, what are you seeing in terms of maybe not in absolute price, obviously margin is some of the raw material costs came down and bounced back up little bit, what do you think the impact is as you look into 2011, 2012, the next wave of orders, not just the ones out of Brazil but also some of these potential regions and projects.

Well, Roger, I think there's a bunch of dynamics here right now. When you start talking about pricing, number one, we're not going to really tell you what we're pricing because our competition listens to this but I will tell you we've become a lot more efficient. If you go back and look at 2005, 2006, Varco and National were merging. We had a lot of the challenges there. We were also coming out of a downturn that really didn't have our plants moving at anywhere near the speed with which we moved today. What you have today is a tremendous efficiency gain. I think that's manifested in 30% margins that you're seeing out of drilling. We kind of like where we are. We think that while praising may come down, we have an efficient sigh and reduction in some cases in raw materials that ought to be able to offset that so we still maintain some decent margins. Let me also stress, we don't work for practice. This is -- we get to sell something one time and when we sell it then we'll support it for the next 20 years but this isn't a situation where we're going to just give something away so we can work for practice. That's not what we do. So I'm confident that we're going to be able to continue to return good margins to our shareholders in the future. Will they be at 30% all the time? No, not necessarily. But I like the way we do things today.

Okay. I mean, so you kind of look at prior obviously you have to go back and look at national and Varco as two separate companies but I was not unusual to see margins drop into the single digits in a trough. Obviously we're all expecting the orders to pick up before we hit a real trough. As I think about second half '11 or '12 when this next wave should start to come through, mid-20s is not and -- I'd say unusual. It's not an unreasonable level to think you could hit.

We feel pretty good, Roger. I'll add too to wrap some numbers on this. In '04 on a pro forma basis you had national and Varco together. Look at our production of. And then you compare that to what we actually did in 2008. Most of those product categories were up 6, 7, 8 fold, huge growth through that period. Part of the of efficiency gains that you're seeing now come out of a little bit of of. We kind of retrenched back to our first tier suppliers and cut loose some of our bottom tier suppliers that were less efficient. So the marginal cost of manufacturing this stuff in this kind of environment is a little better too so that helps us as well.

Okay. Thank you.

Thanks, Roger.

Thank you. Our last question comes from Bill Herbert from Simmons & Company. Please go you ahead.

Thanks, good morning.

Good morning, Bill.

Couple of questions here. First of all, Clay, you were speaking more quickly than my brain could process, so you may have answered this but I'm not sure if I quite caught it with regard to your summary comments. That is what I'm trying to drill down into is essentially the composition of orders for rig capital equipment in Q1. You mentioned three jack-ups. But fundamentally in Q4, if the I recall correctly, you had a nice surge in pressure pumping equipment, land rig equipment, maybe even a little coil tubing, although I'm not sure if that was in the right bucket, and driven by North America as well as China and other ports of call. So apart from the three jack-ups that we benefited from in Q1, what else was the mix?

Sequentially, pressure pumping was up again.

Okay.

And one of the big factors this quarter were top drives.

Okay. Nice.

Huge quarter for top drives and what we hear is that a lot of these land rigs are required to put top drives into their fleet in order to win work and so that's spurring a lot of demand and it's not just the US. I think about half of those were domestic and the other half were international so a lot of interest in that area. So it was just a good -- all the way around, another good, broad based quarter for orders. One other thing too, we had a big crane in here too.

A big crane.

Right.

Got it. So as we look out based upon the visibility that you see with regard to your clients and the feedback mechanism on the order front, and as you look out with regard to the balance of 2010, we were running for example for most of last year at a non-floater quarterly capital equipment order rate of about $350 million per quarter, and that seems to have rise into about $400 million to $500 million per quarter, if not a bit quarter go.

If two quarters make a trend, yes.

I understand. So there's the rub of my question here. I mean, while everybody is uncertain with regard to North American drilling activity, Pete mentioned positive mix shift towards oil. So the likelihood of a collapse is probably unlikely and the service intensity theme is still with us, obsolescence, inventory, et cetera. I'm just kind of wondering why it can't continue.

That's a great question and I can't tell you precisely what our orders are going to be. They've always been volatile. What I can tell you is that drilling consumes an awful lot of stuff that we make and we're seeing these shale plays, the intensity of the frac jobs going into these shale plays, the many, many stages that they're pumping, I read somewhere that six and seven fold type comparisons compared to a conventional frac job, that's good for the equipment that we make and we make all kinds of lenders and coil tubing units and coil tubing itself, we make the rigs going into that trend. We make the down hole tools used to directionally drill those wells. All good for us. Hard to quantify, but feel very good about the future consumption of a lot iron NOV manufacturers.

Last line of inquiry from me, is we touched on at various times in this call but I kind of want to specify, if the you will, what -- I think you don't get credit for is really how you quietly and consistently augmented your earnings power through acquisitions and we've I think, if memory serves me well, you've done about $600 odd million worth of deals over the last 12 months, perhaps more. You've got a pretty sizable LOI on the table right now, so call it 800 pro forma. With regard to the rate of acquisitions that you've been consummating over the past year, and with the improvement in industry conditions worldwide, do we think that the current pace that you've been on is sustainable going forward?

Absolutely, Bill. I mean, I think that as we look at things today, and again, we've -- you know, we've always said we look at about seven deals for every one that we do but we have as many things on the table today as we've had in quite some time. We really like the opportunities that we have out there. And you're going to continue to see us be very aggressive in the M&A business. I mean, we think we know how to do it. We like the opportunities that are arising there today. And you're going to continue to see I think good movement from us on this front.

So really, we shouldn't be surprised to witness anywhere from a $0.5 billion to like $1 billion worth of deals consummated over the next 12 months.

Wouldn't be surprised at all.

Thanks, guys.

Thanks, Bill.

Thank you.

Thank you.

This concludes our question-and-answer session. I'll now turn the call back to Mr. Miller for closing remarks.

We appreciate your interest and we look forward to talking to you at the end of the second quarter. Thank you very much.

Thank you, ladies and gentlemen. A playback of today's conference will be available 90 minutes after the conference concludes. The phone number to access the playback is 888-843-8996. The pass code to access the playback is 25 -- excuse me -- 26597806 followed by the pound key. This concludes today's conference. Thank you for your participation.