國民油井華高 (NOV) 2010 Q4 法說會逐字稿

Welcome to the Fourth Quarter National Oilwell Varco 2010 Earnings Call. My name is John, 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 Loren Singletary, Vice President of Global Accounts and Investor Relations. You may begin.

Thank you, John, and welcome everyone to the National Oilwell Varco Fourth Quarter and Full Year 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 fourth quarter and fiscal year ended December 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, 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 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 and 10-Q 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 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 welcome everyone from frigid Houston to our 2010 Year End Conference Call. Earlier today, we announced fourth quarter 2010 earnings of $440 million, or $1.05 a share, on revenues of $3.17 billion. Additionally, we announced earnings of $1.67 billion on revenues of $12.16 billion, for the entire year. Clay will expand on these numbers in a moment, but we are very pleased with the results and that they exhibit our ability over the past couple of years to navigate a very difficult market with dexterity and nimbleness.

Additionally, we announced new capital order intake of $1.41 billion for our second consecutive quarter of a greater than one to one book to bill ratio. This order intake reflects the industry need for the highly technical solutions we provide. Our backlog ended the quarter at $5.01 billion, and we will expand during this call on the order outlook that we see for the next couple of quarters.

I want to thank all of our employees worldwide for the tremendous efforts they have put forth this year to achieve these results. Their hard work and dedication has been unequaled by anyone in the industry. At this time I would like to turn the call over to Clay to give you more color on the numbers that I've just talked about.

Thanks Pete. National Oilwell Varco posted excellent results in the fourth quarter, earning $440 million, or $1.05 per fully diluted share, on $3.2 billion in revenue. Operating profit was $624 million for the fourth quarter on a GAAP basis. Excluding transaction, devaluation, and voluntary retirement charges from all periods, fourth quarter operating profit of $625 million was up from $598 million in the third quarter, and up from $622 million in the fourth quarter of last year. Sequential operating flow through or leverage was 17% on the 5% increase in sales, lower than is typical, due to items that I will speak to in the operations discussions.

Operating margins for the fourth quarter of 19.7% were generally in line with both the prior quarter and the fourth quarter of last year. For the full year 2010, the Company earned $1.667 billion, or $3.98 per fully diluted share, compared to $1.469 billion, or $3.52 per fully diluted share in 2009, on a GAAP basis. Excluding transaction impairment, voluntary retirement, and restructuring charges, 2010 earnings were $4.09 per diluted share, up 4% from the $3.95 per diluted share earned in 2009, due principally to a lower tax rate in 2010. Revenues were $12.2 billion in 2010, down 4% from the $12.7 billion in revenues posted in 2009. Operating profit for the full year 2010, excluding transactions, devaluation, voluntary retirement, and restructuring charges was $2.465 billion, down $84 million from 2009, representing 15% decremental operating leverage, and excluding unusual charges from both years.

Full-year results for 2010 highlight the cyclical diversification of NOV's portfolio of early and late cycle businesses. Our early cycle businesses, Distribution Services, and Petroleum Services and Supplies rebounded with the North American rig count this year, and posted 15% and 12% year-over-year sales gains respectively. National Oilwell Varco's later cycle Rig Technology Group carried a strong backlog into the downturn two years ago, which permitted it to actually grow in 2009, but it came in 14% lower year-over-year in 2010. The net consolidated result was a modest 4% decline in revenues and 3% decline in operating profit, excluding charges in 2010, as compared to 2009. For 16 straight quarters, since the beginning of 2007, excluding unusual charges, NOV has exceeded $500 million in operating profit, and 19% operating margins. A remarkable run within a volatile market that is instructive of NOV's full cycle diversity.

We are well positioned for the new year, and we see many signs of encouragement as we enter 2011. Over the last few quarters we've discussed blossoming interest in building new offshore rigs, and the recent announcements made this trend more visible to the financial community. Our fourth quarter orders for Rig Technology reflect two new drill ships and several new jackup packages, along with orders in our new FPSO business, APL, which we closed in December. Importantly, I will again note that we book new contracts into our backlog only when they are signed and funded, so our orders for the fourth quarter do not yet fully reflect the magnitude of business we expect to gain on the resurgence in new build activity. Bookings in the first few weeks of 2011 have been accelerating, and we expect orders for the first quarter of 2011 to be strong.

New contract additions of $1.408 billion offset by $1.271 billion in revenue out of backlog, drove our backlog for capital equipment in our Rig Technology Group 3% higher sequentially, to slightly more than $5 billion at December 31st, 2010. Orders destined for offshore markets totaled 86%, and land 14%. International orders account for 86% of the mix and domestic 14% as well. Scheduled outflow as backlog of orders in the backlog at year end is expected to be approximately $4 billion in 2011 and $1 billion in 2012.

Rising demand for new rigs of many types reflect the growing realization among oil companies that newer, more capable rigs offer better efficiency, safety, and reliability. This is an evolutionary process, for which the seeds were planted several years ago by a handful of entrepreneurial drilling contractors, building newer, better rigs and a few foresighted E&P customers willing to try them. Together, they endured a few start-up bugs, retrained crews to run these new machines, and ultimately began to reap the benefits embodied in the technology in these sophisticated rigs.

This evolution proceeds through a series of small victories, a challenging extended reach well here, a redevelopment infill program there, that end up saving the E&P customer money. One at a time, the evolution wins over a company man, a drilling engineer, a drilling superintendent, a drilling department, an entire oil company. Enthusiasm spreads and diffuses slowly but steadily, as skepticism retreats, and rig day rates begin to reflect the new reality. The now well-documented bifurcation in day rates for rigs, new rigs commanding higher day rates than old rigs, offers a real measurement of market preference for this new technology.

This is not a new phenomenon. The drilling industry retooled and replaced rigs many times in its past, moving from cable tool rigs to steam-powered rotary rigs, to diesel mechanical rigs, to DC electric rigs, through the 20th century. Each successive evolution was catalyzed by slowly diffusing realization by E&P customers that newer technology offered greater efficiencies and safety, and each required 20 to 30 years to fully complete, roughly tracking the expected economic life of a rig.

The fact that oil and gas increasingly becomes more difficult to find contributes to these evolutionary cycles. New technologies, like deviated well paths, hydraulic stimulation, horizontal drilling, extended reach drilling, deep water development, sub-salt opportunities, Arctic development, require increasingly sophisticated drilling tools. When needed, the industry builds out entire new drilling tool kits to respond to new opportunities, like when it launched offshore development out of sight of land, with new offshore rigs beginning in 1947 with Kerr-MeGee Rig 16. The industry proceeded to order 542 jackups over the next 35 years, averaging about 15 a year, as it honed and optimized offshore drilling practices on the Continental Shelf.

Similarly, today we believe that the build-out of a new drilling toolkit for deep water development is well underway. Its target is the roughly two-thirds of the planet, covered by deep water, which can only be drilled with a deep water floating rig. The normal progression of the oil business starts with exploration, and if successful, development drilling and production to monetize the discoveries, and within the deep water, so far so good. 182 discoveries have been announced in the last ten years in water depths of 4,500 feet or more, with a third coming in just the last two years. This appears to us to paint a convincing picture of rising deep water drilling needs, as the industry shifts from drilling intensive -- shifts to drilling intensive development, which should also drive demand for FPSOs, where we have been busy strengthening our offering, with our APL acquisition last quarter.

The industry entered this century with a very old rig fleet, with perhaps 7,000 land and offshore rigs around the globe, and with very little investment through the preceding 20 years. The fleet operated day-to-day, by cannibalizing the overhang of stacked rigs, in essence replacing capital consumed in the drilling process from the excess of idle rigs available. This is an important concept for NOV. From a financial perspective between about 1983 and 2005, the industry appeared able to execute its critical task of drilling year in and year out, without having to spend real cash to replace its capital assets. While depreciation is a non-cash cost in the short run, if drillers want to remain in the drilling business in the long run, they absolutely must replace their assets, which does cost cash.

Drilling consumes a rig. Depreciation is the imperfect financial measurement of that consumption. Excess rigs ran out in 2005; depreciation once again became a real cash cost for drillers, and new rig building began in earnest, and NOV's fortunes improved. We believe this turning point signaled that rig building got back into a broad normal retooling and replacement macro cycle.

Things went great until late 2008, when the financial crisis hit, and credit evaporated and commodity prices turned down. I think you all probably remember that. Nevertheless, we believe the macro cycle remains intact; it merely took a breather as credit dried up, and now it's resumed in earnest. Our conviction in the macro cycle wasn't shaken by the downturn. Quite the contrary. Oil above $100 a barrel in today's weak economic climate underscores the need to drill more.

With nearly three quarters of the jackup fleet, over half the floater fleet, and the vast majority of land rigs around the world more than 25 years old, how does the world grow production over the next 20, 30 years without building a bunch of rigs? The sharp resurgence in orders we are seeing is characterized generally by more established offshore participants placing orders, many in view of their very old fleets. This is being catalyzed by a combination of three factors. First, day rates have remained strong for newer, more sophisticated rigs, where utilizations are running 90% or more, compared to 70% or less for older rigs.

Second, shipyards in Asia are hungry and seeking to replenish their depleted backlogs, and therefore offering lower prices for hulls. This, together with lower pricing from us and other suppliers, have reduced the all-in cost of offshore rigs 15% to 20%. Better day rates and lower investments lead to good financial returns on these projects.

Lastly, the shipyards have offered easy payment terms, 20% down and 80% at delivery. I will stress that NOV has not joined in. We remain steadfast in our progress payment requirements, which helped us avoid project cancellations during the downturn, and with regard to our pricing, we have been able to reduce our costs through the deflationary downturn, so we expect to continue to post good margins on the new incremental work.

Our Land Rig business turned down somewhat in the fourth quarter, surprisingly, after steadily rising in the second and third quarter of 2010, but we believe that this is a momentary pause. Demand for land rigs in the Middle East, Iraq in particular, and the Far East, have been strong for the first few weeks of 2011. Interestingly, we have seen North American drillers anxious to develop quasi-proprietary rig designs, which they can brand as their own, incorporating components from other suppliers, or supplying certain owner-furnished equipment or performing their own rig-ups, which can and does lead to inefficiencies in the manufacturing process and ultimately higher costs. In contrast, many international drillers, particularly those engaged in IPM work in remote locations, where problems are usually more difficult to remedy, want out-of-the-box NOV solutions. Downtime costs in these operations is exacerbated when the driller also has numerous other completion crews and equipment and capital waiting on the well to TD.

NOV's fourth quarter also saw very strong demand for well intervention and stimulation equipment, like blenders, frac equipment, and coil tubing units, for the blistering hot North American pressure pumping market. Quoted deliveries are beginning to stretch out, partly because we find it surprisingly difficult to source components, like trailers, truck chassis, cranes, and transmission, in a timely manner. Additionally, the market seems to continue to move towards larger diameter coil tubing solutions. Across all our products, we are hearing rumblings of higher steel and alloy costs within the past few weeks, but we generally place purchase orders soon after we receive signed contracts to hedge against cost inflation, and in certain higher volume products, we purchase to forecast to stay ahead of the cost curve.

We were pleased to see Petrobras open the long-awaited tenders for deep water rigs during the fourth quarter, and set up a holding company to move forward with purchasing the rigs, following its successful capital raise in September. The energy they've exhibited around these new rigs continues to point towards a forthcoming large order, probably in the first half of 2011 for the first tranche of rigs, but this remains subject to a final decision by Petrobras, and could see further delays. We believe NOV is well positioned to execute these projects, and we have been laying preparations for in-country content for the past two years. Interesting to note, the range of bids from $664 million to $824 million per drill ship, came in considerably lower than predicted by naysayers. This will be a challenging project for all involved, but we are certainly up to the challenge.

Interest in shale plays continued to drive North American activity in the fourth quarter, and we share the general concern about a looming gas bubble in the US. Nevertheless, we are encouraged by the very high level of interest in shale technology coming from NOCs and IOCs that want to take it to new continents. Unconventional shale production in Europe, Asia, Latin America, and the Middle East offer the potential to turn into new incremental sources of demand for new rig, directional drilling, and pressure pumping equipment.

As I mentioned, we closed APL late in the quarter, so it produced essentially no contribution to the year's P&L. Strategically, this is a terrific addition for us, adding turret technology to NOV's cranes, mooring, riser pull and hose reel systems that we can offer as an integrated package into FPSOs, that can now exceed over $100 million. We expect the business to add a couple of hundred million in revenue annually, but initially margins will be low until we are able to complete our integration over the coming year. Quotation activity began rising early last year, after essentially nothing in 2009, and appears to be building steadily. We are delighted to welcome the APL employees to the NOV team.

Like many, we are watching the events in Egypt closely and have evacuated most of our ex-pats and foreign nationals, except for a few safe on offshore rigs. Last year, Egypt accounted for $47 million in revenues for NOV. We don't yet know what the financial impact of events will be in the first quarter.

Finally, I want to thank, like Pete, NOV's terrific employees for producing such a strong result this year. We move into the new year with a sterling reputation for executing well for our customers, delivering great service, products, and technologies to keep the oil business humming around the globe. This is entirely due to the dedication and professionalism they exhibit daily. Thank you, you are the best in the world.

Now let me turn to our segment operating results. National Oilwell Varco's Rig Technology segment generated revenues of $1.757 billion in the fourth quarter, up 6% sequentially and down 11% compared to the fourth quarter of 2009. Operating profit was $501 million, yielding operating margins for the group of 28.5%, a decline of 60 basis points from the third quarter, 10 basis points from the fourth quarter of 2009.

Incremental operating leverage or flow-through was 20% from the third quarter sales gain of $107 million, and decremental leverage or flow-through was 30% from the fourth quarter of 2009 on the $220 million revenue decline. We typically expect incremental leverage for the segment to run 30% to 35%, but this quarter saw smaller sequential contribution, due mostly to higher levels of incentive compensation accruals at year end, higher receivables reserves and project cost accruals, and a higher mix of lower margin land drilling and stimulation equipment sales, leading to 20% sequential flow-through.

Non-backlog revenue declined 1% sequentially, due to lower sales of small capital equipment that doesn't qualify to run through the backlog. Aftermarket sales rose slightly from the third quarter to the fourth of 2010. Overall revenue out of backlog improved 10% in the fourth quarter, but revenues from higher-margin, large offshore projects declined 9% sequentially, which was more than offset by gains in land rig revenues and other capital items. This mix shift contributed to modestly lower margins for the segment in Q4, and will likely continue to cause margins to move down over the next few quarters.

Generally, the higher operating margins seen in the first half of 2010 peaking above 30% reflect projects sold at exceptionally high pricing in 2007 and 2008, being executed in a much lower cost deflationary environment in early 2010. As the mix of this high margin work has moved down the past two quarters, margins have followed. Within the past several weeks, however, we have begun to achieve modest pricing leverage again in certain products, les bon temps rouler. For the full year, Rig Technology generated $7 billion in revenues and $2.1 billion in operating profit or 29.7%, compared to $8.1 billion in revenue, $2.3 billion in operating profit and 28.3% operating margins in 2009.

Year-over-year decremental flow-through was held to only 19%, as operating margins improved on a lower revenue base, due to favorable cost variances year over year, steady ascension of the learning curve and continued outstanding execution of the backlog. The Rig Technology Group commissioned nine new offshore rigs during the fourth quarter, bringing our total to 32 for the year, and over 100 offshore rigs since 2005. Looking into the first quarter of 2011, we expect Rig Technology revenues to decline in the mid-single digit percent range sequentially, and post modestly lower operating margins in the mid to high 20% range.

The Petroleum Services and Supplies segment generated total sales of $1.137 billion in the fourth quarter of 2010, representing a 4% sequential increase from the third quarter, and a 21% increase from the fourth quarter of 2009.

Operating profit was $170 million, up $6 million from the third quarter, and operating margins were roughly flat at 15%. Year-over-year incrementals were 31% on the $201 million revenue improvement, excluding charges, in line with expectations, but fourth quarter sequential operating leverage or flow-through was lower than expected, at 13%. This was due to a variety of factors, including start-up costs and new operations in the Middle East and Brazil, mix changes within tubular services, as domestic pipe mills and processors slowed, offset by gains in other lower-margin pipe services, higher costs in Latin America across a couple of product lines, lower solid control margins and additional incentive compensation accruals within certain business lines within the segment.

Additionally, sales of higher margin drill pipe and coil tubing products declined sequentially, following strong third quarter results for both, another adverse mix shift. Modest sequential revenue growth was evenly spread across most major areas, albeit with mix shifts from product to product. Brazil, Russia, and the Middle East posted some of the largest sequential gains, along with good sequential improvement in the US, centered in the liquids rich shale plays, like the Bakken and the Eagle Ford.

Downhole Tools posted strong sequential growth on higher sales in the eastern hemisphere of Canada, and US shales, with drilling motors and borehole enlargement tools in particularly high demand. Drill pipe orders slowed slightly this quarter, as dwindling budgets and holidays slowed inquiries late in the year, but the first few weeks of 2011 have seen orders pick back up. Drill pipe margins improved in the fourth quarter, due to a lower mix of Chinese pipe sales. The mix of four-inch XT drill pipe continues to rise, as the industry appears to be adopting this as the standard for horizontal shale drilling. Generally, most products throughout PS&S, have begun to face rising steel costs, but are also implementing prices increases to offset.

For the full year 2010, Petroleum Services and Supply segment generated $4.2 billion in revenue, up from $3.7 billion in 2009, $585 million in operating profit, up from $453 million in 2009, and operating margins of 14%, up from 12.1% in 2009. Year-over-year operating leverage or flow-through was 30%. Looking into the first quarter of 2011, we expect Petroleum Services and Supplies segment sales to grow in the low single digit percent range sequentially, and post improved operating margins in the mid to high teens.

Turning to Distribution Services, fourth quarter sales in the segment were roughly flat with the third quarter at $423 million, but operating profit improved nicely to $30 million, or 7.1% of sales. Compared with the fourth quarter of 2009, sales increased 28% and operating margins nearly tripled, due to an exceptionally strong flow-through of 24% on the year-over-year sales gains. Typical flow-through for the group runs about 10% or so, so we are pleased with the strong incremental and resulting margins for the group.

The fourth quarter saw sales into the BP clean-up effort on the Gulf Coast move down about $23 million sequentially, but this was offset by improvements in international operations, mono-industrial sales in Europe, and artificial lift sales. The Caspian Region also posted a nice pick-up due to a small acquisition in Kazakhstan. Canada improved nicely sequentially in the Cardium and Bakken Shales, as did the US Bakken across the border. Across North America, the group continued to sell consumables into new land rigs going into service. The group continued to expand its presence in the Eagle Ford Shale in south Texas with two new DSCs.

For the full year, Distribution Services Segment posted sales of $1.546 billion, up 15% compared to $1.350 billion posted in 2009. Operating profit was $78 million for 2010, up from $50 million in 2009, and margins were 5% compared to 3.7% for 2009. Year-over-year flow-through or operating leverage was a solid 14% for the group. For the first quarter of 2011, we expect Distribution Services revenues to come in about flat with the fourth quarter of 2010, at comparable margins.

Turning to National Oilwell Varco's consolidated fourth quarter income statement, SG&A increased $24 million, due to higher incentive compensation accruals, tax consulting costs, and higher bad debt accruals. SG&A as a percent of sales was 11.8% in the fourth quarter, up from 11.6% in the third quarter. Transaction and restructuring costs were $1 million, down slightly from the third quarter. Equity income on our Voest-Alpine joint venture was $14 million, up from $8 million in the third quarter, due to nonrecurring third quarter maintenance and improved profitability on higher green tube and OCTG sales. We expect similar profitability in the first quarter of 2011.

Other expense improved $16 million sequentially, due to the non-recurrence of FX losses posted in the third quarter. FX loss within this line was only about $1 million for the quarter. The tax rate for the fourth quarter was 30%, up slightly from Q3, and for the full year, the tax rate was 30.8% substantially better than the 33.3% posted in 2009. We expect the tax rate for 2011 to be in the range of 31%.

Unallocated expenses and eliminations on our Supplemental Schedule was $76 million in the fourth quarter, up $6 million from the third quarter, due mostly to higher legal expenses associated with acquisitions, tax consulting costs, and incentive compensation accruals. Depreciation and amortization was $129 million, up $2 million from the third quarter. EBITDA, excluding transaction and restructuring charges, was up $54 million sequentially to $768 million, or 24.2% of sales, in total $3.007 billion for the year, up slightly from 2009. National Oilwell Varco's December 31st, 2010 balance sheet employed working capital, excluding cash and debt, of $3.5 billion or 27.5% of annualized sales, down $248 million from the third quarter, due primarily to higher billings in excess of cost and lower inventory.

Total customer financing on projects in the form of payments and billings in excess -- prepayments and billings in excess of costs, less costs in excess of billings, was $25 million at December 31st, representing a sequential improvement of $151 million. Cash flow from operations was $807 million for the fourth quarter, up $354 million sequentially, and totalled $1.5 billion for the full year. CapEx increased $30 million to $92 million in the fourth quarter, bringing full year CapEx to $232 million. We expect CapEx in 2011 to move up into the $450 million range as we pursue a number of expansion opportunities launched last year.

Free cash flow, equaling cash flow from operations less CapEx, was $1.3 billion in 2010, before acquisitions and dividends. Cash spent on acquisitions totaled $556 million, and dividends paid to our shareholders totaled $172 million during 2010. Finally National Oilwell Varco's cash balance was $3.3 billion at December 31st, 2010. Now let me turn it back to Pete.

Thanks, Clay. Listen, I just want to make a couple more brief comments about what is going on, we think, around the world. And first off, let me kind of hit the driving forces again. Clay mentioned technology and the advances in technology, and one of the things that I've been talking to a lot of people about is the differential between chronological age and technological age. And I think many times we kind of take a look at a rig may be only 20 years old, but when you look at that on a technological age aspect, it's a lot older, because of the advances that we are making.

It's very similar to Moore's Law, when you take a look at this in IT, and you're doing the same sort of thing with rigs. I would offer the difference in a rig from 1980 to 1990 was de minimis, whereas the difference in a rig from 2000 to 2010 is large, it's huge. And I think that's one of the things that's driving the bifurcation of the rig market, and we also think that is what's going to continue to increase the demand for the deep water rigs that we're building, the jackups that we're building, and also the land rigs that we are building. So we think there is a very bright future out there for this.

The second driving force that I talk about all the time are shales. And if you take a look at this, and the neat thing right now is that you are seeing the transfer of rigs from the gas shales to the oily shales. You take a look at the Bakken, the Niobrara the Eagle Ford, Granite Wash, the Monterey Shale in California now, these are starting to pull rigs out of the gas market. But I think everybody has been kind of waiting for the gas market to go down, but because of these oils now, they are able to pull these in there, so the rig count is staying fairly decent. So I think they are going to continue to be there.

Also, CNOC just announced another investment I think this week in the Niobrara, and CNOC is doing this again to get ownership, I believe, of some of the gas here, but also to learn. And kind of a little data point I will talk about here is that we have sold, in recent weeks, a lot of Top Drives into China. Now Top Drives in China have been a very good market for us for the last 10 years; however, there has been a little flurry of activity here recently, which would indicate that they are getting those rigs set up to be able to drill shale type wells into China as they learn this. So I think it's, again, small indicator, but I think it's there, and so we are excited about the aspect of shales. Poland, there's been a lot of leasing activity there recently, and I think recently Total announced some things in Argentina. So I think you're starting to see the expansion of shales worldwide; it's going to take a little while; it's going to be slow, but I think as that builds up over time, that's going to play very well for us.

On the international front today, you know as Clay mentioned, North Africa is a little dicey right now. There are some things that we think were getting ready to pop in Algeria and other places, but I think it's going to be more of a wait-and-see attitude at this time. The other parts of the Middle East, especially Kuwait, Oman, and Iraq, look to be very positive. So we think there will be some good things that will be happening there, both on a land rig basis, and some of the shipyards in the Middle East, especially in the UAE, are starting to heat up again. I think as the shipyards get filled in Korea and Singapore, those shipyards are going to come on and I think that will lead to some more incremental business for us.

West Africa continues to be a good area. I think it's really going to be a positive area for FPSOs. As you take a look at Latin America, it's a little bit of a mixed bag. Places like Colombia, Argentina, and of course Brazil are very positive. Mexico is somewhat iffy, and then of course Venezuela is, I think, as you've probably heard on a lot of calls, just not a very positive place for anybody at this point in time. But I think you will see some positives in Latin America and Brazil. It's going be both. They are starting to pick up a little bit even on shore, so I think that's going be some very positive areas for us.

Let me just kind of reiterate one thing Clay said, and that's on the backlog, we would tell you announcements don't equal orders. We are very strict in what goes in our backlog, and even though we know we're going to be successful on some things, we don't put it in the backlog until we have a contract and some money. I think we are very positive about what is going on right now. But again, announcements don't necessarily equal orders. It's always tough to kind of balance that out. But we see a lot of good things happening.

And I will also mention, we've talked about coil tubing an awful lot, and I think coil tubing is finally here. You take a look at it, it's had a lot of promise, but I think there is some really promising developments especially in the shale. Our coil tubing business up in Fort Worth is doing wonderfully. We are expanding our coil tubing manufacturing line here in Houston. We are going to add a fifth (inaudible), and I'm very excited about the prospects for coil tubing.

One final thing I want to talk to you about is, over the last couple of years the markets have been pretty tough, I think we've weathered very, very well, but one of the things that we've done is we've made sure that we took advantage of the time frame in which we could do some different things. And just as an example, we are building two new fiberglass pipe plants overseas, we've got three coating plants going up, these are state of the art; they're going to allow us to optimize. We've taken our logistics chain on Grant Prideco Pipe, and we've been able to compress that, so we can become much more flexible in hitting our customers' needs. We've expanded our repair and maintenance facilities in our Rig Solutions Group. So we have been spending money and incurring some costs, in anticipation of being able to accelerate out of a downturn when things start improving, and I think we are positioned well to be able to do that.

So I like what we are seeing today. I think our results speak for themselves, but I like the backlog starting to build again. And I think things look pretty decent over the next year or two for what we are doing. So given that, John, I would like to turn it over to any questions that our listeners might have.

(Operator Instructions) Our first question comes from Bill Herbert from Simmons.

Thanks, good morning.

Good morning, Bill.

Pete, back to the broader narrative here with regard to what Clay described persuasively here as a resumption of the macro retooling and replacement cycle and then your added observation in terms of differences between chronological and technological age, and I guess with regard to comparing this recent blossoming if you will, or this resumption, if you will, with regard to the new construction cycle versus what prevailed '05 versus '08 when 100 odd floaters were ordered. What are some of the key prominent differences with regard to this next wave versus what prevailed last time? Why don't we start with regard to your market share and how that may have changed?

Well, as you probably know, Bill, visiting with me many times, we don't talk about market share, we just kind of like where we are in the market. And we will do very, very well. I'm not overly concerned about that.

To the first part of your question, though, let me kind of tell you, I think one of the big changes right now, and you hit it right when you said this is a resumption of the cycle. I think some people have said we're in a new cycle. But quite frankly, I think this is just a resumption of a cycle that ended abruptly with some of the problems that occurred in late '08 with Bear Sterns, and Lehman and the like. I think this is a continuation of what started then.

What you are seeing today, I think are two things that are pretty interesting. First off, this is being led by the established early contractors. You are talking about the big boys that are getting in there and coming in and buying stuff. And I think last time it was a little bit more, I wouldn't say speculators, but more the non-traditional customers were the ones that started it back in '05, '06. I think that's a big difference. I think the positive there is that with the established guys doing it, I think you will also see some of the non-traditional folks come back in.

The second one that I think is pretty critical is that there is the understanding now to let the shipyards build it. You are seeing very, it's almost a turnkey type situation with the shipyard, in which they're, whether you're Hyundai or Samsung, or whomever, you're quoting 550, 600, 620, whatever the price might be, and then it's incumbent upon them to work with us to get the rig built. And if you take a look at the history, that you go back to '06, '07, '08, the rigs that were built like that came out on time, on budget. They just came out very, very good, so I think that those two elements are interacting in there today, and I think you will see the contractors go in there and say -- yes, build this thing, deliver it and let's go. Those are the two major elements, I think, that are different.

Bill, can I add a third to that? I would say, too, that the out of the box, standard proven rig designs are the way to go. The projects that got into trouble were from owners that tried to be too clever with regards to saving a little money here or rearranging something there, or insourcing from a less proven supplier. So I think, hopefully the industry, generally I think, has learned that the way to go is to let the shipyards, to let the drilling equipment providers who do this for a living, execute on that on standard proven rig designs and stay away from the more exotic schemes.

Okay, and secondly, how long do you think the current floater construction costs window, up about $600 million for a high-end drill ship, stays open?

I think it's -- I think it's going to start moving up, Bill. As I mentioned, we are starting to see steel prices move. There has been a lot of [incs] built here in the last month or two on commodity prices around the globe, so particularly developing economies seeing some inflation. The current window of discounting on offshore rigs, I think, has been helped by lower steel prices, it's been helped by favorable FX moves, and really a pretty deflationary environment for the past two years, and it appears to us that that is going to be going the other way here soon. I can't tell you precisely, but for customers listening we would say order now.

Okay, lastly for me with regard to shipyard capacity, how much head room is left, and with regard to the name brand shipyards, Samsung, Daewoo, Hyundai, etc., if you were to order a new rig today, the delivery date would be when? How much running room do we have; what is the lead time with regard to getting a rig today?

I think, Bill, that there is still head room. I think they are talking -- as you take a look at this, what is going on in the shipyards today, when we started this back in '05, '06, it was like 3, 3.5 years, today they are quoting a lot of these in 2, 2.5 years. The reason they can do that though is because of the experiences that we have gained over the last 4 or 5 years. We have really become efficient; we have been able to cut a lot of man hours out of this. And so I think you will see a little bit more rapid throughput.

At some point in time, you will hit some inefficiencies and that will change that, but still I think when you look at the Korean shipyards, Samsung, Hyundai, these guys are big and they know what they are doing. They probably don't have as many tankers as they had back in '06, '07, '08 when they were taking those orders, so I think there's still good head room. So I think there is still some promising potential out there.

We also think that the payment terms are probably going to become a little bit tougher, that the easy payment terms that I referenced in my comments are likely to pass and we are probably going to see the shipyards become a little more demanding on the payment here pretty soon.

Yes, thanks very much, guys.

Thank you.

Our next question comes from Kurt Hallead from RBC Capital Markets.

Good morning.

Good morning, Kurt.

Just wanted to -- on the PSS front, can you talk a little bit about, you mentioned some things on drill pipe, you mentioned in the past about the consumption of drill pipe given what is going on in shales, and obviously the premium content for the deep water. So I just wondered if you could give us just a tad more color on what you see on drill pipe order trends, what kind of mix we are talking about, and are we at a point here where you can say we are close to an inflection on drill pipe demand?

Yes, I think we are. The last few quarters we've seen orders rising book to bill through most of 2010 north of one. As I mentioned, though, Q4 dipped a little below that, and revenues came down a little bit. We think that was kind of a holiday slowdown, people had used up their 2010 budgets, and so we think that was a temporary thing. The month of January seemed to indicate that as well, because it came back better in January. So that's kind of what is going on with the recent orders.

Generally, 2010 was characterized by much smaller drill pipe purchases for smaller diameter in size drill pipe purchases for land rigs, specifically for the shales, and we've talked in the past about four-inch drill pipe with XT premium connections, which is our offering into that market kind of becoming standardized for the shales. That's kind of a new size, weight, and grade of drill pipe that works the best in the style of drilling that's underway. So we saw a lot of customers kind of scrambling to get that kind of pipe.

What cycled down in 2010 was the sale of large diameter, very sophisticated premium streams for these floaters. There was a bunch of ordering that happened in late '08 and through 2009 for the new builds. That kind of slowed this year; however, there is now over 100 rigs out there that have not yet ordered pipe, and so we think the outlook for that is pretty good for 2011. That's important for us, because that's a little higher margin pipe for us and a considerably higher dollar per foot pipe for us, and so we think we are pretty well situated.

But the usage trend that you are talking about was something we find fascinating. The old rule of thumb, you go back 20 years ago, people used to think in terms of drill pipe lasting 5 years under normal circumstances, and today we are hearing from operators it's more like 2.5 or 3 years. And it's a combination of things, first the wells are a lot tougher. That drill pipe is being bent around a 90-degree angle, it's being rotated on its side, just the wear and tear because of the complexity of well paths is wearing out drill pipe faster. Secondly, if you think about the implications for drill pipe usage coming out of more efficient rigs that can move more quickly, that pipe is spending fewer days on a truck being moved between wells, and more days actually in the hole drilling each year than it would have been under these old rigs that are out there.

So as these new rigs come on, they're actually spending a lot more time in the hole making oil, and so that's helping speed up the consumption of drill pipe. So we are seeing -- our thesis buying Grant Prideco in 2008 was that drill pipe is becoming much more of a consumable, and actually it's probably even beating what we expected back then in terms of the rates of consumption.

If you can, and you take a look at 2011 and your varying product lines within the PSS Group, on a relative basis, which one do you think has the most opportunity to get net pricing increases in 2011, which one or two do you think has the best leverage, which one or two has the least leverage?

Coil tubing certainly has been in high demand, as Pete mentioned. Again drill pipe coming on from the offshore again looks pretty good. I'll say broadly, most of our products and services within PS&S reported just starting to get a little bit of pricing leverage in the fourth quarter. It's 1% here and the 2% there, so it's not much yet, but it's starting to stick.

We are also, the inflation we talked about in steel, we are seeing that in labor and a few other things, and I think that's well known by our customers. So I think we are just now starting to get a little traction on pricing leverage. We think we might be able to make some gains there in the coming quarters.

I would add, Kurt, that downhole tools, we've got a lot of new products coming out, and I think as you talk about these shale wells, when you're talking about hole openers and different type of bits and motors, even wall [staters], things like that, I think we will get some leverage there, that's just associated with the increase in technology that we see in these areas. So we continue to push as a Company on the envelope in all of our areas on new product development, and I think that in itself enhances your pricing capability.

Okay. If I may, just on the FPSO side, you said you've got -- sounds like a good year of integration to work through before you start to see some of the improvement in the margins. So what kind of improvement would you expect to see, say, exit 2011 from where you are now, and could you give us some additional color on some of the challenges you are facing?

The business came in at -- it's a great business, a large installed base, over 50 turrets around the world in service, great intellectual property, a bunch of terrific engineers that really know what they are doing. They typically outsourced most of their fabrication, and a big part of our business plan now is to insource that into existing NOV facilities. So for instance in Korea, where we have a large assembly capability that we acquired a couple of years ago, and is busy next door to the shipyards, we can also put the BPL turret offering into that network. A lot of the suppliers to the business are suppliers that we also use, and so I think we will have some leverage there.

Generally, I think this business is pretty similar to other Norwegian, very technical engineering-oriented businesses that we've acquired in the past that tended to outsource, and so this is, for us, a pretty well-worn path in terms of how to get the profitability up. But it does take some time so we are not expecting -- we do expect it to be modestly accretive to earnings in 2011, and that should improve quarter by quarter as we get these integration improvements layered in.

Great, thanks.

Our next question comes from Marshall Adkins from Raymond James.

Good morning, guys. We've had a bunch of new build announcements obviously the last few months. I think you mentioned you had, in this last quarter, a couple of deep water and a handful of jackups, without getting too specific, can you give us some sense of what percent of those that have been announced, say over the last quarter or so, have actually been awarded?

Pretty small.

That's what I would assume. I just want to get, 10% maybe?

I don't want to quantify it. Suffice it to say, you've seen a bunch of announcements, a lot more rigs out there, and I think NOV's reputation for being able to execute well on these things is positioning us very, very well as the cycle resumes.

What happens Marshall, kind of on the process, to give you a little bit of an indicator, if somebody announces it, and they may have an LOI with a shipyard. And what happens is we negotiate many times with both the contractor and the shipyard, and we really don't put it into our book until we've signed the final contract, in most cases the way it's going right now, with the shipyard, in some cases with the customer directly. That's one of the reasons there is a little bit of a time gap.

So when you see something that says an LOI, the chances are real good that they are still in the negotiating process with the shipyard. And so that's really the process that's going on. There's a lot of it out there that we know we're going to get, but as we've told you throughout the years, we are real strict on the backlog, and we don't -- I think the history of what happened if you go back to '08, we had $12 billion, and everybody was worried about our backlog getting canceled and it didn't get canceled, a very small portion of it, and I think that's because of the strictness that we have on putting stuff in that backlog. So there is a pretty good time gap between the announcement and the order.

So, suffice it to say, of the ones we've seen lately, just a fairly small portion of those have been awarded at this stage?

They weren't awarded as 31 December, 2010.

Got you.

We are a month into this, and there's some things that have happened in the past month, but this counts off of 2010.

Okay. Clay, you mentioned the financing. We know that the shipyards have been offering pretty attractive financing terms. How much of this new order cycle we've seen really surge in the last two months is that financing, and are we just kind of bringing forward what might have evolved over a two year period, just because the financing is easy?

I think so, Marshall. I haven't run particularly detailed numbers, but have seen some other analyses of the intrinsic economics in building rigs right now. And I think the returns are decent. Kind of the old historical rule of thumb is kind of 15% rates of return on these investments, and I think we are at that or better.

I think the financing is the icing on the cake that probably just makes it a little easier for customers to move forward. I will add too, I think behind the financing that's being offered in a lot of these places is a lot of government export agency trade financing that's out there. The export agencies that we work very closely with around the globe, really stepped up when the credit markets turned down two years ago, to try to catalyze some more work and kind of keep credit flowing. And so what you are seeing now is the effect of that.

Okay. Just to clarify, last thing here, you mentioned the pricing of course from the peak has come down 15% to 25%, depending on what you are looking at. Did you participate in that price reduction pro-rata, or is that more the shipyards and the steel in percentage terms?

They are down a little more than us. We are down. But nevertheless our margins are pretty good, and what is helping our margins is the fact that we've seen the costs come down, and it's a combination of deflation that we talked about, but also just the learning curve effects that Pete mentioned earlier. We've been able to take a lot of hours out of the things that we do, the lessons that you learn. Our folks are really good at capturing those and putting them to work on the next version of the rig. And so those two things have kind of let us whittle our costs down, and with the downturn of the market the last two years, we've shared some of that with our customers.

Great, thanks.

Thanks, Marshall.

Our next question comes from Geoff Kieburtz from Weeden.

Thanks very much. I'm going to try one more time, you mentioned that there's 100 rigs out there that haven't ordered pipe. Is the number of rigs that haven't ordered drilling packages half of that? (Laughter)

Nice try. They order pipe late in the process. And they will tend to order pipe, if you go back to 2008, our drill pipe business was very, very busy, backlog very big, and we were quoting a little later deliveries, and our customers were aware of that, so they tended to get in the queue a little earlier. A lot of that pipe flowed out in 2009. Well, 2009 and 2010 our drill pipe business slowed down, so they know they've got a little more time before they move forward with that, but things are heating up. So that's why we think 2011 we will see more of those folks show up and place orders for pipe for those offshore rigs.

Okay, but you know the question is really about the drilling packages.

Was it? (Laughter)

I thought you were interested in pipe, Geoff.

All right. You talked about the pricing, I think you said that pricing leverage is coming back into the rig tech product lines, is that correct?

Yes.

Okay, so we are seeing a turning point. When you factor all the dynamics that you are seeing into it, and you did say you expect rig tech margins to move lower, are we thinking in the vicinity of the 50, 60 basis points kind of range on a sequential basis?

Yes, and we have been talking about margins moving lower for some time. We've seen this coming, and you've seen it last two quarters. And again, our guidance sort of guides it down through the high 20s, down into the mid-20s; sequentially we guided along that glide path.

Right, which, well, seems a little bit more conservative than your actual performance.

Well, again, what we have been pleasantly surprised is the continued really good execution by our folks (inaudible) quarter by quarter. Internally, we have been surprised at how well they've been able to take advantage of the downturn in the economy and lower costs and have done a really good job putting up better margins than we expected.

Okay, and a clarification, you did close the APL acquisition in the quarter. Where did their backlog go?

It's included in our $1.4 billion.

Can you give us a little breakout on that?

Geoff, we are still parsing through it, because we had to make some determinations on some risk analysis associated with it, because the backlog wasn't quite developed the same way as our rules are. But I would tell you probably about $100 million, right in that vicinity.

So about $100 million of the $1.4 billion orders.

Right.

Okay, so bringing their backlog in, you just treat it as new orders?

Yes. Right. I mean, we are not going to get in there and break the backlog down into little pieces, so again, there is still some parsing we have to do on that. And as we look at some orders we are liable to deduct a little bit more there. It just depends, but it's not anything that's overly material.

Okay, great. Thank you very much.

Thank you.

That will be the last question. I will now turn it back to you, Mr. Miller for closing remarks.

All right, well thank you all very much for dialing in, and we look forward to talking to you on our next call for the first quarter of 2011. Thank you very much.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.