國民油井華高 (NOV) 2011 Q1 法說會逐字稿

Welcome to the National Oilwell Varco first-quarter 2011 earnings call. My name is Matt, 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 Vice President, Global Accounts and Investor Relations, Loren Singletary. Mr. Singletary, you may begin.

Thank you, Matt, and welcome, everyone, to the National Oilwell Varco first-quarter 2011 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, 2011, 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 Forms 10-K and 10-Q that National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.

Further information regarding these, as well as supplemental, financial and operating information, may be found within our press release, on our website at www.NOV.com or in our filings with the SEC.

Later on this call, 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, National Oilwell Varco announced first-quarter 2011 earnings of $407 million or $0.96 per fully-diluted share. These results include $0.04 a share of charges related to our APL acquisition and write-offs that we took in Libya. Without these charges, our net income was $420 million or $1.00 per fully-diluted share on revenues of $3.15 billion. Clay will expand on these results in just a moment.

Additionally, we announced new orders that fulfill our backlog criteria of approximately $2.3 billion. This is the second-best quarter of new orders in the history of National Oilwell Varco. Quarter-ending backlog expanded to $6.16 billion, a 23% increase from the end of 2011. I will comment -- or I should say 2010 -- I will comment further on the backlog during this call.

We are very pleased with the results of this quarter and believe it further substantiates the efficacy of our business model and our product mix. I want to thank all of the NOV employees worldwide for their continued efforts and dedication directed toward our success. At this time, I will turn the call over to Clay.

Thanks, Pete, and good morning, everyone. Our Company generated solid results in the first quarter, posting revenues of $3.1 billion and earnings of $0.96 per fully-diluted share. Our quarter was impacted by unrest in North Africa and the Middle East, and included in the reported results were $17 million in Libyan asset impairments, mostly related to Accounts Receivable affected by sanctions enacted in March, along with some inventory and fixed assets in-country. These charges, along with $2 million in APL transaction costs, reduced reported GAAP earnings by $19 million pretax or $0.04 per share after tax. Excluding these, earnings were $1.00 per fully-diluted share.

Apart from the asset impairments, we estimate unrest across the region reduced revenues about $8 million through the first quarter, mostly within Libya and Egypt, with the majority of the impact within our Petroleum Services and Supplies group. Most importantly of all, our employees are safe, and thankfully, Egyptian operations are largely back to normal. We continue to monitor the situation closely, with the safety of our people of paramount importance.

First-quarter consolidated revenues for National Oilwell Varco were down modestly from the fourth quarter and up 4% year-over-year. Consolidated Q1 operating profit, excluding transaction and Libyan charges, was $628 million, or 20% of sales, in line with the fourth quarter of 2010 and down slightly year-over-year.

Within the results, we experienced a major mix shift as long expected declines in Rig Technology revenues and operating profit were almost completely offset by strong gains within Petroleum Services and Supplies, instructive with regards to the cyclical financial endurance of our consolidated business mix. Petroleum Services and Supplies had an exceptionally strong quarter, with higher sales across almost all products we provide, helped by slowly improving pricing and cooperative North American rig counts.

While all the PS&S businesses performed well sequentially, drill pipe was a notable standout. Ever-higher levels of horizontal extended-reach drilling appear to be accelerating the shift towards premium drill pipe, which accounted for a record 82% of our mix this quarter. Our book-to-bill handling handily exceeded 100% for this product, and we foresee continued strong demand as drillers and rental companies restock with better, more efficient drill pipe tools.

Our 4-inch XT drill pipe continues to sweep the shale drilling field across North America, performing favorably through the challenging curve and lateral sections of these wells.

We also foresee rising demand for drill pipe for new offshore rig builds on a horizon moving steadily closer. Over 50 new offshore newbuilds are expected to order large-diameter, mostly premium strains within the next year and a half or so. Along the way, we are continuing to invest in our substantial technical lead for larger, stronger, tougher pipe, with higher torsional strength connections, which we continue to innovate in our recently-opened drill pipe research facility.

We also increased research and development investment in a proprietary IntelliServ wired drill pipe products this quarter, where we have a joint venture with Schlumberger, to improve the range of services we provide and achieved 98% operational uptime this quarter. IntelliServ has maintained 95% operational uptime globally since mid-2010.

Our Tuboscope unit also benefits from drill pipe demand through its drill pipe coating, hard banding, threading and drill pipe repair services, which we are expanding in the US, Mexico, Brazil and the Middle East. The group also provides pipe inspection services worldwide for all forms of OCTG, casing, tubing, line pipe and drill pipe, and benefited from high pipe mill and processor activity during the first quarter. Demand for tubing and line pipe coating services increased most strongly in North America for all the oil drilling under way, because oil wells often produce lots of water, corrosives and steel, for which our coatings are an excellent antidote.

Rope access inspection services for rigs, another Tuboscope specialty, is seeing good demand from rigs both new and old.

Our conductor pipe connection business, XL Systems, generated solid results as well in the first quarter, owing to renewed focus on conductor pipe pressure integrity following the Gulf blowout. As a result, we are expanding our XL Systems business to better serve our Eastern Hemisphere customers as they move into new Deepwater areas.

Our Star Fiberglass pipe sales improved sharply, despite higher resin costs, benefiting from higher oil drilling and associated produced water volumes across North America. Fiberglass composite piping is impervious to salt water, sour gas and CO2, and demand for this technology has prompted us to undertake significant expansion projects in the US, Brazil and Oman. Star also benefited from stronger industrial demand in the United States.

Our Well Site Services unit posted higher sales of shale shaker screens, a consumable used to separate drill solids from drilling mud, along with higher demand for solids control rental equipment and waste management services across North America, the North Sea and West Africa.

Our largest product line within PS&S, downhole tools, posted higher sequential results throughout the Western Hemisphere on strong demand for drilling motors, bits, agitators and coring equipment. We are particularly excited about new bit and borehole enlargement technologies we are working on in this group, and continue to invest in new technologies to improve drilling efficiencies.

The Mission pump and expendables business enjoyed another solid quarter of demand for valve seats, flowline equipment and other consumables we provide into drilling and pressure pumping operations, along with higher demand for lease transfer and well stimulation multiplex pumps. Overall, the group posted good sequential and year-over-year revenue gains and margin expansion. We continue to expand Mission through a combination of acquisition and investment in new technologies.

Finally within PS&S, our quality tubing unit, which manufactures the coiled tubing going into well completion and stimulation operations, continues to run at maximum capacity, which, as we've discussed on previous calls, prompted us to add additional milling capacity to our plant. Large diameter coiled tubing, 2-inch and above, increased to nearly half our mix in the first quarter, with strong demand out of Canada, across the US and from the Middle East. We expect to bring the new mill on line late in the third quarter.

Overall strong performance across-the-board increased Petroleum Services and Supplies consolidated operating margins 440 basis points sequentially to 19.4%. And the many expansion projects underway for the group, expected to drive results higher over the next 24 months or so, underscore the strong outlook we have for the markets we serve and the high confidence we have in the teams running these businesses.

Broadly speaking, the unconventional shale model driving drilling activity across North America and expanding now into other markets, can be characterized as low geologic risk, but highly drilling and completions intensive. It is utterly unlike drilling a generation ago, which saw fleeting glimpses of precious Darcy reservoir rock here or there, elusive four-way closure, a rare and fortuitous geologic ancestry which bestowed the structure with charge. When the stars aligned for the lucky explorer, it was elegance.

Shale drilling is not elegance. Shale drilling is a brute force enterprise. It hurls massive iron and horsepower at a plentiful, fairly pedestrian rock in exchange for a secure and protected production volume. It is underground shock and awe that makes oil and gas give up and surrender. That is the trade-off -- certainty of production volumes in exchange for oilfield iron eaten with voracity.

Our PS&S segment is composed of roughly 70% sales of manufactured consumables and short-lived capital equipment, like drill pipe, solids control equipment, drilling motors, bits, coiled tubing and many, many more NOV products that are consumed in large quantities to make the economics of unconventional shales work for the industry we serve.

Distribution Services also benefited from sustained high levels of shale drilling and posted solid results in the first quarter, demonstrated by its 6.8% operating margins. Its modest 3% sequential sales decline reflects a couple of large fourth-quarter drilling spare sales which did not repeat. In particular, Canada posted very strong results and high margins due to cost reductions and good market conditions there, with a late onset of breakup.

Likewise, the US continued to benefit from high levels of rig activity. Artificial lift sales are increasing with renewed North American emphasis on oil shale wells and rising sales in Latin America, and the group is seeing increasing sales into Iraq.

Within the US, Distribution Services continues to open new stores and shale plays, like the Utica, Marcellus and Eagle Ford.

Rig Technology delivered seven new offshore rigs this quarter, bringing our total to well over 100 since 2005, all characterized by exceptionally skillful execution. NOV's track record in this regard, both among drillers, drilling contractors and shipyards is unmatched, and has positioned us well to benefit from new orders, as evidenced by $2.3 billion in new orders received this quarter, including six new drillships and more than a dozen Jackups.

The retooling of the rig fleet is well underway. For a more impassioned, colorful exploration of this topic, I refer you to our last 25 conference call transcripts.

Q1 orders for Rig Technology also benefited from increased demand for land rigs, coiled tubing units and frac spreads. Within our new FPSO turret business, orders were slow, but we are working on numerous feed studies for new projects and our integration of APL is proceeding well.

Overall Rig Technology book-to-bill was 203%. Orders totaled $2,277,000,000, up 62% sequentially, offset by revenue out of backlog of $1,124,000,000, down 12% sequentially. Backlog at March 31 was $6,163,000,000, 23% higher than year-end 2010.

The land backlog jumped more than $300 million sequentially to total 17% of the backlog, and offshore equipment 83%. Equipment bound for international markets totaled 87%, domestic 13%. Through the remaining three quarters of 2011, we expect revenue of $3.7 billion to flow out of the backlog on the books as of March 31 and $2 billion to flow out in 2012.

The exceptional financing and pricing for new offshore rigs out of Asian shipyards is drawing to a close, as overall quoted rig prices inch up against rising steel costs and inflationary concerns, and aggressive payment terms offered by the yards are shifting to higher progress billing models. Yards have replenished their backlogs and are holding out for a little better economics.

We are also pursuing better pricing on leading edge bids into numerous projects and have dialed in escalators into options we have awarded. Between options and other announced projects, we expect second-quarter orders to again be strong.

Also within Rig Technology, we are seeing solid interest in BOP upgrade projects and fleet spares, and are delivering our new low-force actuator configuration. We began a new real-time BOP monitoring service, backed up by a rugged black box recorder, for subsea stacks through the IMO business within Rig during the first quarter.

A new land-based eHawk real-time equipment monitoring service, new drilling optimization services and activity-driven demand for instrumentation and drift services all contributed to great results for IMO this quarter.

Onshore rental companies are also replacing many old BOPs, further driving up demand for pressure control equipment. Late this summer, we expect to open our new BOP test facility in Houston, which will have the unique capability to test designs through a wide range of temperatures and operating conditions.

Cost inflation remains a concern for us. Steel is beginning to inch up, as are resins and polymers, and we are experiencing labor pressure in certain areas. Numerous buy-ins like chassis, trailers, hydraulic fittings, gear boxes, et cetera are very tight with long lead times. So far, we have been able to stay ahead of these with pricing, but we continue to monitor the situation closely.

We also continue to improve efficiency, continually shifting our manufacturing footprint, processes and designs to drive down costs of products, like our power swivels, pipe caps and mud pumps. We've begun manufacturing of drilling riser in Korea through our Hochang operation to improve freight costs and efficiencies.

Since the 2009 downturn, we have insourced 2 million man-hours at 7% savings. This has kept NOV machinists and assemblers employed through the downturn, improved absorption on machines that would have otherwise been idle and positioned us well for the upturn that we are now seeing.

Next week, we will launch our inaugural NOV University Manufacturing Leadership Program in collaboration with Rice University to collaborate on cutting-edge manufacturing techniques across NOV.

To summarize, our first quarter saw lower revenues from newbuild rig projects, largely offset by higher sales in our activity-driven PS&S group, illustrating well the thoughtful financial construct of NOV. In past cycles, our Rig Technology segment has lagged our PS&S and Distribution segments about two years or so. All three are tied to oil and gas and all three segments are cyclical, but the later cycle nature of Rig Technology juxtaposed against the others provides NOV with a healthy diversification, producing stable results through the cyclical downturns.

Now let me turn to our operating segment results. NOV's Rig Technology segment generated revenues of $1,608,000,000 in the first quarter, down 8% sequentially and down 15% compared to the first quarter of 2010. Operating profit was $422 million, yielding operating margins for the group of 26.2%, down from 28.5% in Q4 and 30.8% in Q1 of last year.

Lower sales and margins, both sequentially and year-over-year, reflect the expected winding up of the many offshore newbuild projects won during the order ramp from 2005 to 2008 and comparatively low levels of orders seen during 2009 and 2010 owing to the credit crisis. In essence, the revenues are now following the downturn seen in our backlog through the last two years, which will continue to weigh on the segment's margins through the remainder of the year.

Recent orders will help reverse the declines, but will also bring a near-term mix shift towards lower margin land equipment, which turns more quickly, and lower priced offshore equipment. Nevertheless, we believe 2012 will begin to see margin improvements owing to more Deepwater newbuilds at slowly improving pricing.

Sequential decremental operating leverage or flow-through for the group was 53%, and year-over-year first-quarter flow-through was 57%, reflecting this mix shift towards modestly lower pricing and generally more land business carrying lower margins than the offshore. Aftermarket increased about 5% sequentially and increased 17% year-over-year, led by higher service and parts revenues. But small capital equipment sales that don't qualify for our backlog declined sequentially, leading to slightly lower non-backlog revenue overall for the first quarter compared to the fourth quarter.

Well stimulation equipment sales fell sequentially following large international shipments in Q4 that did not repeat, but is expected to rebound in the second quarter following strong orders during the first quarter.

Coiled tubing and frac fleet demand led us to initiate expansion projects in our Hydra Rig, Rolligon and Texas Oil Tool plants this quarter. Demand for land rigs led to a land rig backlog north of $1 billion for Q1, and we expect to continue to see strong land rig sales for both international and domestic customers, responding to rising demand for high-technology rigs and frac fleet equipment.

Looking into the second quarter of 2011, we expect Rig Technology revenues to improve slightly, but for operating margins to continue their drift downwind.

The Petroleum Services and Supplies segment generated total sales of $1,265,000,000 in the first quarter of 2011, up 11% sequentially and up 37% year-over-year. Operating profit was $246 million and operating margins were 19.4%. Compared to the fourth quarter of 2010, the $128 million revenue increase produced 59% operating leverage or flow-through. And year-over-year flow-through was 39%, both held by higher volumes, drill pipe mix and generally improving pricing.

US revenues grew 18%, Canada improved 23%, and international revenues declined 3%, leading to an overall mix of 60% North America and 40% international for the first quarter.

Looking into the second quarter of 2011, we expect Petroleum Services and Supplies segment sales to be roughly flat with Q1 at comparable margins, as growth and pricing improvements in many markets are offset by seasonal declines in Canada due to breakup and continuing headwinds in the Middle East and North Africa due to political unrest.

Turning to Distribution Services, first-quarter sales in this segment were $410 million, down 3% sequentially and up 23% year-over-year. Operating profit was $28 million or 6.8% of sales, and sequential decremental flow-through was 15% on the small revenue change. Year-over-year, the group generated a very strong 22% flow-through on the additional $76 million in sales, led by the improved market conditions across North America. Mix for the group's first quarter was about 76% North American and 24% international.

For the second quarter of 2011, we expect Distribution Services revenues to come in about flat with the first quarter at comparable margins as seasonal declines in Canada due to breakup are offset by modest gains in the US and international markets, including Iraq.

Turning to National Oilwell Varco's consolidated first-quarter income statement, SG&A decreased $7 million due to lower incentive compensation accruals and lower bad debt accruals as compared to the fourth quarter of 2010. SG&A as a percent of sales was roughly flat with the fourth quarter.

Equity income in our Voest-Alpine JV was $13 million, down slightly from the fourth quarter, and we expect similar profitability in the second quarter of 2011. Other expense was $19 million in Q1, reflecting an unfavorable $13 million sequential move related to adverse FX movements, mostly with the Norwegian kroner, and the retirement of some debt at APL.

The tax rate for the first quarter was 31.9%, up from our average 2010 rate of 30.8%. We expect the tax rate for the remainder of the year will be in the 32% range, owing to a slightly higher mix of domestic income than we were previously forecasting.

Unallocated expenses and eliminations on our supplemental schedule was $68 million in the first quarter, down $8 million from the fourth quarter, due mostly to lower legal expenses, incentive compensation accruals and intersegment eliminations. Depreciation and amortization was $135 million, up $6 million from the fourth quarter.

EBITDA, excluding transaction and Libyan devaluation charges, was down $4 million sequentially to $764 million or 24.3% of sales.

National Oilwell Varco's March 31, 2011 balance sheet employed working capital, excluding cash and debt, of $3.8 billion or 29.8% of annualized sales, up $711 million from the fourth quarter due to several factors. Generally, we saw rising sales for each of the three months of the quarter, January to February to March, and issued a large volume of milestone invoices from Rig Technology late in the quarter, both of which led to backend loading of our accounts receivable. This accounted for about half the growth of our working capital.

We also made incentive compensation payments and large tax payments during the quarter, reducing accrued liabilities. And we invested in inventory against higher orders for Rig Technology and rising business levels for Petroleum Services and Supplies. We also picked up nearly $50 million in receivables and inventory from acquisitions.

Working capital employed in Distribution Services was comparatively stable sequentially.

Total customer financing of projects in the form of prepayments and billings in excess of costs -- less costs in excess of billings, was $261 million at March 31, representing a sequential improvement of about $236 million.

Cash flow from operation was negative $25 million for the first quarter due to the increase in working capital items I just described. CapEx declined $13 million sequentially to $79 million, and we expect CapEx for the full year 2011 to be in the $400 million range as we pursue a number of expansion opportunities. NOV's cash balance was $3.1 billion at March 31, 2011.

Now let me turn it back to Pete.

Okay, thanks, Clay. What I want to do right now is just make a couple of brief comments about some of the themes again that we are seeing and what we think is going to probably drive the entire industry throughout 2011 into 2012.

And obviously the first one, as Clay so eloquently pointed out, are the shales. The one thing, though, I want to point out -- on the shales today, you're starting to see a shift to oil. And that is an important shift, because I think that is going to give the rig count a continued life. As a matter of fact, I believe it was this past week, for the first time since 1995, more rigs in the United States are drilling for oil than are drilling for gas.

I think that is going to continue. From our vantage point, that continues to be a wonderful business opportunity for PS&S and our Distribution group. As a matter of fact, I would argue that oil drilling probably provides us more opportunity, especially in the completion phase of the wells.

Additionally, our drilling side is going to continue to see business for fit-for-purpose rigs. They need the best rigs out there. I think you are seeing that throughout the timeframe here that we've been looking at over the last couple of years. You've seen that folks with the best rigs, like H&P, Nabors and others, are continuing to have the best utilization rates.

The other theme I think on shales that will probably start to manifest itself a little bit is the international shale arena. That is going to be a slower growth because of the infrastructure aspect of things. However, we build infrastructure, so we feel pretty good about that. And we are starting to see some things happen, in particular, like in China, we've sold some coiled tubing units into China recently, as well as some top drives. And the reasons for that -- we've always sold a lot of top drives into China, but I think right now, it is more kind of positioning themselves for the advancement of the shale play in those areas.

And if you look at a map on the shale plays around the world, you will see that there is a lot of very, very good-looking shale opportunities. So I think that is going to be a continuing theme as we look into 2012.

The rig bifurcation, something that you've probably heard us talk about, as Clay also so eloquently pointed out about 25 times in a row, is going along very, very rapidly. I think that is part of the reason you're looking at a $2.3 billion intake of new orders. That will continue. As you've heard us say before, rust never sleeps and technology advances. And I think as you get these technology advances, you are going to see more and more folks that are going to want these new rigs. And we are very excited about it. As we look at the projects that are coming across our desk, we feel like there is going to be a lot of pretty cool things happening in this area.

The third theme -- again, you've heard me talk a lot about this -- is technology. I think as we talk about the advancing technology that we are putting out there, it really raises the bar. When you look at the things that we are able to do in these new rigs that we weren't able to do in the past, it really makes the operators want to have these sorts of rigs out there. They have enhanced flexibility and they also have the ability to drill deeper, drill faster, drill longer, extended-reach and the like. So we think that is going to continue on and this technology is going to drive it.

I would also remind all of you that the Offshore Technology Conference is next week. I think you are going to see a lot of neat technology for the entire industry. This is obviously about NOV here, but I also think -- I am very proud of this industry on the amount of technology that we are advancing, and it is really a lot of cutting-edge stuff. And I think if you come to Houston next week for the OTC, you will see a lot of that.

One of the things that we've done and a theme for us in the downturn a little bit has been expansion. When you go into a little bit of a downturn, which we were in the PS&S and Distribution area, you want to utilize the financial strength you have so that you can expand, both through M&A and organic expansion, so that when you are coming out, you can accelerate faster. I think our margins kind of dictated that or presented that this particular quarter.

We are building a lot of new facilities around the world, different coating plants, different fiberglass plants. And I think this expansion is going to allow us to see higher highs as we move into 2012 and on into 2013.

Let me just real quickly kind of give you a little bit of the view of the world that we see. Obviously, Brazil is still very, very important for us. The projects down there are moving along well. Today, we have over 1000 employees in Brazil. We are building some new facilities down there, coating plants and a fiberglass plant, as well as putting up a new service and repair facility and kind of an all-purpose facility. So we are investing heavily in Brazil, and we think as 2011 goes on, we will have very good news coming out of Brazil and the opportunity there.

Middle East and North Africa, still a lot of geopolitical problems. We are watching those closely. A lot of potential there, though. I think when you think about Saudi Arabia and what they are talking about doing and some of the drilling, I think there is some opportunity that is going to present itself as long as, I think, the geopolitical storm kind of can subside a little bit.

Russia has been very nice for us. We are selling new coiled tubing units, workover rigs into Russia. We are building some new facilities. Most recently, the Odoptu well was completed by Exxon. It was a world record well -- I think 7.13 miles of extended reach. And National Oilwell Varco's hands were all over that.

We had ReedHycalog bits in the hole. It was Grant Prideco pipe that was able to drill it. And a lot of the surface equipment was all NOV stuff. So we are real proud of the performance on that, when you take a look at that. And I think that is really going to be a bellwether type operation for the future in a lot of other areas.

China, I mentioned some of the things we are doing there recently. I think China will probably be one to keep an eye on on the shale play. I think the Chinese, you know, they've obviously invested in the Eagle Ford and the Niobrara. I think they are trying to learn from that and be able to take that home.

Mexico looks to be an area that is improving well. You are seeing a lot of the drilling contractors putting some Jackups to work down there. Seadrill is going to put the West Pegasus Deepwater rig to work later in the summer. And we think there is some good opportunity down there. We've expanded our manufacturing footprint in Mexico, which has helped us on our logistics lines in the United States. So we think there are a lot of good things happening there.

And then finally, Korea and Singapore are going to be very, very busy for us. When you take a look at the shipyards and the activity that you are seeing with this recent flurry of orders, those are going to be areas that are going to be very, very important to us over the next two or three years.

So that is kind of a quick overview of the things that we are doing. We are bullish on the business. We think that the business model, as Clay pointed out in his comments, is kind of showing you that you've got the early and mid-cycle things that are coming on stream now, and then we are also starting to reload the backlog. So we like where we are. And Matt, at this time, I would like to open it up for any questions that our listeners might have.

(Operator Instructions) Jim Crandell, Dahlman Rose.

Good morning, Pete, Clay. My first question has to do with your incoming order rate, and -- Pete, and the way that you're booking these new rigs. I think there have been 31 or so new Deepwater rigs ordered since October 1. You booked six in the quarter. And assuming that you won your usual strong market share of these, it appears that given this and the other trends in the business that this $2.3 billion order rate cannot only be sustained here as we go forward, but maybe can even be increased going forward.

Well, Jim, you know us well enough to know that we don't opine much on where the backlog and the order intake is going. But I think that, without a doubt, there is a lot of activity out there. And we kind of pointed this out on the last call, I think, when we announced last quarter we were about 1.3 something of new orders. And people said well, there are a lot of orders that have been announced.

But as we've always explained, just because an order has been announced by a contractor doesn't mean that we have been able to negotiate the proper contract and everything with the folks yet. And as we've pointed out a lot of times, we don't do anything on a notional basis.

So I think without getting into an exact number, Jim, I will tell you we are very bullish on the amount of orders potentially that are out there. And I think as you hear of the contractors announcing that they've worked deals with the shipyards and they've got options, I think you can extrapolate that we are going to do quite well in being successful in being able to monetize those deals.

Okay. And Pete, a question about Brazil. We've been looking for another package of drill ships ordered this year, maybe another five to seven drillships and another couple semi-submersibles. Do you see that happening in Brazil this year?

Yes, I do, Jim. As a matter of fact, I was in Brazil last week, kind of talking to different folks down there and visiting with our people as well as Petrobras and some other customers down there. And they are moving ahead. They've got their holding company essentially set up. There has been some articles on that in the Upstream Oil & Gas magazine, I believe. And there is a lot of good things that are happening.

But as we've kind of pointed out over the -- I guess I was going to say last few months, but I will say years now -- things move a little but more slowly down there. But we are very optimistic that that is going to come to pass down there. And I will say this, in the $2.3 billion that we announced today, there is nothing from Brazil. I don't think there is anything material at all in there.

So anyway, I think that is going to come to pass, and it will happen, I believe, in this year.

Bill Sanchez, Howard Weil.

Thanks. Good morning. Clay, I know for a number of quarters you have talked about ultimately Rig Technology margins, I guess, moving down into kind of the mid-20s here, and you guys have had good success in achieving better than that. We finally saw that dip in 1Q. You talked about it and you are guiding down lower to 2Q here from there. Is that what we should still be thinking, is kind of mid-20s kind of troughing there, and then maybe staying there a bit through the balance of 2011? Or how do we think about Rig Tech margins progressing?

Bill, I really think we are probably going to dip down through the mid-20s into the low 20s through the remainder of the year, is kind of what we foresee. And again, you know well the story, but some of the other folks on the call may not. We took in a lot of very good orders at very high pricing back in '07 and 2008 in a very inflationary environment. And we had sort of factored in an expectation of rising costs.

We did much better than that in 2009 and 2010, largely because of the economic downturn. And so we were actually executing these projects in a deflationary environment. So they were very nicely priced, high-priced rigs, that we were able to actually complete at much lower than expected cost. And it was a combination of a little deflation out there, plus the fact that our teams are just very, very good at applying the lessons they've learned through that build cycle.

So margins got up into the low 30s through the first half of 2010. And we've tried to be very transparent with everyone about the margin downturn that we've expected. So what you are seeing this quarter within Rig is that continuing at 26.2%, and our expectation is it's going to continue to move down.

The good news out there, though, is that the orders, as Pete just pointed out, very, very strong this quarter. With sort of I would say modestly rising pricing through this trend of orders, not in a big way, but we are kind of resetting the backlog and layering in a good foundation of work for 2012 and 2013. So I think the turn is out there, but this is going to be much more of a 2012 event.

Okay. And I know you just addressed, Pete, I guess perhaps expectations on when people look at what ODS at least reports as having been ordered by drilling contractors and what you have booked, especially on the floater side, it still seems like there is a lot of fairway for you.

I'm just curious, as it relates to when you think about options to be exercised out there -- and I know you made the comment, Clay, that shipyards, I guess, are going to be asking more to build these rigs. I know in some cases we've got a lot of these options that have fixed-price economics. Anything there that you all could shed light on in terms of order or exercise rates getting done? Is there -- Clay, did I hear you right -- is there some concerns you had about shipyard financing maybe pulling down some of these options getting exercised?

No, no, that is really more a comment on the market, Bill. The shipyards got very aggressive. A lot of these shipyards are huge employers in the Asian countries where they reside, and there is a lot of concern there as backlogs work their ways down, they would potentially contribute to a big unemployment problem in those countries.

So the shipyards work closely with their host government to have trade agencies, much like the US Ex-Im Bank, to finance projects.

So back in -- a year ago or so, as they were getting increasingly nervous as the backlogs were winding down, they got very aggressive on financings, and were offering some of these projects at 20% down and 80% at completion, which is a very, very attractive set of payment terms. I want to stress -- those are their terms, not NOV's terms. We've always been very good about demanding progress billings through the project to minimize our working capital investment and also minimize our risk in the project.

So that comment really pertains to the shipyards. Our sense is that those sorts of payment terms are dwindling pretty quickly, and that is because the shipyards have been successful in reloading their backlogs and they know that they are going to keep their employees busy here for the foreseeable future. So I think that is putting a little pressure on the situation.

And then in addition, steel costs are moving up, as we are seeing in our own business, and so I think that is also contributing to a little higher pricing that the yards are demanding for projects overall.

And a lot of times, too, Bill, on options, the customers will go back in and they will say, well, we know we have an option at the end of this month -- will you extend it a month, things like that. So it is a moving target. And a lot of times, the shipyard's going, yes, okay, we'll go ahead and extend them for a little while longer. And so again, it is all kind of dependent upon money and things like that.

But we -- so I think when you see something that is just written in stone that this is the option date, you might assume that stone is sand, because that is probably not written quite that hard.

What we do -- I can't speak for shipyards, but we also take that as an opportunity to refresh our costs, as that -- and if we are going to extend an option, we kind of rerun economics and adjust the pricing and/or require a fee to extend the option.

Michael LaMotte, Guggenheim Securities.

Good morning, guys. Joseph Triepke here on behalf of Michael. My question relates to the fact that the need for new topside equipment is largely enabled by advances downhole, which of course are linked to the rising complexity of drilling today's wells. I was wondering if you could speak to the fact that NOV provides components to the major service companies and has an integrated view of the reservoir and conveyance of it -- how that might provide a competitive advantage for you when it comes to engineering new topside technologies.

That's a good question, and I think it gives us a tremendous advantage. Because when you think about it, I think getting information from the bottom of the well is probably the most important thing you do. You don't drill wells for practice. You want to know what is down there, and you want to get that information back.

Well, who basically has the wherewithal to be able to handle not only everything that is going on the surface but also downhole? And when you look at our control systems, this is exactly what we are integrating into. You will be able to sit at the driller's panel, where we have everything -- nobody else is building that; that is us doing it. Plus, we are building everything downhole. And we can integrate that completely into a seamless process that is going to allow the operator to have all of this. And then further to that, we will be able to take that and beam it back to the shore.

So I think it gives us a wonderful advantage, and it is something that we've got different engineering teams throughout the Company working on every day to try to maximize that advantage.

Thanks. Great color. I will turn it back.

Roger Read, Morgan, Keegan.

Good morning, guys. I guess maybe, Clay, just to hit you a little more on the margin front for the Rig Tech business. I understand how margins were much better from the last big order issue as business overall changed on the cost side. But as you compare the pricing -- or the margin that you've priced in today on this particular wave compared to the prior wave, any significant differences?

Early on, Roger, we were -- like everybody else, by the end of 2010, we were a little more aggressive on pricing, in all candor. But as these conversations started blossoming all over the place, I think we've become increasingly more aggressive.

So I would say through this recent upturn, you are seeing gradually rising pricing being quoted by NOV. And it sort of gets up into the range where we were quoting during the '06 through '08 timeframe. Now, the '06, '08 timeframe, you also saw gradually rising margins through that. These are -- and here I am all speaking about target margins. As I pointed out earlier, we actually exceeded our target margins in '10. But if I compare target margins to target margins, we are kind of getting back up there to pretty good levels.

Okay, great. And then on the PS&S business, you mentioned that pretty much everything was up in the Q1 performance. Looking specifically at my notes, I know on the revenue side; I don't know if you said also on the margin side. Curious, other than the regional issues, what is not up here? What still has room to accelerate?

I think like a lot of our customers and our peers, the outperformance in PS&S was really a North American phenomenon. Internationally, it is much more kind of steady as she goes, and we had some rising, some falling, had a couple of countries in South America that were maybe a little more challenged this quarter. So it is much more of an even kind of performance across a lot of international markets.

But broadly speaking, Roger, the real kind of surge in business, the improvement in pricing this quarter was much more of a North American phenomenon, with Canada playing a much bigger role than it has in the past three or four years. Canada really came back this quarter.

Jeff Spittel, Madison Williams.

Good morning, guys. Can I ask you guys to get your crystal ball out a little bit as we think about the pace of offshore rig announcements from here? And understanding we've got some crosscurrents going with the bifurcation in the offshore market, and then financing terms probably starting to tighten up a little bit in the shipyards, can you give us a sense of how you think this plays out maybe over the longer term here? And do you think we just kind of hit a pause in terms of announcements as the market digests what they are trying to accomplish now and then we move forward from there?

I think, Jeff, that is probably -- as you kind of take a look at the way things have gone on from about 2005, you kind of hit a little bit of a runway, you get some announcements, and then there is a little bit of a pause and then you kind of come back and get some more announcements. I think what you have today, you had a pretty good flurry of folks that knew they needed to get in the game. They wanted to get some attractive pricing. They got in there with the shipyards, got that, plus some options.

But I think you also have a bunch of other folks now that are sitting back, going, okay, we are taking a look at this and we know we need to build. But maybe we are going to let there be a pause here. Because obviously, if there is a little bit of a pause, maybe that will impact pricing a little bit and some other things.

So I think you are going to see -- I think if you look on this five years from now, you are going to see a fairly continuous process. But I think on a quarter-by-quarter or even six-month-by-six-month basis, you could see some choppiness in that.

Jeff Spittel Yes.

What really helps us in this -- I mean, you look at the demographics of the rig fleet, out of the 476 Jackups out there, more than 70% are more than 25 years old. There is a lot of building to come. The world has had a pretty steady-state Jackup fleet, in the 400 some odd range, 450 Jackup unit range for decades. And it is -- many of these are -- nearly three quarters are ending -- near the end of their life.

So Jeff, I think go out five years from now, there is going to have to be a lot of replacement. And then on the Deepwater side, technology has just really opened up a lot of new Deepwater basins around the globe that require a lot of iron to exploit.

Good to hear. And then switching over to the FPSO opportunity, understand that you are conducting some feed studies now. Can you give us a sense and I guess familiarize us with what the gestation period typically is in that business, from feed to potential awards? And do you think we could start to see some traction there this year, or is that more of a 2012 event potentially?

I think we are optimistic that orders are going to come flowing in. I'm not sure if we are going to start to see that at the end of this year or if it is more of a 2012 event. But what we know is these FPSOs undergo a lot more rigorous study before the projects actually start to cut steel and move forward. That is a function of the operating conditions and the expected fluids coming out of the reservoirs that they are going to produce. So they are much longer gestation periods, I think, than, for instance, drilling rigs, where we have a lot more experience and are much more kind of all-purpose type assets.

So we are pleased. There is a lot of projects out there on the horizon around the globe. Fundamentally, the FPSO's are a very attractive way to develop remote fields that are a long way from existing pipeline infrastructure, and they are a way to avoid a lot of very expensive pipeline installation to get the operator to first production. So I think it is a much better way to develop these remote styles of Deepwater drilling that is going forward.

And the level of feed studies, the level of projects being considered out there, I think really underscores that that is very much an industry view as well. So we are excited about it. And using the opportunity; it is actually in some ways a little easier to integrate the operation and kind of get it reset while we are not so busy. And so we are using this opportunity to integrate that business and make it much more comprehensive. There's a lot of products at NOV that we can add to what APL already does, and so we are pretty excited about the future.

Brad Handler, Credit Suisse.

Good morning, guys. I am hoping I can draw you out a little bit on PS&S outlook in the second half of '11. Maybe give some more perspective. It sounds like -- for example, it sounds like drill pipe was a strong contributor in Q1. Was there something unusual about that? Or barring the weather in Canada impact, which probably isn't drill pipe anyway, but how does that business -- how do you see that the business progressing forward through the balance of the year? And then we'll come back and maybe just talk about margins more generally, please.

First, within Q1, we always have some unusual puts and takes around the globe. And within drill pipe, for instance, we had a large shipment in Asia that we expected to half ship Q1, half ship Q2. It all went in Q1. And so that was a little bit of a pickup.

But that wasn't the reason for the outperformance. It was just across-the-board really, really good work by that team there making it happen.

Going into the second half of 2011, once we kind of get past the Canadian breakup noise, and hopefully past some disruptions in North Africa, within drill pipe, assuming that we see continued strong demand -- or continued strong drilling activity in the shales, that is certainly going to continue to consume a lot of drill pipe, and we're going to sell into that trend.

But we are also expecting the additive impact of orders for new streams for a lot of these offshore rigs coming out of the shipyards. They're kind of month by month running out of runway to order very large landing strings and very large high-torque, high-strength drill strings that tend to be used by those rigs. And so we are kind of positioning the business here as we move through 2011 in anticipation of that. So our outlook for this business for the remainder of the year is very, very good.

Terrific. So in the pipe business -- I guess I'll stick with that and then we will come back -- can you give us some perspective on how sales volumes compare to kind of prior peak, maybe pre-acquisition Grant Prideco days?

Yes, we are not to where the business was in 2008. I think 2008 was a record year for drill pipe business. And we closed on this business early in 2008, so we are not quite back there yet. But like I said, it is moving up and to the right.

What is interesting, Brad, though, if you look at the sales mix this quarter versus the mix in 2008, with over 80% of the mix this quarter in premium pipe, that's huge. I think in '08, '07 and '08, the business was more like half and half. And what it speaks to is this continued secular shift of drillers towards more premium high-technology drill pipe instruments to tackle these tougher extended-reach and horizontal wells.

Right, so more of the XT product, it sounds like.

Precisely.

For shale. Okay, very good. And then more generally on PS&S, I guess I (inaudible) ask this question -- I sometimes wonder how you guys can answer it. So peak margins, we look at mid-20s, kind of before things fell apart here.

As you see the shape of the business, as you see -- a couple of examples, right? Drill bits doesn't seem to have the same traction because it isn't as important a part of the shale development, just as to one illustration in the US. Are there some limiting factors that we should think about for PS&S as it relates to margins as you make your way through the cycle?

Well, first, Brad, I would clarify that. We actually think bits are very critical to the shale plays, and our offering there does a great job and we continue to invest in new and better bits.

But yes, fundamentally, every cycle is a little different. When we look back at our PS&S business reconstructed on a pro forma basis, with things like purchase accounting and step-up DD&A, for instance, we last saw mid-20 margins back in '01 with that cyclical peak. And then when the business kind of participated in the oilfield upturn in '05 and '06, we saw mid-20% margins in '06 and again in '07 and '08. So we got a good -- we spent a lot of time at margins in the mid-20% range and preceding cyclical peaks over the last 10, 15 years. So I feel pretty good.

If anything, the continued investment in infrastructure and the quality and technology that we offer, new products, if anything, I think that has laid a foundation for very good performance as we continue into this cyclical upturn. I'm always hesitant to tell you very precisely what margins are going to be, because we don't know. But we work hard year in and year out to make our businesses better and more efficient and ultimately generate higher returns and higher margins.

Makes sense. Thanks, guys. I will turn it back.

Tom Curran, Wells Fargo.

Good morning, guys. Clay, as you are over a quarter into the integration of APL now, could you give us some indication as to where ultimately you think EBIT margin could rise to for that business and how long it seems like it is going to take you to get it there?

First, Tom, to be clear, it came in at a very low margin. And that is partly because of the way the business was organized. It is very engineering oriented. Great group of folks who do a good job bringing a lot of technology to the FPSO world, but they tend to outsource everything. And we are much more vertically integrated and have a lot of machines and assembly and fabrication operations that we think we can bring to the combination to improve the margins.

The nature of the transaction layered in purchase accounting step-up as well, and so we are battling that headwind. So we have a long ways to go. I'm not going to be quantitative in my answer, other than to say we expect that as volumes pick up and we start to land some orders and really bring this more packaged concept to the FPSO world, we think the outlook is pretty bright. But we've also, I think, been very clear in saying that is a couple years out.

Okay. And then Pete, could you just give us an update on the M&A pipeline, and specifically how some of those other opportunities you thought were out there with regards to FPSO equipment have progressed?

Good question. I think that, again, we are still very bullish on the M&A situation right now. Obviously, we've got a lot of dry powder, and we are capable of doing a lot of things with that. And as we -- there is a lot of things that we are looking at today. Some of it is small, some of it is fairly good-sized.

But I think as we go throughout the year, you will see us make some moves in that arena, and I am pretty positive about it. You have got -- you are in an interesting time right now, because I think there is enough uncertainty in the overall economic market around the world that people are kind of skittish. And if they think, well, I've been making some pretty decent money in this area, and I wonder if I want to stay in this, or maybe if it is time to sell to somebody.

So we think there is a real buying opportunity out there today, and we've got our business development group very, very active, got them going all over the place, looking at deals. I think as the year goes on, you will see us do more and more deals. We did some deals this quarter. They were smallish -- did two deals. And I think as we go forward this year, you will see some positive things.

Great. And is my understanding correct that when it comes to the FPSO front, you do see prospects similar to APL and that among the other FPSO specialists, they have manufacturing related subsidiaries that they are interested in disposing of?

Well, Tom, I would say we have a pretty good offering right now. We don't have to add anybody. The Turret is kind of the centerpiece of an FPSO, and that came in with APL and [Prosase] business that we brought in in Q4. And that adds to the cranes, the hose reel systems, the riser pull systems, the mooring systems that NOV was already offering. So we've got a pretty good packaged offering already.

When we look at opportunities to expand that offering, they are always gated by -- we look very closely at the financial returns in those transactions. With regards to the other FPSO more vertically integrated folks, who perhaps make their own turrets, we don't -- I am not aware of what they are doing. We are very focused internally on the business that we have and offering that to the people that want to build FPSOs.

Okay, thanks for the color, guys. It was helpful. I will turn it back.

Matt, are you there?

Yes, and that was our final question. You may go ahead with any closing remarks.

Okay. Well, again, thank you all, and we look forward to talking to you at the end of the second quarter. Thank you very much.

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