國民油井華高 (NOV) 2011 Q2 法說會逐字稿

Welcome to the National Oilwell Varco 2011 second-quarter earnings call. My name is Dawn, and I will be your operator for today's call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Loren Singletary, Vice President, Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Welcome, everyone, to the National Oilwell Varco second-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 second quarter ended June 30, 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 risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q 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 2, in order to permit more participation. Now I will turn the call over to Pete for his opening comments.

Thanks, Loren, and welcome everybody to our second-quarter 2011 earnings conference call. Earlier today we announced earnings of $481 million or a $1.13 per fully diluted share on revenues of $3.51 billion. This profit is an 18% increase over both the second quarter of 2010, and the first quarter of 2011.

We are very pleased with these results and believe they reflect a preference for our products and services around the world, and a continuing operational excellence of our employees. Clay will expand upon these numbers in a moment.

Additionally, we announced a record capital equipment order intake of $2.96 billion, to give us a quarter-ending backlog of close to $8 billion. In the past 2 quarters, our new order intake has exceeded $5 billion. I would like to thank our worldwide sales force for their outstanding efforts in achieving these record order intake results.

On a more somber note, I would like to offer our condolences to our Norwegian friends and coworkers on the losses suffered Friday at the hands of a madman. The thoughts and prayers of everyone at National Oilwell Varco are with the people of Norway today. At this time, I'd like to turn the call over to Clay.

National Oilwell Varco produced excellent results in the second quarter, posting revenues of $3.5 billion and earnings of $1.13 per fully diluted share for the period. Our quarter included transaction charges of $4 million pre-tax, and excluding these earnings were $1.14 per fully diluted share.

Operating profit, excluding transaction charges, was $712 million or 20.3% of sales. Higher than we expected, due to strong margin performance from Rig Technology, which offset expected seasonal margin declines from Petroleum Services and Supplies and Distribution Services, stemming from breakup in Canada and flooding in the Bakken area.

Margins in these 2 segments also face some additional mix challenges, which I will detail in a few minutes, but nevertheless, performed well to meet the rising needs of our customers. Strong demand in the North American shale plays and good international activity contributed to solid results for both segments.

Like others in our industry, we have been witnessing a steady migration within North American shale activity. Gas prices have remained range-bound in the $4.00 neighborhood since 2009, below the average for the 2003 to 2008 period, leading to levels of gas drilling about 40% below their 2007/2008 pace.

However, declining gas rigs have been more than offset by growing levels of oil-directed drilling, which has risen sharply to levels not seen in 25 years, fueled by sustained high crude prices. Together with rising deepwater production from the Gulf, the 400,000 barrels of oil per day flowing from shales have resulted in the first increases in US oil production in a generation.

The great migration of activity from gas to oil has created new opportunities for our operations, along with new challenges, as we reposition our assets and workforce to continue to meet the pressing needs of the petroleum industry. As a result, both the Petroleum Services and Supplies and Distribution Services segment are expanding rapidly into new geographic areas to build out the infrastructure required of us.

The Bakken region of North Dakota and southern Saskatchewan, the Utica and Marcellus shales across the upper Midwest, and the East Coast, the Eagle Ford shale of south Texas are pulling workers and iron into new frontier regions, while oil productive regions of old, like California, the Rockies, the Permian Basin of west Texas are experiencing new growth.

Our service operations are busy investing and repositioning to be where our customers need us, adding solid control equipment and generator sets to new field locations, opening tubular inspection and drill pipe repair facilities in growing regions, and investing in our large fleet of downhole drilling motors and bits.

Likewise, our factories for products needed for oil production in these regions are expanding and reconfiguring to meet the evolving needs of our customers. For example, we are adding a new coil tubing mill, which should start up the fourth quarter, to produce larger 2-inch and 2.375-inch coil tubing to accommodate lengthening laterals in these horizontal wells.

We are investing in new artificial lift technologies for liquid wells. We are expanding our fiberglass pipe plants to offer composite pipe solutions to operators dealing with rising water corruption and corrosion challenges.

We have invested in new well service pump technologies and machinery, and additional flow line products for pressure pumpers within our Mission product line. We are also benefiting from strategies undertaken during the downturn to improve our supply chain and efficiency in areas like drill pipe manufacturing, but we have shifted production of tool joints to lower-cost areas in Latin America.

PS&S and Distribution Services also continue to expand overseas. Tuboscope coating and inspection facilities in Brazil, Mexico, Abu Dhabi, and Oman; Star fiberglass pipe plants in Brazil and Oman; new Mission and well site services operations in Brazil and Russia; 2 XL systems facilities in Africa; expansions in Dubai and Saudi Arabia; and new drill pipe manufacturing capability in Abu Dhabi.

In short, we are preparing for growth in the face of a massive industrial transformation -- the application of new horizontal drilling and hydraulic fracturing technologies that turn shales into productive oil and gas reservoirs, which will play an enormous role in the world's energy equation through the 21st century.

This transformation is steadily gaining footholds internationally, as entrepreneurial petroleum producers and national oil companies apply technologies refined in the shale laboratories of North America to promising basins on other continents. NOV intends to play a major role in this important transformation.

And speaking of massive industrial transformations, another parallel effort is underway to find new sources of energy from the Earth's oceans. With 60% of our planet covered by deep water, our industry will require a massive fleet of deepwater rigs to explore, produce petroleum wealth from this exciting frontier area. Exhibit A is NOV's record level of orders for rig equipment during the second quarter.

Clearly, our customers are beginning to share our long-standing view that many, many new rigs are required to advance the deepwater effort, and they are investing heavily in the tools required to develop these offshore resources.

During the second quarter, Rig Technology segment booked new orders of $2.963 billion, up 30% from the first quarter of 2011, and quadrupled the second quarter a year ago. Bookings included drilling equipment packages for 8 drill ships, 6 jack-ups, and a large production platform. None of the rigs were for Brazil.

Revenue out of backlog totaled $1.390 billion, yielding a quarter ending backlog of $7.7 billion, up 26% sequentially. As of June 30, 84% of this backlog was for the offshore, and 16% for land. 84% of the orders are bound for international markets, and 16% for domestic markets.

For the remainder of the year, we expect approximately $2.8 billion of the June 30 backlog to flow out as revenue. Another $4.3 billion is scheduled to flow out in 2012, and the $600 million balance in 2013.

Overall, the segment gained moderate pricing leverage through the first half of the year, in the 6% to 8% range, as we face rising costs for steel and other inputs. Numerous buy-ins, like hydraulic fittings and transmissions, are very tight, with long lead times.

Competition has been tough, but we have been fortunate to win a good number of new orders, owing to NOV's comprehensive offering of leading technology and skillful execution.

We've also been able to maintain good progress billing schedules on these long-lived projects, to minimize our own working capital investments in the projects, and improve our capital efficiency. By increasing our customer's investment in the projects as construction proceeds, these progress billings mitigate the risk of potential cancellation, should we face another sharp downturn like we did in 2009.

As a reminder, we faced cancellation of only a very small fraction of our orders following the downturn 2.5 years ago.

Recent orders have been concentrated in the most experienced shipyards, those that constructed most of the offshore rigs bought between 2005 and 2008. Specific yards have developed high levels of expertise in the construction of jack-ups in Southeast Asia, and the construction of semis and drill ships in South Korea.

Other yards around the world dabbled in offshore rig construction a few years ago, and landed comparably few orders recently, highlighting an evolving market preference for highly experienced yards for the execution of these complex projects.

Building an offshore rig is a much more complicated undertaking, than say, a tanker or freighter. The legs for a jack-up, for instance, require tight tolerances and complex assembly operations, and inexperienced yards missed deadlines over the past few years, as they learned the hard way just how tough it is to build an offshore rig.

Real-world experience in building rigs over the past 6 years have made drilling contractors smarter about the selection of their vendors. Nevertheless, competition among highly experienced Korean yards for floaters has been intense. These yards have been active, building a variety of industrial vessels, tankers, freighters, LNG vessels, in addition to a smaller drilling rig business for many years.

In 2008, the credit crisis and economic downturn slowed orders for all vessels, and these yards saw their backlogs for all vessels decline significantly, as they worked through their large backlogs. The recent uptick in demand for drill ships is offering a way for the Korean yards to refill their backlog holes, and they are hungry, and aggressively pursuing any and all drill ship projects.

But in comparison to the Singapore yards, they have much bigger holes to fill. As a result, their pricing leverage has been limited thus far, while the jack-up builders in the Far East have met with more success in achieving price increases on new jack-ups. Both regions are demanding progress billings more consistent with our own, and don't appear to be offering the 20% down, 80% at delivery specials seen several months ago.

Slack capacity in South Korean yards, coupled with strong desire to replace tanker and freighter backlogs with rig orders, have prompted these yards to sign up for aggressive build schedules and tighter deadlines, generally shaving 10 months or so off the construction schedules of just a few years ago.

NOV's order inquiries for offshore drilling equipment packages have continued to be strong through the first few weeks of July, and we hope to post another strong order quarter in Q3. We are continuing to work closely with various shipyards, including EAS in northeast Brazil, the Atlantico Sul Shipyard, to participate in the Petrobras orders.

We are also continuing to invest heavily in Brazil to support the growing fleet of offshore rigs at work there, and to help meet local content goals for the new rigs.

Our long-term FPSO outlook remains very strong, given that we are tracking dozens of potential projects around the globe. While second-quarter FPSO turret orders improved sequentially, overall they remain slow, which we believe will persist through the next few quarters, due to the very long cycle time required to sanction these projects.

FPSO orders pivot on E&P decisions move forward on billions of dollars of development CapEx, not just for the FPSO, but also for the development drilling programs, sub-sea well heads, manifolds, and riser expenditures. And those decisions typically require extensive reservoir modeling, feed studies, economic forecasting, and financing.

Predictably, they don't go as fast as rig-building decisions. So, in the meantime, we are busy integrating our APL business into NOV, and assembling a broader array of NOV products into a FPSO packaged concept.

Land rig market appears to be getting stronger. We've built 13 large complete land rigs this quarter, along with individual components for dozens of other new-build land rigs, mostly targeting shale plays in the US and Canada.

Our outlook for orders remains bright, with the reemergence of 3- to 5-year term contracts for high capability rigs for shale plays in North America. And we expect international orders for land rigs for the Middle East and the Far East to increase in the second half of the year.

Our backlog for land equipment jumped 22% sequentially to $1.246 billion, due to a combination of strong land rig sales, and high demand for well intervention and stimulation equipment. Demand for coil tubing units, pumpers, blenders, cryogenic nitrogen equipment is surging for pressure pumpers, serving the many active shale plays across the US and Canada. And we were pleased to add frac sand handling products through our acquisition of [Apco] during the quarter.

Overall, our outlook is bright. NOV will continue to play a critical role in the massive industrial transformations at work in the world's oil and gas industry.

The retooling of a land rig fleet with modern technologies to develop new shale plays, the replacement of an aging jack-up fleet, the build-out of a fleet of floating rigs to develop deep water resources, and the supply of a myriad of technologies and products to enable horizontal directional drilling, and hydraulic fracture stimulation in a safe and efficient manner.

With unequaled worldwide scale and scope, strong cash flow with financial resources, and most importantly, the best, most professional workforce in industry, National Oilwell Varco is exceedingly well-positioned to drive transformation.

Now let me turn to our operating segment results. NOV Rig Technology segment generated revenues of $1.894 billion in the second quarter, up 18% sequentially, and up 13% compared to the second quarter of 2010. Operating profit was $517 million, yielding an operating margin of 27.3%, up from 26.2% in the first quarter, and down from 30.4% in Q2 of last year.

We have previously forecasted margins to move down for the second quarter. However, the period benefited from lower costs than we expected, specifically on drilling risers we are building for the many offshore rigs the group is constructing.

Late last year we begin to transfer drilling riser fabrications operations to our Ho Chang operation in South Korea in order to improve proximity to the shipyards, and reduce manufacturing expense. Our analysis this quarter, based on actual results so far, showed much better cost improvements than we had anticipated.

Since most of our large rig construction projects are booked on a percentage of completion revenue recognition model, we adjust our estimates of future costs periodically, and continuously reconcile to expected future margins on all projects.

This quarter's adjustment resulted in a margin pickup and higher revenue, as we reconciled to slightly higher expected margins in the projects overall. Excluding this catch-up effect, Rig Technology margins would have declined slightly from the first quarter.

We are pleased that future drilling riser production and future margins are expected to benefit from these operational cost reductions. But nevertheless, we continue to face modestly declining margins over the next couple quarters, due to the winding up of the many high-margin offshore new build projects won during the order ramp up from 2005 to 2008, and the comparatively low levels of orders and lower margins seen during 2009 and 2010.

This mixed effect is seen in our year-over-year second-quarter comparisons, which showed a 310 basis point margin decline, and only 4% operating leverage or flow-through on the 13% sales gain. This mixed effect was less pronounced in going from the first quarter to second quarter of 2011, and helped by the riser margin pickup. The group's sequential flow-throughs were 33% as a result.

Record orders this quarter are rapidly replenishing our backlog with solid projects, which we expect to begin increase margins in 2012, after they drift down for the next couple quarters.

Most importantly, these projects will be executed by the best rig equipment manufacturing team in the business who routinely innovate new ways of building equipment efficiently and profitably, like drilling risers. They continually seek low-cost, high-quality sources of products across our expansive network of facilities, and post manufacturing margins rarely matched in our industry.

Solid operational performance prompted revenue added backlog to jump 24% sequentially, to $1.390 billion.

During the quarter, we delivered 6 floating rigs, and commissioned 1 jack-up, and the commissioning operations continue on 28 rigs in 14 different shipyards. Non-backlog revenue, of which 82% this quarter was aftermarket spares and services, improved 4%.

Organic expansions along the Gulf Coast, Brazil, Dubai, and the North Sea, acquisitions in Singapore and India, and the growing install base of NOV rigs should position NOV's ascending service infrastructure, for our own make BOPs to underpin rising aftermarket revenues in future periods. Looking into the third quarter of 2011, we expect Rig Technology revenues to be flat or up slightly, with operating margins in the mid 20s.

The Petroleum Services and Supplies segment generated total sales of $1.359 billion in the second quarter of 2011, up 7% sequentially, and up 32% year-over-year. Operating profit was $249 million, and operating margins were 18.3%. Compared to the second quarter of last year, operating leverage or flow-through was a solid 34%.

Revenues improved $94 million from the first quarter, but operating profit was up only $3 million sequentially, and margins declined a 110 basis points from very strong first-quarter levels.

The sequential performance represented only 3% flow-through due to a number of factors. First, the impact of the seasonal breakup in Canada reduced revenues compared to the first quarter, and high decrementals, mostly affecting our downhole tools and well site services product lines.

The non-recurrence of high first-quarter solid control equipment sales into North Africa, and the Middle East, and continuing unrest affecting all operations in that region, further pressured Q2 results.

These sales declines were offset by, first, higher revenues from recent acquisitions at lower margins. Second, modestly lower margins on increased sales, emission, drill pipe, and XL systems owing to mix. And third, lower margins on higher well site services revenues due to start-up costs for new locations and flooding in the Bakken region.

Finally, Tuboscope posted a very strong quarter, with sharply higher coating and pipe inspection revenues as strong flow-throughs. Domestic mix of revenues for the group increased from 50% in the first quarter, to 54% in the second quarter, due to strong demand from the liquids-rich shale plays, while Canada declined from 10% to 7% of the mix as expected due to seasonal breakup.

International grew slightly, but the international mix declined from 40% to 39% during the quarter. The group continues to battle inflationary forces for steel, polymers, epoxy, labor, and rent, particularly in the emerging shale areas. And several product lines are carrying start-up costs for new operations across these, but most are also reporting increasing traction on pricing, typically in the mid-single digit range to offset creeping costs.

Our outlook remains very positive for the segment. We expect revenues and margins to improve, both in the third quarter, as we emerge from the breakup in Canada, strong activity across the shale plays in the US, and offshore markets in the North Sea and the Gulf of Mexico slowly improve.

Mission is seeing steady adoption of premium ceramic liners by drillers, and strong demand for its growing offering to pressure pumpers and for positive displacement pumps.

Sales and rentals of downhole drilling motors should continue to grow, with the opening of our new motor reline facility in Houston, and some amazing test runs for our new Helios cutter PDC bits underpin our improving outlook for downhole tools for the second half of the year. Several other units are expected to benefit from new facility start-ups later in the year and into 2012, including Tuboscope, fiberglass systems, quality tubing and XL systems.

Turning to Distribution Services, second-quarter revenues were $423 million, up 3% from the first quarter, and up 16% from the second quarter of 2010. Operating profit was $26 million or 6.1% of sales, down from $28 million or 6.8% of sales in the first quarter 2011.

Compared to second quarter 2010, operating profit doubled, and operating leverage was a solid 22%. Regional mix swung sharply for the group, with Canada down 28% sequentially, and accounting for only 14% of the segment's second-quarter mix, compared to 22% in the first quarter. Nevertheless, the Canadian operation was able to maintain good profitability, despite the large breakup effect.

US and international sales both grew nicely sequentially, with international operations helped by our acquisition of Capital Valve in the UK, and accounted for 52% and 34% of segment's mix, respectively. US margins were down slightly, with new DSC start-up costs in south Texas, Pennsylvania, and the mid-continent.

Mono industrial sales margins were down in Argentina and Europe, but the group foresees improving results later this year, as international sales of artificial lift products began to grow significantly late in the quarter. As a result, we expect Distribution Services revenues in the third quarter to move up nicely on higher artificial lift sales, recovery in Canada, and continued rig activity-driven growth across the US We expect margins to move back up into the high 6 range.

Turning to National Oilwell Varco's consolidated second-quarter income statement, SG&A increased $9 million sequentially due to higher incentive compensation accruals, but declined as a percentage of sales to 10.7%, as compared to 11.6% in the first quarter and 11.5% in the second quarter of last year.

Operating profit, excluding transaction charges, grew $84 million sequentially, and a $118 million year-over-year. Interest expense declined $5 million sequentially, due to our second quarter $2 million -- $200 million indenture repayment.

Other expense improved $12 million sequentially due to improvements in foreign currency exchange expenses. Equity income in our voestalpine joint venture was $10 million for the quarter, down $3 million from the first quarter due to lower volumes and unfavorable mix, as less OCTG and more line pipe was sold. We expect equity income to decline slightly in the third quarter, due to our annual summer maintenance shutdown in August.

The tax rate for the second quarter was 32%, about flat with the first quarter, and we expect the tax rate for the remainder of the year to be in the 32% range. Unallocated expenses and eliminations on our supplemental schedule was $80 million in the second quarter, up $12 million from the first quarter due to higher tax consulting expenses, legal costs associated with acquisition, and inter-segment eliminations. Depreciation and amortization was $138 million, up $3 million from the first quarter.

EBITDA, excluding transaction charges and Libyan asset write-downs was up $94 million sequentially, to $858 million or 24% of sales. National Oilwell Varco's June 30, 2011 balance sheet employed working capital, excluding cash and debt, of $3.5 billion or 25.2% of annualized sales, down $211 million from the first quarter. This is due primarily to rising orders in our Rig Technology group.

Total customer financing of projects in the form of prepayments and down payments, billings in excess of cost, less costs in excess of billings, was $876 million at June 30. Accounts receivable increased $92 million, and inventory rose $186 million sequentially on higher revenues and acquisitions, largely offset by higher accounts payable and accrued liabilities.

Cash flow from operations was $912 million for the second quarter, a sharp improvement from the first quarter, due to the working capital items I've mentioned, and strong levered cash flow of $618 million.

CapEx increased $34 million sequentially to $113 million, due to high expenditures on new facilities primarily within Rig Technology and Petroleum Services and Supplies. We expect CapEx for the full-year 2011 to be a little over $400 million, as we pursue a number of expansion opportunities.

During the quarter, we spent $208 million on 2 acquisitions, and acquired 2 more businesses within the past few weeks, bringing our total to 6 so far in 2011. This does not yet include the announced acquisition of Ameron, which we hope to close in the fourth quarter, which will push our acquisitions to over $1 billion in 2011.

We filed for regulatory approval last week, and are enthusiastic about the new products Ameron will bring our fiberglass and composite fluid corrosion control solutions and FPSO offerings, within our PS&S group, and new infrastructure and industrial products to our Distribution Services group. We look forward to welcoming Ameron's very talented team to our organization soon.

Finally, to wrap up our balance sheet discussion, NOV's cash balance was $3.4 billion at June 30, 2011. Now let me turn it back to Pete.

I just want to make a couple more brief comments. And as I was thinking about things that I wanted to say today, a lot of it is just an instant replay, from what we talked about the last couple quarters.

Needless to say, the big theme in the United States continues to be the shales. And even though the natural gas is lower-priced today, the rigs that are coming off the gas wells are moving to the oil wells. So we are seeing a very nice consistency in the rig count right now. So I feel very, very good about what we are doing in the shales.

And obviously, all the products that we have out there lend themselves quite well to shales, whether you're talking our downhole tools, our bits, our rigs, our drill pipe and everything that we have in there. So I'm very encouraged, that this is going to kind of continue on.

The other thing, we've talked a lot about is the rig bifurcation. No question, that the best rigs are getting the work. And there's also no question, you are going to continue to see rigs being built. You saw the bump in land rigs that came out this quarter for us, we were very pleased with that. And you continue to see the very high activity, in both the jack-ups and the high-end drill ships.

And we think this is going to continue for a period of time. There are a lot of options that are still out there, and we feel very good about our position in the market, and we like what's going on.

The reason we feel very good about it, here's what I think the real theme is, that's important for us over the next couple years, and that's technology. When you look at the technology that we are putting out there, the interesting thing is you really have to compress the time frame with which you are introducing this new technology.

I will give you an example. We needed to have a much bigger, stronger top drive. And we were able to develop our TDX-1250 in less than a year. And this allowed us to have redundancy, much higher torque, did a lot of different things to it.

Today, we have sold and have on order, delivered already 12, and have another 34 on order, and continue to sell these. We've compressed that, into less than a year. That's really what our goal is, when you talk about technology.

We are doing a lot of things today about remote monitoring, our eHawk system, our BlackBox. Probably the biggest push we have going on is in control systems.

We are the logical producer of control systems. We have everything on the surface. We have everything downhole. So we're the people we think are really going to be able to come to market, with the primo control system, that's very important for everybody.

We are doing a lot in APL today. Clay mentioned, what we're doing there with the integration of that acquisition. And we are very excited about some of the things we can do now with LNG vessels that are coming into the marketplace.

When we take a look at some of our PS&S businesses, we are looking at some modular fracing systems. We are coming out with some new frac pumps in our Mission group. We are doing an awful lot in downhole with new bits. We have new downhole motor designs. We have a vertical drilling tool that we think is going to be very well-received in the marketplace.

So a lot of neat things going on in technology. And we really think that's going to be a driver as we look to the future.

Finally, I believe our investments are paying off. As we take a look at what we did the last few years, Clay mentioned it earlier, we put an awful lot in infrastructure growth. We put a lot of things into places like reline facilities for downhole motors, we basically doubled our capacity and the capability of doing that. We look at our new fiberglass pipe plants. We look at things we are doing in other areas, and pipe coating and the like.

And we think these investments that we were able to make because of our strong balance sheet in 2009 and 2010 are really going to be paying off as we look to the future.

Our M&A, Clay mentioned the operations and the companies that we have closed on this quarter. We feel very, very good about it. We think there are still a lot of good opportunities out there. And with a balance sheet that we have, we are going to have the opportunity to do things that other companies cannot do.

So all in all, we like where we are, right now. We think it was a very good quarter. For those employees at NOV that are listening in, I'd like to thank you very much for everything that you've done, and the hard work. And we will continue on with this.

We like what we are seeing for the remainder of this year and as we go into 2012. So at this point, Dawn, I'd like to open it up for any questions that our listeners might have.

Thank you. We will now begin the question and answer session.

(Operator Instructions).

Our first question comes from Jim Crandell from Dahlman Rose. Please go ahead.

Great quarter, Pete. Congratulations to you and the management team at NOV.

Thanks, Jim. We appreciate it.

Clay, could you go into a little bit more detail on the revenue and margin forward outlook at the capital equipment business. I think I understood what you said about the riser business. But from here, is the outlook for the next, let's just say, 2 to 4 quarters or 2 to 3 quarters, one of slight margin erosion? And on the revenue side, I guess it was my understanding that in the early stages of booking revenue, that you book mainly the engineering revenue. And that that comes on very slowly, while you are running off backlog and on equipment deliveries. And so I was expecting that to sort of unfold fairly slowly for the next 2 to 3 quarters.

On the revenue picture, Jim, the second quarter benefited from more quicker turn items, and higher completed projects -- or completed contracts items that helped drive that, so a lot of smaller, well servicing equipment and the like. The margin surprise that I referenced in my comments at the beginning, really came out of this reshuffling of our drilling riser production infrastructure. We moved a bunch of that over into the eastern hemisphere, to these very large facilities that we acquired a couple years ago in Korea.

And the way it works, that impacted mostly our percentage of completion projects. The way that the accounting works, is that we will continually book toward our expected total cost of the project. And a lot of these big offshore rigs that we are working on have riser as part of their cost -- as part of the products that we are delivering. So as we discovered the magnitude of cost savings, much larger than we expected, what we had to do this quarter then, is reconcile towards a little lower margin across those projects.

So what that does in the quarter, is have a -- create a lift in margins in Rig Technology that you saw, which was a bit of a surprise. And then secondly, in future periods, we do expect margins will be better, margins in Rig Technology from kind of where we were previously. We're still going to trace a path that drops us I think down into the lower 20% range, but not quite as deep a downturn as we were looking at last quarter, based upon these efficiency gains. So that's our expectations for the next couple quarters. And then in 2012, as we get further out, as these new projects flow in, I think that will improve the margin picture, and we'll start to see margins go back the (technical difficulty).

And Clay, what did you say about the ramp in revenue from here? Would you expect a more modest ramp, over the next 2 to 3 quarters?

The next couple quarters I think we are expecting a total of $2.8 billion in revenue out of backlog, which is in line. We have the possibility, Jim, of adding some additional revenue, with new orders coming in the second half of the year that might push Q4 up a little bit more. But as we are getting deeper into 2011, the opportunities to materially push up our revenue guidance on -- for revenue out of backlog becomes more and more limited. So most of the orders that we are taking in now, are going to impact 2012/2013 revenue much more significantly.

Okay. And my second question, Pete, and this one is for you. How do you feel about additional deepwater new builds, besides what already has letters of intent and authority in your backlog? I was wondering if you could address three separate categories. 1, your traditional customers, 2, Norwegian customers, and 3, Brazil, particularly in light of maybe Samsung and Hyundai, sort of filling up for the next year.

Yes, Jim, I think that really almost all levels that you just mentioned, are really fairly positive right now. I think the -- you've got the traditional Western contractors, which have kind of led this most recent order intake surge. I think those guys, a lot of them are continuing to talk about, as soon as they get a contract for 1, they are going to put another one in the queue. So I think you are going to continue to see that happen.

You are seeing a reemergence of some of the Norwegian players. I think that's going to continue to be a very positive deal. Then of course, you mentioned Brazil. I think Brazil, while it has been a long and arduous journey, that is one that I think will probably come to fruition here pretty soon.

The reality is when people think about it, they look at the number of those deepwater rigs that are being built, and they see this historically big number. But the reality is when you look at the world that is covered by 60% deepwater, it's really kind of, no pun intended, just a drop in the ocean. And you really are going to need a lot more of these rigs. So we feel very good about it.

Now let me also talk about, when you talked about Hyundai and Samsung and capacity. Remember, when we were building these back in 2006, 2007, 2008, they had a lot more tankers in those shipyards. They still have the same key side, but now they have a lot fewer tankers. I think the capability of them taking on more, is probably a little bit more than people realize at this point. So all in all, kind of a long-winded way to say, we are still very bullish on the opportunities out there on new builds.

Okay. One more quick question if I could, Pete. Do you see a broadening out of the ordering of new land rigs in the US, from the traditional Helmerich & Payne, Nabors, Patterson, Precision to other companies, in terms of spec new builds or just new builds from other customers?

A little bit, Jim. I think that you are starting to see some new entrants into it. And I think that is being driven probably by operators going out there and saying, hey, we would like to get some more people out here doing this, and we will put these rigs on contract. So we're seeing a little bit of that. I don't think it is huge at this point, but it is something we are experiencing.

Great. Thank you, Pete.

Thanks, Jim.

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

Yes. And congratulations, guys. Thanks very --

Very proud of it.

On the -- Clay, in terms of the nearly $3 billion of new orders, could you give us any color on number of drill ships and jack-ups that are in that mix?

Yes. We booked 8 drill ship packages, and 6 jack-ups in the quarter. And we also had a pretty good sized production platform rig in there as well.

Okay. Let's see, so was a pretty big step up -- I guess it was 6 drill ships in the first quarter --

Right.

-- and then 8, but that still leaves -- I mean, do you --your current count of ships that have been ordered, if we go back to that October of 2010 start date --

Yes. We booked, in addition, in the fourth quarter last year, I think 2 drill ship packages. So that gives us the 16 drill ship packages we built since that start date, Robin. So given that there were -- the number of ships ordered is in the high 20s, and then there's lots of options beyond that, I think there's still quite a bit of work out there. Also, too, I will reiterate second-quarter orders did not include any orders for any of the drill ships for Brazil. And so that is still out there in the mix, and we are working hard, hopefully, to land some of those.

Right. That actually was my second question, was on Brazil, where they have clearly designated a shipyard. They've got the financing in place for the first 7 rigs.

Yes.

And I think you are expecting possibly third quarter award for those rig packages?

Well, I learned a long time ago not to get too specific, on the timing of signing contracts in Brazil. It's been an arduous, lengthy process, but there's been a lot of good developments. Petrobras did set up, Sete, the entity to own and finance these rigs, Sete has executed a contract with EAS on the next 7 drill ships. And I think a day or 2 ago, the revised 5-year CapEx plan for Petrobras was approved. And so, I think it looks like things are moving ahead there.

Okay. Now you gave us the figures on drill ships. It looks to me like what you must have gotten, is really like the full amount that you would potentially get from the drill ships and jack-ups, to add up to that nearly $3 billion. So is that correct, that you kind of got the full --?

Yes, I'd say the level of participation on both, was very high and very good. And just as a reminder, we sell everything we can into sophisticated drill ships. We can exceed $200 million in orders. In the prior cycle, we were up over $250 million. And then in jack-ups, $50 million is kind of a good harsh environment, highly capable jack-up rigs. But actually, what have seen here lately, is some very, very big jack-up rigs, where we have exceeded the $50 million package in a couple of instances. So overall, I think -- again, the marketplace is seeing the value that NOV adds to these new rig construction projects, and I think that our participation thus far has been very, very strong. And we believe that is going to continue.

Right. Okay. Thank you.

Thank you, Robin.

Thank you. Our next question comes from Kurt Hallead from RBC capital. Please go ahead.

Good morning.

Hi, Kurt.

Hi. I just wanted to follow up first, on the commentary about the guide points on PSS, as you go into the quarter. Some of this may be around semantics, but when you talk about an increase, and going out into the third quarter. We've had a few of the other players in the business so far, suggest that the revenue growth, vis-a-vis rig count in the North American market or the US market could be 2 times that rig count. I know your businesses are not quite as service-intensive, so there may be some differential. But if we think about rig count growth being up double digits on a sequential basis, you would have to think that PSS would at least match that. But is there any other things that we need to consider, to think that revenues could grow faster then that rig count?

Well, the good part about our business, we do participate in sort of a higher growth areas, things like coiled tubing technologies, and some pretty high-performance drilling motors bits. And so, I think we have a good mix of businesses within PS&S to participate in whatever rig count movement we have happened. Some of the specific things, Kurt, that I referred to in my comments had to do with seasonal issues in Canada, a much more magnified breakup I think this year, given the strong levels of activity in Q1, and then that fell off pretty sharply. We lost 400 rigs this year in Canada, and last year I think the rig count only went down about 300 rigs. And so it was a much bigger impact this year, and exacerbated by flooding in the Bakken region, which affected both Saskatchewan and North Dakota. So going into Q3, we expect all of that to turn around. And that was really kind of the basis for our guidance for PS&S.

Okay. So I guess, just coming back to it, the view for NOV would be you're not quite at the same two times rig count growth as your service companies, but you could do better than that? You can do better than rig count growth?

Yes, Kurt, we have never been quite that specific on quantifying our forward-looking guidance. I will say, that the things that are positively influencing our outlook for Q3, are our rising level of activity, the turn-around of seasonal breakup in Canada, and the fact that we are getting traction on pricing, which is improving our outlook. Some of the other like pressure pumpers, and other service companies that you may be referring to, may be getting a little more pricing leverage. There are certain segments, particularly within pressure pumping, that have experienced a little more pricing leverage than we have been able to get. Nevertheless, our outlook remains strong.

Okay. And then a prior question there, you referenced kind of what the potential ticket could be for NOV on a deepwater drill ship, for example, and a high-end jack-up. You mentioned that the [Peakford] drill ship was somewhere around $250 million. Now I guess it is still under that. And then I guess, land rigs are still what, $15 million to $20 million for the US? And if you go internationally, could be maybe $40 million to $50 million, depending on the requirements on the land rigs?

Yes. That's pretty accurate.

All right. That's it for me. Thanks a lot.

Thanks, Kurt.

Thanks, Kurt

Thank you. Our next question comes from David Anderson from JPMorgan. Please go ahead.

Thanks, gentlemen. Good morning. A question on drill pipe for the new builds. It looks if you've got about 21 floaters,10 jack-ups coming in the second half of the year, another 14 floaters and 15 jack-ups in 2012. How many of those have ordered drill pipe, and kind of what are some of the trends you're seeing in the timing of orders? Clay, I think you and I talked about this, that some of these guys are -- because they don't have enough contracts, they are pushing out for further and further towards delivery dates. Can you talk about that? And, as that comes through, I would expect those margins to be incremental to PS&S. Am I in kind of in the ballpark in my thinking here?

Yes. We are keeping an eye on that world very, very closely, and know that there are a lot of premium landing strings and drill pipe strings to be ordered by that fleet of new rigs that will be delivered here over the next few years. That something our sales group, within drill pipe pays very close attention to. And what we are witnessing is, some hesitancy -- not hesitancy, is probably not the right word, but I think they are seeking, the oil and gas companies and joint contractors are seeking a little more clarity on the specific programs those rigs are going to go out and drill.

The blossoming of all of these different size, weights, and grades and technologies within drill pipe, means that you probably need to be a little more thoughtful about the selection of the type of drill pipe. And so what we think may be gating some of these orders is, are drilling contractors and their E&P customers they are waiting to get a little closer to the spudding of the wells. And thereby, seeking to optimize the selection of the pipe that is going to go onto these rigs. Nevertheless, you look at the rig fleet that is coming online, they are going to have to order -- those rigs with don't -- without drill pipe. And so we foresee a lot of drill pipe to be ordered, and that will be favorable to the mix. That is some of the best margin pipe we sell

That is what I thought. Could this potentially be a kind of a 4Q upside surprise event? Or is this more like a first half 2012?

I would go 2012.

2012. Okay. On a different subject, sounds like you guys are kind of calming people down a little bit about the FPSO market, in terms of how this is all playing out. But you mentioned about APL integration. Can you just kind of tell us where you stand? I know you talked about shifting some of the manufacturing, the cost control, the overall strategy. I assume this is still going to be the transition year for APL, and then next year, we should start seeing the orders. So could you comment on that? And also, you had mentioned kind of an offering from NOV, in terms of the FPSO package. Is the turret -- are there other things around the turret that we are not familiar with, or is the turret separate from say, your more traditional packages you have, like cranes and the other metal bending things.

Let me take the last part of that question firs, and that really is the NOV offerings on that. What we've got -- the turret is something totally, absolutely new to us. And that came with the APL acquisition. And APL is really a creative organization that is able to do things. And in particular, you've got the submersible turret, which allows you to kind of drop the turret, and you kind of sail the FPSO out of harm's way, if you are in harsh environments, or in the Gulf of Mexico, things like that, when a hurricane comes in.

But we also recently purchased a company called Merpro. And Merpro does a lot of things that are additive to what we do there.

And then plus with our Norwegian operations and a lot of our craneage, and our chain handling and anchor handling and things like that, we offer a pretty wide array of things. It's our intent to continue to do that, but also as I mentioned earlier in my comments about technology, we are also looking at LNG vessels, and APL has offerings for those as well. So we are very excited about, about where this is going. And I think that as we look at the technology that we have out there, we are positioning ourselves very, very well as the independent supplier of that, to a lot of the FPSO owners. And I will let Clay kind of touch on the integration process.

And yes, this is -- and to reiterate, this is a very long-term strategy. They bought APL, not for what we are going to do in FPSO orders this year, but rather for where we see this industry going over the next 10 years. It is really underpinned by a very high number of deepwater offshore discoveries, and the need of the oil and gas community to plumb those discoveries in. And we think FPSOs offer a pretty elegant way to move into more remote locations, and produce those fields.

We will tell you, that when it comes to sanctioning the development of discoveries, and moving forward on spending big CapEx dollars, meaning buying an FPSO, it also carries along with it, a commitment to engage in much bigger drilling programs, and buy a lot more other equipment and hardware and services to develop these fields. And so we think that is kind of gating the FPSO orders here in the short run. But given the strong outlook for crude prices, the number of discoveries that are out there, we are absolutely confident that these projects are going forward. But as Pete mentioned, it's probably much more of a 2012 event.

Great. Thanks, gentlemen.

Thanks, David.

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

Thanks. Clay, with -- regard to the margin road map for the Rig Tech, just a couple of questions, and trying to correlate that with your view on margins. You did mention that you had recently implemented a 6% to 8% pricing increase for Rig Tech?

Yes, that is correct.

Yes. And when does that begin to hit the P&L? Is that sometime late this year, or is it next year or when?

I think it's more of a 2012. And actually, Bill, that has a lot to do with our guidance for 2012 margins kind of starting to go the other way.

Got it. And so, and then also the comment that we made with regard to shipyards, delivery times compressing about 10 months, cycle-on-cycle for a high-end drill ship, correct?

Yes. That's correct.

Yes, that sounds good.

So basically, your revenue conversion out of backlog cycle-on-cycle should accelerate, correct?

Absolutely. What you are looking at, Bill, is an accelerated delivery which obviously leads right into coming out of backlog quicker.

Okay, so your mix is going to be improving, pricing is going to be up, and your absorption ably is going to be better. When does that inflection really begin to take place? Is it at the end of this year, or do we begin to see that happening the second half of this year?

Well, Bill, we -- it is out there. We said, a couple quarters away. I don't want to call that precisely into this year versus 2012, but let's say, a couple quarters away.

Okay. Well, hat's all I have. Thank you very much.

Thanks, Bill.

Thanks, Bill.

Thank you. Mr. Miller, I am turning to call back to you.

Okay. Thank you, Dawn. And thanks, everybody, for calling in. We look forward to talking to you on our next conference call, when we discuss third-quarter results. Thank you very much.

Thank you, ladies and gentlemen. This concludes the National Oilwell Varco 2011 second quarter earnings. Thank you for participating. You may now disconnect.