國民油井華高 (NOV) 2011 Q3 法說會逐字稿

Welcome to the National Oilwell Varco 2011 third-quarter earnings call. My name is Kim and I will be your operator for today's call.

At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

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

Thank you, Kim, and welcome, everyone, to the National Oilwell Varco's third-quarter 2011 earnings conference call. With me today in 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 third quarter ended September 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 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 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.

Thank you, Loren, and good morning, everyone. Earlier today we announced earnings of $532 million or $1.25 per fully diluted share on revenues of $3.74 billion. This compares to earnings of $481 million or $1.13 per fully diluted share in the second quarter of 2011 and third-quarter 2010 earnings of $406 million or $0.97 per fully diluted share.

We are very pleased with these results and they reflect the confidence our customers have in our products and services.

Additionally, we also announced today new capital equipment orders in the quarter of $3.94 billion, a new record for the Company. These new orders increased the total capital equipment backlog to $10.27 billion, a 33% increase from the second quarter of 2011. Clay will expand on both the financials and backlog in just a moment.

I would like to thank all of the National Oilwell Varco employees worldwide for their continued tremendous efforts in achieving these results. In particular I want to thank the Rig Technology sales groups for their yeoman efforts in establishing a record level of new capital orders. Clay?

Thanks, Pete. National Oilwell Varco performed exceptionally well in the third quarter, generating $532 million of net income, as Pete said, or $1.25 per share fully diluted on $3.7 billion in revenues. Sequentially, earnings per share improved 11% on 6% higher revenues. Year over year third-quarter earnings per share improved 30% on 24% higher revenues.

Transaction-related charges were $6 million pretax or $0.01 per share in the third quarter, roughly the same EPS impact as in both the second quarter 2011 as well as the third quarter a year ago. Excluding transaction charges, earnings were $1.26 per fully diluted share in the third quarter.

Operating profit, excluding transaction charges, was $778 million or 20.8% of sales, up $66 million from the prior quarter representing 29% flow-through or operating leverage. Compared to the third quarter of 2010, excluding transaction charges, operating profit improved $180 million, representing 25% leverage or flow-through.

There is much to highlight this quarter as performance was excellent across the board. All three of our segments posted higher revenues and operating profit, both sequentially as well as year over year.

Rig Technology landed a record level of orders for capital equipment, including the largest order ever in the history of our company during the third quarter. Petroleum Services & Supplies generated record quarterly revenues and pushed operating margins above the 20% level. Distribution Services posted its third-highest quarterly sales ever at very strong margins approaching 8%.

Overall, we are pleased with the exceptional performance and grateful for the hard work and terrific execution by NOV's nearly 50,000 employees.

Two clear, broad themes we have highlighted before, shales and deepwater, continued to shape our industry and drove higher demand for NOV's products and services in the third quarter.

First, unconventional shale and tight sand drilling along with seasonal recovery in Canada lead to a worldwide rig count increase of 12% sequentially and 15% year over year. Within North America unconventional plays account for more than half of all drilling and it's propelling many NOV products and services ever higher. All three NOV segments benefited from rising unconventional drilling during the third quarter, and we believe shale drilling will continue to shape National Oilwell Varco's performance for many years to come owing to our strong position in the supply of key technologies which make shales work.

Modern drilling rigs, like those our Rig Technology group offer, move quickly and utilize top drives, AC power, electronic controls, and robotic pipe handling to optimize operations into safe, repeatable, efficient industrial processes. NOV continued to deliver modern land rigs like our IDEAL Rigs in the third quarter to a fleet which must be retooled to fully exploit new shale resources, and the group saw in its backlog for land equipment rise 20% sequentially in the quarter. Importantly, announcements of systematic newbuild plans by major land drillers, mostly backed by term contracts, continued through the quarter.

These modern rigs prefer premium drill pipe, which our Petroleum Services & Supplies group is the largest provider of worldwide. Our highly-engineered drill pipe maximizes drilling fluid hydraulic power through friction-reducing thermoset plastic coatings and optimized torque carrying capacity through sophisticated thread designs and metallurgy. 15 years ago premium pipe constituted less than 7% of our mix; so far this year it accounts for 67%.

Horsepower delivered to the bottom of the hole through pressurized drilling fluids flowing smoothly through drill pipe is converted into torque by our market-leading downhole drilling motor designs, which also saw strong demand in the third quarter. This torque is used to turn NOV ReedHycalog tricone or fixed cutter diamond bits used to efficiently drill long laterals, and it's in these where our new thermal abrasion-resistant Helios cutters, introduced just a few months ago, are breaking records.

Demand for Helios bits, drilling motors, and agitators contributed to improved margins and strong performance for our Downhole Tools unit within PS&S during the third quarter. Shale drilling also spurred demand for solids control and portable power gen sets NOV provides, leading to solid double-digit sequential sales growth for our Well Site Services unit within Petroleum Services & Supplies as well.

Coiled tubing continues to play a large role in the stimulation and completion of these horizontal well bores. Demand for NOV's coil tubing units, along with other frac spread and stimulation equipment provided by our Rig Technology group, led to an 11% sequential growth in orders for this equipment. Once again setting new records.

Each year these coiled tubing units will consume eight or more strings of coiled tubing each, which our PS&S group also provides. With the third-quarter startup of a new large-diameter coiled tubing mill this product line posted double-digit growth and record quarterly sales, a record which we expect to be broken again in the fourth quarter. The Petroleum Services & Supplies segments pumps and flow iron components used in hydraulic simulations are also witnessing strong demand, and helped by our recent acquisitions, these lines posted double-digit sequential growth.

Likewise, high frac pressures dictate competent casing. NOV's inspection services for all the five-inch and seven-inch seamless casing being consumed in the North American shale plays benefited in the third quarter too.

Our Distribution Services segment reliably provides the consumables required to keep drilling and completion operations moving smoothly. And it, too, saw high third-quarter demand from emerging shale plays, particularly in Canada, which led the pack in margins this quarter.

What is striking to me about the evolution of the shale plays is the shortening of the time requirements across so many operations. By that I mean wells are drilled faster. They are cased faster. Wells are fracked faster, providing crews and equipment are available. They are hooked up faster. The entire system is being honed to maximize returns on the capital that it employs.

The adoption of new quick-move rigs which move in one day versus four days, or the shaving off of days and weeks off drilling operations through the adoption of better technologies downhole that generate higher rates of penetration, or the minimization of flat spots or non-productive time from the well [progs] by innovations like off-line stand building, or stimulation companies taking their frac fleets from 12-hour to a 24-hour operations all seem to focus on ever-swifter execution of the task at hand all the while reducing the time dimension. Or said another way, maximizing productivity per unit of time.

To us this begs the question, what do reduction of time requirements imply for NOV's demand? Well, it goes up.

The Shale energy system consumes everything from rigs to pipe to mud to pumps faster. Linear efficiency improvements result in greater demand with linear growth in consumption rates.

Consider, for example, an old rig which takes four days to move. You will have a string of drill pipes sit leisurely on the back of a truck for four days during its move, which it makes every well, whereas the drill pipe on a new quick-move rig gets only one day respite and as a result spends much more of its time downhole actually doing the work. Perhaps this is why many drilling contractors these days are reporting that drill pipe seems to last only 2.5 to maybe three years, whereas a generation ago drill pipe would last five years easy.

Consumables and equipment are being pressed into actual service more days a month than they used to be. Coiled tubing units increasingly move toward 24-hour operations. Today the coiled tubing we sell gets worn out in four to six weeks, less than half the time it would last a decade ago.

Higher productivity by crews and iron equals higher consumption. The flip side of improving efficiencies and shortening of time dimensions for certain operations is high and accelerating consumption of components that NOV makes. Consumption further hastened by higher pressures, higher torques, greater weights, and more extreme temperatures.

NOV is uniquely positioned to supply critical components to a rapidly blossoming oil and gas shale phenomenon. One that has legs, one that encourages and celebrates ever briefer periodic operations that devour the iron that NOV makes and sells, and one we remain convinced will soon spread to other basins outside North America. We are moving decisively in regions like Eastern Europe, the Middle East, South America, and China, which have an abundance of promising shales and, unlike North America, high gas prices.

Shale technology will provide a key solution to the growing energy needs of these regions in the decades to come, and this evolving, unconventional shale energy system with its efficiency-obsessed, time-shortening, consumption-accelerating drumbeat will continue to drive NOV's performance.

The second big theme pushing our business this quarter was deepwater. The deepwater needs two basic ingredients to work -- technology and oil price. Technology evolved in the 1990s to a level of reliability to enable low-risk development of deepwater resources making the deepwater possible.

As we entered the 21st century, governments around the world leased large tracts of deepwater acreage but it's oil price that makes deepwater profitable and attractive. And as oil prices moved up over the past decade the impact on our industry has been steady and predictable.

First came exploration, which prompted demand for some deepwater rigs to delineate reserves in this new frontier. Discoveries are now prompting further demand for more deepwater rigs to develop and produce these resources, and we expect this to be followed by rising demand for production systems like FPSOs.

Our Rig Technology group's results for the third quarter reflect high demand for deepwater rigs from an industry gradually transitioning from exploratory drilling to development drilling. Again, NOV is uniquely positioned to benefit from this trend as our level of orders for rigs in the third quarter demonstrate.

Record orders of nearly $4 billion in the third quarter were anchored by the seven drillship package order from EAS for Brazil totaling about $1.5 billion. In addition to these, the Rig Technology group also landed another seven floater packages for a total of 14 floaters, along with 14 jack-up packages for a grand total of 28 offshore rigs during the third quarter. Interest in land drilling rigs remains strong, and although FPSO orders have been slow in coming, we are bidding a large volume of work in the FPSO area and expect orders to start to come through in future quarters.

As I mentioned earlier, orders for well intervention and stimulation equipment rose to record levels during the quarter.

According to its public comments, Petrobras intends to sponsor 21 more new floating rigs which will be built in Brazil. It opened its second round of bids for floaters to develop its Santos Basin a few weeks ago after awarding the first seven rigs earlier this year. Several drilling contractors and local shipyards participated in the tender, most choosing to bid through [Seche], the company Petrobras set up to own and finance rigs.

NOV continues to bid drilling packages to the participants and we are optimistic we will continue to do well as awards are made. Additionally, we continue to pursue orders for newbuilds beyond Brazil and we are closely monitoring several options held by our customers for rigs and packages. Whereas we previously believed most would be exercised, many are now expiring or being extended, so the ultimate disposition of these is uncertain.

The all-in costs of offshore newbuilds has stabilized. Our pricing presently is 6% to 8% higher than year-ago levels. While some customers are wary of current macroeconomic conditions or are presently too busy with their previously ordered projects and lack additional bandwidth to undertake more, we nonetheless foresee others stepping up and ordering.

Given recent rising deepwater fixtures and stable newbuild costs, we believe the current financial returns on incremental offshore new builds are sufficiently attractive to prompt additional orders.

Q3 revenue out of backlog for Rig Technology was $1.4 billion and our book to bill was 280%. We ended the quarter with $10.3 billion in backlog and we expect revenue out of backlog to be approximately $1.5 billion in the fourth quarter. $6.4 billion is scheduled to flow out in 2012, $1.5 billion in 2013, and the balance in 2014 and beyond.

As of September 30, our backlog was 85% offshore and 15% land and 87% international and 13% domestic. Notably, the offshore rigs ordered over the past year or so are scheduled for more rapid fabrication in the shipyards than rigs built just a few years ago, 12 to 18 months faster, which will require our organization to work at a pace equal to or higher than we achieved in 2008.

With strong growth in both unconventional shales and deepwater, NOV is investing heavily in expanding and improving our capabilities to service the needs of our customers. Last quarter we spoke to new coating plants, coiled tubing mills, drilling motor reline facilities, riser inspection and repair, and drill pipe manufacturing capabilities that we are adding, and these will contribute more and more through the coming quarters.

We have also been extending our capabilities through acquisitions. We are pleased to complete our acquisition of Ameron International the first week of October, so you will begin to see the financial impact beginning in the fourth-quarter financial results. Strategically, the acquisition combines two leading providers of composite and fiberglass pipe and greatly expands the products NOV can offer into FPSOs, drilling rigs, and other marine vessels, and strengthens our position as the largest provider of composite pipe to the oilfield.

It also brings us new infrastructure products and additional water transmission products to our existing water processing equipment lines. We tend to report Ameron's fiberglass composite pipe segment within our Petroleum Services & Supplies segment and Ameron's water transmission and infrastructure product segments within our Distribution Services segment.

We also announced our acquisition of STSA in Singapore, which enhances NOV's ability to service our large installed base of pressure controlled equipment in the Far East. We continue to invest in the aftermarket support of all our equipment knowing our customers rely on our scope and reach to maintain reliability within their operations.

The common strategic thread through all these is our acknowledgment that our customers need to perform quickly and in an increasingly just-in-time energy environment. These two acquisitions, together with 10 more, totaled nearly $1.5 billion in cash we have invested in M&A through the past 12 months to enhance our product and service offerings, which we believe offers the highest return on the capital the Company generates and invests.

As we move into the final quarter of the year our outlook remains bright. Although the financial markets reflect broad macroeconomic uncertainty, we are watching the sovereign debt banking problems in Europe closely. Thus far commodity prices and oilfield activity have remained solid. We believe fundamentally attractive investment opportunities for our customers abound. And NOV, with its terrific team of professionals and its unparalleled technical operating and financial resources, stands ready to help them execute these.

Now let me turn to our segment operating results. Rig Technology revenues were $1.97 billion in the third quarter, up 4% sequentially and up 19% year over year. Operating profit was $528 million and operating margin was 26.8%, down 50 basis points sequentially and down 230 basis points from the prior year.

Operating leverage was lower than normal, 14% sequentially and 15% year over year, owing to the gradually shifting mix towards lower margin projects in our backlog, as compared to projects won prior to 2008. We expect margins to moderate in the mid-20% range in the next few quarters bottoming a little higher than we expected before due, first, higher volumes given strong levels of orders recently which improve absorption and, secondly, continued strong execution on costs by the group. We have once again benefited from positive cost variances within the segment in the third quarter thanks to an abundance of manufacturing talent within this team.

Notably, aftermarket revenues for the Rig Technology group moved up nicely this quarter helped by our STSA acquisition. Aftermarket parts and services rose 18% sequentially and 31% year over year, which offset some of the adverse margin impact of the project mix. We expect aftermarket growth to continue.

Over the past few years we have delivered 120 offshore rigs along with initial stocks of spare parts. The first wave of these are now coming off their initial warranty period, typically 12 months after spud, and are now starting to buy spare parts and services in earnest. We believe this growing installed base, together with the renewed focus on BOP system reliability and our investment in NOV's worldwide aftermarket infrastructure, will contribute to rising aftermarket sales over the next several years.

Looking into the fourth quarter of 2011 we expect Rig Technology revenues to rise in the 5% to 10% range and for the segment operating margins to be in the mid 20%s.

Petroleum Services & Supplies segment generated $1.46 billion in sales for the third quarter of 2011, up 7% sequentially and 34% year over year. Operating profit was $299 million and operating margins were 20.5%. Operating leverage or flow-through was a strong 50% sequentially, helped by a combination of seasonal recovery in Canada and modest pricing levels across most product lines, as was 36% compared to the third quarter a year ago.

Sequential sales growth was strongest in North America where Canada emerged from breakup and the US posted nice shale-driven rig count gains as well. Internationally the segment posted 3% sequential sales growth with higher sales in Asia, the Middle East, and Africa partly offset by lower demand in Latin America and Europe. The group continues to monitor inflationary forces in its cost structure, but generally these were more subdued than seen earlier in the year.

Several product lines are carrying start-up costs for new operations. Most products within PS&S are successfully obtaining modestly improved pricing, typically 2% or 3% to offset creeping costs.

Barring a sharp downturn in the macro economic outlook, our expectations for the Petroleum Services & Supplies segment are high. The group is uniquely positioned to benefit from oil and gas activity. We believe continued high oil prices and functioning capital markets will spur more drilling.

In the fourth quarter we expect revenues for the group to rise a few percent but margins to tick down slightly, owing to the inclusion of additional revenues from Ameron which will be diluted to the margins initially.

Turning to Distribution Services third-quarter revenues were $480 million, up 13% from both the sequential and prior-year quarters. Operating profit was $37 million or 7.7% on sales, up both sequentially and year over year. Operating leverage or flow-through was a solid 20% sequentially and 24% year over year.

Revenues for North America grew 18% sequentially owing to seasonal recoveries in Canada and strong rig activity across the United States. The group is opening new DSCs targeting shale plays in the Utica, Marcellus, and Eagle Ford domestically and Poland, Indonesia, and Columbia internationally. Third-quarter results also benefited from artificial lift sales in Canada and Latin America, and continued sales of consumables into Iraq.

We expect fourth-quarter sales for the group to grow in the 10% range with margins to tick down slightly as the contribution from Ameron's infrastructure products and water transmission groups flows in for nearly a full quarter.

Turning to National Oilwell Varco's consolidated third-quarter income statement, SG&A increased $17 million sequentially due to higher incentive compensation accruals, but declined as a percent of sales, both sequentially and year over year, to 10.5%. Interest expense declined $1 million sequentially due to our second quarter [indenture] repayment. Other expense improved $7 million sequentially due to improvements in foreign currency exchange expenses.

Equity income in our Voest-Alpine joint venture improved slightly on higher green tube volumes, but we expect equity income to decline slightly in the fourth quarter. The tax rate for the third quarter was a little over 32%, about flat with Q2 and in line with our expectations for Q4.

Unallocated expenses and eliminations on our supplemental segment schedule was $86 million in the third quarter, up $6 million from the second quarter due to higher intersegment eliminations. Depreciation and amortization was $140 million, up slightly from the second quarter, and EBITDA, excluding transaction charges, was up $80 million sequentially to $938 million or 25.1% of sales.

National Oilwell Varco's September 30, 2011, balance sheet employed working capital, excluding cash and debt, of $3.4 billion or 22.9% of annualized sales, down $112 million from the second quarter and down $312 million from year-ago levels. This is due primarily to rising orders and down payments in our Rig Technology group.

Total customer financing on projects in the form of prepayments and billings in excess of cost, less costs in excess of billings, was $1.1 billion at September 30, up $142 million sequentially and up $1.1 billion from year ago levels. Accounts Receivable increased $260 million and inventory rose $151 million sequentially on higher revenues and acquisitions, partly offset by higher accounts payable and accrued liabilities.

Cash flow from operations was $634 million and levered cash flow was $672 million for the third quarter. CapEx increased $12 million sequentially to $125 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 in the range of $425 million as we pursue a number of expansion opportunities.

During the quarter we spent $56 million on two acquisitions. NOV's cash balance was nearly $3.9 billion at September 30, 2011, up $430 million from June 30. Note that this is prior to our Ameron acquisition on October 5, which used $777 million in cash.

So now let me turn it back to Pete.

Thanks, Clay. I'm just going to make a couple of brief comments. As we kind of prepared for this conference call, we really discussed what we could talk about. And it is kind of the same thing we have talked about an awful lot in the past, and that is shales and deepwater. Those are the things that are really making the industry tick right now.

I think on shales in particular, I know there is consternation over the price of natural gas. But when the rigs are pulled off the natural gas wells, they are really put on the wet shales, whether it be the Bakken, the Eagle Ford, Granite Wash, some of the areas that we are seeing up there. So we continue to believe the shales are going to be very, very active.

One of the things I want to emphasize that Clay talked about earlier is what I think has been our prudent spending. Not only have we invested in the 2009 and 2010 downturns, we kept putting money into the business. We expanded our quality tubing lines, we consolidated our supply lines for our Grant Prideco operation, we bought Ho Chang in Korea. These things have all been very additive to what you've seen today on these numbers.

I think many times when people buy things it just kind of gets rolled in. But here we are starting to see really the benefits of making these investments, and I think it is also the benefit of having the strong balance sheet that we have. One thing I want to point out on the shales, we are really big believers in first mover. And I think in Poland, Australia, China, and South America the opportunity for shales may not be as great as people want it today, but we are investing in those arenas because it will be great over the next two or three years. And we want to be the people that are there to supply them.

I think expansion in Russia is another thing that we are very big on right now. I think as the Russian political system kind of changes back over a little bit I think you will see more emphasis on the energy arena. Today we are investing heavily to make sure that we are prepared to be able to supply them with the equipment that they need.

Now one thing I do want to talk about just quickly is technology. Obviously the lifeblood of NOV is technology. We are the leader in the equipment that we make today; some of the things that we are working on is new all-inclusive control systems. As the provider of the vast majority of drilling equipment packages, we are the approved solution for being the control system that is going to look at everything from downhole to subsea BOPs, all the way back up to actually running the rig.

We are going to be announcing some new things probably in the first or second quarter of next year. I am really excited about what we are doing there.

Remote monitoring is another one. I think as you take a look at the smart equipment that we are making today, one of the offshoots of Macondo is that you have to know and you want people to know in the Houston offices and the Oslo offices, all over the world, what is going on in their rigs. And because, again, we put most of the equipment out there, we are the approved solution of looking at that, especially when it comes to subsea.

And I will also point out that we just opened up a new R&D facility for our subsea operation plus testing. We actually had some investors through there not long ago and it's really a state-of-the-art facility that I think is pretty cool.

We are doing an awful lot in the downhole tools arena. Clay mentioned the Helios bits earlier. I am excited about all the different products and projects that we have going on.

The neat thing again about the strong balance sheet that we have had over the past four or five years has been our ability to make sure that we are reinvesting in the business and to make sure that we have the new products out there.

Finally, our backlog gives us great visibility. If you take a look at where we are today, if you go back and extrapolate that to where we were in 2008, look at our results that came through 2009 and 2010, we are starting to build up the same sort of backlog today.

So I am excited about where we are on M&A, good opportunities out there. We have spent -- we have done an awful lot in the last calendar year with Ameron being the biggest deal that we have done, but we did APL last December.

There is still a lot of opportunity, but the one thing I will guarantee is we are going to be prudent in our pricing. We are not going to do M&A just to do M&A. We are going to make sure that we are going to get it at a value that is good for our shareholders and we can return money to our shareholders on that.

So anyway, having said that, just a few brief comments. Kim, I would now turn it over to you for any questions that our callers might have.

(Operator Instructions) Jim Crandell, Dahlman Rose.

Morning, everybody. Congratulations to you and your team, Pete. Great quarter all around and 28 offshore rig packages, wow.

We agree, Jim.

Pete, I think you have called the deepwater outlook very well. You and I have talked about that some of the options will probably be picked up, some of which may not be picked up and could be picked up by others. With deepwater day rates continuing to strengthen, do you have any sort of change in sense about the options, number one, and sort of deepwater rig orders outside of Brazil, number two?

You know, Jim, I think that a lot of the options will be exercised. I think some of the ones that weren't were probably not exercised simply because people were a little skittish about the macroeconomic environment -- with what is going on in Europe, are we looking at a double-dip recession, things like that. But the good news is that some of the options have been extended out.

Ultimately, over the next, I think, year or so you are going to see a lot of these options. They are going to go ahead and put them in play. They are going to go ahead and exercise what they have got out there.

We are still very bullish about where we are in this marketplace. I think as you take a look at the need for deepwater around the world and you take a look at the way they are getting gobbled up right now, I mean you take a look at kind of the tightness in the market today. I think most people are just saying why do I want to commit right now when I can probably wait a month or two and get a little bit better, hopeful, visibility on the economy and then make my move then.

So I think it's just going to be a question of timing, but we are still very, very bullish on the demand for deepwater rigs.

Jim, this is Loren. I will tell you that the drilling contractors that we talked to may not exercise these options, but they will buy rigs in the future. The demand out there and, as you mentioned, the day rates that we have for the ultra-deepwater rigs continue to go up. There is just a lack of deepwater rigs for all the opportunities that the oil companies have out there today and so we will continue to see deepwater rigs being bought over the long term.

And just to follow-up on deepwater, Pete. If you look at your potential for what you can sell to a deepwater rig, I think you had last cycle actually maybe one that was up above $300 million. If you look at just these Brazilian rigs and say, okay, seven rigs for $1.5 billion, it's materially less than that.

Including the reduced price for steel, which I assume makes up a big chunk of that, are these packages including less equipment? Or is there any kind of -- or would you expect to earn I guess the same type of margins in Brazil that you are earning in the rest of your rig equipment business or in Korea when you typically have -- supply a package?

Well, Jim, I think as you take a look at the rigs that are in Brazil right now or that we are bidding in Brazil, you have to understand these are kind of benign water type rigs and so they have a lot different requirements than you have on the super-duper dual-activity type rigs, the Transocean and old Pride, now Ensco, that we built. And so the reality is it's just a little bit different suite of equipment.

We are still getting everything on it. Margins are going to be fine on it. It's just the difference in the type of rig. If you take a look at the Transocean type rigs, those are full dual-activity. They have got dual DEPs, or drilling equipment packages, things like that on them, whereas the rigs in Brazil -- I would say they want to call them dual-activity, but I would say it's kind of 1.5 activity, if you will.

So the derricks are going to be smaller, you are not going to have a full two times the drilling equipment package, things like that. So the numbers are still awfully solid and I think you will see us monetize the backlog very similar to what we have in the past.

Okay. And last question, Pete, is how do you see the orders for equipment packages to FPSOs over the next, let's just say, three to six months?

Jim, I think they will be fine. We are taking a -- the FPSO business is a shade different than the drilling equipment business. You have FEED studies and you have a lot of different things -- when I say FEED, front-end engineering studies. They take a little bit longer to materialize and each one of them today is still kind of a project in and of itself.

You have heard me talk before about one of the things we want to do is standardize FPSOs and I think we can. We are talking to some customers about that. Our engineering groups that are over in Norway working on that that is a goal that they have. So it's a little bit longer timeframe, but I think we have kind of guided toward we would start seeing some decent orders in 2012 and we are still pretty consistent with that.

Jim, this is Loren again. We are tracking over 150 FPSOs that we think will materialize in the next five to 10 years. And we feel really comfortable with where we are today in the FEED studies. We are participating in all these FEED studies so I think you will see some meaningful results here in 2012 or 2013.

Great, good. Well, thank you very much.

Thanks, Jim.

Bill Sanchez, Howard Weil.

Thank you, good morning. Clay, you mentioned with regard to pricing on the capital equipment side year to year you are tracking 6% to 8% higher. That percentage is similar to what you discussed on the second-quarter call.

I was wondering if you could just talk about kind of the pricing outlook from here. Was some of that a function of, perhaps, mix with the Petrobras rigs being included in there in third quarter? And I guess then as a follow-up, as we think about the margins in Rig Tech here and the impact of that pricing starting to have a positive effect there, you have mentioned margins flat here or down I guess I guess a bit the next couple of quarters. It sounds like a second quarter next year inflection is kind of what you are expecting; can you talk a little bit about that as well?

Yes, Bill, as you know, since that is a later cycle business for us the results that you see in our income statement kind of reflect what was going on in pricing 18 months to two years ago or even longer, because it takes us a while to build these things and then recognize revenue on them. But generally, the history that we have had with pricing in Rig Technology -- and I am going to stay away from talking about pricing on any particular tender, like Petrobras, so these will sort of just be broad statements.

But generally, pricing declined obviously as we came out of 2008 but it was very high in 2009. The 6% to 8% improvement is really kind of off rock bottom where we ended up late 2009/early 2010 and has picked up 6% to 8% broadly speaking across a lot of the offshore equipment that we sell.

Here of late I think it has kind stabilized in that region. We still see good demand and I think we are certainly paid a premium for what we sell vis-a-vis competition, because we do a good job executing and offer a terrific value in the technology that we provide. But I think in the next quarter or two, at least as far as we can see, pricing is going to be stable.

In terms of impact in the P&L, again 2012 we talked about margins moving down from Rig Technology through the back half of 2011 and then kind of starting to recover in 2012. That is the impact of that pricing increase. Fortunately, though, I think it's really the impact of the higher volumes.

We have had great order quarters here for the last few quarters, really culminating in the third-quarter record orders, and as those projects start to flow in in 2012/2013 that is when you start to see the margin uptick. And that margin uptick, importantly, is as much volume -- probably more volume driven than it is price driven.

Okay. And as my follow-up I just wanted to turn to PSS quickly.

Can you talk a little bit about just the drill pipe business in general? I know, I guess by my math that is probably about a quarter of the revenue within that segment. I know on past calls we have discussed a lot about pending orders here for deepwater rigs and that is very high-margin work for you.

Maybe you can talk about the number of deepwater rigs that you still see needing to order type. And then I guess, more importantly too, what about an eventual replacement cycle starting on the land side given this compression in useful life given the intensity of the shales, Clay or Pete?

Or Loren.

Or Loren.

Just had to jump in there.

Or whomever.

Bill, we are tracking closely. Approximately 50 outdoor rigs are going to be delivered here in the next year or year-and-a-half. We know in our contact with those drilling contractors on a weekly and monthly basis to find out exactly what they are going to need based upon the locations that are going to be drilling in around the world. So there is over 50 of them that are out there that are available to us at this point in time.

So it's something that we are on top. We monitor, like I said, on a weekly basis, so we are going to do quite well with that particular type of drill pipe. Again that is premium pipe; that will be 6 5/8 OD, 5 7/8 OD type pipe.

Now on the land business --

Yes, the -- touch on a couple of numbers, Bill. The mix of drill pipe in this quarter was a little less than 20%, so you are a little high on your estimate. The business is doing very well, though. It's accretive to our PS&S margins overall.

And to finish up on Loren's comment, it has really been dominated the last few quarters by orders from land operators, specifically from the shales plays. And that is -- it's good and bad. It's good in that those -- the pipe that is used in those shales plays typically has premium connections that can handle a very high level of torque.

The bad is it's smaller diameter. Four-inch XT is kind of the dominant kind of pipe that we are doing the best in and getting the most pricing leverage. See the most demand for. And so it's a nice, high-margin level of pipe, but not nearly as good as the bigger, beefier offshore pipe that we sell.

So once we start to see five-inch -- sizes larger than 5 7/8, 6-inch, 6 5/8-inch pipe orders start to flow in from these offshore rigs I think that is when you will see kind of the next leg of margins from drill pipe.

And then, Bill, just to close the loop so you hear from all three of us on this one, I will also mention that when you talk about land folks on drill pipe, and especially in the shales, the big customers are actually the rental companies. A lot of this -- the drilling contractors, once you make the turn on these shale wells and go into the horizontal section and you go into that four-inch XT, the drilling contractors usually have the operator then rent that. And that pipe is being worn out, as Clay mentioned earlier, pretty dramatically.

So we are really kind of getting a three-for right here. We have got the land drilling contractors, we have got the rental companies, and then we have got the offshore guys, so we really like where we are on the drill pipe business right now.

But given, Pete, where those product lines, I guess across the PSS spectrum, are weighted relative to rig count and perhaps lagging a bit, is the outlook you think for 2012 for you, even though 50% of that revenue stream, let's say, roughly is North America, that margins are going to be fairly resilient versus where you exit 2011, if not up a bit?

We have been building on margin through the years you have seen; partly that is volume, partly that is price. So as we go into 2012 -- barring a sharp downturn in the rig count, which we all agree is a possibility, but barring that we would expect 2012 to really look pretty good.

Okay, I will turn it back. Thanks for the time.

Bill Herbert, Simmons & Co.

Thanks. Good morning. Clay, with regard to Rig Tech margins, if you back out the benefit from I guess the riser issues in Korea last quarter -- I think that was it -- the margins were actually in the 25-ish-percent range versus the 27.3% recorded, correct?

Right, that is correct.

Yes, the 26.8% in the third quarter, walk us through the margin performance on that front. And then, moreover, in thinking about 2012 you had mentioned the benefits from absorption primarily driving the uptick in 2012, the expected uptick, plus to a lesser extent a better backlog mix. Is there any reason why we should not expect to see the 30% to 35% incremental margins that we have witnessed historically for Rig Tech during the expansionary phase of the cycle?

Yes, we believe that is very doable in that range. We think that is kind of a normal, as it were, for Rig Technology.

In terms of the margin performance this quarter, a couple of things led to the outperformance. If you recall last quarter we were looking for volumes that were really pretty flat, maybe up 1%, but more or less quarter-to-quarter flat. We did just slightly better than that; we did 4% growth, so a little higher volumes I think helped on the margin front.

But again I think the main performance driver in the third quarter was just very, very good execution by our group and once again very good cost control. Then as sort of a third factor I would throw in there mix. We had a terrific quarter by our well intervention and stimulation equipment group, and a lot of demand for frac fleets and that sort of equipment that came in at high margin. So all that kind of culminated in out-performance in the third quarter.

As we are kind of seeing this roll by quarter by quarter that is causing us to take a little more optimistic view of what the future quarters hold here as we finish up 2011 and move into 2012, and thinking now that bottom maybe looks like it's going to be in the 25%-ish range.

Bearing in mind, hopefully, we are a lot better at building rigs than we are at forecasting.

I think you are pretty good at forecasting too, be that as it may. So really, plausibly here given your revenue forecast for next year, really a Rig Tech margin in the high 20%s if not starting with a 3 is not necessarily implausible, correct?

I would caution you, when we did -- we have had two quarters in that group north of 30% in the early part of 2010 and there were a lot of stars that lined up, so I wouldn't want you to get too carried away on the ultimate margin. We are -- and I would stress again too that anything in the 20%s at all in terms of margins equals a really, really good return on capital for that group.

No, it's simply the math, right? Given your revenue forecast and the incrementals which are relatively in line with historical precedent, that is the margin that it spits out I believe.

Yes, yes.

But I hear you.

And to finish off the story too, the incrementals this quarter, both sequential and year over year, in the 14%, 15% range, much lower than your 30% to 35%. But again it's because of this gradually shifting mix away from those tremendous rigs sold in 2008 that we have executed it at very, very high margins.

Okay, that is all I have. Thanks very much, guys.

Geoff Kieburtz, Weeden & Co.

Thanks very much. Pete, you mentioned -- you talked a little bit about M&A and just wondered with the volatility, let's say, that we have seen in the equity markets would you say that you have seen increasing opportunities in the M&A market?

Geoff, that is a great question. It's a difficult answer because right now there is such volatility that until things settle down a little bit, if in fact they ever will, it's pretty difficult to be able to price. Because obviously when the stocks are down, we are sitting there and we are licking our chops going we have got a real opportunity here, but then the sellers are going, wait a minute now, my stock price was up 15% a couple of weeks ago. Do I want to get in the market and sell today?

So it's really -- it's one, especially in a public company and I think when you -- you can almost read through the Ameron materials and you can see how that whole process plays out. It's just one of timing, it's one of -- you just don't wake up in the morning and go, gosh, I am going to go buy these guys. It's a lengthy process that takes patience, which we have.

So I would say on a public company the volatility makes it a little bit more difficult right now. Now private companies that is totally different. I think that the volatility makes them take a look out there and go, gosh, maybe we ought to get what we can for our money.

The public market basically prices your company, the private market doesn't; you price your own company. And so I think the opportunities there to buy some of the private situations that we are seeing out there are probably going to be more robust for us over the next 12 months.

Okay. In that context and with a strong balance sheet and cash flow and increasing visibility, how are you thinking about dividends these days?

You know, Geoff, we raised our dividend this year. We started our dividend a couple of years ago at $0.10. I think we are up to $0.11 today.

Obviously, we paid a special dividend a couple years back. As we take a look at uses of cash, always number one is going to be M&A. And we talk this with our Board strategically every Board meeting, and I am talking every Board meeting. Our Board is on top of the strategy and they are on top of uses of cash.

We will take a look at whether or not we want to increase our regular dividend and then we always revisit the issue of a special dividend. But I will tell you special is just that, special, and there is no expectation behind it. So those are the two major uses of cash though, I think dividend and M&A.

Great. Thank you.

Michael Lamotte, Guggenheim Securities.

Thanks. Good morning, guys. I would like to just follow up quickly on the Rig Tech margin question and in particular the impact of FPSO orders flowing through with respect to the discussion of a normal 30% to 35% incremental, especially [as you] look out to 2012 and 2013 and start to see orders on that product line start to come through. Are there offsets in efficiency, in pricing, in rig packages that can impact the fact that it's a lower margin product line to begin with?

Yes, that is -- you raise a good point. That is a work in process at FPSOs and we are trying to fundamentally change how FPSO turns are sold and standardized, as Pete mentioned, and so we have got some work to do there. But offsetting that, Michael, I would point to my comments earlier about growth in the aftermarket which is going to be highly accretive to those flow-throughs.

So when we talk 30%, 35% we are sort of talking a, for what it's worth, if you can define such a thing, an average mix across the segment. But more deepwater offshore packages, more aftermarket would certainly help us exceed that level. Conversely, more FPSOs for land rig or service rig volume and mix would pull that down.

Okay. And how big is aftermarket overall within Rig Tech today?

About 25% this quarter.

Okay, great. Thanks, guys.

Kurt Hallead, RBC Capital Markets.

Wanted to get you up first on PSS, maybe if you guys look out over the next 12 months or so, how would you rank your top five product lines or areas in PSS? Do you think it still would be drill pipe would be number one? Can you just give us some flavor on how you think it might shake out over the course of the next 12 months or so?

Kurt, in terms of how much we love them, we love them all equally. But if you are asking in terms of size --

Yes, just relative size. Give you some general sense on how you see things evolving over the next 12 months.

Kurt, this is Loren. Our Downhole Tool group has made tremendous strides here in the last couple of quarters. They actually, from a revenue standpoint, are the largest segment in the PS&S group. Obviously you have drill pipe and you have your Tuboscope group and then you have our Well Side Services and Mission Products -- those are the top five groups within Petroleum Services.

And you don't necessarily see that ranking changing over the next 12 months?

Not really.

I don't think so. I think, Kurt, the one thing about the PS&S business everybody knows, I think, we are the leader in rig technology, but when you take a look at a lot of those products that we have out there, be it Grant Prideco, Mission products, Brandt, Tuboscope, these are really market-leading names. It's really pretty cool stuff.

I almost hate to mention them all, because we have got so darn many of them I don't want anybody to feel bad that I left them out.

Also too, within the group out there, within their respective spaces, businesses like Quality Tubing, which is a leading provider of coiled tubing worldwide, it's not in our top five in terms of contribution but they really do provide a lot of market leadership in that space. XL Systems, Mission products, our IntelliServ group has a unique proprietary product and service that they are offering to (multiple speakers)

Fiberglass products.

(multiple speakers)

As was mentioned earlier in the call with the acquisition of Ameron, it's leader in the field.

I hope we mentioned everybody. If we didn't, we are going to hear about it after the call.

Did you get all those written down Kurt?

I gave up after the first five. That is okay. Also, you guys may have mentioned it; I might have missed it. Number of land rigs that you had in Rig Tech orders for the quarter, how many were there?

I don't think we mentioned it. It was a good quarter; looking forward into Q4 we actually expect the quarter to be even better. So a lot of land rig demand out there, both internationally as well as North America.

But do you have a number you can share with us?

No. Kurt, let me tell you why. As the US guys build land rigs they do it themselves, and so we sell components to them. And so we don't -- I could tell you how many mud pumps, how many drawworks, how many top drives, how many derricks, but many times we are shipping those components to the land guys. Internationally, we sell the entire rig.

And so we have always kind of hesitated -- we break down our backlog on offshore versus land and you can kind of extrapolate in that land business about how many are there, but it's a very difficult thing. It's not that we don't want to tell you, it's just that when someone is buying 15 FCR houses and 15 top drives that is great business, but those aren't complete rigs.

And the price points on complete rigs have you been able to move that up at all? I think US you are still around $15 million to $20 million. Internationally it could be maybe as high as $40 million. Are those numbers still --?

We are getting a little price leverage there and that is, if anything, kind of on the higher ends of those ranges.

Okay, all right. Then I think taking your complete body language here I think you guys would probably be in relative disagreement that your Rig Tech orders have peaked out here in the third quarter. Would that be a fair comment?

Kurt, I can take you back to 2006 and 2007 and 2008 we had the same question a lot of times. So we keep looking at that peak getting up there a little bit. So as you know, we don't predict what is going on there but there is a lot of rigs out there.

All right. I will end it on that loaded question. Thanks, guys.

Thank you, that was our final question. I will turn the conference back to Mr. Pete Miller.

Thank you all for calling in. We look forward to talking to you in February when we have our year-end conference call. Thank you very much.

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