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National Oilwell Varco, Inc. (NYSE:NOV)

Q3 2008 Earnings Call Transcript

October 23, 2008 10:00 am ET

Executives

Pete Miller - Chairman, President and CEO

Clay Williams - CFO and Senior Vice President

Jeremy Thigpen - President, Downhole Tools and Pumping Solutions

Analysts

Jim Crandell - Barclays Capital

Kurt Hallead - RBC Capital Markets

Robin Shoemaker - Citigroup

Bill Sanchez - Howard Weil Inc.

Brad Handler - Credit Suisse

Michael LaMotte - J.P. Morgan

Geoff Kieburtz - Weeden & Co.

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the National Oilwell Varco Third Quarter Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, October 23rd of 2008.

And at this time, I’d like to turn the conference over to Pete Miller, President and Chief Executive Officer. Please go ahead, sir.

Pete Miller

Thanks, Marcia. Good morning. Welcome to the third quarter 2008 National Oilwell Varco earnings conference call. I’m Pete Miller, Chairman and CEO of National Oilwell Varco. And with me on the call today are Clay Williams, our Chief Financial Officer, and Jeremy Thigpen, the President of our Downhole Tools and Pumping Solutions group.

Earlier today, we announced earnings of $548 million or $1.31 a share on revenues of $3.6 billion. Included in the results are $0.04 charge for costs associated with our recent Grant Prideco acquisition and about $0.09 of after-tax charge associated with the Hurricane Ike disruption that we had in Houston.

While the facilities made it through Hurricane Ike very well, we lost a lot of power, and as a result, lost about two weeks of productive capacity out of many of our facilities. That’s what entails this $0.09. This in fact will be recouped over the next couple of quarters as we ship out products that we deducted out. Overall, we are very, very pleased with the results that we had in this quarter.

Additionally, we announced a record capital intake of new orders of $2.4 billion, bringing our current backlog up to a record level of almost $12 billion. It’s really $11.8 billion, but I like to say $12 billion. Clay will provide a lot of detail on this in just a moment, but I think it does indicate the continuing need to retool our business and to rebuild the infrastructure that we have around the world. We are very pleased with these results as I said earlier.

While there is anxiety and concern over the near-term prospects of the oil and gas business, most especially because of the financial anxiety around the world, we believe our outstanding employees, our strong balance sheet, our exceptional products and our wonderful business model are going to present us with opportunities that we haven’t seen for quite some time. We feel very, very good about our opportunities and the way we are going to advance through the future.

At this point, I’d like to turn it over to Clay Williams who will give you a little bit of color on the numbers, tell you a little bit about our backlog, and then we’ll turn it over to Jeremy to talk a little bit about his business in the Downhole Tools and the Pumping Systems. Clay.

Clay Williams

Thanks, Pete. Before we begin this discussion of National Oilwell Varco’s financial results for its third quarter ended September 30th, 2008, please note that some of statements we make during this call may contain forecasts, projections and estimates including but not limited to or comments for the outlook of 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 year.

I refer it you to the latest form 10-K and S-4 that National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of 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 in this call, Pete, Jeremy and I will answer your questions. We ask that you limit your questions to two in order to permit more participation. National Oilwell Varco generated earnings of $548 million or $1.31 per fully diluted share in its third quarter ended September 30th, 2008, on revenues of $3.6 billion.

The results include a $0.04 per share transaction charge related to our second quarter merger with Grant Prideco in line with our prior guidance and an estimated impact of $0.09 per share from Hurricane Ike. Excluding both items, earning would have been approximately $1.44 per share, a terrific result for stormy quarter, in more ways than one.

Hurricane Ike took a significant toll on our Texas employees, customers and suppliers in the quarter, as Pete mentioned, and continue to have an impact into the fourth quarter. While we were fortunate to avoid any serious damage to our facilities, 40-plus NOV facilities and hundreds of our Houston area suppliers were without power and working shorthanded.

Company-wide, we estimate that $114 million in revenues were lost or deferred, mostly in our Rig Technology segment at high decremental leverage. Unfortunately, only a small portion of this will turn around in Q4 which was also affected during the first few weeks of this month, but most will come back in Q1 2009.

Additionally, hurricanes affected certain portions of our operations in Mexico, but thankfully on a much smaller scale. Things are returning to normal, and we are working hard to take care of our customers.

Our thoughts and prayers are also with our local and Mexican employees and their families as they patch roofs and replace sheet rock and try to get their homes back to normal too after severe hurricane season.

Yet another hurricane descended upon the financial markets just a few days after Ike carrying with it a blizzard of questions about our order book. Before I review the third quarter operating results for our three segments, which by the way were excellent, I’d like to take a few minutes to tell you more about the nature of our backlog.

Most importantly, the backlog ascended to a new record of $11.8 billion, roughly 14 times the amount of orders we had when National Oilwell and Varco merged three and a half years ago. It has increased every quarter since the merger due to the pressing need to upgrade an old, tired land rig fleet and jack-up rig fleet to modern new AC power, electronic controls and robotic pipe-handling technologies, and to build out a deepwater fleet capable of drilling vast, unexplored swaths of the planet covered by 500 feet of water or more.

In the third quarter, we shipped nearly $1.4 billion out of backlog, a little less than expected due to the impact of Hurricane Ike. We expect nearly $1.5 billion to be recognized in revenue from backlog in the fourth quarter of this year, $5.7 billion in 2009, and the balance of $4.6 billion thereafter.

Despite the severe crisis -- the credit crisis, National Oilwell Varco managed to post a record level of orders of $2.4 billion during the third quarter, including four deepwater packages for Brazil and two more deepwater packages for other established publicly-traded drilling contractors.

Notably, only three of the four Brazilian floaters were among the 12 letters of intent issued by Petrobras in March. The fourth was for a domestic Brazilian drilling contractor moving ahead with building in anticipation of growing demand for that market.

Our backlog contains only contracted work. It does not contain letters of intent for notional projects. Nothing goes into the backlog without a contract. Our contract on major projects do not permit cancellation for convenience. Our contracts do not allow for cancellation for lack of financing.

We require substantial down payments to begin work, sometimes 10%, usually much more and require progress billings which are structured to, in the aggregate, keep NOV cash positive during the construction.

As of September 30th, NOV has collected in cash or has cash due by the end of next week amounts that exceed our investments in these projects by more than $3 billion. If all of our customers were to walk away from all of their projects, thereby defaulting on their contracts, we have substantially more in cash than we’ve invested so far, plus, we have the undelivered inventory too. And much of the delivery is fungible; items like top drives, draw works, and mud pumps that we sell day in and day out.

But let me be clear, we expect our backlog of projects to move ahead as planned in accordance with their contracted terms. As of September 30th, 90% of our backlog was for international markets. 66% of our backlog or $7.8 billion was directed at major offshore rig new builds. 19% or $2.2 billion was for various offshore components spanning platform rigs, construction vessels, FPSOs and replacement or upgrade items for offshore drilling rigs. And 15% or $1.8 billion was for land equipment, of which $1.1 billion was for a domestic market expressing a strong preference for modern rigs.

This illustrates well the breadth and diversity of our product offering through our Rig Technology segment. In aggregate, we are 31% complete with the $7.8 billion of major offshore projects I referenced, which totaled $11.3 billion when first ordered. 56% of these orders were placed with NOV when the 12-month WTI strip was below $75 a barrel.

Most of our large offshore projects are contracted through shipyards which accounts for 58% of our total backlog. Based on their latest public financial statements, our top-five shipyard customers have $6.6 billion more in cash than they have in debt, which totaled less than $3.5 billion. They appear to us to be very well capitalized.

Most of their customers are established drillers. Only 13% of our backlog is for start-up drilling operations and slightly more than half of these are established shipping companies with existing strong cash flows venturing into drilling. 34% of our total backlog is either with government-owned enterprises, have secured export-import financing guarantees, or is in the process of applying for guarantees now.

We have one customer behind on payments, which places $182 million of our backlog, about 1.5%, at risk. We’ve notified that customer that we have stopped work until we are paid. Notably, we have collected $40 million more than we currently have invested in their project. In short, we are very comfortable with the stability of our current backlog.

However, we recognize that financing new, large projects has become much more difficult for industry participants lately, and we expect that NOV’s orders will be down over the next few quarters. We are continuing to work with our customers on new rig construction projects, but several are pausing in the face of lower commodity prices and tougher financing. That’s okay. In the meantime, we have a solid $11.8 billion worth of work to do, plenty to tide us over.

NOV is well positioned to weather this storm. On September 30th -- our September 30th balance sheet illustrates how the company has completely de-levered our business on a net debt basis despite a large cash acquisition in the second quarter. We’ve done this through solid cash flow from operations, which is $1.7 billion year to date.

Free cash flow after CapEx, but before acquisitions, has been $1.5 billion through the first three quarters. As a result, on September 30th, we had cash in the bank totaling $1.8 billion, and debt fell to $1.5 billion, only $19 million of which is current. Majority of our debt is due between 2011 and 2015.

I am also pleased to report that as of yesterday, we have fully repaid the remaining balance on our revolving lines of credit that we secured to finance the acquisition of Grant Prideco. This means we’ve repaid over $2 billion in acquisition debt since April 21st, 2008, and that we now have over $2.5 billion of available capacity on our lines. We entered this financial hurricane with a rock solid balance sheet.

We also entered the storm with a very strong portfolio of service businesses, something that National Oilwell Varco doesn’t get enough credit for. Many on Wall Street seem to pigeonhole National Oilwell Varco as a rig builder and a backlog story. This is easy to understand, given the sharp rise in rig construction and headline grabbing order and backlog results we have been consistently posting.

I’d like to offer a new framework to use when thinking about NOV. In reality, our portfolio business is a far more diverse and durable. NOV is a full-cycle participant in the oil field.

Our Petroleum Services & Supplies and Distribution Services segments are highly driven by rig count and oil field activity. We’ve noted in the past that Rig Technology segment is mostly, but not entirely, fueled by capital expenditures by oil field service companies and lags the other two segments by a year or two.

Notably, about 23% of Rig Technology sales in the third quarter are not CapEx driven, but were rather from the aftermarket support of our large installed base which is growing monthly. Aftermarket support is generally tied more to activity levels than to CapEx.

All three segments are fundamentally driven by oil and gas prices, but the Petroleum Services & Supplies and Distribution groups comprising 43% of Q3 earnings are a first derivative of commodity prices, while the Rig group, comprising 57% of Q3 earnings is a second derivative.

Combining two groups of cyclical business where one lags the other even though they are based on the same fundamental driver tends to add stability to earnings and cash flow. As activity falls, we expect to see it first in our PS&S and Distribution areas, while our strong backlog in Rig should enable us to bridge the valley. If one side of our house hits the downturn, the other can provide cash and capital to invest in the extraordinary opportunities that inevitably arise in depressed markets.

NOV is a far more thoughtfully constructed company than the highly cyclical rig builder that we are often perceived to be with balance between activity-driven and CapEx-driven lines that are sometimes out of phase.

Significantly, NOV occupies exceedingly strong positions in a number of oil field services arenas, not just rig construction. We’re the largest provider of tubular inspection, internal coding, hardbanding, and threading services worldwide. We are the largest provider of pump expendable and small centrifugal pumps worldwide.

We make more than half the world’s coiled tubing and coiled tubing units. We are a leading provider of solids control equipment, shell-shaker screens and thermal absorption treatment of drill cuttings. We are a leading provider of composite pipe to the worldwide oil field. We are a leading provider of procurement and distribution services to the upstream oil and gas industry. We are the largest manufacturer of drill pipe, collars and spiral wave.

In a moment, Jeremy will tell you more about the remarkable position his business has built in the supply of downhole tools used in horizontal, directional, and performance drilling. There is a lot more here at NOV than just building rigs, and the third quarter margins of Petroleum Services & Supplies and Distribution Services, both records, offer excellent evidence of the great work these groups perform for their customers.

To summarize, we think that strong worldwide oil field activity-driven service franchises backstopped by a strong, worldwide provider of capital equipment with solid orders to execute over the next three years make for a powerful combination that can handily weather the cyclical ups and downs of the oil business.

Finally, if there is a silver lining to the current credit meltdown and the downturn in the drilling business that everybody believes is coming, it is this. We are very, very good at executing transactions in a capital-starved world.

NOV was born in a capital-starved world. That’s where Pete, Jeremy and I spent most of our careers. Capital-starved world open up extraordinary opportunities to those with cash and capital. We’ve stepped up our efforts to find solid acquisition opportunities and believe that the deeper activity falls, the more interesting the acquisition opportunities will get.

This process takes time and patience, but having closed close to 200 acquisitions in the past dozen years, between National Oilwell and Varco we have the talent and fortitude to do some great things here, not to mention a bulletproof balance sheet.

Turning to operations, overall, excluding the transaction-related noise, third quarter results were excellent. Consolidated revenues were $3.6 billion, up 5% from the second quarter and up 18% year-over-year, including continuing Grant Prideco operations in all periods on an adjusted compliant business.

Operating profit was $818 million or 22.7% of sales excluding transaction charges. And operating profit flow-through or leverage was 24% sequentially and 32% year-over-year compared to the adjusted combined historical quarters.

Rig Technology generated $1.9 billion in revenue and $500 million in operating profit in the third quarter, yielding an operating margin of 26%. The impact of Hurricane Ike hit this group the hardest, deferring about $79 million of revenue. As a result, revenue out of backlog increased only 2% sequentially to $1.363 billion and overall segment revenue increased only $15 million.

Operating profit fell slightly, owing to high decrementals on the deferred work due to under absorption. Orders for land rigs jumped significantly in the third quarter, due to lots of demands for AC land rigs for North America backed by termed contracts, including several orders for ideal rigs and our new Drake Rig design. We expect the first Drake to spud in mid-2009.

We continue to quote lots of land rigs into markets in the Middle East, North Africa and Latin America with 9 to 14 month deliveries, but have seen the market for land rigs in Russia and China cool recently due to credit and political issues.

On the offshore front, in addition to the six floater packages I mentioned earlier, Rig Technology also secured a handful of jack-up packages consistent with the past several quarters. While the credit picture has been discouraging lately, several factors point to improving economics of rig building namely, rising dayrates for ultra-deepwater floaters, falling steel costs and a strengthening US dollar.

Offshore rig building tends to be naturally belong to the dollar for drilling contractors. Because the dayrate market is denominated in US dollars, the rig fabrication predominantly occurs overseas. Shipyards source steel from foreign mills and buy lots of welding hours denominated in Sing dollars and Yuan, and National Oilwell Varco manufactures much of what we sell into these projects overseas too. Improvements on all three areas, dayrates, steel and FX should lift returns on projects, credit notwithstanding.

Looking into the fourth quarter, we expect Rig Technology to post strong sequential growth set and operating profit flow-through in line with our long-term 30% guidance resulting in margins comparable to our second quarter margins.

Petroleum Services & Supply segment generated revenues of $1.3 billion in the third quarter, up $66 million or 5% from the second quarter, including a full quarter contribution from continuing Grant Prideco operations in both quarters.

Operating profit leverage or flow-through on this same basis was 50% owing to excellent results from ReedHycalog, which picked up TReX royalties, solids control and the seasonal rebound out of break-up in Canada.

Year-over-year including a full quarter from Grant Prideco and adjusting for products transferred to other segments in the second quarter, Petroleum Services & Supplies revenues improved about 10% at 44% flow-throughs. Hurricane Ike impacted Q3 Petroleum Services & Supply segment revenues by about $35 million, about 60% of which we expect to recover in Q4.

Orders for drill pipe improved again this quarter, after nearly doubling last quarter, driving our backlog for drill pipe back up close to $1 billion. Revenues improved, but drill pipe margins declined due to the hurricane impact and unfavorable mix of smaller API pipe and higher steel costs.

The group outsourced more green tubes due to a planned shutdown of our Voest-Alpine mill during the quarter. If the rig count moves down as expected, we would expect drill pipe demand to soften somewhat.

Recent high demand from domestic operators for drill pipe together with high domestic rig counts in the third quarter lifted the domestic mix of US revenues for the entire Petroleum Services & Supplies group to 54% during the third quarter.

We have seen no credit crisis impact in the field internationally nor in North America, but nevertheless believe that an impact is coming probably in early 2009. At this point, we expect North America will be hit hardest and that most International operations would continue with their 2009 drilling plans.

Looking forward to the next quarter, we expect strong results with low single-digit sequential growth in the Petroleum Services & Supplies group, but expect margins to fall slightly due to mix and temporarily higher steel cost in drill pipe, which should begin to turn around in Q1.

Distribution Services had an outstanding quarter with a record result. Revenues were $498 million, up 17% from the second quarter and up 38% year-over-year. Operating profit was $44 million, and operating margins were 8.8%. Sequential operating leverage or flow-through was 26% and year-over-year flow-through was 14%.

U.S. operations led most of the increase rising 18% in revenues with 20% plus flow-throughs on improving margins and activity with the Mid-Continent and Rocky Mountain areas leading the way. The hurricane impact was minimal on domestic operations but did delay shipments out the Port of Houston for a modest amount of international revenue and contributed an overall slight sequential decline in international sales. However, international margins improved as compared to the second quarter.

Canada posted strong results coming out of break-up due to high demand for pipe in Saskatchewan and Eastern Canada. Artificial lift also posted a strong quarter. We’re cautious in our outlook for Distribution Services for Q4 owing for the potential for a drilling slowdown and pricing pressure late in the year in North America, which accounts for about two-thirds of the group’s revenues. Consequently, we expect revenues for this group to be down a couple of percentage points and for margins to fall in the fourth quarter.

Turning back to National Oilwell Varco’s consolidated third quarter income statement, SG&A increased $36 million sequentially on a GAAP basis as we picked up a full quarter of Grant Prideco results and accrued higher incentive compensation levels to benefit cost.

Interest expense declined $5 .6 million as we steadily paid down Grant Prideco acquisition debt. Other expenses swung $29 million from a debit in Q2 and a $14 million credit in Q3 due to large FX movements in Europe.

Equinity income from our Voest-Alpine JV increased slightly to $20 million where higher pricing helped offset a mill shutdown and a stronger dollar impact. And allocated expenses and eliminations on our supplemental segment schedule which is pro forma for the Grant Prideco acquisition for all periods for $55.5 million up $5.8 million due to higher incentive accruals and a turnaround for insurance credits in Q2, partly offset by higher savings from the Grant Prideco acquisition.

Depreciation and amortization was $116 million in the third quarter, excluding transaction-related inventory step-up charges and exceeded our Q3 CapEx of $104 million. EBITDA was $974 million in the quarter.

Our September 30th, 2008 balance sheet employed working capital excluding cash and debt of $2.4 billion, up $84 million sequentially and equaling 16.6% of annualized revenue, consistent with recent prior quarters. DSOs improved slightly from Q2. Cash flow from operations was $462 million and less Q3 CapEx of $104 million yielded free cash flow for the quarter of $358 million.

Now, let me turn it over to Jeremy for his comments.

Jeremy Thigpen

Thanks, Clay. I really appreciate this opportunity to share with our listeners some additional information about a few of those product lines that are not quite as visible as our rig or distribution businesses.

Our particular portion of the PS&S segment accounts for approximately $2 billion in annualized revenue and is comprised of four different distinct product areas that we refer to as mission products, drill-stream telemetry, downhole, and drill bits and services.

With mission, we design and manufacture a complete portfolio of multipurpose pumps utilized in both drilling and production. We also provide the fluid end modules, pistons, liners and other expendables that enable our customers to optimize their performance, simplify their maintenance processes and reduce their total cost of ownership by extending the life of their pumps.

I suppose the simplest way to describe mission is to tell you that it’s a microcosm of NOV. We have the most recognized, respected, and trusted brand names in the market, impeccable quality, industry-leading technology, a global manufacturing and distribution network and well-positioned and well-capitalized customers that just happen to include NOV distribution, NOV rig solutions and all the world’s largest land and offshore drilling contractors.

Therefore, while we are certainly keeping a watchful eye on the global economy and its impact on commodity pricing and drilling activity, especially in U.S. land, we feel very comfortable with our position. As of this morning, we have not yet experienced any weakening in our day-to-day expendables business. We still have a healthy backlog of CP packages for the various new builds that are in process, and with our premium products, we continue to capture market share both domestically and abroad.

However, in the event that we do experience a slowdown in the U.S., we believe that we’re well positioned to quickly shrink our pipeline to reflect the change in demand. Quite honestly, a modest slowdown would not be the worse thing in the world for our business.

Today, we are running two ten-hour shifts at most facilities, and we are still heavily dependent up on our outsourcing to keep up with demand. Therefore, if required, we will quickly move to in-source manufacturing, eliminate overtime, and if needed, reduce our number of shifts. Whatever happens, as the undisputed leader in the market, we will be well equipped to continue to prosper.

Although not nearly as large or as established as our mission product, our drill-string telemetry product, more commonly know as the IntelliServ Network, is an exciting new technology that continues to impress the early adopters of the service. The real-time information provided by the Network enables our customers to instantaneously interpret data that is typically only available after the well is drilled. Therefore, our customers are now able to enhance drilling performance while significantly reducing the risk associated with downhole tool failures and wellbore instability.

While market acceptance is a bit slower than we would like, I’m pleased to report that we successfully commercialized the technology and expanded the network to provide high-speed data telemetry services to customers in the U.S., Mexico, South America, the North Sea, and Australia.

To date, the performance of this system has proven to be exceptionally reliable and our customers are demonstrating their commitment to the technology by awarding us with multi-well and multiyear contracts. Given these contracts and our ever strengthening contracts with companies like Schlumberger, Halliburton, Baker and Weatherford, we fully expect for this technology to begin gaining real traction in Q1.

Finally within our downhole and bit product lines, we design, manufacture and service a complete array of downhole tools utilized in both drilling and well intervention applications. Over the past few years through significant investments in acquisitions and product development, and our global service and manufacturing capacity, and our rental fleet, we have migrated from a relatively small North American-based business with a fairly limited product offering to the industry’s largest and most comprehensive independent supplier of downhole tools.

Whether our customers require drill bits, or motors, drilling jars, shock tools, non-mag drill collars, underreamers, stabilizers, or any combination of the above, we are the only independent supplier currently capable of meeting all of their downhole needs on a global basis.

As I think about our downhole and bit products, I am probably most pleased by the way in which the legacy downhole, Andergauge and ReedHycalog employees have so quickly recognized the value of this newly-combined entity, and so eagerly latched on to each other to pursue various growth opportunities.

For example, all of our folks immediately recognized that Andergauge is a perfect compliment to downhole. It markets to the same customers. It supplies technology that can and should be run in tandem with our other downhole tools. It requires capitals to support the build of its rental tool fleet, and it requires global manufacturing and service capabilities.

Therefore, with downhole’s existing customer relationships and supply contracts, NOV’s strong balance sheet, downhole manufacturing facilities in Canada, the U.S., the U.K., the UAE and Singapore, and downhole service facilities in every major operating area around the world, we have all the pieces in place to immediately and substantially grow the Andergauge product line.

To help put this opportunity into perspective, prior to the application, Andergauge outsourced 100% of its manufacturing and supported its worldwide operations out of only two service facilities, one in Aberdeen and one in Houston. Now that we have combined Andergauge and downhole, we’re in the process of manufacturing Andergauge components in-house and migrating tools to our various facilities around the world. As you can imagine, both of these actions are driving tangible growth and revenues in operating margins.

As another example of collaboration, we’re recognizing the value of sharing resources between downhole and bits. Within downhole, we enjoy outstanding relationships with companies like Schlumberger and Halliburton, Weatherford and Baker, however, our exposure to the operators has been somewhat limited.

Conversely, within bits, we’re in front of operators every day, actively competing for every section of every well. This obviously represents a great opportunity for us to gain market intelligence, while also leveraging our relationships and our technologies to present a single face and a more comprehensive solution to our various customers.

We’re also actively coordinating our engineering efforts across our various product lines. Perhaps the most exciting example of this collaboration involves the utilization of ReedHycalog’s BlackBox technology, which is a downhole vibration recorder.

With BlackBox, we’re able to gain a better understanding of drilling dynamics in various environments and applications. And with this information, our engineers are now able to analyze different combinations and different configurations of our existing tools to meet our customers various drilling challenges. They’re also able to use this information to develop new technologies that will help our customers to enhance drilling performance.

As I hope you can see, we are extremely excited about these various growth opportunities, and we believe that we can leverage the strengths of our newly combined businesses to capture market share even in a soft market.

Having said that, we are actively preparing the organization for potential slowdown. Our guys in the U.S. know that they’re not going to receive the same amount of capital for new tools and machines as we approved in ‘07 and ‘08. And they also know we could begin migrating some of our existing U.S. tools to some of our newer facilities in newer markets, including Veracruz, Tripoli, Abu Dhabi, [Alcabor], Mumbai and [Tangu]. And our manufacturing guys know that they need to be prepared for potential reduction in demand.

Much like I described in our mission plans, our downhole facilities are currently running two ten-hour shifts and all of our bit plants are operating on three eight-hour shifts. Therefore, if required, we know that we can quickly shrink our pipeline and our expense base without cutting so deeply that we risk compromising the future health of our business.

In summary, barring a total collapse in the economy and commodity prices, we like other NOV businesses are very well positioned to continue to flourish in any market with recognized, respected, and trusted brand names, impeccable quality, industry-leading technology, global manufacturing and distribution, and well-positioned, well-capitalized customers. In short, we’re in good shape.

Thank you for your time, and I’ll turn it over to Pete.

Pete Miller

Thanks, Jeremy, and thanks, Clay. I just want to make a couple of quick comments myself, and then I’ll turn it over for Q&A. I think one of the things that’s for everybody to realize, while we certainly believe that North America is going to get softer, I think everyone out there realizes that, kind of one of the unique things about our business today is, it basically is very rapidly self-correcting.

If you look at the number of wells that are being drilled today, the vast majority are becoming horizontal wells. There are shale plays, and quite frankly the completion curves on shale plays are very significant. When you stop drilling and all of a sudden cut into the production capacity, it’ll all of a sudden cut into the amount of gas out there which in turn means you better start drilling again. We’ve seen this happen whether you go back to the ‘99, whether you go back to 2001. And so, we do believe things will be rapidly self-correcting.

Secondly, you’ve heard a lot of the drilling contractors talk about the need for the newer rigs. I think yesterday Nabors mentioned that their new rigs are in great shape and they were going to get rid of old rigs and they were going to actually cut some up. Quite frankly that plays into exactly what we have been talking about for a long time. We need infrastructure replacement.

Irrespective of what happens over the next year or so or two on the financial economy, rust never sleeps. And if you are going to continue to need the infrastructure replacement, we think we are in great shape to be able to handle that.

I think Clay gave you a very good definition and description of what our backlog’s all about and it gives us plenty of opportunity to be able to withstand any shortfall, but be able to prepare ourselves to give this industry the things that it needs. It’s all about technology. It’s all about repairing that infrastructure.

Real quickly, on an international basis, I think there is a lot of areas that continue to be pretty exciting. The Northeast and -- I mean sorry, Middle East and North Africa are still great areas. And for them, and, again, it comes back to replacement of reserves. It’s not so much the price today, even though they are concerned about that, but it’s much more of building up the reserves for the future.

Quite honestly, I can’t make a big argument that I don’t like $70 or $75 oil, because I think it will help the economy rebound faster. It also is not going to impact their projects that they are doing in places like the Middle East, and we continue to have very robust activity there in bidding products.

Kind of one of the more interesting areas too that I think is flying below the radar is Latin America. You look at a lot of the IPMs going on in places like Mexico. Jeremy just mentioned, we are there with our products to help the folks out on these IPM situations. Brazil, while it may cut back a little bit, I think in the short term, on the number of rigs that they are announcing, they still have to continue to want to advance and get the equipment down there to be able to increase their productivity.

You noticed, I think it was yesterday in the Chronicle, they talked about having production of 4.2 million barrels a day by 2015, and that was from their CEO. And let me assure you if they are going to do that, they are going to need rigs, and they’re going to need the support of those rigs and they’re going to need the equipment that we have.

So, we feel very comfortable that while there certainly are some short-term wins. And maybe even would push into the immediate term, we are positioned to take advantage of this, and I think really do some fairly unique things.

One other area that I’ll talk about for a second, and it’s not exactly a country, but it’s the Arctic. We’re seeing a lot more interest in the Arctic, the types of rigs that can in the Arctic. They are saying there is more opportunity up there. And if you look at the Stockman rigs we an announced a couple of quarters ago in the Baltic Sea, I think you’ll see that there is more and more things that will be done in the Arctic arenas. So, they need new rigs, and those, quite frankly, are very expensive rigs. So, we are excited about some of the prospects there.

Finally, let me touch just a second or two on technology. Clay mentioned our Marcellus, our Drake rig for the Marcellus shale, really a cool rig. We’ve already sold a bunch of these, designed, specifically for the terrain and type of wells that are being drilled up there, and we are doing more and more things every day with AC technology, our permanent magnet motors.

So, all in all we feel pretty good about where we are positioned. We certainly aren’t Pollyanna’s. We understand there’s headwinds out there, but we also understand that my hair didn’t get gray because I haven’t been through this before. The fact of the matter is we’ve got a management team that knows how to do things, and we’re going to do things that are correct. But right now we are excited about where we are. We are excited about our balance sheet. I think there are a lot of good things going on, as well as a lot of challenges.

Finally, I’d like to thank all of our employees. It’s been a tough time, between hurricanes in China, between flooding in Mexico -- I am sorry earthquakes in China, flooding in Mexico, and hurricanes in the Gulf Coast, our folks have come through it well. They have continued to be very productive and help this company out. And for that, we are very, very thankful.

So, at this time, Marcia, I’d like to turn it over to you for any questions that our callers might have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). Our first question is from Jim Crandell. Please state your company name followed by your question.

Jim Crandell - Barclays Capital

Good morning, guys, Jim Crandell from Barclays Capital. Another great quarter. Congratulations.

Pete Miller

Thank, Jim.

Jim Crandell - Barclays Capital

First question is about Brazil. I think Clay mentioned that you received 3 of the 12 orders from Brazil in the third quarter. Would you expect the majority of the reminder in the fourth quarter? And can you give your thoughts on spending coming out of Brazil, and rigs coming out of Brazil over the next two to three years?

Pete Miller

Jim, I would say -- I wouldn’t say that we would be getting the orders in the fourth quarter. I think there is a potential we will have some of them in the fourth quarter. I do think they are having a few challenges there getting the financing straightened out the way they want it. If you will note, yesterday -- I mentioned earlier about the CEO from Petrobras being in town and he kind of mentioned that they were helping a lot of these folks find financing. But in the event that they couldn’t, Petrobras was going to prepare themselves to provide some of the financing.

So, I think these are going to go on. The exact timing I think is a little bit problematical at this point. While where we could get some in the fourth quarter, I think the majority would stretch out into ‘09.

Jim Crandell - Barclays Capital

Okay.

Clay Williams

Jim, probably worth noting too there are avenues of financing available out there. Most of the major shipbuilding countries around the world have export/import banks that offer guarantees and can assist builders with financing these rigs. So, there are discussions going on with some of those entities around the world.

Jim Crandell - Barclays Capital

Okay. Second question is, Clay, I believe you told our group three weeks ago of the 102 projects that you are involved in 100 have long-term financing. If my recollection isn’t right, please correct it. In light of that, do you see this situation where you have one customer behind on payment; do you see this as a one-off or very close to a one-off situation?

Clay Williams

Yes, let me clarify, Jim. I said that we had a couple of projects where we knew didn’t have long-term financing.

Jim Crandell - Barclays Capital

Right.

Clay Williams

There are others – we are not 100% positive. Remember, we contract through the shipyards pretty frequently. We do have a lot of insight into most of our customers and feel good about their financing, just to clarify that. But yes, we do view the one project that we are having issues on right now is really a one-off. As I mentioned, it’s less than 2% of our backlog and we are substantially cash ahead on that project.

And I’ll also add too that this isn’t entirely unusual. This is kind of the business that we are in, and sometimes people get a little late on payments. So, we are talking to that the customer and hopeful things will get on track here.

Jim Crandell - Barclays Capital

Okay, thank you.

Pete Miller

Thank you, Jim.

Operator

Thank you. Our next question is from Kurt Hallead. Please state your company name followed by your question.

Kurt Hallead - RBC Capital Markets

Hey, good morning.

Pete Miller

Hi, Kurt.

Clay Williams

Hi, Kurt.

Kurt Hallead - RBC Capital Markets

Hey. Obviously, given where your stock is trading right now, it’s discounting pretty significant decrement in business probably lot more severe than we’re actually going to see going forward. I appreciate all the color you have given. Maybe on a more near-term basis then, Clay, you referenced on PSS that the fourth-quarter margins would be down, right?

Clay Williams

Right.

Kurt Hallead - RBC Capital Markets

I was wondering, was that frame of reference off the hurricane-impacted third quarter, or should we think about it a little bit differently?

Clay Williams

That’s sequential. So, it’s compared to the third quarter which is very, very strong. But it’s less a hurricane impact, Kurt, because a hurricane will really affect both quarters. It actually trickled into the first couple of weeks of Q4. It’s less a hurricane issue than it is just a general mix issue that we foresee there.

Kurt Hallead - RBC Capital Markets

Okay. And I mean, if business actually does slow down to the extent that your stock is predicting. It looks like you guys are going to throw off a tremendous amount of cash. So, I guess that dovetails into your viewpoint of the opportunities that may be presenting themselves right now?

Clay Williams

Absolutely. It’s important to note that we have a very scalable businesses that aren’t terribly capital intensive. As I mentioned, we are under-spending depreciation in CapEx, and so we do generate a lot of cash. We’ve been careful with our balance sheet before this. We haven’t had a stock buyback in the past to preserve capital, because as a management team that has been through a lot of cycles in this industry. We recognized that when business is very good. You really kind of need to hang on to that cash because it has a lot of option value when business turns and gets bad.

And so, now that we appear to be moving into a world where market is going to be a little bit softer, we do believe that there are very, very good opportunities that are going to present themselves. We’re glad that we have a strong balance sheet and we’ve preserved capital. We’re glad that we are going to throw off a lot of cash and capital. And we look forward to deploying capital into those opportunities that present themselves as a direct result of the world we find ourselves in.

Kurt Hallead - RBC Capital Markets

Okay. Do you think that means there is a fourth leg or do you think you will find some things that will tie into your existing, like PSS businesses, for example?

Pete Miller

Well, I think, Kurt, it could be a lot of different things. I think as we look strategically as who we are, if a fourth leg presented itself, we would certainly do it. We like the business model we’ve created. As Clay pointed out earlier, we have got a lot of -- this is a true full-cycle play. And I think there are some other things that we can add into that that makes sense financially and strategically. We would certainly be willing to do it.

I think we’ve shown in the past that we are pretty good at that. We are very good at integration and we’re going to keep our eyes open. And the nice thing is that a lot of -- I always tell everybody, if you’re going to build a rig, you always come to us to at least get the quote, and use us as a stocking horse, if nothing else. And if you were going to sell or if you’re interested in selling, you’re always going to come to us to at least see if we are interested. So, we like the opportunities that are out there today.

Kurt Hallead - RBC Capital Markets

Okay. Thanks a lot. Appreciate it.

Pete Miller

Sure.

Operator

Thank you. Our next question is from Robin Shoemaker. Please state your company name followed by your question.

Robin Shoemaker - Citigroup

Yes, Robin Shoemaker, Citigroup. Congratulations, Pete and Clay, on a great quarter.

Pete Miller

Thanks, Robin.

Robin Shoemaker - Citigroup

Yes. I wanted to ask you about the editions to backlog, again, for the quarter. I think you mentioned six deepwater rig packages, a few jack-ups were in there. Could you just indicate whether these orders -- of course during the quarter there was kind of a big change in the credit markets and so forth and oil prices continue to fall. Could you describe these as having come earlier in the quarter rather than later?

Clay Williams

It was -- I know in the month of September, we booked about $600 million out of the $2.4 billion. So, that was kind of while the storm was going on. So, I guess it fell off just a tad. But Robin, I’ll stress these things are so big and lumpy. I am not sure that means anything. We have continued to win some orders since September 30th. So, through the first three weeks of this month, we’ve had orders to continue to come in the door since all this news broke.

But in spite of that, I’ll kind of reiterate what Pete and I said earlier, we do expect our customers are going to take a little pause here generally. So, it is softening a little bit. But, a lot of our customers went into our backlog with eyes open about the current credit crisis.

Robin Shoemaker - Citigroup

Okay. Then my follow-up is regarding the drill pipe business. You mentioned the back log of a $1 billion roughly of drill pipe orders. I think that’s been pretty steady. We know in passed downturns, of course, that drilling contractors in the US tend to take drill pipe off of idle rigs and looks like the number of rig counts are going to come down. What’s the plan for Grant Prideco in the event that we had, let’s say, a rig count decline from 2,000 level to 1,500 or something like that, and you begin to see the same patterns you saw in the past, where drill pipe was taken off of idle rigs to use on working rigs.

Pete Miller

Well, Robin, I think as with anything, we are pretty darn good at responding at what goes on in the marketplace. I think one of the nice things that you have today is that the Grant Prideco folks have done a great job, but we are also very much of a worldwide company. And the nice thing about drill pipe is that it is very fungible. You can move it around. Contractors move it from rig to rig, and fortunately, manufacturers can move it from country to country. As you look at a lot of the deepwater rigs that are out there today, a lot of those rigs that are on order don’t necessarily have the pipe.

I think there is a secondary thing that is happening that’s a little different than in the past. When you look at the number of wells that are being drilled that are, in fact, horizontal, extend reach, the wear and tear on drill pipe is a lot different than it has been in the past. So, the long-winded answer of that is; number one, I think the world’s going to need a little more pipe than it’s needed in the past even with the reused number of rigs; and secondly, if in fact we have to slow down, we slow down, and we know how to handle that, and we’re able to pull back very effectively and keep our costs in line.

Robin Shoemaker - Citigroup

Okay. I appreciate that. Thanks, Pete.

Pete Miller

Okay.

Operator

Thank you. Our next question is from Bill Sanchez. Please state your company name followed by your question.

Bill Sanchez - Howard Weil Inc.

Howard Weil. Good morning.

Pete Miller

Hey, Bill.

Clay Williams

Hi, Bill.

Bill Sanchez - Howard Weil Inc.

Just to cycle back on the Petrobras question from earlier. The 3 of the 12 that you awarded, Clay and Pete, were there other awards made during the quarter that went to other [cable com] providers or is there still nine remaining, if you will, that need to be awarded going forward.

Pete Miller

Well, heck, Bill, I would never admit that anything was ordered to anybody else. No I think as you go forward there probably are still plenty of those to be awarded. I think that there some have been awarded, but I also think that that number 12 is probably a floating number too. I think that number could go up. It could go down. So, the only thing that I can tell you is what we got, but I am not really too worried. We got a pretty good position in the market.

Bill Sanchez - Howard Weil Inc.

Okay. So, one follow-up, Clay, for you, margins on the backlog if we think of the $11.8 billion right now and what the aggregate margin is embedded in that versus what you have already recorded to the P&L so far. I take it on average higher than what we have seen so far.

Clay Williams

Yeah, you’ve generally seen a shift over the last couple of years towards more offshore and more ultra-deepwater and more sophisticated equipment, which is good for our margins, that’s accretive to the margins generally. But, there is not a huge difference. We get good margins on the land rigs we sell too. So, that’s kind of one effect you saw. As we move through the cycle, we’ve had margins expand somewhat -- they kind of flattened out somewhat over the past year.

The other is, though, that we’re also getting better and better at executing on these rigs. We are now performing installation and commissioning work on the second copy and third copy of rigs, and we just -- there is a learning curve effect here, as we do the second, third, fourth, fifth version, costs tend to come down. So, I think that will help add to the margins as we go forward too.

Bill Sanchez - Howard Weil Inc.

And the incremental orders you see here over the next few quarters, margins should be consistent with what we have recently seen?

Clay Williams

Yes, in broad terms, I believe so. As I mentioned, there was a couple of good economic drivers that are helping the economics of building rigs with steel rolling over about 10% to 20%, with the dollar strengthening. That helps us. We make a lot overseas that is costed in foreign currencies, and so translating that to those costs to dollars reduces them.

Bill Sanchez - Howard Weil Inc.

Thank you, all.

Pete Miller

Thanks, Bill.

Clay Williams

Thanks, Bill.

Operator

Thank you. Our next question is from Brad Handler. Please state your company name followed by your question.

Brad Handler - Credit Suisse

Thanks, it’s Brad Handler with Credit Suisse. Good morning, guys.

Pete Miller

Good morning, Brad.

Brad Handler - Credit Suisse

I guess following up on Bill’s line of questions. Can you speak specifically to the steel, to steel ruling over? You buy forward -- I am sure you buy forward. But how much of the backlog might you be able to benefit in terms of margins relative to steel if it continues to decline?

Clay Williams

Actually not that much. We do work very hard to try to lock steel in. We learned a long time ago we are not very good on speculating on steel price directions and we refer not to do that. So, when we win an order, what we like to do is just lock it in so it’s no longer a big variable. And to do that, we place orders for castings and forgings and structural steel as quickly as we can after we win a contract. So, in terms of our existing book of business, we expect to have not that big of an impact from falling steel prices. But looking forward to the next projects that we bid with a little cheaper steel costs that helps us in terms of our cost structure.

Jeremy Thigpen

Also it helps all of our day-to-day businesses. If you look at the PS&S group, we don’t buy forward that much and don’t carry over large inventories of steel. So, as we see steel starting to roll over and decline here over the next couple of months, it certainly helps our cost structure.

Brad Handler - Credit Suisse

Can you -- Jeremy, thanks for that. Can you comment a little bit on kind of proportion of costs? I know you were talking about a lot of different businesses, but --

Jeremy Thigpen

Sure. Yes, it ranges across the businesses. If you look at our downhole business, steel makes up approximately 45% of the total cost of our goods. And if you look at the mission businesses, it ranges anywhere from 45% to 80%. Those modules are very steel intensive and so we benefit greatly from the reduction.

Brad Handler - Credit Suisse

Okay. Thank you. If I could steal just sort of an unrelated follow-up and I guess this is out of curiosity.

Pete Miller

Yes.

Brad Handler - Credit Suisse

If anything else the IntelliServ comments that you made, it sounds like we had a lull relative to when Grant was running this business, quite a lull in terms of getting follow-on orders to the initial work. It sounds like you are suggesting that has finally turned and activity will ramp. So, perhaps how many strings might you be running as of the first quarter of ‘09 just as a way of referencing the turn?

Jeremy Thigpen

Right now we have 13 strings. We’re going to be adding another three in Q1. And so, it’s a combination of both the strings and kind of the resources to perform the jobs. But at the point, will be at the point where we will have 16 strings in Q1.

Brad Handler - Credit Suisse

Running or you will have them.

Jeremy Thigpen

They won’t be running concurrently.

Brad Handler - Credit Suisse

Okay.

Clay Williams

You probably want to know, too, you’re getting repeat customers.

Jeremy Thigpen

Absolutely. That’s -- 2008 has been a great year for IntelliServ. We haven’t had any problems with the network whatsoever. There is no downtime associated with the network whatsoever. And so, we’re getting a lot of repeat business, and that’s really our focus is to focus on a core group of customers in a few geographic areas to make sure that we get this right and gain the acceptance in the marketplace that we want for this technology.

Brad Handler - Credit Suisse

Okay. Thanks. It was very helpful.

Clay Williams

Thanks, Brad.

Jeremy Thigpen

Thanks Brad.

Operator

Thank you. Our next question is from Michael LaMotte. Please state your company name followed by your question.

Michael LaMotte - J.P. Morgan

Thanks, JP Morgan. Good morning, guys.

Pete Miller

Good morning, Michael. How are you doing?

Michael LaMotte - J.P. Morgan

I am doing okay. Thanks, Pete. A question for you, Clay, on the CapEx side. You mentioned that you are under-spending depreciation. I know that you have been spending on facilities with cellular manufacturing and that kind of thing. Where are you now in terms of CapEx plans in this effort to try to ring cash out of the business?

Clay Williams

As we have talked about in the past, converting a facility over to cellular manufacturing is a fairly lengthy and involved process. You can’t just shut down a plant for three months while you rearrange all of the machine tools. And so, it’s a two to three year or four year in some cases, type effort. So, we’re a pretty good ways of the way through on the facilities that we plan to make this conversion in, probably touches two-thirds of our manufacturing facilities that we have in Rig Technology. We also have facilities in PS&S that have adopted cellular.

Jeremy Thigpen

Yes. All of the downhole and mission manufacturing businesses have adopted the cellular manufacturing approach.

Clay Williams

Yes. But one of the key aspects of it too that it is not terribly CapEx intensive. You’re really more rearranging workflow, and processes, job descriptions and how you’re organized more so than going out and writing big checks for roofline and machine tools. We have made rifle shot purchases of machine tools along the way to kind of bolster our manufacturing capabilities, but the thing about Rig Technology is it’s really a fairly capitalized business.

Michael LaMotte - J.P. Morgan

So, if we think about current CapEx levels, it’s probably pretty sustainable even call it a maintenance level at this point, ex-acquisition?

Clay Williams

Well, yes, in fact, we can spend less if we need to. In fact, Jeremy’s businesses consume a kind of a disproportionate amount of capital because they have such high growth opportunities. That’s something we can adjust to the marketplace.

Jeremy Thigpen

High growth opportunities and the fact that it’s a rental model --

Michael LaMotte - J.P. Morgan

I was going to say, what percentage is now in rental roughly?

Jeremy Thigpen

It depends by product line, but between 50% and 60% depending on the month of the quarter.

Pete Miller

To add a little more color, three-fourths of our third quarter CapEx which was $104 million, so a little over $75 million was in our Petroleum Services & Supplies Group. Rig Technology truly is a pretty capitalized business. Our PS&S business is a little heavier on capital because there are all rental businesses. In addition to Jeremy’s, we also rent a lot of solids control equipment and other things.

Michael LaMotte - J.P. Morgan

And 50%, 60% of that $75 million is rental tool related?

Clay Williams

I don’t think it’s quite that high, but it’s certainly over half.

Michael LaMotte - J.P. Morgan

Okay. As a follow on, if I think of the M&A environment of previous downturns, NOV and the predecessor companies were in very different stages of their own corporate development as was the business itself. If I think about value and use of cash, why not step on a share repurchase plan? I mean is there that much out there that could plug holes or create other business lines that would potentially create as much value as buying back your own stock here?

Pete Miller

You know, Michael, I think everything is on the table for us today. I think we are in a little bit of un-chartered waters right here when you take a look at what we perceive to be a pretty undervalued stock price. But others out there have undervalued stock prices too. I think as we look that this, I wouldn’t want anybody to ever think that we just exclude anything, but I think as we go to our Board and talk about our strategy. We put everything out there on the table, and that’s not to say that a stock buyback wouldn’t be one of the things that we clearly would have right on the table.

But we want to make sure that we are creating a lot of value for our shareholders, and then many times if we can find something out there that really adds to true growth and to true earnings and get that value, that’s what we are going to do. But you can rest assure, this management team is committed to creating value for our shareholders and we’re going to do that in the best way possible.

Michael LaMotte - J.P. Morgan

Is co-private on the table?

Pete Miller

Heck. Is this the last question?

Clay Williams

Thanks, Michael.

Michael LaMotte - J.P. Morgan

I am done.

Operator

Thank you. And the final question is from Geoff Kieburtz. Please state your company name, followed by your question.

Geoff Kieburtz - Weeden & Co.

Weeden & Company. Good morning.

Pete Miller

Good morning, Jeff.

Clay Williams

Hey, Geoff.

Geoff Kieburtz - Weeden & Co.

Just a couple of follow-ups. You guys keep a very good track of what’s on the, let’s say the shadow calendar in terms of orders and so on. Have you seen anything that you would have rated as high probability either get pulled off the list or at least moved to a low probability over the course of last three months?

Clay Williams

We’ve had specific customers say, hey, we want to see where this credit market is going, where commodity prices shake out, that sort of thing. Yes, we got a couple of customers. I don’t think anyone is coming to us saying, absolutely not, we’ve decided we’ll never ever buy this rig. It’s more a case of let’s low play this a little bit and see how things go.

Bear in mind, Geoff, these conversations with these customers are kind of three-way conversations. There is us, there is a shipyard, there is a customer, and then they will be talking to their sources of financing, if they need external financing for the rig. They are often also talking to oil companies about specific specifications that their customers want to build into the rigs. And so, they are a lengthy conversation. They go on for months and quarters and sometimes even years. And so, today we have a lot of time invested in these various conversations.

So, I think people truly do believe that the world does need more deepwater drilling capacity, then there will be a need for these rigs, but kind of view this as sort of a short-term dislocation. Many, as I mentioned earlier, are looking for other sources of financing and talking to some of the export/import banks, the government-sponsored agencies around the world that guarantee financing, and they seem to be filling in some of the gaps here. So, we are hopeful. We do acknowledge there will be a headwind here for a couple of quarters, but hopefully things will turn around after that.

Geoff Kieburtz - Weeden & Co.

In terms of your comment about your orders coming down in the next several quarters, are you also signaling that you will expect to see backlog coming down?

Pete Miller

I don’t know that I would say that. As you take a look, Geoff, over the last couple of years, our book to bill has been in some cases two to one and alike. So, I think it would be too early to say that I would say backlog is coming down. Certainly, the book to bill isn’t going to stick up at 1.8 or two to one.

Geoff Kieburtz - Weeden & Co.

Right.

Peter Miller

But still, and I think what’s important to realize is orders are coming in and this is the 23rd of October, and we have taken some very significant orders in October already. So, I think it’d be premature to say exactly what would happen because we in uncertain times. But still, orders are coming in, and I think that in the long run, it’s still a very positive business.

Geoff Kieburtz - Weeden & Co.

Okay. And if I could just on the separate topic, on the M&A, are you willing to give us any of your current thoughts as to what looks most interesting as everything starts looking cheaper?

Clay Williams

We’ve got a lot of good opportunities. We’ve got a pretty broad range and a lot of good opportunities on the table.

Pete Miller

Yes. And I hate to tell, you Jeff, because then the price is liable to go up.

Clay Williams

To give a little more color, I think most public companies in oil field services have pretty strong balance sheets. They have watched their stock prices decline and they are going take the long view here too. And I think, realistically, what’s probably most doable are companies that are facing a little bit of balance sheet distress, or need to refinance and need external capital. In both public and the private arenas, we’ve had some private equity players rolled into the space in the last few years that highly levered a couple of oil field service companies that we know. So realistically, that’s probably the most doable deal in the short term, and we’ll refine our resources.

Geoff Kieburtz - Weeden & Co.

At a very kind of conceptual level, would you -- should we expect it to be primarily manufacturing oriented, or are you looking at anything more deep involvement in the service area?

Pete Miller

Well, I think, Geoff, as you look conceptually at where we’ve always been strategically, we think any product and service in the upstream oil and gas business makes a lot of sense, but also secondarily, we sell, and some of our best customers are people like Schlumberger and Halliburton, and folks like that, and we don’t exactly go out and look for ways to compete against them. What we like more are the products we can provide them and the service that we provide associated with those products.

Jeremy Thigpen

Yes. We’ve done a couple of acquisitions this is quarter in Petroleum Services & Supplies. We do a couple of acquisitions every quarter. So, I want to stress that this is something we do day in and day out. And given what’s going on in the marketplace and potential for downturn out there, we just think there will probably be more coming, and we are anxious to -- we think it’s going to be a pretty interesting time, look forward to doing some deep deals.

Geoff Kieburtz - Weeden & Co.

Great. Thanks very much.

Pete Miller

Thanks, Geoff.

Operator

Thank you. That concludes the question-and-answer session. At this time, I’d like to turn the call back over to Mr. Miller for any closing remarks.

Pete Miller

Thank you, Marcia. And we appreciate everybody’s interest and calling in, and we look forward to talking to you at the end of the year. Thank you very much.

Operator

Thank you, sir. Ladies and gentlemen, that concludes the National Oilwell Varco third quarter earnings conference call. If you would like to listen to a replay of today’s conference call, please dial 303-590-3000 with the access code 11120270 followed by the pound sign. We thank you for your participation today, and at this time, you may now disconnect.

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