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Executives

Loren Singletary - Vice President Global Accounts and Investor Relations

Merrill A. “Pete” Miller, Jr. - Chairman, President and Chief Executive Officer

Clay C. Williams - Senior Vice President and Chief Financial Officer

Analysts

James Crandell - Barclays Capital

Marshall Adkins - Raymond James

Robin Shoemaker - Citigroup

William Sanchez - Howard Weil Inc

Dan Pickering - Tudor Pickering Energy Partners

National Oilwell Varco, Inc. (NOV) Q4 2008 Earnings Call February 4, 2009 10:00 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the National Oilwell Varco Fourth 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). As a reminder, this conference is being recorded today, Wednesday, February the 4, 2009.

I would now like to turn the conference over to Mr. Loren Singletary, Vice President of Global Accounts and Investor Relations. Please go ahead, sir.

Loren Singletary

Thank you Lore and welcome everyone to the National Oilwell Varco fourth quarter and full year 2008 earnings call. With me today are Pete Miller, Chairman, President and CEO and Clay Williams, Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and full year ended December 31, 2008, please note that some of the statements we make during this call may contain forecast, 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 the risk 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 to you to the latest Forms 10-K, 10-Q and S-4 National Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussions of the major risk factors affecting our business. Further information regarding these as well as supplemental, financial and operating information may be found within our press release, on our website or in our filings with the SEC. Later on this call, Pete, Clay and I will answer your questions. We ask that you limit your questions to two in order to permit more participation.

Now I'll turn it over to Pete for his comments.

Merrill A. “Pete” Miller, Jr.

Thanks Loren and good morning everyone. Earlier today, National Oilwell Varco announced fourth quarter net income of $585 million or $1.40 a share on revenue of $3.8 billion. Included in this numbers, a pre-tax charge of $20 million or $0.04 a share for transaction cost associated with our earlier this year in April merger with Grant Prideco.

For the year, we have revenues of 13.4 billion and net income of 1.96 billion or $4.90 a share. Our year-over-year revenue growth surpassed 20% and our year-over-year operating growth... operating profit growth was 29%. This was a very good year for National Oilwell Varco.

Backlog for capital equipment at the end of the quarter was 11.1 billion, as net new orders for the quarter were 724 million. While this was the first quarter in 14 quarters that our book-to-bill has been less than one, it was a solid order rate given the historic economic challenges that the world is facing since the end of September. I want to thank all of our wonderful employees for the hard work and dedication that they had in achieving the stellar 2008 results. This could not have been done without this tremendous workforce.

I'll come back in a minute or two to discuss more on the operational color, but at this point in time, I'd like to turn the call over to Clay Williams to give you some color on our earnings and what we're seeing as we drove into the future. Clay?

Clay C. Williams

Thanks Pete. National Oilwell Varco posted outstanding results in the fourth quarter, generating record earnings of $1.40 per share on 3.8 billion in revenue. These results included $20 million in transaction costs related to the Grant Prideco acquisition, excluding these fourth quarter earnings were $1.44 per diluted share.

The fourth quarter capped a terrific year for National Oilwell Varco which saw the company earned nearly $2 billion in net income or $4.90 per share on revenues of $13.4 billion. Excluding transaction costs for the full year, earnings would have been $5.08 per share for 2008.

Fourth quarter operating profit was $856 million and full year operating profit was $2.9 billion. Excluding transaction related charges, Q4 operating profit was $877 million and operating margins were 23%. Operating leverage or the incremental operating profit flow-through was 29% on the 5% revenue growth sequentially, excluding transaction charges for both periods.

National Oilwell Varco acquired Grant Prideco on April 21, 2008 and began looking the incremental results for these operations as of that date pursuant to U.S. GAAP. In order to provide more transparency and comparability we continue to disclose additional pro forma results for our combined operations in the supplemental disclosure schedule in our press release, and on our website which is summary operating data by quarter, back to the beginning of 2005.

These results include the expected ongoing impact of purchase accounting PP&E and intangible step-up to the transaction in prior periods, and exclude inventory amortization and other one time transaction charges to make them apples-to-apples and to help you in your analysis of historical trends.

Compared to the pro forma combined fourth quarter of 2007, fourth quarter 2008 revenue increased 20% and operating leverage was a strong 32%. Full year 2008 pro forma operating profit was $3.1 billion on $14 billion in revenue, which grew 20% year-on-year. Full year pro forma operating leverage was 30%.

NOV finished 2008 with a very solid balance sheet, owing to our exceptionally strong cash flow from operations which totaled $2.3 billion during the year. This together with the second quarter completion of the sale of certain Grant Prideco businesses enabled NOV to completely repay the $3 billion in cash consideration required for the Grant Prideco acquisition.

As a result, our $2 billion revolving line of credit that we set up and completely drew down in April is now completely paid-off, and available for us to use again over the next four plus years.

Cash at December 31st, totaled over $1.5 billion and debt totaled $874 million; substantially all of our debt is due between 2011 and 2015. So at this point we do not expect to go to Washington DC and ask for product volumes (ph). We are pleased to have such strong financial footing during a time when worldwide economic activity is slowing sharply.

The current crisis began as a seizure of credit markets and candidly 90 days ago we were hopeful that oil and gas business where most participants or reasonably well capitalized would be spared. However in the past 90 days slackening demand for oil and gas has driven commodity prices sharply lower, testing the economics of many development projects particularly heavy oil and gas projects in North America. Consequently, rig-counts particularly in North America have plummeted, and we are seeing operators here curtail operation sharply. Reactivity move down mostly late in the quarter and was generally led by smaller, vertical drilling programs which are less revenue intensive for us and others.

However, more revenue intensive horizontal drilling particularly in the Shale plays has began to decline sharply too and we expect activity to decline further through the first half of 2009; primarily in North America. Interestingly, we believe the lag in the declining horizontal and directional rigs in North America reflects the comparatively stronger economics these projects exhibit. And underscore the importance of directional and horizontal technologies in the drilling role in the overall energy equation.

The current activity is expected to drive revenues from our petroleum services and supplies sharply lower in Q1. But at this point we expect revenues to roughly stabilize here for the remainder of the year. Margins will also decline sharply perhaps into the high teens, given the high intrinsic operating leverage embedded in our portfolio exacerbated by the rising pricing pressure that we are seeing in this segment.

Similarly, our distribution services business is expected to decline in both Q1 and again in Q2 before stabilizing. As a reminder, both of these segments are closely tied to drilling activity around the world. They will feel this downturn first and most acutely. We are hopeful for a second half 2009 recovery, we're not yet planning on this for these units.

In contrast, we continue to expect another year of strong performance from our Rig Technology segment where we forecast sales to be up slightly in 2009 versus 2008. Q1 results should significantly exceed the prior year's first quarter but likely decline slightly from Q4 and continue to decline slightly through the remainder of the year, owing to softening demand for pressure pumping equipment and land drilling equipment in North America.

However, our $11 billion backlog will continue to swamp the equation as we methodically work through the dozens of offshore rig construction projects we have underway, driving a fairly steady $1.3 billion in revenue per quarter out of backlog.

Overall margins for the group are expected to hold roughly steady in the mid 20% range. Despite challenging few quarters ahead, 2009 could very well be the year for NOV to shine. Last quarter I discussed the financial power embedded in the construction of NOV; roughly half of our sales from rig activity and half of our sales from capital equipment, both are driven by oil and gas but they are way shifted by a year or two.

Our forecast for the coming year bear this out, and we expect the momentum of a large backlog to drive strong results from our Rig Technology group, at a time when PS&S and distribution are declining. Although we expect earnings to be down year-over-year, the company still expects to post reasonable results overall and enjoy continued solid cash flow as we build new equipment and as some working capital winds out of the services businesses.

We think that strong worldwide oil field activity driven service franchises, back stopped by a strong worldwide provider of capital equipment with solid orders to execute over the next couple of years make for a powerful financial combination that can handily weather the cyclical ups and downs of the oil business.

Now I want to take a few minutes and update you on our backlog for large capital equipment for the Rig Technology segment. As our press release notes, we secured orders for new equipment during the fourth quarter totaling $724 million. These additions are net of $95 million of contracts we removed from our backlog due to payment defaults for negotiating cancellations which I will detail for you in just a moment.

We recognized revenue out of backlog of $1.466 million, up 8% sequentially, yielding a book-to-bill of slightly less than 50% for the quarter. This resulted in the first decline in our backlog since National Oilwell and Varco merged in early 2005. Significantly though, inspite of the most challenging credit environment in decades, orders for new equipment continued to flow in including packages for three new jack-ups and one new floater during the fourth quarter, together with a wide variety of replacement and upgrade equipment that we typically sell to keep the fleet of rigs working around the world.

The December 31, 2008 backlog was 90% international and 10% domestic and 14% land and 86% offshore. The ending land backlog of $1.5 billion was down 324 million but still well above mid-2008 levels. Just the close of the quarter, we have secured orders for two additional small jack-up packages and remain optimistic for orders for the coming year.

Underpinned by significant need for new deepwater drilling assets for the Santos Basin in Brazil, we believe that is entirely possible for NOV to secure orders in a range of 3 to $4 billion in 2009, provided Petrobras executes its current plans.

Our orders in this scenario would be down from $7.3 billion won in 2008, they would continue to provide a very healthy base of business in addition to the $11 billion we carry into a year. Notably, most of our recent offshore customers are pursuing government backed trade financing to anchor their shipyard projects, particularly GIEC (ph) in Norway which is considering doubling its lending framework to 110 billion kroner, Exim in Korea and Sinosure in China.

We have handful of customers who have faced significant financing pressures in the last 90 days and we are working with some to modify payment and timing requirements to keep their projects moving. We have two land rig programs where we have agreed to push back deliveries and payments to accommodate our customers' needs. These have been accomplished without the need for NOV to modify its pricing or other commercial terms other than timing, and generally makes sense for our operations and here's why; in addition to preserving the work for future periods, it permits us to execute these projects in a more measured workmen like fashion.

That's good for costs and margins. Think back to the topic we've addressed on these calls repeatedly since 2005; execution of the crushing pile of orders raining down on NOV for new drilling assets. We have executed exceptionally well, but in so doing, have relied heavily on outside suppliers, fabricators, contract laborers and others at higher marginal cost.

Our own employees have worked exceptionally long hours at time and a half overtime to get equipment out the door to meet the pressing needs of our customers. With pressing needs not quite so pressing anymore, NOV can undertake these projects in a much more efficient manner with less reliance on higher marginal costs resources and less overtime. In short, stretching deliveries permits us to execute a little more efficiently to catch our breath and in certain instances, we've agreed to do that.

We referenced earlier, we now have one offshore rig project and a number of smaller component orders in default in our contracts or in negotiations to cancel. These totaled $95 million and we will pay $13 million in cash on these and all were removed from our backlog during the fourth quarter.

We recognized no revenue or profits on these. Additionally, we have another $364 million of backlog work at risk, where we have collected any aggregate $93 million in cash against revenue recognized of $41 million. These include five offshore rigs where we have suspended work at the request of two customers who are actively pursuing buyers or additional financing for these with our assistance.

Two of the five have contracts and buyers for the projects with whom we are negotiating terms. We told you about four of these five offshore rigs last quarter is having operation suspended. So incrementally during the quarter we halted work on more and more.

Also within this $364 million of that risk contract is currently in the backlog of five land rigs where we are in discussions on cancellation terms. I will stress it in the aggregate we remain cash ahead on all these.

The other 97% of our backlog continues to hung along well, as our operations personnel execute smartly and efficiently. So far this cycle we have delivered 41 offshore rigs, on time, on budget.

As a result our timing in backlog adjustments we are forecasting revenue at a backlog for 2009 to be down slightly from the guidance we provided on our third quarter call to about $5.2 billion in 2009, roughly inline with a 5.3 we shipped out of backlog during 2008, and well above 2006 and 2007 levels.

Specifically, we pursue revenue out of backlog in Q1 to be in the $1.3 billion range I mention earlier, but if our forecast hold for both production and orders we would nevertheless expect to begin 2010 for the backlog in the range of about $9 million. At present, we have $4.7 billion in revenue scheduled out of backlog for 2010 and a $1.1 billion balance in 2011 based on backlog amounts as of December 31, 2008.

Despite the near term challenges we are confident the world will build many, many more rigs in the coming year. The fleet remains old and tired; the U.S. still drives three-fourths of its energy need from oil and gas as do many countries.

The 452 offshore rigs born 25 years ago or more... recent announcements of rig retirements do not surprise us. And with the IEA saying that oil production will soon be declining 9% per year, the world will turn to new offshore frontiers to replace these declines. They are unaware of anything that will drill an offshore well other than an offshore drawing rig.

Now let me turn to our segment results. Rig Technology generated $2.1 billion in revenue and $557 million in operating profit in the fourth quarter, yielding an operating margin of 26.7%. Revenue out of backlog improved 8% sequentially helped up by turn around after Hurricane Ike in the third quarter, and non-backlog revenue was up 10% as well.

Aftermarket sales were 27% of total revenue... of total segment revenue and grew 4% sequentially. And non-backlog capital shipments jumped 23% sequentially. Sequential operating leverage or flow-through was a strong 35%. Compared to the fourth quarter of 2007 revenue grew 31% and 30% operating leverage. For the full year, Rig Technology posted sales of $7.5 billion up 31% and 32% operating leverage.

Broadly the North American and Russian land rig markets were showing the most weakness. As we moved into the first quarter, with demand for drilling equipment from Latin America and the Middle East largely continuing strong. Recently delivered Rapid Rigs and Ideal Rigs are working very well in four Latin American countries, prompting interest from it for additional units from IPM projects.

Our offshore prospects have decidedly NOC flavor to them, in addition to the 28 potential floaters that Petrobras has stated that they need.

While North Sea drilling activity is expected to be down, we are seeing rising interest in upgrading platform rigs and cranes in this market and expect a solid 2009. Recent pricing pressure has been most acute in the land rig market with some pressure on jack-ups, but we're also seeing falling steel and production cost and improvements in FX to help offset. Installation and commissioning of ongoing rig construction projects is proceeding well with approximately 500 NOV personnel, assigned to 22 rigs underway currently.

We expect to peak in mid 2009 at 38 rigs being commissioned simultaneously. Sales of well intervention and stimulation equipments serves this quarter to record levels and shipments to Russia and the Middle East exceeded expectations, driving record margins.

However we are seeing a sharp curtailment of orders for coil tubing and nitrogen equipment for North America and Russia. China orders in wireline equipment sales continue to remain relatively strong in the first quarter. And we also benefited from instrumentation sales into China... I'm sorry in to India, to help offset sliding demand for rental equipment in North America.

To reiterate we expect Q1 2009 results to be down just slightly from Q4 due primarily to slowing coil tubing and nitrogen vaporization equipment sales.

The Petroleum Services and Supplies segment generated record revenues of $1.4 billion in the fourth quarter, up 77 million or 6% from Q3. Operating profit was $341 million and operating margins were a solid 24.6%. Sequential leverage or flow-through was 15%, below our long-term average for reasons I'll touch on in just a moment.

Pro-forma for Grant Prideco year-over-year Q4 sales grew 5% at 58% flow-throughs for the segment.

The quarter benefited from a high level... a very high level of drill pipe shipments which drove a record level of revenue for the Grant Prideco drill-pipe business for both the fourth quarter, which benefited from the turnaround of Hurricane Ike and for the year.

However margins declined from the third quarter due to 8% higher steel cost in Q4, as we use much more third-party supplied green tubes due to a scheduled mill shutdown at our Voest-Alpine mill.

We expect to see drill-pipe steel cost to continue to rise into the first quarter but should fall thereafter. Drill-pipe margins were also adversely affected by mix in the quarter; specifically we had a lot less large-diameter premium pipe and a lot more APINC 50 (ph) pipe to alliance customers. That drove revenue per foot down.

Overall demand for drill-pipe is slowing and we expect sales to be down significantly in 2009, new strings of premium pipe for new offshore rigs not withstanding.

Our other petroleum services and supplies businesses also posted strong results in the fourth quarter, particularly our mission multiplex pump and valves sales and our quality tubing... coil tubing business.

We continue to align our new (inaudible) business which also posted a record year in 2008 with our Downhole Tools business to jointly tackle the needs of our directional and horizontal drilling customers in this area, and are progressing well to assure manufacturing and sales resources.

Sequential revenues for both were up. IntelliServ picked up a couple of more jobs during the quarter, lifting results and we are anxious to close the joint venture we announced with Schlumberge last December, which is pending regulatory review.

Pricing across most of our service businesses is under pressure with 5 to 15% reductions common in North America, but remain relatively stable so far in international markets. We are just now beginning to see lower steel costs and some of the product lines we manufacture, down perhaps 10% on recent orders, but expect steel to decline further as economic downturn worsens.

On the cost side; we are redeploying assets and personnel, producing overtime, shifting production from suppliers to in-house facilities, and where necessary adjusting our workforce.

For the full year Petroleum Services and Supplies segment generated $5.3 billion in revenue and $1.3 billion in operating profits for 24.4% margin including pro-forma Grant Prideco for the full year. The 6% year-over-year pro-forma growth flowed through 35% additional operating profit.

Overall, we expect North America to continue to bear the brunt of the economic inactivity downturn for at least the next few quarters.

During the fourth quarter we saw the Mid-Continent, Rockies and West Texas areas hit the hardest. But likely we have seen the Barnett area also come under pressure.

Gulf Coast and Haynesville seem to be holding up reasonably well, while Canada is likely to be challenged through the remainder of the year. Internationally, Russia seems to be the most depressed, while the Middle-East, Latin America and the Far East remain relatively stable. With about 54% of fourth quarter sales from Petroleum Services and Supplies from North America, sliding the rig counts are expected to drive large double-digit declines in revenues from Q4 to Q1 of 2009 at steep decrementals.

Distribution services had another solid quarter posting 8.8% margins on sales that were down about 3% from the third quarter. Revenues for the group were $483 million and operating profit was $42 million in the fourth quarter. And operating leverage or flow-through was 9%, inline with group's long-term 10% average.

Compared to the fourth quarter of 2007, revenues grew 32% at a very solid 18% flow-through. The U.S. came under pressure in the fourth quarter as operators began laying down rigs and curtailing rig reactivations and rig-up activity. U.S. decrementals were higher than normal due to arising pricing pressures on top of lower volumes.

The Mono Industrial business also failed with slowing industrial activity, but operating profit remained stable due to cost reduction initiatives. Canada was up modestly in revenue but significantly up in operating profit compared to the third quarter, due to cost reductions made in prior periods.

Distribution wrapped up a record year in 2008 at an extraordinary 7.3% operating margin, which is outstanding for this business. Revenues were $1.8 billion, up 24% year-over-year at 10% leverage of flow-through. Our international growth initiatives, including NOV's unique rig store concept paid dividends this year in this quarter as our international DSCs posted strong double-digit growth for both the year and the sequential quarter.

Looking forward into the first quarter, we expect sales to fall at double-digit declines, owing to the sharp decline in the rig count in North America which accounts for a majority of sales for distribution. Decrementals are likely to be higher than our average of 10%, due to rising pricing pressure across the region and reduced supplier rebates.

Turning back to National Oilwell Varco's consolidated fourth quarter income statement; SG&A increased $22 million sequentially, due mostly to higher sequential incentive compensation accruals but remained roughly constant as a percentage of revenue at about 8.7% of revenue.

Interest expense declined $4 million as we repaid debt associated with the Grant Prideco acquisition. Our credit and other income declined $4 million due mostly to FX swings. Equity income from our Voest-Alpine joint venture decreased $4 million as we booked a purchase accounting adjustment related to our investment there. Excluding this adjustment, NOV's income from the JV was actually up about $5 million sequentially due to higher margins in OCTG and line pipe sales.

Unallocated expenses and eliminations in our supplemental schedule, which is pro forma for Grant Prideco for all periods, was $63.5 million, up $8 million sequentially due to higher incentive compensation accruals at year end and higher inter-unit sales profit eliminations, offset by other favorable movements in other items.

The tax rate was 32.6% for the quarter and 33.5% for the year, and for 2009 we expect the rate to be in the range of 32 to 33%. Depreciation and amortization was $118 million in Q4, excluding transaction related inventory step up charges, and Q4 CapEx was $114 million.

Full year CapEx was $378 million. And including the full year of Grant Prideco, it would have been $412 million on a pro forma basis. We expect 2009 CapEx to be in the range of $350 million. EBITDA in the fourth quarter was $1 billion.

Our December 31, 2008, balance sheet employed working capital excluding cash and debt of $2.4 billion, about flat with Q3 and equaling 16% of annualized revenue, consistent with recent prior quarters. DSO has improved slightly from Q3 and we are watching collections closely. Customer financing of projects in the form pre-payments and billings in excess of cost, less cost and excess of billings was $2.3 billion at December 31.

Cash flow from operations for the fourth quarter was $588 million and less Q4 CapEx of $140 million yielded free cash flow for the quarter of $474 million.

Now let me turn it back to Pete.

Merrill A. “Pete” Miller, Jr.

Thanks Clay. I'd like to make a few brief comments on what we're seeing operationally out there, just to give you a little bit of a color and I doubt much of this will be much of a surprise to the people on this call. Clearly, the weakest area that we see in the world right now is North America. I think the North American rig count is declining very, very rapidly.

Interestingly though, the decline as Clay pointed out in his comments, is really one of the type of wells. If you're drilling kind of strictly vertical wells, many of those rigs have come down very rapidly. You've seen it happen in places like Oklahoma and West Texas.

The Shale wells have held up reasonably well. While we expect there to be reductions in the shale wells, the interesting thing is many of the products that we sell in the shale wells really are much greater volumes than we sell on more traditional wells.

So the decline is not linear many times. It's actually less than that. But there is kind of one nice thing that's happening, and I think it's something that'll come back in to play later.

Many of the rigs that are going to be... that are going to stop working today in North America won't work again. For the first time, you are hearing drilling contractors use the word retirement. They are actually saying, we are going to retire some rigs we are not going to bring some of these rigs back. And the inevitable upsurge again that will occur, I won't give you the year or the time but it will occur when you start saying rigs picked up. It's going to be the newer type of rigs that we put into the system recently. There is going to be a greater demand for those rigs and quite frankly, we're going to be here to help with that demand.

So, we think in the short-term while there is pain, in the long-term the demand for the type of rigs and the technology that we have, will be there. I think our market leading names, whether its Tuboscope our distribution business, we'd hike a log (ph), those types of businesses prosper more in down times than some of the people that don't have quite the market leading name.

So we think there is great opportunity out there even in a bad market. We kind of are excited about the prospects of being a weak market because we think the business model that we've used to build this company allows us to withstand downturns better than many others because we are in fact a complete full cycle play whether its in the early to mid-cycle and our distribution and PSS of late cycle, which we're seeing in the backlog, but we think its going to carry a lot through.

So, while North America is going to be challenging, I think some reasonable spots will be shale's, and also a lot of the deepwater rigs that we're building today are starting to show up in the Gulf of Mexico. And as those work, there is going to be a demand for our proprietary products to take care of the equipment that's on those rigs are highly technical, and a lot of things are going to be positive for us when we look at the work that we could do on these rigs and the support that we're going to be able to give our customers. Yeah, it's going to be challenging, no question about it and I think North America is really going to be the biggest challenger in the world.

Internationally though, and I want to talk about that for a moment, that really is where it's going to be a better market. We believe you will see decline internationally, isn't going to be anyone near as great as what you have in North America, and again it's going to be very regionally directed.

We think that the North Sea is going to slowdown; you've heard other service contractors talk about that. Kind of a need thing for us on the North Sea though, when it does slowdown, many of the platforms that are up, they'll take time to refurbish the equipment and upgrade.

We have and we announced not too long ago, our with frame agreement was Statoil (ph) to be able to go in and refurbish and upgrade a lot of the equipment that they have on lot of their platforms located in their producing areas. So we think some of this downtime that might be associated with the lack of production its going to provide opportunity for us to refurbish and rebuild rigs.

And we think Saudi Arabia will slowdown. I think when you look at that kind of taking, they brought up their OPEC cuts, however other places in the Middle East, specifically Kuwait, Oman, and even Iraq are looking to build new rigs. So we believe that you'll see some opportunity there, especially in the land rig business, and these are the expensive land rigs, when you start talking about the desert type rigs that they use there, they could be as much as 30 or $40 million each.

We are seeing enquiries coming out of there, and very serious enquiries, so we believe that parts of the Middle East are going to be very positive. Brazil will continue to be a positive. I think when you talk about stimulus packages in other countries, they are looking at, how can they stimulate the things that increase employment, and how can they stimulate the things that increase their financial liability.

And generally speaking, many of these areas that's our financial sector. When you look at what Petrobras has announced, we're very cautiously optimistic of that many of those rigs will in fact come to provision, and we're position very well to be able to take advantage of that, and that's one of the reasons, as Clay pointed out in his comments that we continually to expect orders coming in throughout the year and orders of a meaningful size I believe, as for the good backlog as we exit '09. We are positioned very well to take advantage of this.

Mexico, I think will continue to be an interesting place and especially in the IPM. So I think a lot of the service companies that do the IPM's are going to need the type of equipment that we provide. We have bridge drill pipe or drilling rigs that are going to be able to help them support these IPM projects.

North Africa, is another area that we think is going to be very positive. I think geopolitically, you'll see some of the issues associated with all of the natural gas for Europe coming out of Russia this year, and kind of the shutdowns in the red cold time. And you look at some of the gas lines that can come out of the Mediterranean and enter Southern Europe, and then go up into other areas, I think you're going to see Algeria, Egypt and most specifically Libya want to increase their capability of being able to produce natural gas. They all are enquiring about the type of rigs that we build, that can help them do this.

So, there are some real positive spots out there. And for the most part, we feel like the international arena is one that's going to give us some opportunity. We have build the company over the past few years to take advantage of that.

As we've looked at many of the acquisitions we've done, we've tried to do them overseas; we've positioned ourselves with plans that can take care of the overseas demand. We think places like Russia will clearly be slow. However, we do have some customers there that are financed much better than others, and we can see where some of these customers will utilize this opportunity to go ahead and bring in some new equipment to position themselves for the future.

The shipyards around the world; we think many of them will be looking very closely and support from their governments, and also some sort of financing of many of their customers. We are very close with the major shipyards of the world, be it Samsung, be it Kepler Phelps (ph) be it Daewoo, Hyundai. And we think that we'll continue to see a goodly amount of business coming out of these areas as they utilize their stimulus packages to try to make sure that they can go ahead and build additional rigs.

So, while we certainly understand the softness in the business most especially North America, we think the softness will not be quite as acute in the international arena and we are uniquely situated to provide the opportunities that those folks are going to need for the equipment that they're going to need.

Now let me talk about a couple of things individually. Clay has talked some of them already. We are seeing a reduction in cost. We think at some point in time that will manifest itself, and so even if there are factors, pricing pressure, we believe some of the pricing pressure will be mitigated in cost. And we also have a very diverse manufacturing base that allows us to be able to put manufacturing in areas that give us the best efficiency and the lowest cost.

Now we're going to continue to invest in our people. We've opened up technical colleges around the world. We're going to keep those opened. When you take a look it the way we built up this company, we brought in a lot of great people. We trained them and to let a lot of people go and then bring them back in later, pay severance packages and then have to retrain, can be very expensive.

So while we certainly are always going to size our operation pursuing to what the revenues are, we also are going to ensure that we maintain the best possible people that we can, because ultimately you'll see an uptick in this business and when that occurs, I think the companies with the best people and properly trained people are going to gain the most.

We're going to continue to invest in technology. And as we look at what's going on out there, the next generation of this, the things that we've done with IntelliServ are continuing advancements on different types of Downhole Tools and quite honestly our ability to create more rigs that are more efficient and have less people on them, we think are very important, we'll continue to do this.

We're blessed with a good balance sheet. I think that balance sheet is going to allow us flexibility to take a look at what we can find out there that will help build us for the future. This company really in many cases was built on bad times. We are able to find great deals, we are able to take those great deals and put them into our template, our international template and really expand earnings on a real basis and we want to make sure that we take care of that.

Most of our customers today have great balance sheets. They're just like we are and I think what you'll see in many cases there's going to be a shift away from maybe new rig construction to really component upgrades, I think top drives, iron (ph) mix, piping handling systems, new control systems, you'll see a lot of these to be put on rigs, not necessarily buying a new rig but bringing rigs in, refurbishing them and making sure that they can compete with the brand new rigs. So we think that will continue to happen.

As you see rigs come down, when you take a look at the rig components, historically there's been a lot of cannibalization. But today one of the interesting things as many of the new rigs have such equipment that you can cannibalize it off the old rigs. And I am talking rig equipments specifically, because when you look at these control systems, when you look at the way we built AC Drawworks versus DC Drawworks, the way that you're looking some of the mud pumps, it's not like it was in the mid-80's when every rig kind of looked the same when you pulled a piece equipment off and you put it on.

So I think the cannibalization while there can be some, will not be quite what you've seen in the past. We're excited about the aftermarket. We are putting a lot of these new highly technical rigs out there and I think that aftermarket is going to provide some great opportunity and provide annuities that we've talked about for a long time that will continue its performance.

And finally, other areas such as that we don't talk about much, but cranes are very specific pieces of equipment like that. We've got a great position in, some of that will go to the industrial arena. A lot of that will go on drilling rigs. So we believe very strongly that the business model we put together kind of puts us in a nice position to be able to take advantage of a downturn. I think the acquisition opportunities are going to be pretty nifty and so overall, we think we're very well suited to be able to handle whatever is going to happen.

If a question comes to me what's going to happen, I can tell you the only thing I know is I don't know, and we're positioning ourselves to be able to take care of whatever the market is going to be able to provide us.

I'd like to say its going to be short-term, downturn, I don't know that. Is it long term downturn? I don't know that either. I will tell you this. We think the biggest issue is demand. Its not necessary supply of product, it's the demand of product and demand turns on a dime and supply turns on millions of dollars in long time.

So we think that when the demand does turn, the company that have positioned themselves well, have the best employees and the best products will prosper and I feel like we are in that position.

So that's really kind of a quick rundown. I think Clay gave you good color. I appreciate the... some of the things that were said there and what I'd like to do right now Ray is open it up to any questions that our customers might have.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen we will now begin our question-and-answer session (Operator Instructions). Our first question comes from the line of Jim Crandell. Please state your company affiliation, followed by your question. And please limit yourself to one question and a follow-up question. Please go ahead sir.

James Crandell - Barclays Capital

Yes, Barclays Capital. Very good quarter guidance and a excellent rundown.

Clay Williams

Thank you, Jim.

Merrill Miller, Jr.

Thanks, Jim. Thanks.

James Crandell - Barclays Capital

Pete or Clay, could you elaborate a little bit more on Brazil and the order picture there? It seems if were to achieve the 3 to 4 billion possible I guess in new orders, that Brazil could be a huge chunk of that, maybe as much as over half of incoming orders. Can you talk about what the potential is, you think the potential is there for Brazil to execute on the remainder of their 12 rig program? How do you see that being financed and how do you that overall picture unfolding?

Clay Williams

The announcement earlier, I think it was last week from the Board of Directors of Petrobras where they came out it with a $174 billion budget, that I think it's a five year budget, it was up 55% from depreciating five year budget, to me that's a resolve that they are going to move forward. Previously in 2008, Jim, as you are aware Petrobras indicated the need for first... they indicated a need for 40 deepwater floaters to drill mostly the Santos basin and develop a sub-salt (ph) resources that they've discovered in that basin. The first trench of those were issued as the letters of intent, about a dozen floaters, and then behind that there is another 28 floaters.

And I don't think Petrobras, and I don't want... we are careful not to speak for them, but I don't think they backed off from that estimate of the need for floating rigs. And everything they've done point to a lot of resolve in moving forward with that perfectly. And so, we're hopeful with the announcement just last week which I think also included the statement that their program is pretty healthy down to pretty lower oil price, indicates that they're going to move forward.

Merrill Miller, Jr.

And I think the other thing on that too Jim, is that we've invested pretty heavily in infrastructure down there. And I think Brazil is going to want a lot of local content, and we're positioned to be able to take advantage of that. As with anything like this, I think there is always timing issues, but we're pretty bullish on the fact that they're going to continue to move ahead. And I think Brazil realizes that the oil and gas is very, very important to their economy. And we're even see some movement on land actually in Brazil and they've come in and looked at things like Rapid rigs and Ideal rigs to be able to drill more gas wells on land. So we're pretty confident that they're going to push forward.

James Crandell - Barclays Capital

Okay. Just as a follow-up to that. Just wonder if you could, again just a focus on the question in Brazil, can you remind as Clay or Pete of those, that 12 ridge additional trench, how many rig equipment package orders you've gotten so far, my reckon is that it is three, but maybe update that. And is there anyway you can be a bit more specific on what you think about the overall financing down there? And I'll get back to my earlier question, it seems like Brazil has the potential of being a... I mean a $2 billion country for orders that's coming there?

Clay Williams

Yeah, we'll be careful not to quantify it or get more specific in that Jim. But I will confirm, we announced this last quarter that we had won three of the 12, we're in our backlog. There was also a fourth floater that we won in the third quarter which was essentially a Brazilian speck rig to serve in that market. And we'll tell you that, those customers and others are trying to progress the financing of those rig projects since specifically talking to a lot of the export, import agencies around the world that are referenced in my earlier comments.

So, we're optimistic, we're going to be able to make that work.

James Crandell - Barclays Capital

Okay. Thank you.

Merrill Miller, Jr.

Thanks, Jim.

Clay Williams

Thank you.

Operator

Thank you, sir. Our next question comes from the line of Marshall Adkins. Sir please state you're company affiliation, followed by your question and please limit yourself to one question and one follow up question. Please go ahead.

Marshall Adkins - Raymond James

Raymond James. So, I just want to get this clear Clay, you're not taking tar funds?

Clay Williams

Yes. I can confirm that Marshall.

Merrill Miller, Jr.

No, we're... actually we're doing that to protect our pay, Marshall.

Marshall Adkins - Raymond James

I understand. That's not my question. My question is this. And I'm going to ask you go on a limb here because I know you'll really enjoy that. North America, if I recall, roughly 50/50 mix last year. If you had to look towards '010 and I don't want any specific numbers, just kind of generically, is North America, a 30 of your business or a quarter of your business, looking out to '010?

Clay Williams

Yeah, I'm almost not sure projecting at '010. I will tell you Marshall that in 2008, North America was 58% of our Petroleum Services and Supplies segment and 75% of our distribution segment. And that's where we had the most concentration. Rig Technology, total sales in North America were only 25%. So it's much more of an international focused business. So,...

Marshall Adkins - Raymond James

The blended mix close to 50-50?

Clay Williams

Yeah, the blended mix is actually 41%

Marshall Adkins - Raymond James

Okay.

Clay Williams

Total, out of North America. And that of course is brought down by the rig component.

Marshall Adkins - Raymond James

Right, right, okay.

Merrill Miller, Jr.

And I would say Marshall that as we push forward, that number will be reduced. So that's by design. We've said for a long time that North America is very much of a mature oilfield, and while we certainly like generating cash out of North America, a lot of the growth, I think a lot of the acquisition opportunities that we look at today, will be in the international arena.

Marshall Adkins - Raymond James

That was going to be my follow up question, as you did hit the... I'm kind of... that you built this company during bad times. Can you give us a little more direction I mean your balance sheet's strong. What direction are you heading acquisition? I mean you mentioned international, but just give us a little more color there.

Merrill Miller, Jr.

I think there's a few things we'd like to do. If you take a look at the actual drilling rig itself, there's not a whole lot more we need on it. There's still some things we like. And I think the other thing is just a lot of international companies that are very, very highly technical, that invent a lot of things and we find that we can go in and buy those at a very decent price but be able to put that in our marketing machine and expand the revenues very, very rapidly.

So I think on the rig side, definitely we're looking at better technology, things that we can put in the system rapidly. I would say though most of what we'd look at internationally is really on the Petroleum Services and Supplies side. And I think that's an area that we've grown very dramatically over the years.

We've got, I think one of the best suites of Downhole Tools all the way from bed up to the rig floor. We think there's other things that we can add there that are pretty interesting, that we can supply our big customers like our Schlumberger or Halliburton.

And so I think you will see more emphasis on that. I think the expansion of what we do and our brand operations, a lot of solids control. There's a lot of neat things there. We have a lot of thermal desorption to take care of cuttings. So I think you'll see an emphasis on technology and in the rig side and in different products and expanded service on the PS&S side and of course, distribution we're seeing some good success and expanding internationally and we'll look for local type operations to be able to enhance our offerings in that regard.

Marshall Adkins - Raymond James

Perfect guys, thank you.

Merrill Miller, Jr.

Thanks Marshal.

Clay Williams

Thanks Marshal.

Operator

Thank you, sir. Our next question comes from the line of Robin Shoemaker. Please state your company affiliation followed by your question and please limit yourself to one question and one follow-up question. Please go ahead.

Robin Shoemaker - Citigroup

Thank you. Citigroup. Hi. Clay I wanted to ask you a little bit about your backlog discussion and projections. It just seemed quite a bit better than what I was thinking it might be. You have the 11 billion backlog delivered 5.2 billion and yet you end up the year at 9 billion, and I realized these are just some kind of projections you made. But does... and clearly Brazil was a key factor as you mentioned in achieving that kind of projection, but does... are you assuming there that these Brazilian contractors such as Delba Shaheen (ph) who have these ten-year contracts with Petrobras to build rigs but are unable to find financing that in fact they are able to find financing and those rig orders go through.

Clay Williams

Well Robin, I'll reiterate what I've said earlier. We're optimistic that with the help of a number of sovereign governments around the world that are stepping into the fray, generally our customers will find financing. As this is our long-standing policy, I'm not going to make any specific comments about any particular customer out there.

Robin Shoemaker - Citigroup

Yes.

Clay Williams

But directionally that's where the group is going. GIEC (ph) which is the Government Import Export Credit Association in Norway just announced a few days ago that the Government is proposing to more than double their lending framework to 110 billion kroner, I think this time last year it was only 50 billion kroner. So there is a consorted effort amongst the number of governments out there to stimulate their economies by stepping up and financing some of the stuff.

We work closely with the import export credit agencies to document local content in these things. And so, we're very aware of the financing activity amongst many of our customers and frankly I think the odds are good that they will find financing.

Robin Shoemaker - Citigroup

Okay. So then my follow up would be then on Grant Prideco, the drill-pipe business basically the... can you talk about the visibility of drill-pipe order book especially beyond the first half of '09 and whether you believe we will be with all the idle rigs sitting around, seeing quite a bit of surplus drill-pipe removed from idle rigs impacting the drill-pipe sales very significantly as we get later into the year?

Clay Williams

Yeah we do see a pretty sharp fall-off in drill-pipe sales in the coming year. Not surprisingly, it's a very cyclical business with regards to North American rig count and what you have in the drill-pipe business is when rigs start getting laid down, drilling contractors will pull strings off of idle rigs and put them to work on busy rigs. And so you have this little bit of cannibalization phenomenon and that... we are very, very aware of.

And so, that will take a toll on 2009. What will help us though is, we expect steel cost to decline which will help kind of spin the margin impact of that a little bit. We also know that there are a number of very large offshore rigs that are going to be delivered into the market in 20... 2009 and 2010. Those rigs tend to buy a multiple strings. They tend to buy premium strings. They tend to buy big landing strings that are large diameter 5.786 and 6.58 inch of pipe, much higher metallurgy premium threads.

And so for us it's a much more attractive sale because it's a much higher margin piece of business. And so we... you see this mountain of offshore rigs that are coming in to the marketplace they are all going need strings and pipes. We have a lot of visibility into that and that market is going to... it's going to remain pretty solid.

And then lastly, behind all of this Robin, despite the normal cannibalization trend with cyclicality behind the drill-pipe business is a very steady multi-decade phenomenon, where the style of new... though the new style of drilling with horizontal wells, higher rates, higher torques, much longer extended reach sections, has really surpassed the capabilities of a lot of API commodity type drill pipe.

And is really, we're seeing the market gradually shift towards more premium pipe. And where API commodity pipe is being used, it's being worn out faster. The rigs are pushing the drill-pipe beyond kind of its design capabilities to drill these more exotic horizontal wells. When you take drill-pipe and you bend it around a 90 degree bend, you really put a lot of stress and strain on it.

So we think that this is a temporary thing. 2009 will be challenging in drill-pipe. But the long-term secular trend using larger premium pipe, premium threads, higher torque, higher weight handling capabilities, is all very much intact and we're going to benefit from it in the long run.

Robin Shoemaker - Citigroup

Okay, thank you.

Merrill Miller, Jr.

Thanks Robin.

Operator

Thank you, sir. And our next question comes from the line Bill Sanchez. Please state your company affiliation followed by your question. And please remind yourself to ask one question and one follow-up. Please go ahead.

William Sanchez - Howard Weil Inc

Howard Weil. Thanks, good morning.

Clay Williams

Hi, Bill.

Merrill Miller, Jr.

Hi Bill.

William Sanchez

Clay, I was hoping you can go back and address the backlog at risk number, at this point, and given how far I guess along we are in terms of the credit troubles and the first hands we've seen of cancellations of rigs, that $364 million as you see it, kind of worse case at this point or could we see that grow here over the coming quarters?

Clay Williams

Well, I've been surprised a lot, Bill by as you have and everybody has been over the last couple of months. So, I'll never say never, but I will say, we scrubbed the backlog pretty hard and while it could grow we certainly don't see it growing materially beyond this. Most of the stuff we have in our backlog is, will further advance to many of these projects at risk, as from the numbers I think earlier I have mentioned, we only recognized 41 million in revenue on 364, so it's kind of early days in those projects.

Once the rig is 70, 80, 90% complete you know its going to get done. So, but this, right now, I think this is a realistic estimate. I'll also stress too, Bill where the majority of this, we are walking with these customers to find buyers for these projects and actually meeting with some success. I wouldn't tell you that it's a sure thing that this 364 is going to drop out. We're just highlighting it as being at risk based on our analysis.

William Sanchez

Okay.

Merrill Miller, Jr.

I have a lot of switch gears on speed dial Bill, lets say if anything falls out and it looks pretty interesting, give us a call. So, there is interest out there. The world needs deepwater rigs, we know that. And I think if some of these things were to fall behind a little bit that does a lot of buyers in the wings that I kind of look in their jobs, they would like not to more then to be able to get a rig in 2010 or 2011 as opposed to having wait up to 2013 or 2014.

So, we're pretty comfortable of what we've got, we've kind of said that all along and we hope we gave you a little bit more color today to prove that fact.

William Sanchez

Sure, you do. I was hoping to maybe you could give an update. I know in the second half of last year you were starting receive orders for your new Drake rig in the Marcellus, could you give us an update on where that stands and is that still a potential bright spot for you here in '09.

Merrill Miller, Jr.

Yeah, it is. We will deliver, I think the first Drake rig this quarter. We've... kind of put it on fast track, we are pretty excited about it. We think that things that it can do will be very positive. And we're also very bullish on the Marcellus, I mean I think it's too early to say, but I think as the Obama administration gets into energy, they're going to discover that one of the things, that's a fairly quick, very clean and very plentiful resource of natural gas.

And so we think you could see some things that will be positive for natural gas. And the need thing is with our Ideals and Rapid rigs, and Drake rigs especially in the Marcellus, we're well positioned to be able to help satisfy that need. I know you've seen some of the figures on some of the big wells coming out of the Marcellus. And clearly, the Haynesville is producing a lot of gas and the Marcellus has had a couple of wells up there that have produced some fairly eye-popping numbers.

So, we are on track with it, and I think the customers that we sold it to at this point in time are pretty excited about it.

William Sanchez

Okay. Thank you for your time.

Merrill Miller, Jr.

Okay. Thanks, Bill.

Operator

Thank you sir. Our next question comes from the line of Dan Pickering. Please state your company affiliation, followed by your question. And please limit yourself to one question and one follow-up. Please go ahead.

Dan Pickering - Tudor Pickering Energy Partners

Hi, Dan Pickering, Tudor Pickering Hold. I did have two questions. So when we look at kind of the base line orders, Clay or Pete, I mean historically when they are worth a lot of new rigs being built offshore, I think Varco-NOV, kind of was running at 800 million to 1 billion level in terms of just kind of ongoing orders. Is anything changed in that timeframe, should that number be a little bit higher kind of organically without new builds?

Clay Williams

While, two things. The accounting has changed because Varco used to report a different backlog basis, which was everything and we sort of scale that back now that the orders beyond $250. So it's not really an apples-to-apples comparison if you go back prior to merger with them.

Dan Pickering - Tudor Pickering Energy Partners

Okay. Yeah.

Clay Williams

Secondly, yes. I think things have changed. You're replayed generally... we are replacing a more mechanical blacksmith equipment of 1970 something, with equipment that has a lot more embedded electronics and much, much tighter machines tolerances, a lot more of hydraulics or electric motor actuated sort of motion in it.

All that stuff requires a lot more OEM, kind of feeding and probably frankly, there's a much better job its much more efficient, its much more fit for purpose, but it probably it gets worn out faster, because rigs are, you don't have much... you don't have quite the safety margins designed into rigs and so that I think drives probably a higher level of organic support for the fleet from NOV period-over-period, hard to quantify but that's what I'd say.

Dan Pickering - Tudor Pickering Energy Partners

Okay. So the billion from a while back feels like a decent base line there?

Clay Williams

Yeah I think the guidance we're providing is in that close to 1 billion range or so.

Dan Pickering - Tudor Pickering Energy Partners

Okay, thank you. And then Clay you mentioned your view for PSS was a fairly sharp decline first quarter versus fourth? And then flattening out from there, what's the driver of the flattening out process given rig count probably declines again in Q2. How do you offset that decline?

Clay Williams

This is basic... Dan the guidance we provided was based on our most recent budget that we rolled up last week and believe we're going to be able to offset some of the Canadian break-up decline that you see in the second quarter. Our exposure in PS&S to Canada is we do have some exposures on that rig last year with only about 9% to the full year.

So you see a little bit of that affect, but we see some other specific things going on including a lot of excitement in South America, which we believe is going to offset that.

Dan Pickering - Tudor Pickering Energy Partners

Okay. So it's basically international offset in it?

Clay Williams

Right.

Dan Pickering - Tudor Pickering Energy Partners

Thank you.

Merrill Miller, Jr.

Thanks Dan again.

Operator

Thank you, sir. And ladies and gentlemen, that does conclude the question-and-answer session. I would now like to turn the conference back over to Mr. Miller for any closing remarks. Please go ahead sir.

Merrill Miller, Jr.

We'd like to thank everybody of listening in today and we look forward to talking to everybody again at the end of the first quarter. Thank you so much for your interest.

Operator

Thank you, sir. Ladies and gentlemen, this concludes the National Oilwell Varco fourth quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial 303-590-3000 and enter a passcode 11124801. Once again if you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter the passcode 11124801.

ACT would like to thank you for your participation. You may now disconnect. Have a pleasant day.

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