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National-Oilwell Varco, Inc. (NYSE:NOV)

Q4 2009 Earnings Call

February 3, 2010 10:00 am ET

Executives

Loren Singletary – Vice President, Global Accounts and Investor Relations

Pete Miller, Jr. - Chairman, President & Chief Executive Officer

Clay Williams - Senior Vice President & Chief Financial Officer

Analysts

Jim Crandell – Barclays Capital

Marshall Adkins - Raymond James

Bill Herbert - Simmons & Company International

Ole Slorer – Morgan Stanley

Robin Shoemaker – Citigroup

Kurt Hallead – RBC Capital Markets

Operator

Good morning, ladies and gentlemen, and welcome to the National Oilwell Varco fourth quarter 2009 earnings conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Please note that conference is being recorded. I will now turn the call over to Mr. Loren Singletary, Vice President, Global Accounts and Investor Relations. Mr. Singletary, please go ahead.

Loren Singletary

Thank you, Christine, and welcome everyone to the National Oilwell Varco fourth quarter and full year 2009 earnings conference call. With me today is Pete Miller, Chairman, CEO, and President of National Oilwell Varco, and Clay Williams, Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco’s financial results for its fourth quarter and fiscal year ended December 31, 2009, 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 risk and uncertainties, and actual results may differ materially. No one can assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release or on our website at www.nov.com or in our filings with the SEC. Later on this call, we will answer your questions which we ask you to limit to two in order to permit more participation.

Now I will turn the call over to Pete for his opening comments.

Pete Miller, Jr.

Thanks, Loren, and good morning. Earlier today we announced fourth quarter 2009 earnings of $394 million, or $0.94 a share on revenue of $3.13 billion. We also announced full year earnings of about $1.5 billion, or $3.52 a share on revenues of $12.7 billion. Given the challenges faced by the world-wide economy in the past eighteen months, these are very solid results. We greatly appreciate the loyalty, dedication, and efforts of all of our employees throughout the world that created these results. Additionally, we announced year-ending backlog of $6.4 billion, with an order intake of $624 million during the fourth quarter. Clay will expand further on these results and backlog in a moment. Then I will finish with some comments about the market and our operations, and then we will answer any questions that you might have. Clay?

Clay Williams

Thanks, Pete. National Oilwell Varco posted good results in the fourth quarter, earning $394 million, or $0.94 per fully diluted share on $3.1 billion in revenue. Excluding $14 million in pre-tax transaction charges, earnings were $0.96 per diluted share, up a cent from third quarter and down $0.48, or 33% from the fourth quarter 2008 earnings, excluding transaction and restructuring charges from all periods. Fourth quarter operating margin of 19.8% was down slightly from 20% in the third quarter, and sequential operating flow through our leverage was 9% on the 2% increase in sales. Compared to the fourth quarter of 2008, operating margins declined 320 basis points, and the company posted decremental operating leverage of 38% on a year over year sales decline of 18% excluding transaction and restructuring charges from all quarters.

On the full year 2009 the company earned $1.5 billion or $3.52 per diluted share, compared to $2 billion or $4.90 per diluted share in 2008. Revenues were $12.7 billion in 2009 compared to $13.4 billion in 2008 on a GAAP basis. Excluding transaction impairment, voluntary early retirement program and restructuring charges, 2009 full year earnings were $3.89 per diluted share.

Adding in the ProForma effect of the Grant Prideco acquisition which closed in April 2008, sales for 2009 declined 9% for the year owing to a much softer level of drilling activity throughout the year as compared to 2008. 2009 ProForma operating profit of $2.5 billion declined 19% from

$3.1 billion in ProForma operating profit generated in 2008. All in all a good result for a challenging year. It saw precipitous fall in rig activity in a year over year worldwide rig count that was down 31%.

Turning back to the fourth quarter results, the company benefited from a nice recovery in both our petroleum services and supplies and distribution services businesses. We saw a resurgence in activity and enthusiasm across North America, along with some selected international markets.

Rig Technology continued to execute extremely well, posting margins and revenue out of backlog that pleasantly surprised us, along with landing a few more orders through the quarter. Although we are early in the new year we are very encouraged by what we see so far and believe that the foundation has been laid for a meaningful recovery.

The back half of 2009 saw oil prices stabilize around $70 a barrel, and North American gas move above $5 per mcf. Remarkably strong considering persistently anemic GEP numbers and chronically scarce credit. Operators drove 4% international and double digit North American rig count increases throughout the fourth quarter discovering along the way that the rig consumables cannibalized from stackridge (ph) earlier in the year need to be replaced before these rigs can strut in and go back to work.

About three quarters of our petroleum services and supplies segment sales are consumables and quick turn capital items we manufacture that are used in drilling and production processes, so we benefited from the increased demand and showed 6% sequential growth and 39% flow-throughs in the third quarter. The petroleum services and supplies demand uptick wasn't enough to spur any pricing leverage just yet but most products at least saw price stabilization through the third quarter after three-quarters of significant price reductions.

The new sea level for pricing appears to have leveled about 25% or so below peak 2008 price levels, with certain products at greater and certain products at lesser levels of discounting compared to twelve months ago. Cost reductions and continued focus on efficiencies have helped mitigate the margin impacted discounting. If past up-cycles are a guide, pricing leverage is still at least a few quarters away, but again we are encouraged that we are seeing modestly rising demand at stable pricing in the near term within petroleum servicing and supplies.

The groups fourth quarter saw demand rising month by month for coiled tubing strings, ignition products used in well stimulation operations for long horizontal laterals and unconventional shale's. This mirrored higher coiled tubing unit and pressure pumping equipment sales seen late in the quarter within the rig technology group, for both North American and international markets. Anecdotally we have heard of tightening utilization and pricing – prices rising for well stimulation service companies across a number of shale plays and believe this will continue to drive demand into 2010.

Pressure pumping can be brutal on equipment and service companies are ostensibly buying equipment to augment their moves into the emerging and rapidly growing shale plays. Bits, reamers, drilling motors and other down hole tool products within petroleum services and supplies also posted good double digit increases from the third quarter to the fourth quarter and (inaudible) directional drilling critical ingredients for high profitability shale development programs continued to gain share amongst all rigs drilling.

Cost production and issuance within this product line helped fuel better margins there as well. Tuboscope and Well Site Services put up stronger results across the board, with both growing sales and improving margins and adding in – both added acquisitions in 2009 which are contributing to their results.

Drill pipe sales remain soft and fourth quarter revenues declined slightly, but margins were up owing to a favorable mix of premium pipe going into offshore new builds and lower steel costs. Higher priced inventory purchased in 2008 had now all been shipped. We do not foresee a meaningful recovery in drill pipe demand until late 2010 at the earliest, but in the meantime we are pleased that the high mix of premium pipe, lower costs and manufacturing efficiency initiatives are helping us sustain margins for this group.

Distribution Services also benefited from restocking idle North American rigs going back to work, but this phenomenon was offset slightly by lower margins out of international operations where Latin American and Canadian artificial lift projects had seen some delays. Overall distribution generated 8% higher sequential sales and modestly higher margins in the fourth quarter. The group still faces considerable pricing pressures from hungry mom and pop regional competitors in the United States.

Rig Technology saw its North American customers come back to life in the fourth quarter. Demand for high spec drilling machinery to safely and efficiently drill long horizontal laterals is beginning to push rig day rates higher for new AC rigs with top drives and electronic controls.

Well and gas operators clearly prefer these new rigs and are willing to pay more for them and in fact have almost all of the newest rigs contracted and back to working today. Meanwhile older rigs continue to wrestle with dwindling demand and day rates. Even relatively new rigs, say those constructed before 2005 are being upgraded to ensure that they have the latest capabilities that operators are after.

In the fourth quarter NOV's Rig Technology segment was there to help. We sold both new rig packages to North American drillers as well as a lot of top drives and smaller equipment to make existing rigs more competitive. Rig Technology posted order additions of $624 million in the fourth quarter, offset by $46 million in cancellations. When we agreed to permit and international credit challenged customer to trim their order from five land rigs down to two, for net order additions \to the company of $578 million.

Included in the fourth quarter was one package for a semi-submersible for an Asian contractor and as noted earlier bookings for well stimulation units both domestic and abroad were particularly strong. We were also seeing slightly rising inquiries for rigs in the Middle East and Russia and believe that Iraq may be emerging as an interesting market for a lot of rig equipment over the next several years.

On December 31, 2009 National Oilwell Varco's Rig Technology backlog was $6.4 billion with 11% or $735 million destined for land markets and 89% or $5.671 billion going offshore. 92% of the backlog is for international locations. $4.7 billion is scheduled to flow as revenue in 2010, $1.4 billion in 2011and about $300 million in 2012. We have identified $274 million of the backlog, about 4% as being at risk, predominantly jack-up packages for international contractors struggling with financing.

While we did not book any drilling equipment packages for any Brazilian rigs during the fourth quarter we continue to work diligently on Petrobras' requirements for their 28 new floaters with numerous shipyards and joint contractors. Tenders were issued in mid-October for 28 new deep water rigs to be constructed in Brazil with local contact requirements for the drilling equipment packages ranging from 28% up to 50% through the execution of this program over about six years. NOV is refining it's local content plan and we are confident we can comply. Bits by shipyards and drilling contractors are due back to Petrobras the first week in March and so far there have been no delays announced although ten clarifications and addendum's have been issued.

Should NOV be successful in these we do not expect any orders to flow into our backlog from shipyards and contractors until the third quarter at the earliest and there exists a potential for delay due to the complexity of this program. Nevertheless we remain convinced that Petrobras will move forward, owing to the remarkable Santos basin discoveries and the acute worldwide shortage of ultra-deep water rigs.

We are also involved in several other offshore projects around the globe quoting drilling rigs, well intervention vessels, FDSO's and platform upgrades. Our sense is that the all in dollar cost in building offshore vessels has fallen considerably as Asian shipyards are seeking to replace dwindling backlogs and steel prices have declined steeply since 2008. Many of the drilling contractors considering these new build projects are simultaneously pursuing term contracts with E&P operators to backstop the economics. We believe that a resurgence of term contracts is required to turn these projects into orders for NOV and are cautiously optimistic we will begin to see some movement on this front within the next several months.

Financing for speculative new builds remains virtually non-existent. Banks are generally requiring term contracts from operators in addition to higher equity levels in the new build projects.

In the meantime our Rig Technology group continues to get a little better at what they do every day, employing modern lean quick response manufacturing to efficiently build and service the sophisticated high tech equipment required to safely develop oil and gas resources. Their fourth quarter margins underscore the great job this group does.

Finally National Oilwell Varco has stepped up its corporate acquisition efforts throughout 2009 to strengthen its product and service offerings to our valued oil and gas customers and enhance its competitive advantage and financial performance. We closed nine acquisitions for $573 million during the year and acquired a drilling fluids business to complement our solids control and waste management well site service lines within the first few weeks of 2010.

We continue to pursue additional acquisition opportunities believing that we can build value for our shareholders through these strategic acquisitions. Our strong cash flow and balance sheet provide the financial capability but our experienced knowledgeable professional workforce really makes this strategy work. Warren, Pete and I are all grateful for the outstanding job they did in 2009 and we look forward to tackling the challenges of 2010 with them.

Now let me turn to our segment operating results. NOV's Rig Technology segment generated revenues of $2 billion in the fourth quarter, down 1% sequentially and down 5% compared to the fourth quarter of 2008. Operating profit was $567 million yielding operating margins for the group of 28.6% a decline of 40 basis points from the third quarter but up 190 basis points from the fourth quarter of 2008. Decremental leverage for flow through was 57% from the third quarter on the small revenue change, and operating profit improved $9 million from fourth quarter of last year even though sales were down about 5%.

Once again, this quarters generally favorable cost variances on large projects continued to translate to strong margins for the group even though unit volumes of many items the group makes are much lower than peak 2008 levels resulting in absorption challenges for certain of our plants. Revenue out of backlog of $1.512 billion decreased 6% sequentially but nevertheless exceeded our expectations once again this quarter. Non backlog revenue during the fourth quarter of 2009 was $466 million up 16% sequentially but a little below our forecast. Most of the increase came from higher sales of small capital equipment that do not run through the backlog, destined for reactivated North American land rigs and well service companies but after market spare parts and services were roughly flat with the third quarter.

After market did see a slight mid-shift away from offshore towards land which ran a little more than a third of the total in the fourth quarter after market business. The first few weeks of 2010 have seen an increase in spare parts demand which we continue to attribute to rig re-activations.

The Rig Technology group commissioned five new offshore rigs during the fourth quarter and installation and commissioning activity will continue to rise for the next few quarters. We are presently at work on 31 rigs across 13 different shipyards across the globe. So far this cycle, NOV has delivered over 70 new offshore rigs. Our fourth quarter acquisition of Hochang in South Korea contributes to our heavy fabrication capabilities adjacent to some of the largest Asian shipyards and brings derrick erection and heavy crane manufacturing in house.

Looking forward into the first quarter of 2010, we expect Rig Technology revenues to decline in the high single digit percent range at around 50% decrementals, reducing operating margins in the mid 20's.

The Petroleum Services and Supplies segment generated total sales of $936 million in the fourth quarter of 2009 representing 6% sequential increase from the third quarter and a 33% decrease from the fourth quarter of 2008. Operating profit was $107 million excluding transaction and restructuring charges up $21 million from the third quarter on the same basis, and operating margins improved 160 basis points to 11.4%. Fourth quarter sequential operating leverage or flow through was 39% and year over year decrementals were 52% excluding charges reflective of the significant year over year discounting in the groups business.

Sequential growth was relatively broad-based with the segments largest product lines, Downhole tools and bits, Tuboscope and well site services all putting up low double digit sales growth. Drill pipe was the exception with a slight sequential sales decline and book-to-build ratios well below one, but again the drill pipe group posted very strong margins for the fourth quarter.

We are finding that longer horizontal laterals in some of the emerging shale plays are requiring higher torque higher tensile strength drill pipe to execute these challenging programs and the new offshore rigs coming to market are ordering premium pipe, both of which help our mix.

NOV remains a clear leader in premium high torque, high tensile strength drill pipe technology. Nevertheless the business remains challenged by the overhang of more conventional drill pipe around the globe, which drilling contractors understandably would prefer to use if possible.

The downturn of 2009 permitted us to adopt a more aggressive stance in the integration of the ReedHycalog bits business which came in with Grant Prideco into NOV's Downhole tools business. That initiative began to gain traction during the fourth quarter as we adjusted our manufacturing and service delivery footprint through the year and we expect the Downhole tools business will continue to see improving results due to continued focus on manufacturing efficiencies. We are pleased with the marketplace acceptance of our combined systems offering along with new Downhole technologies like the DuraForce impact resistant diamond cutter on our bits and reamers.

Once again in the fourth quarter, most of the sales of the petroleum services and supplies segment went into international markets with gains in Asia and Latin America roughly offsetting declines in the Middle East. Nevertheless, most of the segment's sequential growth came squarely out of North America where resurgent domestic rig counts and seasonal recovery in Canada fueled incremental demand.

North America accounted for 46% of the segment sales by destination, up from 42% in the third quarter. For the year, North America was 47% of segment sales and 53% was international. Looking into the first quarter of 2010 we expect steady improvements in Downhole tools, coil tubing, and XL systems to be offset by lower drill pipe revenues resulting in roughly flat results in our petroleum services and supplies segment before our special charges we expected related to Venezuela.

The impact of currency devaluations announced by Venezuela on the bolivar and have legislated changes to compensation and social regulations under way, will result in a charge during the first quarter of 2010. While we cannot yet determine the size of the charge until the additional clarifications are made by the government, we believe it could be in the range of $20-$30 million pretax and will be borne mostly within our petroleum services and supplies and distribution services segments. My guidance for these segments does not yet factor in this Venezuela charge.

Turning to distributions services, sales in this segment rose 8% from the third quarter to the fourth to $331 million. Operating profit was $8 million up $1 million from the third quarter and operating margins were 2.4%, up 10 basis points from the third quarter. Compared to the fourth quarter of 2008, revenues declined 31% and margins dropped 650 basis points. Incremental leverage or flow through was a modest 4% from the third quarter to the fourth and decremental flow-throughs were 23% from last year's fourth quarter, again due to significant price concessions made during 2009 and reduced supplier rebates to the group on lower purchase volumes.

Domestic sales benefited from the rising rig count in the US as rigs stripped of consumables were replenished to go back to work largely for the big shell plays driving good incremental. Canada also showed very strong seasonal rebounds, particularly in the Bakken Shales in Southern Saskatchewan and two more mature shales in BC and Alberta. Pricing pressures, poorer mix, and higher prices for copper electrical products limited flow-throughs. The internal business of distribution services was roughly flat sequentially. Delays in artificial lift sales into Mexico were offset by gains in the Middle East and on new rig commissioning sales into Asian shipyards. For the first quarter we expect

distribution services revenues to improve slightly, producing modestly better margins.

Turning to National-Oilwell Varco's consolidated fourth quarter income statement, overall gross margins were up 2.2% from the third quarter to 31.3%. SG&A moved up sharply, up $79 million due mostly to higher incentive compensation accruals at year end and also higher legal expenses. As a result, SG&A as a percent of sales jumped to over 11% of sales in the fourth quarter compared to 9% of sales in the third quarter. Transaction restructuring costs were $14 million down from $17 million in the third quarter. Equity income in our Valista Alpines (ph) joint venture was $2 million, up slightly from the third quarter due to improved profitability on OCTG sales. Other expense grew $10 million sequentially to total $23 million in the fourth quarter due mostly to foreign currency exchange movements. Approximately $5 million of the increase was associated with our fourth quarter acquisition of Hochang and movements in the Korean won. The tax rate for the fourth quarter was 32%, in line with our expected rate and in line with our expectations for 2010.

Unallocated expenses and eliminations on our supplemental segment schedule was $59 million in the fourth quarter up $5 million from the third quarter due mostly to higher incentive compensation accruals. Depreciation and amortization was unchanged from the third quarter at $126 million and CapEx increased $21 million to $64 million bringing full year capital expenditures to $250 million.

EBITDA, excluding transaction impairment and restructuring charges was flat sequentially at $731 million in the fourth quarter and $3 billion for the full year compared to $3.5 billion in 2008.

National-Oilwell Varco's December 31st 2009 balance sheet employed working capital excluding cash and debt of $2.8 billion, up $574 million or 26% sequentially due primarily to the $525 million decrease in billings in excess of cost. This liability account reflects customer prepayments to NOV made in advance of our earning the revenue. As we work through the backlog with favorable payment terms we earn the cash paid to us in prior periods. The relief of this deferred revenue liability shows up as an increase in working capital and pushed NOV's working capital as a percent of annual sales ratio up to 22% this quarter.

Total customer financing on projects in the form of prepayments and billings in excess of costs less cost in excess of billings was $802 million at December 31st, down about $600 million due to the increase in revenues out of backlog during the fourth quarter.

Cash flow from operations was $126 million for the fourth quarter and $2.1 billion for the full year, compared to $2.3 billion in 2008. Free cash flow equalling cash flow from operations less CapEx was $1.845 billion. Cash spent on acquisitions totalled $573 million and dividends paid to our shareholders totalled $460 million during 2009.

Now let me turn it back over to Pete.

Pete Miller, Jr.

Thanks, Clay. What I want to do at this time is just make a few brief comments about what I think some of the overriding themes are going to be as we look at this industry over the next couple of years. And I'm going to reiterate some of the things that Clay pointed out, but fundamentally there's about six things that we think are really going to be driving the business, and number one is the inventory replacement. Just like the economy in general, inventories in our industry have been driven down as people became more efficient. Those inventories have to be replaced on the rigs both in our distribution and our PS&S business we're positioned wonderfully to take advantage of that.

Technology is still going to rule. I think what you have to have are environmentally sound, safe, and efficient equipment out there, and this isn't just in a drilling rig, but this is almost everything that we manufacture and it's also very discrete items. As Clay pointed out, we're putting a lot of top drives on rigs today, new top drives. We're putting a lot of new iron roughnecks on rigs. Our new bits like our DuraForce bits, our new bore holes — I mean, these things are all very, very important and I think the technology that you're going to have is going to rule. Also, technology is on a little bit shorter lifespan today, much like computers. It's expanding and changing very rapidly and so things that in the '70s we made that were going to last for 30 years today may be replaced in about 10 years.

The shales, obviously you're going to hear an awful lot about shales from everybody in the service industry. Shales take a lot of high tech equipment, they take a lot of horsepower for fracking, and they take a significant infrastructure. I think the shales are going to start moving overseas and I'll talk about some of those areas in just a moment, but I think the infrastructure is going to play a huge role in being able to support those shale plays all over. In the United States today in our distribution group we're opening up new facilities in places like Troy, Pennsylvania and (Inaudible), Pennsylvania, and to be able to take advantage of the things that are going on in the Marcellus.

Deepwater development, I know everybody knows about Brazil, but deepwater development is going to continue in a lot of different areas. You've got to look at West Africa, you've got to look at the Mexican sector of the Gulf of Mexico. I think (inaudible) is going to start playing a much bigger role. It's not just a Brazilian play, but it's really going to be a worldwide play and I think it's going to dictate the need for more deepwater rigs.

Obsolescence of equipment, a lot of the equipment out there today is old and some people I think like to believe that the old equipment's just going to continue to work forever. It will not. Prima facie evidence is looking for rig count today. The new rigs are working, the old rigs aren't. This phenomenon is going to stretch itself to offshore rigs as well as land rigs. We're here to be able to help replace a lot of these rigs that need to be replaced.

And then finally, international expansion and local presence; you have to have the footprint internationally. While I think the shales in North America are going to be very exciting we also believe that the real growth in this business for us, and I think for the industry in general, is going to be in the international arena.

So those are kind of the six overriding themes that you'll hear us talk a lot about as we go forward and those things are really going to help drive this business, I believe, in a very positive direction. Our distribution business continues to be the leader. We continue to have very innovative solutions when it comes to supply-chain management. I think our results given the reduction in rig count, the fact that we've been able to maintain the profitability we have, I think shows that we've got some wonderful people running that business in a very creative way.

And our petroleum services supplies business, I talk about technology and new products, that really is going to be a key for that business. This past quarter we opened up our new research and development facility for Grant Prideco. It's located here in Houston and we've got some exciting things going on there. Drill pipe is a highly engineered product and the shales need a highly engineered product and we're going to be there to help serve them. As we look at our advanced drilling solutions and our Downhole tools group I think our ability to pair drill bits with the rest of the bottom hole assembly is really starting to show some traction. We're getting a lot of work in the deepwater Gulf of Mexico and I think we'll get a lot of work in other areas as we take a look around the world.

We start in our well side services group. I think the acquisition of Ambar is going to strengthen us in our product offering that we have and we're very creative in being able to put solids control and other products like that together. So we're moving ahead very rapidly in these areas and I think the past quarter showed us gaining the traction back that we needed to gain.

In our rig technology business it's all about new products and it's about our capability to execute. As you take a look at the number of new deepwater rigs that are coming out today that we've put out, those folks have done a fantastic job, but more than that we're also starting to see things happening in the land side that we think are very exciting. Our new Drake rig is working up in the Marcellus. It's a small footprint deep drilling rig that AC Technology — it's really a top of the line rig and getting very good reviews. New work over rigs, our four season five seas, those things are really starting to gain some traction out in the marketplace and we think you'll see more and more orders of those.

As we look around the world I think one of the more exciting areas today is the Middle East and North Africa. We just are opening up new facilities from Tuboscope in Abu Dhabi and we're opening up a new rigs services facility in Kuwait. There's going to be a real demand for the land drilling rigs in both Kuwait and we think ultimately into Iraq. Clay mentioned that Iraq was going to be a good area, I think it's going to be a very positive area. Whether or not it has a material effect over the next six months might be questionable, but I think as we go forward it's certainly going to be able to be very lucrative for us and I think as you take a look at what we've already done in Kuwait, you look at the number of rigs we've built and put in that country it's a very nice stepping stone to be able to do the same sorts of things in Iraq.

The offshore rig demand in the Middle East is picking up. You're starting to see a lot of things done in the Persian Gulf. The Saudis are going to be building a jack-up rig for themselves. I think you're going to continue to see that being pushed along, but the neat thing about the Middle East is not only is it a good capital market for us, but our PS&S business has a lot of traction as well as distribution in those areas.

Latin America, clearly the name of the game right now is Brazil. We're working diligently. Clay mentioned in his comments about what we're doing on preparing for some of the Brazilian tenders. We feel very good about where we're going. As Clay pointed out we're going to be able to match whatever they need on local content and Mike mentioned that in our fiberglass pipe business we're building a new plant in Recife in Northern Brazil and we're breaking ground on that as we speak.

Other parts of Latin America that I think will be positive will be Mexico. I think ultimately you're going to see an expansion of deepwater drilling in the Gulf of Mexico. We are very excited about that prospect and we also continue to have very good manufacturing facilities and other things in the Mexican area.

I'll go to Russia for just a moment. We sold some land rigs in Russia this past quarter. We're excited about that. I think you'll see more Arctic movement there. We're currently building the rigs that are going into the Shtokman Field. They'll be delivered over the next 18 months I believe, and as we look at that I think there'll be more and more opportunities in those particular areas. The North Seas I think will be a little flat but I think you'll see, especially in the Norwegian outer continental shelf as we go up into the Arctic there you'll see some opportunity and we're going to be positioned there to be able to take advantage of that.

And then finally I'll just talk a little bit about North America, and it's all about the shales whether you're talking about the Barnett, Marcellus, Haynesville, Eagle Ford, Granite Wash — I mean it is really going to be about the shale plays, the Bakken has been a very exciting one up there for oil especially. So I think that those are the things that are going to be driving our business. There is challenges ahead. I think the financial challenges of the world are still with us. We fear most another downturn in the general economy, however we feel very good about our position in our markets, we feel very good about the way that our folks have executed during the past 18 months and we kind of look forward to some very, I think, good times over the next few years. We're very excited about where the business is going.

So at this point, Christine, I'll turn it back to you and see if anybody has any questions.

Question-and-Answer Session

Operator

Thank you. (Operator's Instructions) The first question comes from Jim Crandell from Barclays Capital.

Jim Crandell – Barclays Capital

Good morning, guys. Another great quarter, congratulations. Pete, I'm not going to ask about rig equipment this morning, but first of all on your Ambar acquisition from Patterson and Fluids, I assume you're not buying Ambar to rename a US focused niche mud company. Can you talk at all about the opportunity in that business and your strategy?

Pete Miller, Jr.

Jim, I think that you're obviously right. I mean, as we've talked about acquisition in the past we've said that anything we buy really has to fit into our international template and we feel that way with Ambar. We buy a lot of US-based companies and we'll continue to obviously operate in the US, but we also want to be able to develop those products and put them into the international arena, and we think there's an opportunity here. We've been in this business for a long time. When you take a look at our branch operations, we've had those and they've been part of the legacy Varco and Tuboscope companies and then of course when we merged in 2005 they became part of NOV, but we've had mud up in the Rockies for quite some time and we've partnered up around the world with a lot of other mud companies because really it's kind of a defining factor and a lot of this is the solace controlled equipment.

So about a year ago when we bought Spirit Mud we also became a big producer of barite and so we're a cruncher and producer and we actually sell that to a lot of the other companies, but we believe there's an opportunity international and actually a very good opportunity to be able to expand this business because look we've already got the infrastructure in place in most of the big major oil fields around the world and as you take that we can just kind of put a lot of the different operations in those facilities and be able to, we think, compete very favorably with some people that do that today.

Jim Crandell – Barclays Capital

Okay, thanks. And my second question is, I know in the past Grant Prideco has had some exceptional leverage from a bounce in North America, can you comment on where inventories of drill pipe may be in North America today, what you're seeing from domestic land drilling contractors in terms of pipe buying today both for let's say applications for horizontal wells and for conventional type wells?

Pete Miller, Jr.

Yeah, Jim. There's obviously a lot of pipe on the ground kind of on a global basis across North America as rig counts have dropped from 2,000 and now it is around 1,250 or so. So there's a lot of idle rigs and idle strings of pipe, but that pipe is mostly commodity type pipe, API connections, NC50 4, 4.5, 5 inch conventional pipe strings. What the industry's finding across North America is that as they push out these long laterals and long horizontals they're really driving up the torque and the stress on the pipe tremendously and so a lot of the new shale place areas like the Marcellus in the northeast are moving more towards high torque connections and so that's really helping us from a mixed perspective. So the overall kind of supply/demand situation is out of balance given all the commodity pipe on the ground, but we've been able to kind of put up good numbers here quarter by quarter through the downturn largely because we've seen such a favorable mix shift towards the premium pipe for those kind of programs plus all the offshore rigs that are flowing into the market now, they generally tend to buy much more premium landing strings and drill pipe strings which are better margins for us.

Jim Crandell – Barclays Capital

Okay and just a quick follow-on, Clay or Pete, could you characterize the upturn in demand you're seeing for new rig orders in the US land rig market to do this unconventional drilling today? Are you just starting to see the early signs and with the horizontal rig count back up now to peak levels and continued interests in drilling here, do you expect a real surge in new rig orders in the US?

Pete Miller, Jr.

Jim, we are in the infancy of it. There's no question. I think we're in the first inning there, but one of the things that we've experienced over the past four or five years is that land rig business really can change on a dime and we do anticipate — we're seeing an awful lot of quoting today, a lot of interest with our customers on these new rigs because really that is the name of the game. I mean, if you're going to go into these areas you have to have an environmentally friendly efficient highly technical rig and I would expect that as we go throughout the year we'll see a continuing momentum of land rig orders, land rig tendering for US based customers. Thank you, Jim.

Operator

The next question comes from Marshall Adkins from Raymond James. Please go ahead.

Marshall Adkins - Raymond James

I want to understand margins better here, you're PS&S business revenues were about half of Rig Tech last year in one of the ugliest rig count environments we've seen in a while. Margins bounced up in the quarter, ex the Venezuelan stuff, how should we look at PS&S margins going forward? Is it going to be pricing driven or (inaudible)? You've talked a little bit about that Clay, can you give us a little more detail on the PS&S margins? In a second I'll come back and ask you about Rig Tech margins.

Pete A. Miller Jr.

You bet, Marshall. I think let's set drill pipe aside because I think drill pipes going to continue to be challenging through 2010, I think most of the other products that we sell through PS&S are going to see steady volume improvements quarter by quarter at least for the next couple of quarters without a lot of pricing help. I think pricing help in times past when we've gone through up-cycles you sort of got to reconsolidate and get settled in, and start to see that modest growth and demand and after supply demand starts to get tied and utilizations arise above whatever thresholds value is needed.

Suddenly, our customers get to be more concerned about the timing of these consumables and stuff showing up or the service crew showing up out on the rig and less concerned about pricing. And that's where pricing leverage flows in, I think that's still at least a few quarters away, what we'll see in those businesses is sort of steady volume increase with rising activity levels and modest quarter-by-quarter improvements until pricing leverage kicks in. What's going to probably swamp the equation here though for the next couple of quarters is the drill pipe fixture, we do foresee that business to continue to move down in revenue we still have booked a builder below one and we're working through our backlogs. So PS&S in particular, would be the sum of those two groups.

Marshall Adkins - Raymond James

So just to follow up on that exact point it sounds like PS&S, which historically has been a chunk of your business was not last year, will become a big part of your business but probably 2011 of that not quite as much in early 2010 of that.

Pete A. Miller Jr.

We do foresee improvement, obviously we're entering this years with a lot brighter outlook for rig count and so I think year-over-year is going to be in terms of the really big contributions to earnings and operating profit that typically come hand-in-hand with pricing leverage, which is going to be a little later in the game.

Marshall Adkins - Raymond James

And on the rig tech margins, pricing of going forward we assume maybe down a little bit, but your efficiencies in your cost cutting and all that stuff seems to have all said that, should we model deteriorating margins there or can we hold them here where they are?

Pete A. Miller Jr.

They are going to go down I think I said in my comments, you know next quarter we're looking for mid-20's we've been very pleasantly, positively surprised the last couple of quarters that the margins have beat our internal expectations. Though looking at the schedule, things in the backlog and how they are flowing out, the group is doing a fantastic job managing for efficiency in driving cost down and you've seen that in the numbers, but the volume begins to present a little more absorption issues and that also comes in on top of lower pricing issues, as you pointed out we have been quoting a little lower prices lately.

Marshall Adkins - Raymond James

Great job, guys, thanks.

Operator

The next question comes from Bill Herbert from Simmons & Company. Please go ahead.

Bill Herbert - Simmons & Company International

Thanks, good morning. Clay, just want to probe a little bit with regards to your sensibly restrained guidance for PS&S, all the variables that you talked about with regard to lead or flat quarters sequentially, essentially persisted in the fourth quarter, yet revenues were up 6% and if you look quarter on quarter thus far, we averaged 12 rigs per week increasing in the third quarter, nine rigs per week in the fourth this is M-I SWACO land, we're up 36 rigs per week in the first quarter.

Land oil remains extremely vigorous as does gas, I'm just curious as to why we shouldn't see a 5% - 10% uptake again in the first quarter in a typical volumetric incremental that we see in the recovery period of close to 40% as evidenced in the fourth quarter?

Pete A. Miller Jr.

Again Bill, one of the big swings in the quarter vis-à-vis on account of our forecasts was drill pipe had a really solid year uptake that drove a lot of the OP in particular.

Bill Herbert - Simmons & Company International

And why isn't that going to repeat in the first quarter given all the trends that you talked about regard to increasing demands?

Pete A. Miller Jr.

A lot of it was lumpy tied to the delivery of new offshore rigs this quarter.

Bill Herbert - Simmons & Company International

Offshore rigs, got it. Alright, that makes sense, second line of inquiry here is with regard to the rig tech orders fourth quarter, back out the floater what were the orders?

Pete A. Miller Jr.

Bill, I'd prefer not to disclose specifically what we want on any particular package

Bill Herbert - Simmons & Company International

We've been running normalized non-floater order rate of about $350 million per quarter, with the uptake with regard to the rig count in North America and essentially premium rigs being sold out and thus as Pete mentioned an incipient increase with regard to drilling packages for North American rigs. What should we expect at normalized non-floater quarterly order run rate to be going forward?

Pete A. Miller Jr.

I think and we talked about this in the past it's really difficult for us and I think dangerous for us to try to characterize orders for capital equipment as normalized and I'm always reluctant to do that because this is inherently a little bit lumpy.

What I would say the fourth quarter was characterized by was very broad based ordering. We saw complete North American land rigs, we saw components for North American land rigs to upgrade existing rigs, we saw international rigs, we saw offshore equipment that's really fairly broad based in a quarter.

Bill Herbert - Simmons & Company International

Okay, it just seems that ex the significant lumpiness with regard to the floaters it seems that we're seeing an uptake on several different fronts, which I think is reasonably encouraging for you guys, that's all I have. Thanks.

Pete A. Miller Jr.

Thanks, Phil.

Operator

The next question comes from Ole Slorer from Morgan Stanley.

Ole Slorer – Morgan Stanley

Thank you. To begin, a really good quarter here. I want to just dig in to what's going on the floater's side right now outside of the 20 rigs in Brazil that the market seems to be excessively focused on. Are you seeing anything from Brazil, for example, outside these 20 rigs? There's been some other contracts as of late that went to Acker though we seem to be hearing increasing rumblings from US players about exploring in building a series of rigs.

Loren Singletary

This is Loren and I will tell you that in our discussions with the customers there are a lot of things going on outside of Brazil. The operators are actually going to the drilling contractors now and asking for very specific types of rigs for specific locations around the world whether it is the Arctic, West Africa, and so we're working with these drilling contractors every day to put together packages that makes sense. Now again, most of the drilling contractors are being very disciplined in their approach and that they want to have a contract with these operators before they pull the trigger and actually buy these rigs.

Ole Slorer – Morgan Stanley

Your timing, can you talk a little bit about projects and tenders you are working on now compared to half a year ago or some kind of pre-backlog type of activity measure?

Pete A. Miller Jr.

I'd really rather not talk about that at this point.

Loren Singletary

We've never disclosed the number of projects, but I will tell you it's been what I would characterize as steady and very indicative I think of a lot of seriousness by the drilling contractors who are looking hard at these projects. I mentioned in my opening comments though, they are requiring term contracts from operators and the banks are generally requiring term contracts from the operators. So, I think a lot of this falls on the operators to sign those contracts before these things turn into orders. There are a lot of very broad-based serious discussions out there going on about new, as Pete mentioned, the Middle East incremental demand over sand.

Pete A. Miller Jr.

I'd also have to emphasize, there's not a project done that we don't get a chance to look at, it doesn't matter if the other guys are going to get it. You're going to come to us because if nothing else and I've said this a million times, you're going to use us as your stalking horse. We've got a good sense of what's out there, we think we probably have the best sense in the industry of what's out there, and quite frankly that's kind of proprietary.

Ole Slorer – Morgan Stanley

Hello, Pete. I'm very happy about you not filling up the order backlog with its first wave, let me make that very clear.

Pete A. Miller Jr.

Your call back in 2005 we told you the same thing. We'll take the later stuff.

Ole Slorer – Morgan Stanley

My follow up question is if you look at the peak of construction prices out of Korea, for example, in the previous cycle I think the numbers are $750 million. Certainly, the rig brokers that we've talked to seem to suggest that you can now order relative similar rigs in the count of $500-$550 million brackets. Could you talk a little bit about how much of that has been a reduction in the price of the drilling package, relative to the yards having become more efficient and generally yards taking it on the chin, given the terrible state of the global ship building market?

Loren Singletary

I think you characterized it accurately, the yards are facing a little tougher head winds and they've seen their backlogs decline as they worked through their L&G vessels and freighters and tankers and things and so they're very aggressive going after some of these things. FX and steel have helped as well but NOV's not unscathed in this equation, we're pricing down as I mentioned, so we're contributing to that but I think proportionately not nearly as much as the larger pricing down.

Ole Slorer – Morgan Stanley

Thank you very much.

Operator

The next question comes from Robert Shoemaker from Citigroup. Please go ahead.

Robin Shoemaker - Citigroup

Good morning. Could you clarify, last time Clay on the call you talked about several categories of rigs that Petrobras intended for and one category was rigs that we purchased and owned by Petrobras seven drill shifts two semis that would be built in Brazil. That was my first question, what is the status of that to the extent that you're aware of?

Clay C. Williams

That tender has been issued to a number of ship yards around Brazil and again, I think the bids are due back the first week of March on that package of nine.

Robin Shoemaker - Citigroup

Okay. And then with respect to the tenders that were distributed to drilling contractors for additional rigs predominantly to be constructed in Brazil where does that stand? And also the issue of the rigs that were ordered in 2008 and which were awarded term contracts in 2008 but had faced financing challenges?

Clay C. Williams

Robin, first the 19 additional rings I think can be awarded in groups of up to four to individual drilling contractors and there's a lot of folks working on those tenders and they are on a similar sort of timeframe that are due back to Petrobras, I believe in the first week in March. Again I'll stress, so far the tender process has not been officially delayed but worth noting there have been a number of clarifications coming out of Petrobras and it's a complicated situation and so it wouldn't be unusual for these tenders to be delayed a little bit.

We're working hard to make sure that we can comply with local content requirements on those programs. The group of seven for Petrobras ownership is illustrative of the local content requirement for the drilling equipment package, it has raised from 20% for the first couple up to 50% for the last few, and the similar or other local content requirements across the other 19.

Pete A. Miller Jr.

With regards to the 12 floaters that Petrobras issued letters of intent for, I think it was in May of 2008, there remains a handful out there that have not secured financing. We have not booked those into our backlog and won't do so until they secure financing and make down payments. So nothing really new to report here, but a couple of those operators continued to be challenged by financing so that's the situation there.

Robin Shoemaker - Citigroup

So you're understanding is that the 28, there is not deviation from the requirement that the actual vessel haul be built in a Brazilian ship yard.

Pete A. Miller Jr.

We believe that Petrobras is very serious about local content requirements and continues to require a very high level of local content both the hauls and the drilling equipment packages.

Robin Shoemaker - Citigroup

Okay, thank you.

Pete A. Miller Jr.

Thank you, Robin.

Operator

There's time for one last question, today's final question comes from Kurt Hallead from RBC Capital Markets. Please go ahead.

Kurt Hallead – RBC Capital Markets

Good morning. So I want to ask on the pricing, you said that it is a few quarters out, can you state at this point that pricing has stabilized across all your product lines? And is there any pricing power yet in any of your product lines?

Clay C. Williams

I would say it’s a mixed picture, Kurt. Most product lines I think we are seeing stable pricing some exceptions would be the commodity drill pipe that I was talking about earlier that it still under a lot of pressure. Certain regions and distribution continue to see pricing pressure with regards to pricing going up I'd say it's a little more regional I think the emerging shale plays in the Haynesville and the Marcellus have probably seen the best pricing environment so right now kind of a mixed picture, but in broad brush strokes I would characterize it as stable right now.

Kurt Hallead – RBC Capital Markets

Okay thanks. That's it.

Operator

Gentleman, that concludes the Question and Answer Session for today. Please go ahead with any closing comments

Pete A. Miller Jr.

Thanks, Christine. And I thank you all for listening in and I look forward to talking to you again at the end of the first quarter 2010. Thank you very much.

Operator

Thank you for participating in the National-Oilwell Varco fourth quarter 2009 Earnings Conference Call. This concludes the conference for today, thank you for your participation. You may now disconnect at this time.

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