National Oilwell Varco's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.31.14 | About: National Oilwell (NOV)

Start Time: 09:07

End Time: 10:07

National Oilwell Varco, Inc. (NYSE:NOV)

Q4 2013 Earnings Conference Call

January 31, 2014 09:00 AM ET

Executives

Pete Miller - Chairman and CEO

Clay Williams - President and COO

Jeremy Thigpen - SVP and CFO

Loren Singletary - VP, Investor and Industry Relations

Analysts

Jim Crandell - Cowen & Company

Jeff Tillery - Tudor, Pickering, Holt

James West - Barclays Capital

Michael LaMotte - Guggenheim Securities

J. David Anderson - JPMorgan

Operator

Welcome to the Fourth Quarter and Full Year 2013 Earnings Conference Call. My name is Shannon, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I’ll now turn the call over to Mr. Loren Singletary, Vice President of Investor and Industry Relations. Mr. Singletary, you may begin.

Loren Singletary

Thank you, Shannon, and welcome everyone to the National Oilwell Varco fourth quarter and full year 2013 earnings conference call. With me today is Pete Miller, Chairman and CEO of National Oilwell Varco; Clay Williams, President and Chief Operating Officer; and Jeremy Thigpen, Senior Vice President and 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, 2013, please note that some of the statements we make during this call may contain forecasts, projections and estimates, including, but not limited to, comments about our outlook for the Company’s business.

These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco as on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information, maybe found within our press release on our website at www.nov.com or in our filings with the SEC.

Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation.

Now, let me turn the call over to Pete.

Pete Miller

Thank you, Loren and good morning everyone. Earlier today, National Oilwell Varco announced fourth quarter 2013 earnings of $658 million or $1.53 per share on revenues of $6.2 billion and full year earnings of $2.33 billion or $5.44 per share on revenues of $22.8 billion. Factoring in pre-tax transaction cost or pre-tax gains, the quarterly results were $670 million or $1.56 per share and for the full year it was $2.36 billion or $5.52 per share.

Clay and Jeremy will expand on these results later in the call. Additionally, we announced new capital equipment orders of $3.61 billion to raise our backlog to a record level of $16.24 billion. Our book-to-bill ratio for the quarter was over 1.4 to 1. This backlog is continuing to improve with the industry wide demand for the great products and services we provide. I’d like to thank all of our employees around the world for the continued professionalism and dedication to provide our customers with the best equipment and support in the industry.

I’ll now turn the call over to Clay for more color on our quarter and year.

Clay Williams

Thank you, Pete. National Oilwell Varco posted $5.52 for fully diluted share excluding extraordinary gains in transaction related charges in 2013. Earnings declined 7% from 2012 on the same pro forma basis as did operating margins and 7% lower North American rig counts, rising competition and high customer inventories, drill pipe, downhole tools and other consumables we manufacture were not fully offset by strengthening international markets.

Additionally, high volumes of equipment destined for the offshore, moving to our plants at higher marginal cost, new rig floor layouts which negated learning curve effects for past years and straying supply chain together with low demand for pressure pumping equipment took a toll on Rig Technology margins for the year. Rig Technology margins bottomed in the second quarter and began to move up slightly through the second half of the year.

Despite these challenges, National Oilwell Varco accomplished a great deal in 2013. All three segments posted record revenues for the year. NOV posted a record level of cash flow from operations of $3.4 billion buoyed by strong improvements in working capital efficiency. We made good progress divesting certain real estate and non-core assets acquired with our Ameron and Robbins & Myers acquisitions to free up additional cash. In fact late in the fourth quarter we executed an agreement to divest in industrial aggregates business to a strategic buyer, which will yield another -- roughly $100 million.

Our strong outlook for cash flow prompted NOV to double its dividend last May and we expect another significant increase again in 2014. We’ve steadily increased our allocation of the capital we generate back to our shareholders, while still successfully executing our strategic plans and we expect this trend to continue through the coming year.

Operationally our Rig Technology segment won a record $13.1 billion in orders for capital equipment. That’s again higher than the revenue we shipped out last year, lifting our backlog to a record $16.2 billion. We made great progress expanding our capacity and numerous drilling rig product categories in the phase of unprecedented demand this year.

We also achieved better payment and pricing terms on 2013 projects, contributing to better working capital performance. Our FPSO businesses posted over $1 billion in new orders this year. Again a new record. We saw margins for our FPSO businesses increase 760 basis points year-on-year as volumes and better pricing began to get traction. We expect to do well in 2014 given our recent capacity expansion in Brazil and backlog growth in this area.

We completed the integration of key businesses acquired over the past several quarters, Robbins & Myers, Fiberspar, Wilson, CE Franklin, NKT Flexibles into our existing infrastructure. Well some of these strategic moves were executed shortly before market conditions in North America began to slide, all cemented National Oilwell Varco’s market leadership and importantly leadership economics for NOV for the long-term in products such as composite tubulars, progressive cavity pumps, downhole drilling motors, sucker rod services, flow line and chokes.

We believe leadership economics provide real competitive advantage and higher margins in oil field services owing to scale efficiencies, purchasing power, installed base, reputation effect and lower risk to buyers. Further we tend to invest aggressively in technology leadership, which we view as an obligation of market leaders to further enhance our competitive advantage. NOV was built on systematic application of these principles, a competitive advantage in the oilfield and we continue to deploy resources to enhance positioning of our businesses.

Scale economies are enabling us to spin-off our distribution business. Our acquisitions of Wilson Supply and CE Franklin together with NOV's distribution services business has created an upstream distribution services business of unequal capability, which will become an independent stand-alone company next quarter. We are very excited about the prospects of distribution now and we believe that it will unlock additional value for our shareholders while creating exciting new opportunities for our employees.

In short, though challenging, 2013 was also a very productive year for our organization and we accomplished much to position NOV for future growth and competitive advantage, principally in the four key areas I discussed last quarter. One, deepwater drilling rigs; two, floating production technologies; three, jack-up rig fleet retooling and four, shale technology expansion, which leads me to our outlook for 2014.

First, deepwater drilling rigs; following 26 floater drilling equipment package wins by NOV in 2013, much has been written lately about falling demand in 2014. We certainly concur that fewer E&P tenders for deepwater drilling rigs lately in the face of 39 un-contracted floaters to come to market in the new few years, should point to a more restrained outlook for newbuild deepwater rig demand in 2014. The only problem is we just don't see it yet.

Those who know most about the market continue to place orders. Demand actually looks to be holding up well so far and we expect rig technology book-to-bill to land close to 1 or maybe even exceed 1 for the first quarter. We're off to a good start in 2014.

Lately, demand for rigs appears to be shifting towards less traditional entrepreneurs and less traditional shipyards, nevertheless, some large well capitalized drilling contractors are continuing to look at placing more floater orders. It maybe that they continue to find the low all-in costs of these high quality drilling assets, aggressive shipyard terms, availability of financing and drilling contractor organizations already geared to finance, build staff and execute these projects simply too compelling to pass up.

It maybe that they see two-thirds of a place of which can only be explored with floating rigs driving a much bigger fleet in the future. It maybe that they see development drilling demand rising around the globe given the 200 plus deepwater discoveries made that are in need of development drilling. I don't know. I'm just happy to take orders. But in this space we are very glad that over the last two years, we deployed significant capital into our capacity to build 2 million pound plus top drives and drilling riser, deepwater BOP stacks and other critical components to offset these flows.

For instance, our record level of subsea BOPs made in 2013 will be eclipsed in 2014 and probably again in 2015 given our record backlog and expanded capacity in this arena. We continue to invest capital and new game-changing subsea BOP technology which we expect to test this year, along with the 20,000 PSI rig design and other innovations we continue to evolve in the deepwater drilling world.

Growth and initiatives, number two, our floating production systems which produce subsea developments where we saw great progress in 2013 and we expect more in 2014. In short, we believe we are offering a differentiated value proposition to an industry segment FPSO construction that frequently sees cost overruns of a third and tends to deliver vessels a year or more late.

A 30% cost overrun on $1 billion project is serious money. A 14-month delay in first production on a multibillion dollar NPV project is serious money. As the number of deepwater rigs rise, more discoveries are made, oil companies seek to actually produce these fields and generate cash flow from them and floating production vessel projects are launched, the inherent efficiency in the system will be compounded. The status quo has not worked very well in our view. We think we have a better way.

We are very excited about pioneering a new model based upon our packaged offering and we hope to land our first package contract in this arena in late 2014. Our acquisitions of NKT Flexibles, APL turret mooring systems, (indiscernible), TechDrill, Petrex, Forth Valley, Ameron and other investments have uniquely positioned NOV as the major supplier of key components in the deepwater floating production projects. We believe NOV's successful execution of a similar game plan for offshore drilling rig construction, our manufacturing of project management expertise, coupled with shipyard relationships; supply chain management, M&A and integration skills leave NOV uniquely well positioned to pursue better ideas in this space.

Critics; notably engineering firms who sell engineering by the hour argue that different field conditions necessitate highly customized designs that require lots of engineering hours. Production vessels must be precisely optimized to the expected flow characteristics of the field. That's great except that nobody knows exactly what that will look like. Oil companies move forward on development with one, maybe two well controlled points in that best limited flow test. In initial flow characteristics, water, turret, gas, oil ratios, et cetera, always change over time. Oil companies always get smarter about a field as timing and drilling and production progresses, optimizing around a point solution and early glimpse of what production might look like is false precision in our view.

We think we have a better way targeting more robust designs, more modularity, more configurable systems which can be constructed repeatedly and at lower risks. Fewer suppliers with each supplying more kit limits cross-company equipment interfaces and permits better management of interface consistently between products, reducing risk and complexity; oil companies, FPSO operators and shipyards would all benefit. That's our vision.

The third growth area, jack-up feet rejuvenation is underway in earnest and helped contribute to our strong level of orders in 2013. We won a record 66 drilling equipment packages for new jack-ups in 2013. Like the deepwater space, we may see a pause in 2014 but in the short run, customer interest remains high. Our application of capital into this overlaps to some degree with what we do for our deepwater customers, bigger BPO top drives, better control systems, et cetera. But it also includes investment in cranes and jacking systems in places like North France where we were doubling our productive capacity within our BLM unit.

At the risk of boring you once again with jack-up fleet demographics, I'll again report that the jack-up fleet remains old and rusty. 45% of the fleet is more than 30 years old and steel vessels which sit in saltwater every day of their lives do not live forever. Finally, the growth opportunity which spans nearly every other area of NOV centers on unconventional shale technologies. As we discussed last quarter, shale development is transformative and touches almost everything we do, at least onshore. It starts with new land rigs which utilize AC power, electronic controls, robotic pipe handling, quick move attributes and now walking or skidding capabilities.

North American drilling contractors get this and are investing in earnest to upgrade land fleets to this standard. International drilling contractors will certainly follow. Next, we outfit the rig with premium drill pipe and downhaul drilling motors used to turn fixed cutter bits to efficiently drill long laterals and horizontal wells. NOV provides these along with fluids, generator sets, drilling cuttings and water management services. We saw critical components into hydraulic fracture stimulation operations, coil tubing in units, flow iron, pumps, mixing and blending equipment, also required to produce economic results on these projects.

The extraordinary production growth in the United States over the past three years is Exhibit A of how remarkable the shale technology is. There is no doubt that it will migrate to other regions. This takes time and NOV equipment to make it happen and NOV remains uniquely well positioned for this opportunity, which is still in the very early innings of moving forward steadily. Specifically, in Latin America and the Middle East we are seeing a gradual increase in demand for new Tier 1 rigs, a shift to premium drill pipe, rising demand for drilling motors and even pressure pumping equipment.

In North America we expect oilfield service companies to begin deplete some of their stocks of inventory and a few early green (indiscernible) improving business a little later in the year. Higher gas prices would certainly help. Logic dictates that demand will rebound as consumables are consumed, pad drilling, juggernaut, seriously pursuing footage and efficiency 24 hours a day, seven days a week, 365 days a year. As we've said many times, drilling consumes rigs and equipment. NOV's business model is a shale acreage plus NOV technology rigs, equipment pipe and bits going one end of the machine, oil will flow out the other.

In short, we expect four major trends in energy. Deepwater rig fleet build out, deepwater floating production and subsea development, jack-up rig replacement and retooling and growth and diffusion of share technologies to shape our fortunes and provide interesting and profitable reinvestment opportunities. Our success in these areas has provided NOV with exceptional cash flow, which is more likely to exceed our opportunity set more years than not going forward. Therefore, we expect to fund these opportunities while continuing to increase our dividend probably substantially later this spring.

Our strong performance would not be possible without the hard work and dedication of our more than 60,000 employees; many, many thanks to all of you for taking such great care of our customers in 2013 and for making NOV such a special team. Jeremy?

Jeremy Thigpen

Thanks, Clay. Since Clay already summarized the 2013 highlights, I’ll try to focus the majority of my commentary around our fourth quarter performance and our expectations for 2014. As Pete and Clay previously mentioned it was another record breaking quarter and year for National Oilwell Varco. For the fourth quarter 2013 the company posted net income of $658 million or $1.53 per fully diluted share excluding $16 million in pre tax transaction charges. Fourth quarter 2013 earnings were a record of $1.56 for fully diluted share up $0.22 per share or 16% from the third quarter 2013 and up $0.07 per share or 5% from the fourth quarter 2012.

Quarterly revenue of $6.2 billion which was also a record improved 8.5% sequentially and 8.6% at year-over-year despite a challenging rig count environment which was relatively flat sequentially and down 3% from the fourth quarter of 2012. Excluding transaction charges from all periods and the gains resulting from the outstanding legal claim in the third quarter of 2013, operating profit for the quarter was $973 million, up 14% sequentially and up 2% from the fourth quarter of last year. Operating margins on this basis were 15.8% for the fourth quarter of 2013 compared to 15% for the third quarter of 2013 and 16.8% for the fourth quarter of last year. Sequentially, operating profit flow through our leverage on the 8.5% growth with a solid 25%.

Now let’s turn to our segment operating results. The Rig Technology segment generated record revenues of $3.3 billion in the fourth quarter up 16% sequentially and up 14% compared to the fourth quarter 2012. Operating profit for the segment was $697 million and operating margins were 21.1%, essentially flat with the prior quarter. On the Q3 conference call, we expected Rig Tech revenues to increase in the mid single-digit percentage range as continued declines in the sale of intervention and stimulation equipment would be more than offset by an increase in land related revenue associated with our third quarter bookings plus higher offshore project revenues as we redoubled our efforts with the shipyards to bring some projects back on schedule and continue growth in our aftermarket business.

Well to our very pleasant surprise revenues per intervention and stimulation equipment actually improved sequentially as we were able to opportunistically utilize existing inventory to fill unexpected demand that surfaced in the quarter. Additionally revenue out of backlog increased more than expected up 20% sequentially to $2.5 billion primarily driven by a number of completed contracts which included four drill ships, 9 jackups and 9 land rigs in the quarter. Also we were encouraged to see strong sequential growth from our APL and NKT offering the products. And finally our aftermarket business grew 9% sequentially to a new quarterly record of $682 million. For the full-year Rig Tech generated $11.6 billion in revenues which surpassed the segments 2012 record by 15%.

Turning to Rig Tech margins given the incremental cost required to support record levels of installation and commissioning activity in the quarter and the continuing expense associated with numerous strategic growth initiatives and capacity expansions, we were pleased that margins remained relatively flat with Q3, still we remain as committed as ever to improving our already industry leading margins by one, continuing to push pricing whenever possible and two, optimizing our supply chain for the expansion of our capacity and the streamlining of our processes.

Now let’s transition to the Q3 capital equipment orders and our resulting backlog. As evidenced by the 3.3 billion in new orders industry demand for our equipment remains very strong and our customers continue to recognize National Oilwell Varco for our industry leading technology, our proven track record of delivering projects on time and our unmatched ability to support our equipment globally.

For the quarter we booked four drill ships and 25 jackups bringing our total for the year to 26 floaters and 66 jackups. Of the four floaters that we booked in Q4 we secured the subsea BOP stacks on three of the vessels, two of which purchased dual stacks. We also secured two spare stacks in the quarter giving us a quarterly total of seven subsea stacks and of the 25 total jackups that we booked in Q4 we secured 23 of the stacks proving that the investments in capacity and technology that Clay previously referenced are indeed paying off. In addition to the strong orders for offshore drilling equipment we also secured a number of orders for our APL loading systems and our NKT flexible flow line and riser technology, which enabled us to exceed our 2013 bookings target of $1 billion.

And finally we secured a number of drilling equipment packages destined for both the U.S. and international air markets as well as a number of complete work over rigs destined for Russia. All of these new orders were partly offset by revenues out of backlog of more than 2.5 billion resulting in a book to bill ratio of 1.4 times. For the year, orders totaled 13.1 billion which eclipsed the 2011 record by 21% and resulted in a record year ending backlog of 16.2 billion up 7% from Q3 and up 37% year-over-year. Off the total backlog approximately 93% is offshore and 94% is destined for international markets. Based on what we had in backlog as of December 31, 2013 we expect approximately $8.5 billion to flow out as revenue throughout the year with just over $2 billion of that total flowing out in the first quarter. Please not that this estimate does not include any capital equipment that we might book in turn during the year.

Looking into the first quarter of 2014, we expect orders for new offshore drilling equipment packages and floating production equipment to remain strong, and we expect to see continued demand for new land drilling rigs in Latin America, the Middle-East and Russia as well as some new land rigs and equipment packages for North America.

Well we do not expect a fifth consecutive quarter of bookings in excess of $3 billion and we’re not currently anticipating that we will duplicate the record booking activity of 2013 we have enjoyed a very strong start to the year and we’re in the middle of some very encouraging and constructive discussions that could soon materialize into new orders. Time will tell but we think that it could be another bid year for worse.

For Q1, we expect Rig Tech revenues to decline sequentially as the large year end shipments for both land rigs and stimulation equipment which boosted our fourth quarter results will not repeat and we expect for margins to continue to be challenged to expand above the 21% due to the sequential decline in land rigs and stimulation equipment that continued high levels of installation and commissioning activity and a slight delay in the start up of our flexibles plant in Brazil which is now flipped firmly into the second quarter, but for the full-year 2014 we expect for Rig Tech revenues to grow in the high single digit percentage range as we execute against our record backlog and continue to benefit from our ever expanding aftermarket business. We also expect for margins to expand as we move throughout the year but at a slow and steady pace.

Petroleum services and supply segment posted revenues of $1.9 billion up 6% sequentially and up 9% from the previous year. Operating profit improved 13% sequentially to $366 million and operating margins were 19% up 110 basis points from the third quarter of 2013.

On the third quarter call we suggested that revenues in this segment could improve in the low to mid single-digit percentage range, as a strengthening Canadian market and some large end of year projects shipments into international markets would be partially offset by U.S. market that typically slows during the holiday season. We also forecasted for margins to move modestly higher on the incremental volume. Well as expected our U.S. revenue declined slightly, our Canadian revenue improved slightly and our international and business improved almost 18% sequentially.

Well on the subject of international growth, since 2010 the international the average international rig count has increased 202 rigs or 18.5%. Over that same time period our PS&S segment international revenues have grown 62% and represented 49.5% of the segments total revenue in the fourth quarter. Needless to say we're pleased that our investments are paying off and we look forward to continuing growth in key international markets.

From a margin perspective, the quarter played out a little better than expected as well with 36% leverage or flow-through on the 6% sequential increase in revenue. For the full-year 2013, PS&S segment revenues had $7.2 billion surpass the 2012 record by 3% despite a 3% decline in the worldwide rig count over that time.

As we enter the first quarter of 2014, we believe that the Petroleum Services & Supplies segment should receive some benefit from heightened activity in Canada however this increase will be more than offset by the loss of the large year-end international projects that benefited us in the fourth quarter of 2013. As such we’re forecasting revenues to decline in the mid single-digit percentage range sequentially and for margins to contract with the volume.

But for the full-year 2014 we’re planning for revenues to improve in the mid single-digit percentage range as we benefit from the fact that most of our U.S. land customers have worked through their inventories for most products with the exception of drill pipe. And we continue to build upon the success that we have experienced in international markets. Naturally we expect margins to improve with the incremental volume; however with the potential for additional pricing pressures in North America land we’re concerned that our historical 30% flow through target may be overly ambitious for this year.

The Distribution & Transmission segment posted revenues of $1.25 billion, down almost 7% sequentially and down 1% compared to the fourth quarter of last year. On the lower volumes operating profit dollars declined to 23% sequentially to $60 million and operating margins dropped to 100 basis points from Q3 to 4.8%.

On the third quarter earnings call, we expected revenues within the D&T segment to decline in the low single-digit percentage range as increasing activity in Canada would be more than offset by reductions in the U.S. where the holiday season would result in fewer billing days. Unfortunately we did not fully appreciate the impact that a mid-week Christmas holiday would have on operations, and we did not factor in the potential loss of billing days due to severe weather.

In total, we estimate that the combination of holidays and weather disruptions resulted in six fewer billing days in the quarter, which more than explains the 7% sequential decline in revenue. And because of the weather's steep and unexpected decline in revenue, in addition to some incremental costs associated with our ERP implementation, our detrimental flow through of 20% was somewhat worst than we would typically expect but understandable.

For the full year 2013, the Distribution & Transmission segment posted revenues of $5.1 billion, which was a new record, and exceeded our full year 2012 results by over 30%. Looking into the first quarter of 2014, we expect the Distribution & Transmission segment to benefit from increasing Canadian activity and hopefully a few more billing days in the U.S., so we're forecasting revenues to improve modestly, sequentially. However, we expect margins to be challenged to expand as we begin the rollout of our ERP platform to the legacy Wilson and CE Franklin organizations.

For the full year 2014, much like our PS&S segment, we're planning for revenues to improve in the mid single digit percentage range as we, one, benefit from the fact that most of our U.S. land customers have worked through their inventories and two, we continue to grow our international business, which like PS&S have significantly outpaced the growth in the international rig count.

For our Distribution & Transmission segment, international revenues have improved 194% from 2010. Unfortunately because of the heavy lifting that we're doing this year, which includes the ERP rollout, continued facility consolidations and preparations for the spin-off, we're only forecasting slight year-over-year margin expansion.

So, in summary, 2013 was certainly a challenging but a record breaking year. As we move into the first quarter 2014, for the total company we're forecasting a mid single digit percentage sequential decline in revenue with barely high detrimental margins. But for the year, we're forecasting mid single digit percentage growth over 2013 with strong year-over-year flow through.

Now let's turn to National Oilwell Varco's consolidated fourth quarter 2013 income statement. Gross margins improved 50 basis points, sequentially, to 24.3%. SG&A increased 25 million, sequentially, on the incremental volume but as a percentage of revenue, SG&A declined 30 basis points, sequentially, to 8.5%.

Transaction costs, primarily related to the Robbins & Myers acquisition, totaled $16 million in the quarter. Interest expense increased $1 million, sequentially, to 27 million but interest income improved 2 million to 4 million as a result of higher cash balances and higher yield.

Equity income in our Voest-Alpine JV was 16 million, up $3 million, sequentially, as the plant resumed operations following its annually scheduled maintenance in the third quarter. We expect equity income for the JV to decline slightly in the first quarter of 2014 as demand for drill pipe and (indiscernible) in the U.S. will continue to be somewhat muted.

Other expense for the quarter was 17 million, which was 2 million higher than the third quarter but still fairly consistent with historical trends. The effective tax rate for the fourth quarter was 29.2% which was well below the third quarter rate of 30.8%, as benefited from some sizable U.S. manufacturing credits, some R&D credits and a higher percentage of international income. Going forward we expect that the effective tax rate should remain in the range of 31%.

Unallocated expenses and eliminations on our supplemental segment schedule was 160 million in the fourth quarter, down 5 million sequentially. Depreciation and amortization was 200 million, up 9 million from the third quarter. And EBITDA, excluding transaction charges, was a quarterly record of 1.2 billion or 19.3% of sales. For the full year 2013, the company produced 4.3 billion in EBITDA.

Turning to the balance sheet, National Oilwell Varco's December 31, 2013 balance sheet employed working capital, excluding cash and debt, of 6.3 billion, is down almost 900 million from the third quarter and down over 400 million from the same time in 2012. In the quarter, our accounts receivable balance only increased 96 million despite revenue growth of 485 million over that same time period.

Our prepayments and milestone invoicing on current projects once again outpaced costs incurred resulting in a 319 million favorable delta. And even more importantly in the quarter, we drove down inventory by 475 million. While it's taken some time to turn the ship, we're starting to realize the benefit of our heightened focus on commercial payment terms, on collections and on inventory.

As a direct result of our strong operating results and more efficient management of working capital, we generated a quarterly record of 1.5 billion in cash flow from operations, which marked a 50% improvement over the previous record of 1 billion, which we generated in the third quarter 2013. So we're clearly pleased with the performance over the second half of the year.

During the quarter, we spent 185 million in CapEx bringing our 2013 total spend to 669 million. We also made dividend payments of 111 million, cash tax payments of 213 million, cash interest payments of 111 million and we paid off the remaining balance of 600 million on our commercial paper program, which enabled us to finish the year with 3.1 billion in long-term debt of which 3 billion was from the bond offering in November 2012.

Despite these fourth quarter disbursements, we still managed to build our cash balance on nearly 700 million to 3.4 billion leaving us with a net cash position of 286 million at December 31, 2013 versus a net debt position of 1 billion at September 30, 2013. Of the 3.4 billion in cash, only 10% of the balance was in the U.S. at December 31. As we move through 2014, we expect CapEx spending to decline from the 669 million that we spent in 2013. However, we still have some sizable projects underway in key markets. Therefore, we expect CapEx could still approach 600 million for the full year 2014.

Now, let me turn it back to Pete.

Pete Miller

Thanks, Jeremy. I'm just going to have a couple of brief comments because I think Clay and Jeremy have really hit all the big topics quite well. The one thing I'd like to echo Clay on is really about technology. Technology marches on and as technology improves that changes rigs, I think a good proxy for this yesterday if any of you listened to the Helmerich & Payne conference call, they announced nine new contracts for newbuild rigs. Well, why would that happen if in fact there are rigs still stacked out there that people could pick up. I'll tell you why that can happen. It's a proxy for what's going on around the industry.

The operators want the best rigs. They want to most highly technical rigs. Where do you get those? You get those from NOV. That's why I think that the rumor of the depth of order of new rigs is being greatly exaggerated. I'm very confident that things are going to continue on in a very positive fashion. I also believe what you're probably going to see overseas is a quicker response to shale than a lot of people are projecting. I think the world needs natural gas. We're getting ready to fire up hopefully within the next year or so, some LNG facilities here in the U.S. and I think that all bodes well for what we're doing.

Finally, I'd just like to offer one note. One of our long-term executives, Haynes Smith is retiring today. Haynes has been with us for quite some time, has been the President of our Tuboscope, our fiberglass and our brand operations and we all want to wish Haynes the best in the future.

So at this point, Shannon, I'd like to open it up for any questions people might have.

Question-and-Answer Session

Operator

Absolutely. We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. (Operator Instructions). Our first question comes from Jim Crandell from Cowen & Company.

Jim Crandell - Cowen & Company

Good morning, everyone.

Pete Miller

Good morning, Jim.

Jim Crandell - Cowen & Company

Pete, since the spin-off is March 31, I'm assuming this is your last time on the call as CEO and I just want to congratulate you on a terrific 13-year plus run as CEO.

Pete Miller

Thank you, Jim.

Jim Crandell - Cowen & Company

I guess, first of all, Pete, could you talk a little bit to the nontraditional demand for floaters? I think we probably can get a good handle on what SeaDrill, Noble, Ensco, et cetera are doing, but probably less so on the nontraditional demand which you had some positive things to say. Can you talk to that point in a little bit more detail?

Pete Miller

Sure. And I think it's kind of ironic, Jim, that when you talk about the traditional players, the one you brought up with SeaDrill, because I would tell you back in '06 they were a business plan and they were one of the major nontraditional players and looked what they've built themselves into. And I think you're going to see the same thing in the long [ph]. There's a couple things that happened here. The shipyards want to stay buys and the shipyards are offering still very compelling economics for the build of these and there's still other folks that want to get in this business. And if you can get in this business with the new rig fleet, ala SeaDrill, ala Pacific Drilling, ala things that Ocean Rig is doing, I think there's still a lot of room for people to enter in because what you're going to do is you're going to marginalize the rigs that really don't have the technology and the rigs that are aged. So, we're seeing a lot of activity still in that arena. I'll ask Clay to kind of add a little bit of color to that.

Clay Williams

You bet. Specifically, we're seeing entrepreneurs out of Asia and Europe interested in building rigs and moving forward on those projects. Many are talking to some of the shipyards in China and are impressed by the sorts of terms that those two bring to our offering and so pretty excited about that. That's the group of shipyard we do very well with because they recognize the value of a more complete NOV package to go into those. So, I think they see the opportunity here, I would stress to, although a lot as we talk about in our comments, a lot's been written about short-term demand in the deepwater and offshore arenas. If you are building a rig that's a two and a half to three, three and a half year project. So you're really sort of aiming for where the puck is going. We look out 2015, 2016, 2017 and see all the acreage that's been leased, that needs to be explored. I think that's really the target that they are focused on here. They don't appear to be too anxious about near-term outlook for demand for rigs.

Jim Crandell - Cowen & Company

One other question about deepwater, guys; if I had to think about where I've been surprised the most on the upside in terms of NOV's performance. I mean there are number of areas, but I'm just amazed at how you have -- at how well you are doing in subsea deepwater BOP stacks. Pete, Can you talk to a little bit about some of the reasons for your, I guess your dominant market share here in 2013 in that area?

Pete Miller

Well, Jim I think that at the end of the day we recognized early the importance of what was going to be for the subsea stacks. I think Macondo really kind of emphasized that and we put some very significant investments into our West Little York facility here in Houston and we got in early. I mean today we can actually test I believe seven BOPs simultaneously which is an industry leader, and so the fact of the matter is I think people have come to us and said, you saw it early, you guys have increased your capacity and we want to buy from you and I think coupled that with the fact that I talked about it all the time. We're in 63 countries with 1,250 locations around the world and that's a competitive advantage that I don't care where you are going to move your rig, I don't care what you are going to do. Well, we are going to support you. We have a company in South Africa that actually can redo and work BOPs that are on the West Coast of Africa and the East Coast of Africa. We do things in the Middle East. We've got facilities in Aberdeen. We've got facilities in Singapore that really can take care of that. So, I think a lot of it has been better technology, increased capacity and our ability to take care of our customers wherever they are in the world.

Jim Crandell - Cowen & Company

Okay, and Pete, the last question I have, I think you commented that you expect you will end you first integrated or you hope to end your first integrated FPSO package by the end of 2014, I mean does it seem to you that this is going on, certainly is going slowly, but is it a surprise to you that it's going slowly and how are your oil company customers, I guess responding to the idea of standardization and offering an integrated package for an FPSO?

Pete Miller

Jim, I’ll let Clay kind of expand on that.

Jim Crandell - Cowen & Company

Okay.

Clay Williams

That’s a great question. I would say they are very intrigued by the idea. They have been -- the oil companies together with FPSO owner operators have been a little frustrated with the economic results around building FPSO projects. As I mentioned in my comments, they tend to be very highly customized and focus on a particular field, and changes are made along the way, which introduces inefficiencies in the manufacturer or the construction of those large vessels. So, I think we're talking to people who are beginning to see problems with the status quo, and the key thing for us is we're talking to everybody involved up and down the food chain. So, everyone from oil companies to FPSO owner operators to engineering firms to shipyard’s are involved in the conversation. And I think all of us recognize that there ought to be a better way to pursue these. And so we're in fairly advanced conversations on one particular project that is the one I'm referring to, we hope to get done this year. In terms of the pace, these are large multi-billion dollar investments by IOCs and those of us who have spent time in this industry know that all those projects tend to move slowly and thoughtfully. So, what’s acquired before someone pulls the trigger on building an FPSO with sanctioning an entire field development and that's something that I think IOCs, NOCs tend to study quite closely. So, I guess we're not terribly surprised at the pace and I would add we're very pleased to see progress in this arena. So, very excited about what the future holds here.

Jim Crandell - Cowen & Company

Okay, great. Thank you.

Clay Williams

Thank you, Jim.

Operator

Our next question comes from Jeff Tillery from Tudor, Pickering, Holt.

Jeff Tillery - Tudor, Pickering, Holt

Hi, good morning.

Clay Williams

Good morning, Jeff.

Jeff Tillery - Tudor, Pickering, Holt

Clay you mentioned in discussion around the Rig Tech outlook, some green shoots here in North America. Just curious are you seeing anything on kind of the intervention side or is it mostly rigs? Just discuss how you see this year playing out in terms of the land piece of the business?

Clay Williams

Yes, specifically that was in intervention. In hydraulic fracture simulation equipment we had some -- I think Jeremy talked about this in his comments, some opportunistic sales of frac fleet equipment that we were able to meet out of inventory, so pleased with that. Within PS&S we manufacture hydraulic fracture unit, frac fleet pumps and we have four or five customers that we’re getting calls from here recently looking for replacement parts and new pumps. So we’re seeing kind of here and there indications that perhaps some folks are starting to work through their inventory of consumables. We hear back on the Rig Tech coil tubing side that units are – there were idled units late last year and that operators are wearing out frac fleet and coiled tubing units and parking those and then picking up the idled units. So there’s sort of this cycling going on of the fleet which is to be expected given the high pace of utilization and how hard this equipment has worked. And that’s really kind of the engine that’s going to drive future demand and past cycles have taught us that you run this equipment really, really hard and then once utilization hits a certain level then they got to come back to us and to our competitors to restock those consumables and buy new units. And so we’re not seeing a clear, I am not here to tell you that 2014 is the year that we come back with a vengeance, but we’re seeing a few anecdotal signs of encouragement out there across the North American market.

Jeff Tillery - Tudor, Pickering, Holt

Okay. And my second question just around the offshore side of Rig Technology. The qualitative field it seems like the comfort level for you guys around execution whether that means commissioning or learning curve on some of the newer designed rigs is growing. I mean, can you just talk about the kind of -- some of the qualitative field as -- I mean as you’ve been kind of over that business now eight or nine months now, compared now versus how you felt April or May last year?

Clay Williams

Well, we’re working really, really hard. I appreciate how professional that team is over there and the great job that they do with respect to the offshore projects and we’ve talked about this on past calls. First, we signed up a couple of years ago began signing up for new rig floor layouts for new class requirements ABS and DNV requirements around the rigs. We are sort of building new versions of these drilling rigs and we’ve lost some learning curve effects. The second thing we did is, we signed to build these rigs clearly – signed up to build these rigs very, very quickly. And so when you shape more than a year off of the construction schedule what we’ve learned and our shipyard partners have learned and our suppliers have learned is that, that’s a -- perhaps we don’t want to bridge too far. And so a lot of these projects ran into delays and problems and so as we approach the end of them we -- a lot of that, we’d say look, the owners in these projects look to our I&C efforts to sort of catch up. Now I&C you generally plan on five to six months of installation and commissioning work at the tail end of a rig and that’s assuming you have electricity hooked up to the rig floor, you’ve got mechanical hookups done, we’re relying on our shipyard partners to accomplish all that. What we found in these projects is that they’re running a little late due to no fault of our own, but we’re asked to commission these and three or four months to work around the clock which we never did in the previous cycle to work 24 hour operations with only partially completed hook-ups around the equipment. So, that's the specific margin headwind we have run into. We are committed to our customers. We are committed to get these rigs back on schedule and so we are doing that and we are incurring extra cost. And so what we are finding as we work through this is that we are making good progress. I think there will be a learning curve effect out there in 2014. I think as we kind of clear through this work and we are going to get better at it. We are also training a lot of people. Pete just a second ago mentioned our investments in our BOP infrastructure and a big part of that is investment in our teams. So we’ve opened our seventh NOV technical college. We have 350 new service technicians being trained currently moving through that system and so we are expanding our workforce to be able to accommodate this record backlog and extraordinary requirements that are being required by the market that we serve.

Jeff Tillery - Tudor, Pickering, Holt

Thank you very much.

Pete Miller

Thanks, Jeff.

Operator

Our next question comes from James West from Barclays.

James West - Barclays Capital

Good morning, guys.

Pete Miller

Good morning, James.

James West - Barclays Capital

Pete you had mentioned in your prepared remarks right at the end there that you thought that international shales were going to take off a bit faster than what was anticipated by the market right now. We've heard kind of a mixed bag, I guess; from some of the diversified service companies around that, some fits and storage [ph], so we're just going to dig into that comment a little further and kind of what do you see in there that leaves you to that conclusion?

Pete Miller

I think there's a couple of things, James, and if you take a look, for instance, right now Argentina is coming on very well for us. You've heard a lot of people talk about softness in Latin America, but quite frankly Latin America is a real positive place for us right now and Argentina is on them and that's almost all shales. If you can go back a year or two ago and in Russia, they were actually downplaying shales because they didn't want people getting too excited about it because that was kind of their – their main thing was shipping natural gas from Russia into Western Europe. But today even the Russians are saying, okay, we're going to start exporting our shales pretty rapidly. And we've been selling equipment into Russia pretty successfully and a lot of that equipment is going to be utilized to be able to take care of those shales. We also have manufacturing over in Minsk, Belarus that's doing very, very well when it comes to building equipment for the fracking that's necessary for the shales in Russia. So I think that's another area that's very positive. China is one and you've heard me say this before. China has some issues with pollution and they've burned a lot of coal and there's a quick and easy answer to that and that's the utilization of natural gas. And China needs natural gas and I think you'll see them exporting their shales probably more rapidly than people give them credit for. And I think I certainly understand the other opinion because there's a lot of infrastructure buildup that has to occur for this to happen more rapidly. However, as you've heard me say before, we're in the business of infrastructure buildup. And so we've actually sold equipment, coal tubing equipment and the like that we build in the U.S. into China. And so I think there's a lot of positive things as you look around the world at the opportunity on these shales and my belief is it's going to come to fruition sooner rather than later because the world needs it.

James West - Barclays Capital

Okay.

Clay Williams

Jim, if I can add something to that too. I think it's important to make a distinction between shales and shale technology because a lot of this demand that we see for hydraulic fracture stimulation or horizontal drilling for improved rig efficiency, we consider shale technology but they're being applied to the other reservoir rocks. And so more conventional reservoir rocks, tight sands, that sort of thing, I think we're seeing our E&P companies implying these things with the shale technologies to those and so that's further growing the pie for what NOV sells.

James West - Barclays Capital

Okay, fair enough. And then one other question from me, maybe a little bit unfair question but I know you talked about book-to-bill being over 1 times in 1Q, do you think that's a reasonable expectation for the full year because you have this nontraditional demand coming for offshore rigs and you have the FPSO order potential coming or is that – or should we think about maybe it's (indiscernible)?

Pete Miller

James, last year this time I was asked that question. We'll be over 1 and everybody kind of went oh, yeah, right. Well, I was wrong. It was 1.5. We've got a little bit of visibility into the first quarter and we feel very good, as Clay said in his remarks and Jeremy has said. But I think it's real difficult for us to make a projection at this point in time that this is exactly what we're going to see. I think that makes it difficult, but we feel very good about what we're seeing and we feel very good about who we're talking to. And I've also said this before, you don't buy – you aren't going to do an offshore rig without at least coming to NOV and getting a quotation from us. So, you mentioned why we use this as a stalking horse? And so we've got a pretty good visibility into the things that are going on and let's just say we like where we are and we feel pretty good. We wouldn't rule out the possibility.

James West - Barclays Capital

Okay, got you. Thanks. Fair enough. Thanks, guys.

Pete Miller

Thank you, James.

Operator

Our next question comes from Michael LaMotte from Guggenheim Securities

Michael LaMotte - Guggenheim Securities

Thanks, guys. If I could follow-up on the international Tier 1 rigs question, the contractors; are you seeing more interest from indigenous or local contractors or are there global players looking to grow their international businesses?

Clay Williams

It's really both, Michael. In Argentina, what we're doing with indigenous contractors, the Argentine government has waived importation duties on rig equipment between now and I think July 1. And so we're seeing a big surge in demand for rigs for that particular market; in the Middle East, more of the international players along with some of the local Middle East participants. Really who we try to target are joint contractors willing to bring that new technology, a differentiated offering into their particular market. And so where we've had the best luck in the past are with more forward thinking sort of drilling contractors who see the benefit, they see the impact that this new rig technology has made here in North America and they're really going in with the business plan and try to replicate that. Those are the folks that we tend to do the best with.

Michael LaMotte - Guggenheim Securities

Thanks, Clay. In the Middle East, if I think about one of the advantages of North America, AC electric rig, it's the speed in which it can break down and move location. That doesn't necessarily transfer to the desert. What's the driver there for upgrades in desert class rigs?

Clay Williams

Really more reliability and drilling efficiency focused. You're correct. Sometimes it depends on the market within the Middle East, sometimes quick move is less important. But I would say generally where we've done the best for the much larger rigs in the Middle East, so 2,000 and 3,000 horsepower land rigs. Moving doesn't matter because efficiency moves matters and the cost of moves matter. But really highly automated, reliable, big equipment is what we're seeing demand for over there. That's kind of our niche in that marketplace. I would add to that AC power is starting to get good traction over there. The U.S. market converted from DC electric to AC electric over the past decade or so (indiscernible). Middle East is lagging a little bit, but we're now seeing good demand for AC rigs in that marketplace.

Pete Miller

And it also depends country-to-country, as Clay said, Michael, I mean places like Oman, the speed of movement is probably more critical than in the place like Saudi. So, it's kind of dependent but the good thing is in our (indiscernible), we've got products for all the needs over there.

Michael LaMotte - Guggenheim Securities

Okay, great. And if I could just come back to the Argentina comment, quite a little bit about lifting the import restrictions on rig equipment for the next six months? I mean that's a pretty unusual move for the Argentine government. I imagine that there is quite a scramble to jump through that window. Can you talk about sort of the magnitude and what you're seeing there? And also does it extend to any frac equipment or is it just drilling packages?

Clay Williams

I'm not sure on the last question, frac equipment versus drilling packages. It's important to our land rig business but in the context of $3.3 billion segment last quarter, it's moving the needle but not – that's a big ship to turn. So, glad to see it. Very, very pleased to be able to help that market upgrade its rig fleet and we're looking forward to executing on those projects. But this is – it is part of a much bigger business.

Michael LaMotte - Guggenheim Securities

Great. Okay, guys, thanks. I'll turn it back.

Pete Miller

Thanks, Michael.

Operator

Our final question comes from David Anderson from JPMorgan.

J. David Anderson - JPMorgan

So a question on kind of the overall outlook on rig equipment on the newbuild floaters, clearly the market is very concerned that we're getting close to the end of the rig equipment cycle. Can you talk about the technology aspect and how that plays out? Do you think you can get kind of 20 floaters and 30 jack-ups that kind of baseline number or just kind of – be upgrade and kind of the high grading of the fleet, is that unreasonable to expect?

Pete Miller

As you take a look at the jack-up numbers, I mean the jack-up numbers continue to defy the common logic. And I would say there is nothing common about that logic. The fact of the matter is that we – as Clay pointed out, 45% of the jack-ups are still over 30 years old and that's just the tough sell to people plus they don't have the flexibility to be able to drill. You can take a super 116-C newbuild with 450 foot legs and you can drill in 50 feet of water. You can't take a [max] [ph] supported slotted jackup and go drill 300 feet of water. So the flexibility is there. You got the same sort of thing with the big floaters. So I think there is potential – you’ve heard me say this before, if I give dates, I don’t give numbers and if I give numbers, I don’t want to give dates. So I think there is a lot of good out there, but I would be hesitant to zero it on absolute numbers at this point.

J. David Anderson - JPMorgan

Okay. And then your current traditional rig package or on the Rig Tech revenue floater, Rig Tech is getting a little bit complicated these days, lot of moving parts. Just in your traditional rig package business, Clay you talked about the headwinds that you’ve been facing and that obviously installation and commissioning, but there is also some tailwinds coming up as you start seeing better pricing starting to flow through. How do we think about that part of your business, kind of headwinds turning into tailwinds? Is there -- is this kind of a two second quarter event as you would see it playing out or is there (indiscernible)?

Clay Williams

David, we see sort of a gradual improvement in that business bolstered by two things. One is, we can measure margin in our backlog and we have seen that turn and start to move up and it’s not a big move, it’s a $16.2 billion backlog, is a big animal to turn. But it’s going the right direction in the last six months. And then the second thing is we know from experience learning curve effects are real. And as we start making second and third and fifth copies of these rig designs as our supply chain store that evens out given the extraordinary level of work we know that will have a positive impact on the P&L. And so we kind of dialogue that calculus and we’re looking -- I’d say over the next several quarters we should continue to march up the back up in EBIT margin.

J. David Anderson - JPMorgan

Good. Thank you, Clay and Pete best of luck in your new adventure there.

Pete Miller

Thank you. I appreciate it, David.

Operator

At this time, I’d like to turn the call back to Mr. Miller for closing remarks.

Pete Miller

Well, we thank you all for calling in today and we look forward to talking to you at the end of the first quarter. Thanks very much.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect.

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