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Executives

Clay Williams - Chief Financial Officer and Executive Vice President

Merrill Miller - Chairman, Chief Executive Officer and President

Loren Singletary - President

Analysts

William Sanchez - Howard Weil Incorporated

Geoff Kieburtz - Weeden & Co. Research

James Crandell - Barclays Capital

J. Adkins - Raymond James & Associates

Brian Uhlmer - Pritchard Capital Partners, LLC

National Oilwell Varco (NOV) Q2 2010 Earnings Call July 29, 2010 9:00 AM ET

Operator

Welcome to the National Oilwell Varco Second Quarter 2010 Earnings Conference Call. My name is Kristine, and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Loren Singletary, Vice President, Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Loren Singletary

Thank you, Kristine, and welcome everyone to the National Oilwell Varco Second Quarter 2010 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 second quarter ended June 30, 2010, 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 form 10-K National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release on our website at www.nov.com, or in our filings with the SEC. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation.

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

Merrill Miller

Thank you, Loren, and good morning. Earlier today, National Oilwell Varco announced second quarter 2010 earnings of $401 million or $0.96 per fully diluted share on revenues of $2.94 billion. These results compare to second quarter 2009 earnings of $220 million or $0.53 per share on revenues of $3 billion. Clay will expand on these results in just a moment. Additionally, we announced new capital equipment orders of $689 million and a quarter ending backlog of $4.9 billion.

Throughout the call, we'll provide a little bit more color on the backlog and some of the things that are happening around the world. We are very pleased with these results and it shows the continued outstanding performance of our employees around the world. I will talk a little bit later about some of the operational issues and some of the things that we're seeing around the world. But at this time, I'll turn it over to Clay for his comments.

Clay Williams

Thank you, Pete. National Oilwell Varco posted second quarter 2010 net income attributable to the company of $401 million or $0.96 per diluted share, compared to $1.01 per share for the first quarter of 2010 and $0.53 per share in the second quarter of 2009, all on a GAAP basis.

Included in the second quarter 2010 results were $4 million pretax or $0.01 per share after tax and transaction charges. Excluding these earnings were $0.97 per share. This compares to $1.10 per share in the first quarter of 2010 and $0.90 per share in the second quarter of 2009, excluding unusual transaction, restructuring impairment and discrete tax items from these periods too.

As I do each quarter, I will focus my comparative remarks on results excluding these unusual items, which are reconciled in our press release to highlight changes in our underlying businesses.

Overall, results were solid. Domestic rig activity was robust. Canada breakup was not too bad, and outlook for Canada is rising for the second half of the year. And a steady recovery has taken root in international markets, albeit a bit more subdued than the vigorous recovery we've seen on this continent.

Second quarter gross orders of $689 million of capital equipment for our Rig Technology group marked the third quarter in a row, gross orders have exceeded $600 million mark. Revenues out of NOV's backlog of capital equipment were a little less than $1.3 billion comparable to shipment levels generated during the beginning of 2008.

Second quarter operating profit of $494 million produced operating margins of 20.2%. Compared to the first quarter, flow-throughs were 59% on a 3% sequential revenue decline due to the underlying mix changes. Compared to the second quarter of 2009, the company generated $5 million higher operating profit, despite a $69 million year-over-year revenue decline, lifting operating margin 60 basis points year-over-year.

This is due in large part to better year-over-year margins on work coming out of backlog due to continued excellent performance by the Rig Technology team.

Rig activity in the United States grew 12% from the first quarter and 61% from the second quarter of last year, as the shale play Juggernaut continued to regain traction following the sharp downturns of last year. Our customers are expanding the application of shale play technology, horizontal drilling and hydraulic fracture treatment to unconventional liquids plays in addition to unconventional gas. Horizontal drilling in the United States now handily exceeds its prior 2008 peak and has grown eight folds since 2004. Virtually all business lines within Petroleum Services & Supplies and Distribution segments benefited from the domestic rig count increase, both sequentially and year-over-year, with particularly ardent demand from products utilized in horizontal shale well drilling and completion operations, coiled tubing, multiplex pumps and flowline products, downhole drilling motors and tools and premium drill pipe.

The Petroleum Services & Supplies segment saw U.S. revenues increased 16% sequentially. Distribution domestic results were up 24% sequentially. Similarly, within Rig Technology, demand for pressure pumping equipment and coiled tubing unit surged, with significant orders placed by many North American pressure pumpers. And interest in new land rig technologies from top drives to complete fit-for-purpose rigs remain resolute.

United States, actually North America, because I have to include Canada, too, has become one massive laboratory for the application of shale and unconventional reservoir technologies pioneered by the industry throughout the past decade. As these technologies have matured, the scientists and land men and entrepreneurs that comprise the oil and gas industry have become increasingly energetic in their quest for the next promising shale play opportunity, and are pressed with technology into oil-productive regions in addition to gas.

The progeny of the Barnett Shale is far more than gas and dollars and profit. It has fathered the Woodford, the Fayetteville, the Haynesville, the Montney, the Marcellus, the Horn River, the Bakken and the Eagle Ford. And stay tuned, because it's not done yet. The Utica, the New Brunswick, the Cardium, the Green River, with Niobrara, the Collingwood and the Monterey, along with others, have been placed in the Petri dish, and all hole promised to contribute in a safe, environmentally sound and profitable way to the energy needs of this continent through the 21st century.

And that's just here. 2010 also marked the export of this technology to Asia, the Middle East, and most significantly, Europe, where half dozen major shale plays are also under serious study.

We don't know which plays will win this race, but we are confident that all of the racers will need lots of drill pipe, drill bits, drill motors, pumps, fluids, coil tubing picks and shovels. And supplying the picks and shovels and other oilfield hardware they need is NOV's specialty.

During the second quarter, Petroleum Services & Supplies witnessed stronger demand in international markets as well, up about 16% sequentially. While Distribution's International business was up more modestly. Both segments posted sequential declines in Canada as expected, due to the seasonal breakup in road bans there that led to a 65% sequential decline in the rig count.

Both Petroleum Services & Supplies and Distribution Services posted higher revenues and margins, both sequentially and year-over-year for the second quarter of 2010. We believe that this improvement signals that the results of mid-2009, Q3 specifically, will prove to have been the bottom of the recent sharp downturn. In the short run, the moratorium on deepwater drilling in the Gulf of Mexico will generate some headwinds to the second half of 2010. But we are nevertheless hopeful that these segments will continue to grow with rig activity as the world emerges from the great recession of 2008 and 2009.

Certainly, oil price is trading with a seven handle, stable if not heroic gas prices, and gradually improving access to credit should continue to fuel recovery, at least in the oil and gas sector.

The Rig Technology group has done a terrific job bridging NOV through this difficult period. We entered the downturn with record backlogs of long-term offshore rig construction projects, which enabled NOV to largely sustain earnings for 2009. Our portfolio businesses and the financial construct date simplifier are working as planned.

We participate in a highly cyclical space, and our strong balance sheet and access to credit enable us to seize opportunities, both organic and transactional, as they present themselves, and for example, enabled us to assemble a leading drilling fluids business, expand our foreign assembly capabilities near our shipyard customers, grow our mission flowline products and enter into new rig equipment inspection services during the downturn of 2009.

Including the pro forma results for Grant Prideco and excluding transaction and restructuring and other unusual charges, the company's quarterly operating profit has exceeded the $0.5 billion in every one of the last 14 quarters, even though the average quarterly worldwide rig count has exhibited extreme volatility through this period, ranking from 2,000 rigs to over 3,500 rigs during a period in which National Oilwell Varco generated over $5 billion of cash.

Our strategic effort to enhance our offering for FPSOs is underway and we hope to get a transaction closed soon in this space, provided we can get the numbers right. Maintaining financial discipline is paramount to the successful execution of our strategies.

Our playbook here is simple and similar to what we've accomplished in the drilling rig space: Develop a package of products to offer through our well-honed manufacturing assembly, installation and commissioning operations that offer superior value and low risk to an area that we see as high growth in the years to come.

This takes time and patience and fortitude, but should ultimately create value for our shareholders. Specifically, we'd like to boost our offering into FPSOs to exceed $100 million per package, up from about $25 million currently.

The credit market crisis significantly impacted our orders for Rig Technology for the past several quarters. Building a deepwater rig spans four years and costs several hundred million dollars. So the availability of financing looms large in the decision calculus of most of our customers. Nevertheless, we are seeing improvements, having landed one drilling equipment package for a Brazilian floater during the second quarter.

Also, you may have heard form the shipyards in Asia that we signed two more floaters for Brazil just a few weeks ago. These two should flow into our backlog during the third quarter, pending receipt of our customers' down payment which we expect to receive next week. We are pleased to see these long-awaited projects achieve financing after a two-year effort, and finally start to cut iron.

Gross orders for the second quarter were $689 million, hopefully signaling that, again, mid-2009 marked the low point for orders during the downturn. Orders for pressure pumping and coil tubing equipment were particularly strong in the second quarter, closely followed by land rigs, both domestic and international, lifting and handling equipment, top drives and mobile rigs.

Like Q1, this represents a broad cross-section of our product offering and reflects consumption of existing equipment through day-to-day operations, and a steady workmanlike conversion to better technologies as driller economics permit. As an example, the rising day rates for new AC electronically controlled rigs illustrate the superiority of this equipment, which stands in sharp contrast to the market for 30-year-old rigs that still comprise a majority of the fleet.

Our backlog of capital equipment for Rig Technology stands at $4,856,000,000 as of June 30, 2010, which is down 11% from the prior quarter. Orders were adjusted for the cancellations of two small rigs in the Middle East and a handful of negative change orders totaling $29 million, resulting in net order additions of $660 million.

We consider $188 million to be at risk of cancellation. As expected, revenue out of backlog declined about $254 million and totaled $1,251,000,000 during the second quarter, reflecting the completion of numerous projects won in the 2007-2008 time frame. Approximately 81% of the backlog is offshore projects and 19% land, reflecting a 31% sequential increase in our land rig backlog from the first quarter. 86% of the backlog is for international markets and 14% is for the U.S.

Execution remains superb. We delivered two drill ships and two semi-submersibles during the second quarter, bringing our total to 84 offshore rigs built during the last cycle, with essentially all on time and on budget. Installation and commissioning activities remain brisk, with nearly 700 personnel at work on additional rigs. Margin performance on these projects once again exceeded our expectations, owing to close attention to execution, favorable cost variances and FX movements, and above all, experience.

Like many of you, we've been watching Brazil with rapt attention. And so far, so good. After an extended prelude, Petrobras is now in receipt of tenders for 28 deepwater floating rigs from several local shipyards and a handful of mostly local drilling contractors. The technical proposals within these bids have been opened, and the commercial proposals within these bids are to be opened soon.

These sophisticated deepwater rigs are required to be constructed in Brazil and are drilling equipment packages in which National Oilwell Varco has a very high level of interest, are required to contain a minimum level of local Brazilian content, which rises from 20% for the first few to 50% for the last rigs. Deliveries of these rigs are scheduled between 2014 and 2017.

NOV has devoted considerable resources to developing our plan to achieve the local content requirements within this time frame, and we are confident that we can comply. To this end, we're expanding operations and are underway adding three new facilities in-country to service this growing market. It will be challenging, but we are up to the task.

Petrobras has signaled that they intend to own a controlling interest in some, perhaps most of these rigs, and intend to contract others to be built and owned by drilling contractors. We all await their decision on a number of rigs in each category and the ultimate winners of the tender process, but NOV has pursued these aggressively and we like our odds. NOV is well known in Brazil, and we are committed to meeting the needs of this market.

In terms of timing, we could begin to land orders from this tender process late this year, but the first quarter 2011 is probably more likely, and as always, the process could be subject to further delays.

Nevertheless, we remain convinced the Petrobras is committed to building these rigs in-country, using it own needs for rigs to bootstrap the company into becoming a major supplier of deepwater rigs for years to come, much like Norway used its North Sea discoveries of the 1970s to bootstrap itself into becoming a major oilfield services participant.

The moratorium on deepwater drilling in the Gulf of Mexico following the Macondo blowout, had minimal impact on our financial results in the second quarter. We shut down 19 Solids Control and Waste Management jobs on affected rigs, but we were able to largely redeploy these field crews into new areas in the Rockies and the Marcellus. Distribution Services saw second quarter sales rise as our stores scramble to outfit the massive response effort with basic supplies.

The Rig Technology group saw modestly lower purchases of spares and consumables among the affected rigs, but many of the rigs appear to be moving toward using this time to catch up on upgrade and maintenance activities, so we are likely to see higher sales in spares in the coming months. However, we expect to see a larger negative impact overall across all three segments in the second half of the year, as customers struggle through tougher permitting requirements, even in shallow water, and are generally pausing to see the ultimate resolution of new pressure control requirements.

Consequently, some specific purchases such as drill pipe and conductor pipe connections have been deferred, pending the outcome of the pause, which could cause NOV $0.01 or $0.02, on a consolidated basis, over each of the next two quarters.

Additionally, a number of deepwater rig construction projects from the Arctic and elsewhere, which we believe we're close to signing, have been suspended pending the resolution of the moratorium. However, we have also seen a couple of drilling contractors launch exploratory studies of new rig projects, soliciting budgetary quotes from shipyards for new deepwater rig build projects in recent weeks. These are a long way from becoming firm orders for NOV, but we are pleased to see some rekindled interest.

We believe the roughly 25% decline in the all-in construction costs for deepwater rigs, mostly due to some very hungry shipyards along with some FX help, is catalyzing this interest among opportunistic potential buyers.

With the tragedy in the Gulf of Mexico leading to new blowout for vendor regulations and specifications from the Bureau of Ocean Energy Management, customer inquiries are trending significantly higher and orders for pressure control components, spares, repair and services rose during the second quarter. Accordingly, we have ordered a substantial quantity of long lead time BOP body forgings to be in a position to quickly supply replacements for those which cannot be recertified, additional cavities to enhance existing BOP stacks, as well as for additional capital spares.

One customer has already asked for enhancements to a block for vendor stack previous law and order for a new offshore rig being fabricated in Asia to be in a position to meet or exceed the expected new regulatory requirements.

We're also fast-tracking the creation of a new expanded research and development center for testing new pressure control technology near our bloffervener [ph] plant in Houston. Prior to the accident, we were at work on new low-force shear capabilities designed to expand the size and range of drill pipe and other tubulars, which can be sheared by rams, and have been awarded a patent on low-force shear blade design with a few more applications in the works. Our goal is to get a product to market quickly that can shear larger higher-strength drill pipe bodies and even tool joints. Many lives along the Gulf Coast have been touched by the terrible tragedy that occurred on April 20, with the loss of the Deepwater Horizon. And our condolences go out to the families who have lost 11 loved ones.

Like everyone in this industry, we are committed to cleaning up the mess and securing the well. Several NOV businesses have been engaged in the installation of the cap, the rapid execution of the relief wells and the cleanup efforts on the beach. We understand our imperative to operate safely and in an environmentally responsible way. This has been an extraordinary accident and a somber reminder of the responsibilities all of us in the oil and gas industry share.

Now let me turn to our segment operating results. The Distribution Services segment generated revenues of $366 million during the second quarter of 2010, up 9% from the first quarter of 2010 and up 20% from the second quarter of 2009. Second quarter operating profit was $13 million or 3.6% of sales, up 30 basis points from both the first quarter of 2010 and the second quarter of 2009. Operating leverage or flow-through was 6% sequentially and 5% year-over-year.

The U.S. led the way, posting 24% higher sequential revenues through a combination of higher sales into the shale plays, shale play drilling and completion operations, higher sales into new domestic land rigs being outfit for service and higher sales into the Gulf Coast region to support cleanup efforts, leading to solid double-digit incremental growth sequentially and year-over-year.

Canada declined seasonally at high decrementals, owing to lower volumes and a litigation accrual. International revenues improved slightly, but margins fell due to mix and higher scrap expense. We expect the Distribution Services segment to generate good sequential growth in the third quarter, provided the U.S. rig count stays up, held by seasonal turnaround in Canada and certain international projects we see in the works. Margins are expected to continue to improve at a steady rate.

The Petroleum Services & Supplies segment generated total sales of $1 billion in the second quarter of 2010, up $110 million or 12% from the first quarter of 2010, and up $120 million or 13% from the second quarter of 2009.

Operating profit was $138 million or 13.4% of sales, up about 120 basis points from the first quarter on a $25 million sequential operating profit increase. Sequential operating leverage or flow-through was 23% sequentially and 35% year-over-year.

Most businesses posted solid gains on sequentially higher levels of drilling activity in the U.S. and overseas. Sales of composite pipe surged on large project orders into the chemical and industrial space in the U.S. and large project in the Eastern Hemisphere. Coiled Tubing sales through coil tubing, Tuboscope Coating & Inspection Services and NOV Wellsite Services also posted strong double-digit sequential increases on higher domestic activity.

Mission sales of Drilling Expendables and Multiplex Pumps and ACCEL system sales of large diameter connectors also posted increases, while IntelliServ Downhole Tools posted lower sequential results, partly due to Canadian breakup. Drill Pipe sales jumped 25% sequentially, with modestly improved margins, as more land contractors and rental tool companies placed orders for premium pipe for shale plays. While premium XT connections and higher volumes and commensurate higher absorptions helped profitability, the smaller-sized, generally about 4 inch, and higher mix of alliance customers, alliance being the code word for discounted, led to lower revenue per foot and limited operating leverage on the revenue increases.

We also sold more drill pipe into the domestic Chinese market from our plants in China, which was diluted to the mix in margins. Orders for the quarter increased 11% sequentially. Overall, the sequential leverage for Petroleum Services & Supplies of 23% fell below the historical average for the group of around 30% through the cycle, but that is typical for the group during the second quarter due to Canada, where most products and services declined at high decrementals, often more than 50%.

Lower leverage on drill pipe reflecting the mix shift also contributed to the softer incrementals. Overall, pricing has stabilized for most, but not all products, and certain products are just starting to win back pricing increases in North America. International pricing is also mixed and has historically demonstrated more inertia and less volatility both up and down.

Looking into the third quarter of 2010, we expect revenues and margins to remain roughly flat with the second quarter, as seasonal recovery in Canada offsets lower revenues in the Gulf of Mexico related to the moratorium and lower revenues on some specific international projects.

The Rig Technology segment generated revenues of $1.7 billion in the second quarter, down $214 million or 11% sequentially, and down $245 million or 13% compared to the second quarter of 2009. Operating profit was $509 million, yielding operating margins for the group of 30.4%. Decremental leverage or flow-through was 34% from the first quarter to the second, and 11% from the second quarter of last year to the second quarter of 2010.

Project margins remained very strong, despite the 17% sequential decline in revenue out of backlog, as the group continued to execute new rig fabrication projects exceptionally well. Compared to the first quarter, non-backlog revenue increased $40 million or 10%, led by higher parts, sales, rental revenues and modestly higher small capital equipment sales, which fall below our $250,000 backlog threshold.

Higher Spare Parts sales began to flow-through late in the quarter as our aftermarket repair centers filled up with equipment coming in from the idle Gulf of Mexico rigs, many of whom are using this time to overhaul and upgrade components with particular emphasis on pressure control equipment. Instrumentation Monitoring and Optimization posted sequentially improved revenues on higher U.S. leasing and instrumentation sales overseas. Well Intervention and Stimulation equipment revenues were down in the second quarter following large deliveries in the first quarter, but are expected to increase significantly in the second half of the year, owing to strong order intake from North America and Chinese pressure pumpers which more than doubled Q2 shipments.

Generally, the shift toward higher diameter, thicker wall coil tubing, typically 2 inch or 2 3/8 inch, for shale plays is spurring demand for new equipment. Increase for new land rigs have remained brisk. Operators of overland fleets in North America are upgrading, ordering top drives for their fleets and/or complete new AC rigs outright. The second quarter marked an important milestone, NOV shipment of its 1,000th model TDS-11 Top Drive. Interest in new AC technology land rigs in the Middle East and certain Latin American markets remained steady. Iraq in particular, will need a number of new land rigs to execute its ambitious drilling plans for that country.

Orders for lifting and mooring equipment picked up in the second quarter, partially related to FPSOs and construction vessel demand and order also improved for mobile rigs, both domestic and international customers. Approximately $2.4 billion of the $4.9 billion in backlog on the books as of June 30, 2010, is scheduled to flow out in revenue through the remainder of 2010, with $2 billion scheduled for 2011 and the balance thereafter.

Looking into the third quarter of 2010, we expect Rig Technology revenues to remain roughly flat with the second quarter and expect margins to decline into the mid to high 20% range, owing to a lower mix of higher margin offshore rig fabrication revenue.

Turning to National Oilwell Varco's consolidated second quarter income statement, SG&A increased $13 million sequentially to $338 million or 11.5% of annualized sales due to higher outside consulting expenses related to tax planning, along with higher incentive compensation accruals. Equity income in our Voest-Alpine joint venture was $8 million, up from the first quarter on sharply higher OCTG sales and a strong dollar.

Other expense was $3 million related to minor foreign currency exchange rate losses and bank charges. The tax rate for the second quarter was 31.8%, about what we expect for the remainder of the year. Unallocated expenses and eliminations on our supplemental schedule totaled $66 million in the second quarter, up $9 million sequentially on higher intercompany profit eliminations between segments.

Depreciation and amortization declined $3 million from the first quarter to the second, and CapEx increased $16 million sequentially to $47 million, a little more than a third of DD&A. We expect CapEx for the full year to be below $300 million. EBITDA excluding transaction, restructuring and devaluation charges was $728 million in the second quarter, down 9% sequentially and up 6% year-over-year.

National Oilwell Varco's June 30, 2010 balance sheet employed working capital, excluding cash and debt of $3.6 billion, up $204 million, or 6% sequentially due primarily to the decrease in billings and excess of cost and increase in accounts receivable. This increased working capital to about 30% of annualized revenues this quarter.

During the second quarter, cash flow from operations was $187 million, cash spent on four small acquisitions totaled $16 million, and our ending cash balance was $2.7 billion. Now let me turn it back to Pete.

Merrill Miller

Thanks, Clay. I want to make a few more brief comments on some of the issues and expand upon a couple of things that Clay has said. And then I'll turn it over for questioning from everybody on the call.

But I want to really emphasize again the shales, and it's not just natural gas. I think that's what a lot of people have been thinking about. But a lot of these shales, in particular, the Eagle Ford and the Bakken, are really oil plays. And I think that really kind of gives us a lot more long-term visibility into what's going on here, and especially, as Clay mentioned, when you have a sudden [ph] handle on oil prices. We are very aggressively positioning ourselves to be able to take advantage of these oil plays. In Distribution, we're opening up new facilities, we're doing the same thing in our PS&S business. And really, we're positioning our PS&S business to be the primary beneficiary of a lot of the things that are going on specifically, bids, what we're doing with like Downhole Tools, obviously our pipe, and we really like what's going on in that area. And we think, as Clay pointed out, that it's really going to expand worldwide, and that really provides a neat opportunity for us. Someone once said, well, around the world, they don't have the infrastructure in place to be able to do these shales. And I always like to say, by the way, we build infrastructures. So we're kind of ready to go with that. And I think that's going to be a kind of a neat deal.

We've also utilized this little bit of softening in the market to make sure that we position ourselves to come out of this much better. In particular, we've done a lot of consolidation of our manufacturing, we've moved products around. And I think that really is seen in some of the margins that we're getting in both our Rig Technology Group and in our PS&S Group. I think we've got some great manufacturing people, and they've been able to really consolidate and get things done, I think, in a very efficient and effective fashion. And I believe, over the next five or six years, that's going to pay very sharp dividends to NOV and to our shareholders.

Let's talk about the international arena for just a moment. Clay touched on it, obviously, Brazil, and I'm sure we'll get some questions on Brazil. But we have very actively building three facilities down there. We travel extensively down there looking at the marketplace and we're excited about what's going to happen. Certainly, it's not happening at the speed at which we'd all like, but my experience in the international arena, in 30 years in this business, is nothing really happens at the speed I'd like. But we're very confident that things, in fact, are going to happen.

I think North Africa is appearing to be a little bit better right now. Algeria slowed down because of some issues associated with their state-owned oil company. But I think now, they're clearing up a lot of that. I think the second half of the year, is all going to be a much better place in Algeria. I think Bolivia continues to look very good and Egypt has been a very nice spot for us.

The Middle East will continue to be very active. I think most of the service companies you've heard talk on calls over the past couple of weeks have all felt pretty decent about what's going on in the Middle East.

I think a number of area that we're excited about, has finally started to even come around a little bit, is Russia. We've opened up a new facility in Russia. We've sold some land rigs into Russia this past quarter, and I think it is going to be an area that really is going to see, I think, a very significant pickup over the next few years. We've been positioning ourselves over there to really take advantage of that. In particular, our facility in Nizhnevartovsk were running just about every one of the products that we have throughout our company out of there, and I'm excited about the prospects for that. So I think those are really going to be positive things.

What I'd like to end up on those is talk a little bit about new technology. As you've all heard me say numerous times, NOV is the company with some of the best and brightest engineers in the industry, with some great ideas to help the industry operate safely. I'd like to take a little time to expand upon one of the things that Clay talked about, and it's a project that we've been working on for about three years to improve the capacity of shear rams on our BOPs, blowout preventers. What the engineers at our Pressure Control Group have come up with as a result of this is a low-force shear ram design that fits in our 18¾-inch BOP. This new patented design is showing great improvement in shear capacity for our rams using significantly less hydraulic force. Partly because of the situation in the Gulf, we began expediting the lab testing earlier this year.

During that testing, the new shear ram has consistently been able to shear our XT69 tool joints, which is used on 6 5/8-inch drill pipe. That's a big deal. Not only is the tool joint big, but being able to shear that in this fashion, pretty exciting. I'm not going to get into a lot of the technicalities on the design, but we're excited about this, and we're going to be going to market with this. And I think it's something that is really going to be beneficial for the industry.

Two other things we're working on very significantly is a lot more remote monitoring. We've already done a lot with our rehaut [ph], but we're trying to expand that. And I think one thing that's really been kind of fun for us is our blackbox technology that we use on our bits. This enables us to get a lot of information that when we turn back over to our customers, allows us to make the drilling of wells much more efficient. We're going to continue pushing the envelope on technology. We believe we're a great technology company, and I'm excited about some of the things we're doing.

So that's just a few brief comments form me. Kristine, at this point in time, I'd like to turn it over for any questions that our listeners might have.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Jim Crandell from Barclays.

James Crandell - Barclays Capital

Pete, I want to ask about a couple of things you didn't touch on during your call. The first one is IntelliServ. I guess, do you still feel that this is going to be one of the most important technological developments in the industry? And whether you want to put numbers on it in terms of jobs or revenues, can you give us some indication of progress on the whole IntelliServ technology and when you think now it might evolve into something meaningful for NOV?

Merrill Miller

Jim, it's a great question, and it is something that -- when I talk about our technology, and people ask me, are there some game-changers out there, the one game-changer I always point to is IntelliServ. I think it really has some tremendous potential. As you well know, we finalized the JV with Schlumberger last year. We're still kind of getting our feet on the ground and our wings a little bit wet on working with them on it. But I think, everybody's excited about some of the prospects. The hold up, if you will, or some of the issues associated with it, are really getting a lot of the tools to be IntelliServ compatible. You want to have sensored bits as an example. We're doing a lot of work on sensored bits, and I think we have to get a little bit more in there, some of the downhole tools, the other things have to be a little bit more IntelliServ compatible. The rigs themselves have to have a few modifications, specifically, like a top drive. We have to be able to make sure that those things good. So that's taking a little bit of time. I will tell you this, the projects that we put it out on, have been tremendous successes. And the testimonials we're getting back from the customers have been really, really good. What we have to do right now is really, kind of put together a program that can monetize that for our customers, show them where the value added is, and then I think go along with it. It's not going to happen overnight, and I would be very reluctant to put any numbers around it at this point in time. But I will say, I think it has tremendous potential. I can go back in 1985 and tell you about the potential of top drives and it was kind of a slow goal for a while. I think this has the same sort of game-changing capability the top drives have. And today, top drive's ubiquitous, they're everywhere and you have to have them on the rig. So I'm very, very excited about it, Jim. But again, I'd be very reluctant to put any numbers around it. But I think, in four or five years, when we're on this call, we'll be talking about the success of IntelliServ.

James Crandell - Barclays Capital

My second question is, as NOV makes a huge amount of products that go on an offshore rig, other than the BOP stack, where might you see a plus to NOV's business based on either improved safety standards, or increased repair maintenance requirements?

Merrill Miller

Jim, there's going to be an emphasis, I think, on maintenance. There always has been an emphasis on maintenance. I don't want to make it sound like this is something that's new. I mean, people have really done a good job. I think there will be an expanded emphasis on maintenance, and I think that will probably play well to everything that we're doing. And I think also, what probably plays well on this situation is that you want to buy your equipment and you want to have the support of the best that's out there. And I think that, again, we've got locations all over the world. If you're running rigs in Brazil, we're there to help you. If you're running rigs in West Africa, we're there to help you. If you're running rigs in the Gulf of Mexico, we're there to help you. So I think because of requirements that'll are probably be strengthened, certainly, we're going to be there to help and help the industry take care of those issues.

James Crandell - Barclays Capital

Pete, aside from the FPSOs that you went into, I think if I had to say, if there's one thing I'm surprised about over the last couple of years, it's been NOV not being able to do any big transactions, which I think, you attributed to the fact that after let's say, Schlumberger paid for Smith, the price went up and the price that you were willing to pay and the price that sellers wanted just wasn't in sync. Are those getting any closer today? And do you think you'll see a sort of break in this logjam for a potential transaction for NOV?

Merrill Miller

Yes, I think so, Jim. I mean, one of the things that we're committed to, we're committed to our shareholders and everyone is that we're going to maintain our discipline. And we've had a great track record of buying companies, and we bought them very efficiently and very effectively, and we don't want to change that. And there's some things that are out there that we'd really like. But when the seller's eyes get bigger than their stomach, it's pretty tough to pull through. But I will tell you this, we've got more deals on the table today, we've expanded the size of our Business Development group, and you'll see us make some news. We're patient people. We kind of played out some of these things and they come back to see us. There have been many times when people would walk away from the negotiating table with us, only to see them come back six months later and say, well, maybe that wasn't such a bad deal after all. So we're patient, and I think you'll see us do some deals.

Clay Williams

Yes. We've also, Jim, done a lot of small deals. You're right, we haven't announced any blockbuster, billion-dollar size deals. But in the past 18 months, we've done about 15 acquisitions, spending close to $700 million. So they do add up. And these are, frankly, very good compelling economics. They bring a lot of very interesting technologies. They bring us new products, and so we continue to knock those out. The bigger deals, as you know, take a little longer they're more protracted sort of dating period between the parties, and we are not going to lose our discipline.

Operator

The next question comes from Marshall Adkins from Raymond James.

J. Adkins - Raymond James & Associates

On the PS&S, because I think margins there were higher than we all thought, and it sounded in your discussion, Clay, that it was more utilization, or throughput driven, not pricing. So on that front, is there room for more pricing? Are these margins sustainable? And how high can PS&S margins get over the next few years?

Clay Williams

Q2 was up in volume, and what you saw was almost purely all volume-driven. In fact, Marshall, as you know, our incremental leverage a 24% there going from Q1 to Q2 is below what would typically post due to some mix issues, higher Chinese pipe and Canada cycling down with breakup. We are not seeing pricing improvement in most business lines yet. The good news is that we've seen this movie a few times before. And usually, as you move a few quarters into the recoveries when you start to get a little better pricing and you start to get some improvements on that front. So the last time this all played out was a period between 2003 and 2008. We went through an extended growth cycle in the industry. Right now, things look like they did, let's say in '05 when we were kind of had margins in the mid-teens for PS&S. And by '07, we were up into the low to mid-20s and kind of went up to the mid-20s pretty firmly by 2008. So we've got a good clear track record of tracing that out in the past. That exemplifies the power pricing leverage in the Petroleum Services Group.

J. Adkins - Raymond James & Associates

I think you mentioned, of the backlog, you have 86% international, I think it was 18% offshore. I want to focus on the backlog you've added, the $660 million net adds, can you kind of break that down by product line, by geographic region, onshore, offshore, that kind of thing, just to help us understand where the new bookings are coming from?

Clay Williams

Yes. The big movers this quarter were coiled tubing and pressure pumping equipment, where the book to bill in that group was more than two. And that was mostly centered on North America, but not exclusively. We also sold a lot of pressure pumping into China, which has been a good market for us in the last several quarters, so a lot of interest there. Land repackages ticked up, and as I mentioned, our overall land rig as you point out, our land rig backlog jumped nearly 1/3 sequentially, and now comprises nearly 20% of the backlog. And so that was a good move on that. That was really across-the-board. We had complete rig packages for domestic land drillers, as well as customers in the Middle East and Russia. And also, another really good quarter for top drive demand. I think we have over 70 top drives sold again, this quarter. And again, a lot of those going into the land rig market. So there's really a broad-based order quarter. The offshore floater that we sold late in the quarter as well wasn't quite as big as kind of our usual floater order, because it didn't include some pressure control equipment. So that moved the needle nicely. But it didn't -- I would stress that the orders for the quarter were very broad-based and across all the products that we offer.

J. Adkins - Raymond James & Associates

So looking at a year, I mean, should we expect those overall backlog numbers to be more like 60% international offshore? Or give us some of your thoughts there.

Clay Williams

Well, as we pointed out, we had big expectations for Brazil. We do think Petrobras is going to move forward. So I think the needle is likely to move back the other way sharply once we have those 28 Deepwater floaters.

Operator

The next question comes from Brian Uhlmer from Pritchard Capital.

Brian Uhlmer - Pritchard Capital Partners, LLC

Talking on the BOP front, as we look out to what your expectations are for potentially new regulations. First off, when you're talking about new BOPs and your new patented technology, are we replacing the entire body of the ram? Or are we just replacing kind of the guts, as well as the bonnets and the components inside of that ram? And what is kind of an estimate of the capital per rig that would be required to kind of upgrade and meet the tougher requirements in your view?

Merrill Miller

Well, I think Brian, there's going to be a lot of things you can do. Your question is kind of a set quadratic equation. There's a lot of variables there. But we'll be able to upgrade existing equipment that we've manufactured. We'll be able to add a bonnet to things that we've already manufactured. For instance, if you've got a four-ram stack and you have to make it a six-ram stack, we can go out and retrofit that and make it to a six-ram stack. If you've already got a six-ram stack, we can go out and we can retrofit and put in what I was talking about on these new low-force shear rams. So there's a lot of different variables in there. And in some cases, people may want to buy a complete new stack, and like a complete stack just to kind of give you the run-of-the-mill number. And again, if you bought a six-ram stack today, state-of-the-art, it's close to $50 million. However, I don't think a lot of that's going to have to happen. I think you're going to be able to modify and in some cases, you can go ahead and modify for as little as probably $2 million or $3 million. It's going to depend on the particular situation. And there's a lot of stacks out there today that don't need the darn fit. I mean, if you take a look, especially the rigs that have been built new recently, irrespective of, if they're ours or other folks have put them on there, they're going to have a stack that can meet whatever requirements, I think, are going to come out. So that's a little bit of a long-winded answer and there's a lot of different ways to look at it.

Brian Uhlmer - Pritchard Capital Partners, LLC

And following up, when you're talking about the floater that slipped into the quarter, was that just the joint package? So it didn't include cranes, it didn't include -- was that rig that's being built, possibly but was someone else supplying that essential portion of equipment that you don't normally supply? And what was the magnitude of that?

Clay Williams

What I was mentioning on that was the stack and the riser pack, which is a big-dollar item. But everything else, I think, we did real well on.

Brian Uhlmer - Pritchard Capital Partners, LLC

So just a stack of the riser?

Clay Williams

Yes.

Operator

The next question comes from Geoff Kieburtz from Weeden & Co.

Geoff Kieburtz - Weeden & Co. Research

I've got another question on the backlog. It looked to me, if I'm right, that your backlog for 2011 delivery jumped up by about $600 million sequentially. Is that because of the kind of predominance of the coiled tubing and pressure pumping components?

Clay Williams

Exactly, Geoff. That's a quicker-turn stream of orders. And we can deliver land rigs in six months, nine months, a year kind of depending on the model. And so the deliveries are now starting to ramp up in 2011 in the existing backlog.

Geoff Kieburtz - Weeden & Co. Research

And I understood your answer there to the earlier question, that as a percentage basis, with Brazil coming in, you'd expect the backlog to shift back toward international offshore. But is there any reason to think that the magnitude of those short-cycle orders is going to diminish in the next several quarters?

Clay Williams

What I think is most encouraging. And this is to me, this is the big picture out there, is that day rates for these new rigs continue to move up, the joint contract providers of this new rig technology frankly, just continue to see steadily higher demand and more interest in that technology than their competitors that are offering the old 1970s rigs. This has been a very steady sort of unfolding of an awareness amongst oil and gas companies of the capabilities of the new rig technology, and that's the engine that's driving this. You have all this commodity price cyclicality juxtaposed on this. But behind it all is this very steady gradual move towards new technology. And we are absolutely convinced that, that is going to continue. And that's exactly in line. We have been saying this for five years, the industry is shifting towards this new technology for onshore rigs.

Geoff Kieburtz - Weeden & Co. Research

And my other question has to do with -- you gave us a lot of different kind of currents, if you will, related to the Drill Pipe business, sort of pluses, the minuses. Are you able to kind of cut through all of the different factors and give us any sense of what you expect in terms of Drill Pipe volumes and margins as we go over the next several quarters?

Clay Williams

Yes. It's certainly picking up. Our backlog rose again this quarter, second quarter in a row, and that's a nice turnaround. We haven't seen, as I mentioned last quarter, we haven't seen book to bill over one in Drill Pipe since, I think, mid-2008. And so it's going the right direction. Big picture last year, we were selling more premium pipe into offshore rigs that were coming out of the shipyards, which is very high margin, big pipe into that customer base. This year, we're selling smaller pipe to more land drillers and alliance accounts. So the revenue per foot dropped, along with we're also selling more pipe into the domestic Chinese market. So neither of those are high-margin businesses as our premium offer pipe.

Geoff Kieburtz - Weeden & Co. Research

And those are trends that you think are going to persist here for several quarters?

Clay Williams

The small pipe demand is really tied to the shale plays. The industry is kind of standardizing on four-inch drill pipe with XT premium connections, which is great for us. And we're happy to help them put that pipe in the market. Worth noting too, we're also seeing a shift in the customer base, more towards rental tool companies. The shale plays are very, very tough on Drill Pipe and the Drill Pipe offering. It gets torn up. And so the rental tool companies are coming in and providing a pipe for a lot of those drilling programs.

Geoff Kieburtz - Weeden & Co. Research

And does that feedback to your outlook for Voest-Alpine? A little bit of an improvement sequentially in the quarter, does that continue?

Clay Williams

Hardly. Voest-Alpine also sells OCTG into the North American market as well, Geoff. So that's probably actually the bigger driver for their profitability there.

Operator

There is time for one last question. Today's final question comes from Bill Sanchez from Howard Weil and Company (sic) [Howard Weil Incorporated].

William Sanchez - Howard Weil Incorporated

Pete, just for a clarification point, so the Brazilian floater you got in 2Q and the two more you've announced on this call for third quarter, does that essentially wrap up now any potential awards from the initial 12 that Petrobras announced back in '08?

Merrill Miller

There's still some stuff that's hanging out there, Bill. And I don't want to get too definitive about it. And we're not really sure ultimately what's going to happen. Our focus today is really more on the ones that we've talked about plus the technical tenders that were opened recently down in Brazil and the other things coming. But I think there certainly could be something else that could potentially happen.

William Sanchez - Howard Weil Incorporated

As far as the margin guidance in Rig Technology, Clay, and they were still looking to see that eventual margin decline here. I was hoping you could talk a little bit about how the mix is shaping up when we look kind of the spares and aftermarket business, if you will, or the component that doesn't meet the 100,000 threshold and, I guess, dump down outside of the capital equipment side. Can you tell me how that's affecting? I'm assuming that's higher margin work for you relative to what's in backlog. Can you talk about how that's supporting margins? And then beyond third quarter, how do you see kind of a trough, if you will, margin quarter shaping up for RT as a whole?

Clay Williams

The improvement in spare parts sales is accretive to the margins there. But I'll stress too, Bill, that the work that's kind of dwindling down a little bit, these offshore rig is pretty high margin too. So you kind of got those two going in opposite directions with regard to the margin contribution. The land equipment that we sell isn't quite as good as those two streams of revenue.

William Sanchez - Howard Weil Incorporated

Is third quarter -- it may eventually, you get down to this mid to high-20s. Is that a decent assumption to make going forward beyond 3Q as you see it, Clay?

Clay Williams

Yes, I think so. We actually outperform margin in the second quarter. We were expecting high 20s when we announced last quarter and ended up being a little over 30%. Again, excellent execution on these projects. And that just continue to do a super job. But they do tell us that hey, as the volumes are coming down, absorption gets a little bit trickier and the mix is shifting towards more of this land work which isn't quite as heroic on the margins. So that's the reason I gave mid to high 20% margin guidance on relatively flat revenues for Rig Technology in Q3.

William Sanchez - Howard Weil Incorporated

I guess and maybe it's just a clarification point. But Clay you mentioned, you're looking on the FPSO side to go from $25 million to $100 million per package. I'm just curious, is that going to be achieved based on in-house products you already have, that you guys are going to just be able to sell more of? Or is there something that you guys need additionally on the M&A side to get to that kind of target number?

Clay Williams

We're working on a transaction now that we're hoping to get done here soon, and that would bring that additional revenue potential to us.

Operator

Gentlemen, that concludes today's question-and-answer session. Please go ahead with any final remarks.

Merrill Miller

Thanks, Kristine. And I'd like to thank you all for calling in, and we look forward to talking to you again at the end of the third quarter. Thank you very much.

Operator

Thank you for participating in the National Oilwell Varco Second Quarter 2010 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.

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