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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

John Anderson - JP Morgan Chase & Co

Kurt Hallead - RBC Capital Markets, LLC

William Herbert - Simmons & Company International

James Crandell - Dahlman Rose & Company, LLC

Robin Shoemaker - Citigroup Inc

National Oilwell Varco (NOV) Q2 2011 Earnings Call July 26, 2011 9:00 AM ET

Operator

Welcome to the National Oilwell Varco 2011 Second Quarter Earnings Call. My name is Dawn, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Loren Singletary, Vice President, Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Loren Singletary

Thank you, Dawn, and welcome everyone to the National Oilwell Varco Second Quarter 2011 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, 2011, please note that some of the statements we make during this call may contain forecast, projections and estimates including, but not limited to, comments about our outlook for the company's business. These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially. No one 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 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 2 in order to permit more participation.

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

Merrill Miller

Thanks, Loren, and welcome everybody to our second quarter 2011 earnings conference call. Earlier today, we announced earnings of $481 million or $1.13 per fully diluted share on revenues of $3.51 billion. This profit is an 18% increase over both the second quarter of 2010 and the first quarter of 2011. We are very pleased with these results and believe they reflect the preference for our products and services around the world and the continuing operational excellence of our employees. Clay will expand upon these numbers in a moment.

Additionally, we announced a record capital equipment order intake of $2.96 billion to give us a quarter-ending backlog of close to $8 billion. In the past 2 quarters, our new order intake has exceeded $5 billion. I would like to thank our worldwide sales force for their outstanding efforts in achieving these record order intake results.

On a more somber note, I would like to offer our condolences to our Norwegian friends and co-workers on the loss they suffered Friday at the hands of a madman. The thoughts and prayers of everyone at National Oilwell Varco are with the people of Norway today.

At this time, I'd like to turn the call over to Clay.

Clay Williams

Thank you, Pete. National Oilwell Varco produced excellent results in the second quarter, posting revenues of $3.5 billion, earnings of $1.13 per fully diluted share for the period. Our quarter included transaction charges of $4 million pretax, and excluding these, earnings were $1.14 per fully diluted share.

Operating profit, excluding transaction charges, was $712 million or 20.3% of sales, higher than we expected, due to strong margin performance from Rig Technology, which offset expected seasonal margin declines from Petroleum Services & Supplies and Distribution Services stemming from breakup in Canada and flooding in the Bakken area. Margins in these 2 segments also faced some additional mix challenges, which I will detail in a few minutes. But nevertheless performed well due -- to meet the rising needs of our customers. Strong demand in the North American shale plays and good international activity contributed to solid results for both segments.

Like others in our industry, we have been witnessing a steady migration within North American shale activity. Gas prices have remained range bound in the $4 neighborhood since 2009, below the average for the 2003-to-2008 period, leading to levels of gas drilling about 40% below their 2007-2008 peaks. However, declining gas rigs have been more than offset by growing levels of oil-directed drilling, which has risen sharply to levels not seen in 25 years, fueled by sustained high crude prices. Together with rising deepwater production from the Gulf, the 400,000 barrels of oil per day flowing from shales have resulted in the first increases in U.S. oil production in a generation.

The great migration of activity from gas to oil has created new opportunities for our operations, along with new challenges, as we reposition our assets and workforce to continue to meet the pressing needs of the petroleum industry. As a result, both the Petroleum Services & Supplies and Distribution Services segments are expanding rapidly into new geographic areas to build out the infrastructure required of us.

The Bakken region of North Dakota and Southern Saskatchewan, the Utica and Marcellus Shales across the upper Midwest and the East Coast, the Eagle Ford Shale of South Texas are pulling workers and iron into new frontier regions, while oil productive regions of old like California, the Rockies, the Permian Basin of West Texas are experiencing new growth.

Our Service operations are busy investing and repositioning to be where our customers need us, adding solids control equipment and generator sets to new field locations, opening tubular inspection and drill pipe repair facilities in growing regions and investing in our large fleet of downhole drilling motors and bits. Likewise, our factories for products needed for oil production in these regions are expanding and reconfiguring to meet the evolving needs of our customers. For example, we're adding a new coiled tubing mill, which would start up in the fourth quarter, to produce larger 2-inch and 2 3/8-inch diameter coiled tubing to accommodate lengthening laterals in these horizontal wells.

We're investing in new artificial lift technologies for liquid wells. We're expanding our Fiberglass Pipe plants to offer composite pipe solutions to operators dealing with rising water production and corrosion challenges. We've invested in new well service pump technologies and machinery and additional flowline products for pressure pumpers within our Mission product line. We're also benefiting from strategies undertaken during the downturn to improve our supply chain and efficiency in areas like drill pipe manufacturing, where we have shifted production of tool joints to lower-cost areas in Latin America.

PS&S and Distribution Services also continued to expand overseas. For example, Tuboscope coating and inspection facilities in Brazil, Mexico, Abu Dhabi and Oman; Star Fiberglass pipe plants in Brazil and Oman; new Mission and Well Site Services operations in Brazil and Russia; new XL Systems facilities in Africa; expansions in Dubai and Saudi Arabia; and new drill pipe manufacturing capabilities in Abu Dhabi.

In short, we are preparing for growth in the face of a massive industrial transformation, the application in new horizontal drilling and hydraulic fracturing technologies that turn shales into productive oil and gas reservoirs, which will play an enormous role in the world's energy equation through the 21st century. This transformation is steadily gaining footholds internationally, as entrepreneurial petroleum producers and national oil companies apply technologies refined in the shale laboratories of North America to promising basins on other continents. NOV intends to play a major role in this important transformation.

And speaking of massive industrial transformations, another parallel effort is underway to find new sources of energy from the earth's oceans. With 60% of our planet covered by deep water, our industry will require a massive fleet of deepwater rigs to explore and produce petroleum well from this exciting frontier area. Exhibit A is NOV's record level of orders for rig equipment during the second quarter. Clearly, our customers are beginning to share our long-standing view that many, many new rigs are required to advance the deepwater effort, and they're investing heavily in the tools required to develop these offshore resources.

During the second quarter, Rig Technology segment booked new orders of $2,963,000,000, up 30% from the first quarter of 2011 and quadruple a second quarter a year ago. Bookings included drilling equipment packages for 8 drillships, 6 jack-ups and a large production platform. None of the rigs were for Brazil. Revenue out of backlog totaled $1,390,000,000, yielding a quarter-ending backlog of $7.7 billion, up 26% sequentially. As of June 30, 84% of this backlog was for the offshore and 16% for land. 84% of the orders are bound for international markets and 16% for domestic markets. For the remainder of the year, we expect approximately $2.8 billion of the June 30 backlog to flow out as revenue. Another $4.3 billion is scheduled to flow out in 2012 and the $600 million balance in 2013.

Overall, this segment gained modest pricing leverage through the first half of the year in the 6% to 8% range, as we face rising costs for steel and other inputs. Numerous buy-ins like hydraulic fittings and transmissions are very tight with long lead times. Competition has been tough, but we have been fortunate to win a good number of new orders, owing to NOV's comprehensive offering of leading technology and skillful execution.

We've also been able to maintain good progress billing schedules on these long lift projects to minimize our own working capital investments in the projects and improve our capital efficiency. By increasing our customers' investment in the projects as construction proceeds, these progress billings mitigate the risk of potential cancellation should we face another sharp downturn like we did in 2009. As a reminder, we faced cancellation of only a very small fraction of our orders following the downturn 2.5 years ago.

Recent orders have been concentrated in the most experienced shipyards, those that constructed most of the offshore rigs bought between 2005 and 2008. Specific yards have developed high levels of expertise in the construction of jack-ups in Southeast Asia and the construction of semis and drillships in South Korea. Other yards around the world, who dabbled in offshore rig construction a few years ago, have landed comparatively few orders recently, highlighting an evolving market preference for highly experienced yards for the execution of these complex projects.

Building an offshore rig is much more complicated to undertaking than, say, a tanker or a freighter. The legs for jack-up, for instance, require tight tolerances and complex assembly operations, and inexperienced yards missed deadlines over the past few years as they learned the hard way just how tough it is to build an offshore rig. Real-world experience in building rigs over the past 6 years have made drilling contractors smarter about the selection of their vendors.

Nevertheless, competition among highly experienced Korean yards for floaters has been intense. These yards have been active, building a variety of industrial vessels, tankers, freighters, LNG vessels, in addition to a smaller drilling rig business for many years. In 2008, the credit crisis and economic downturn slowed orders for all vessels, and these yards saw their backlogs for all vessels decline significantly as they worked through their large backlogs. The recent uptick in demand for drillships is offering a way for the Korean yards to refill their backlog holes, and they are hungry and aggressively pursuing any and all drillship projects. But in comparison to the Singapore yards, they have much bigger holes to fill. As a result, their pricing leverage has been limited thus far, while the jack-up builders in the Far East have met with more success in achieving price increases on new jack-ups.

Both regions are demanding progress billings more consistent with our own and don't appear to be offering a "20% down, 80% at delivery" specials seen several months ago. Flat capacity in South Korean yards, coupled with strong desire to replace tanker and freighter backlogs with rig orders, have prompted these yards to sign up for aggressive build schedules and tighter deadlines, generally shaving 10 months or so off the construction schedules of just a few years ago. NOV's order inquiries for offshore drilling equipment packages have continued to be strong through the first few weeks of July, and we hope to post another strong order quarter in Q3.

We're continuing to work closely with various shipyards, including EAS in northeast Brazil, the Atlântico Sul yard, to participate in the Petrobras orders. We are also continuing to invest heavily in Brazil to support the growing fleet of offshore rigs at work there and to help meet local content goals for the new rigs.

On our -- our long-term FPSO outlook remains very strong, given that we are tracking dozens of potential projects around the globe. While second quarter FPSO turret orders improved sequentially, overall they remained slow, which we believe will persist through the next few quarters due to the very long cycle time required to sanction these projects. FPSO orders pivot on E&P decisions to move forward on billions of dollars of development CapEx, not just for the FPSO but also for the development joint programs, subsea wellheads, manifolds and riser expenditures, and those decisions typically require extensive reservoir modeling, feed studies, economic forecasting and financing. Predictably, they don't go as fast as rig-building decisions. So in the meantime, we're busy integrating our APL business into NOV and assembling a broader array of NOV products into an FPSO package concept.

Land rig market appears to be getting stronger. We built 13 large complete land rigs this quarter, along with individual components for dozens of other new-build land rigs, mostly targeting shale plays in the U.S. and Canada. Our outlook for orders remains bright, with the reemergence of 3- to 5-year term contracts for high-capability rigs for shale plays in North America, and we expect international orders for land rigs for the Middle East and the Far East to increase in the second half of the year.

Our backlog for land equipment jumped 22% sequentially to $1,246,000,000, due to combination of strong land rig sales and high demand for well intervention and stimulation equipment. Demand for coiled tubing units, pumpers, blenders, cryogenic, nitrogen equipment is surging for pressure pumper, serving the many active shale plays across the U.S. and Canada. And we were pleased to add frac, sand handling products, through our acquisition of APPCO during the quarter.

Overall, our outlook is bright. NOV will continue to play a critical role in the massive industrial transformations at work in the world's oil and gas industry: the retooling of a land rig fleet with modern technologies to develop new shale plays, the replacement of an aging jack-up fleet, the buildout of a fleet of floating rigs to develop deepwater resources and a supply of a myriad of technologies and products to enable horizontal directional drilling and hydraulic fracture stimulation in a safe efficient manner. With unequaled worldwide scale and scope, strong cash flow and financial resources, and, most importantly, the best, most professional workforce in the industry, National Oilwell Varco is exceedingly well positioned to drive transformation.

Now let me turn to our operating segment results. NOV's Rig Technology segment generated revenues of $1,894,000,000 in the second quarter, up 18% sequentially and up 13% compared to second quarter of 2010. Operating profit was $517 million, yielding an operating margin of 27.3%, up from 26.2% in the first quarter and down from 30.4% in Q2 of last year.

We previously forecasted margins to move down for the second quarter, however, the period benefited from lower costs than we expected, specifically on drilling risers we were building for the many offshore rigs the group is constructing. Late last year, we began to transfer drilling riser fabrication operations to our Hochang operation in South Korea, in order to improve proximity to the shipyards and reduce manufacturing expense. Our analysis this quarter, based on actual results so far, showed much better cost improvements than we had anticipated.

Since most of our large reconstruction projects are booked on a percentage-of-completion revenue recognition model, we adjust our estimates of future costs periodically and continuously reconcile to expected future margins on all projects. This quarter's adjustment resulted in a margin pickup in higher revenue, as we reconciled the slightly higher expected margins in the projects overall. Excluding this catch-up effect, Rig Technology margins would've declined slightly from the first quarter.

We are pleased that future drilling riser production and future margins are expected to benefit from these operational cost reductions. But nevertheless, we continue to face modestly declining margins over the next couple of quarters, due to winding up of the many high-margin offshore new-build projects won during the order ramp-up from 2005 to 2008 and the comparatively low levels of orders and lower margins seen during 2009 and 2010. This mix effect is seen in our year-over-year second quarter comparisons, which showed a 310-basis-point margin decline and only 4% operating leverage or flow-through on the 13% sales gain. This mix effect was less pronounced in going from the first quarter to the second quarter of 2011 and helped by the riser margin pickup. The group's sequential flow-throughs were 33% as a result.

Record orders this quarter are rapidly replenishing our backlog with solid projects, which we expect to begin to increase margins in 2012 after they drift down through the next couple of quarters. Most importantly, these projects will be executed by the best rig equipment manufacturing team in the business who routinely innovate new ways of building equipment efficiently and profitably, like drilling risers. They continually seek low-cost, high-quality sources of products across our expansive network of facilities and post manufacturing margins rarely matched in our industry. Solid operational performance prompted revenue out of backlog to jump 24% sequentially to $1,390,000,000.

During the quarter, we delivered 6 floating rigs and commissioned one jack-up, and the commissioning operations continued on 28 rigs in 14 different shipyards. Non-backlog revenue, of which 82% this quarter was aftermarket spares and services, improved 4%. Organic expansions along the Gulf Coast, Brazil, Dubai and the North Sea, acquisitions in Singapore and India and the growing install base of NOV rigs should position NOV's ascending service infrastruction -- infrastructure for our own make BOPs to underpin arising aftermarket revenues in future periods. Looking into the third quarter of 2011, we expect Rig Technology revenues to be flat or up slightly with operating margins in the mid-20s.

The Petroleum Services & Supplies segment generated total sales of $1,359,000,000 in the second quarter of 2011, up 7% sequentially and up 32% year-over-year. Operating profit was $249 million, and operating margins were 18.3%. Compared to the second quarter of last year, operating leverage or flow-through was a solid 34%. Revenues improved $94 million from the first quarter, but operating profit was up only $3 million sequentially and margins declined 110 basis points from very strong first quarter levels.

The sequential performance represented only 3% flow-through due to a number of factors. First, the impact of the seasonal breakup in Canada reduced revenues compared to the first quarter at high decrementals, mostly affecting our Downhole Tools and Well Site Services product lines. The non-recurrence of high first quarter solids control equipment sales into North Africa and the Middle East and continuing unrest affecting all operations in that region further pressured Q2 results. These sales declines were offset by: first, higher revenues from recent acquisitions at lower margins; second, modestly lower margins on increased sales in Mission, Drill Pipe and XL Systems owing to mix; and third, lower margins on higher Well Site Services revenues due to startup costs for new locations and flooding in the Bakken region.

Finally, Tuboscope posted a very strong quarter with sharply higher coating and pipe inspection revenues at strong flow-throughs. Domestic mix of revenues for the group increased from 50% in the first quarter to 54% in the second quarter, due to strong demand for the -- from the liquids-rich shale plays, while Canada declined from 10% to 7% of the mix, as expected, due to seasonal breakup. International grew slightly, but the international mix declined from 40% to 39% during the quarter.

The group continues to battle inflationary forces for steel, polymers, epoxy, labor and rent, particularly in the emerging shale areas. And several product lines are carrying startup costs for new operations across these, but most are also reporting increasing traction on pricing, typically in the mid single-digit range to offset creeping costs. Our outlook remains very positive for the segment. We expect revenues and margins to improve both in the third quarter, as we emerge from the breakup in Canada, strong activity across the shale plays in the U.S. and offshore markets in the North Sea and the Gulf of Mexico slowly improved.

Mission is seeing steady adoption of premium ceramic liners by drillers and strong demand for its growing offering to pressure pumpers and for positive displacement pumps. Sales and rentals of downhole drilling motors should continue to grow, with the opening of our new Motor Reline Facility in Houston and some amazing test runs for our new Helios cutter PDC bits, underpin our improving outlook for Downhole Tools for the second half of the year. Several other units are expected to benefit from new facility startups later in the year and into 2012, including Tuboscope, Fiberglass Systems, Quality Tubing and XL Systems.

Turning to Distribution Services. Second quarter revenues were $423 million, up 3% from the first quarter and up 16% from the second quarter of 2010. Operating profit was $26 million or 6.1% of sales, down from $28 million or 6.8% of sales in the first quarter of 2011. Compared to second quarter of 2010, operating profit doubled and operating leverage was a solid 22%.

Regional mix swung sharply for the group with Canada down 28% sequentially and accounting for only 14% of the segment's second quarter mix compared to 22% in the first quarter. Nevertheless, the Canadian operation was able to maintain good profitability despite the large breakup effect. U.S. and international sales both grew nicely sequentially, with international operations helped by our acquisition of Capital Valve in the U.K. and accounted for 52% and 34% of the segment's mix, respectively. U.S. margins were down slightly with new DSC startup costs in South Texas, Pennsylvania and the Mid-Continent.

Mono Industrial sales margins were down in Argentina and Europe, but the group foresees improving results later this year as international sales of artificial lift products began to grow significantly later in the quarter. As a result, we expect Distribution Services revenues in the third quarter to move up nicely on higher artificial lift sales recovery in Canada and continued rig activity-driven growth across the U.S. We expect margins to move back up into the high-6 range.

Turning to National Oilwell Varco's consolidated second quarter income statement. SG&A increased $9 million sequentially, due to higher incentive compensation accruals but declined as a percentage of sales to 10.7% as compared to 11.6% in the first quarter and 11.5% in the second quarter of last year. Operating profit, excluding transaction charges, grew $84 million sequentially and $118 million year-over-year.

Interest expense declined $5 million sequentially due to our second quarter $2 million -- $200-million indenture repayment. Other expense improved $12 million sequentially, due to improvements in foreign currency exchange expenses. Equity income in our Voest-Alpine joint venture was $10 million for the quarter, down $3 million from the first quarter due to lower volumes and unfavorable mix, as less OCTG and more line pipe was sold. We expect equity income to decline slightly in the third quarter due to our annual summer maintenance shutdown in August.

The tax rate for the second quarter was 32%, about flat with the first quarter, and we expect the tax rate for the remainder of the year to be in the 32% range. Unallocated expenses and eliminations on our supplemental schedule was $80 million in the second quarter, up $12 million from the first quarter due to higher tax consulting expenses, legal costs associated with acquisitions and inter-segment eliminations. Depreciation and amortization was $138 million, up $3 million from the first quarter. EBITDA, excluding transaction charges and Libyan asset write-downs was up $94 million sequentially to $858 million or 24.4% of sales.

National Oilwell Varco's June 30, 2011, balance sheet deployed working capital, excluding cash and debt, of $3.5 billion or 25.2% of annualized sales, down $211 million from the first quarter. This is due primarily to rising orders in our Rig Technology group. Total customer financing on projects, in the form of prepayments and down payments, billings in excess of costs, plus costs in excess of billings, was $876 million at June 30. Accounts receivable increased $92 million, and inventory rose $186 million sequentially on higher revenues and acquisitions, largely offset by higher accounts payable and accrued liabilities.

Cash flow from operations was $912 million for the second quarter, a sharp improvement from the first quarter, due to the working capital items I had mentioned and strong levered cash flow of $618 million. CapEx increased $34 million sequentially to $113 million due to high expenditures on new facilities, primarily within Rig Technology and Petroleum Services & Supplies. We expect CapEx for the full year 2011 to be a little over $400 million, as we pursue a number of expansion opportunities.

During the quarter, we spent $208 million on 2 acquisitions and acquired 2 more businesses within the past few weeks, bringing our total to 6 so far in 2011. This does not yet include the announced acquisition of Ameron, which we hope to close in the fourth quarter, which will push our acquisitions to over $1 billion in 2011. We filed for regulatory approval last week and are enthusiastic about the new products Ameron will bring our fiberglass and composite fluid corrosion control solutions and FPSO offerings within our PS&S group and new infrastructure and industrial products to our Distribution Services group. We look forward to welcoming Ameron's very talented team to our organization soon. Finally, to wrap up our balance sheet discussion, NOV's cash balance was $3.4 billion at June 30, 2011.

Now let me turn it back to Pete.

Merrill Miller

Thanks, Clay. I just want to make a couple of more brief comments. And as I was thinking about things that I wanted to say today, really a lot of it's just an instant replay from what we talked about the last couple of quarters.

Needless to say, the big theme in the United States continues to be the shales. And even though the gas -- natural gas's lower price today, the rigs that are coming off the gas wells are moving to the oil wells, so we're seeing a very nice consistency in the rig count right now. So I feel very, very good about what we're doing in the shales. And obviously, all the products that we have out there lend themselves quite well to shales, whether you're talking our downhole tools, our bits, our rigs, our drill pipe and everything that we have in there. So I'm very encouraged that this is going to kind of continue on.

The other thing we've talked a lot about is the rig bifurcation. No question that the best rigs are getting the work, and there's also no question you're going to continue to see rigs being built. You saw the bump in land rigs that came out this quarter for us. We're very pleased with that. And you continue to see the very high activity in both the jack-ups and the high-end drillships, and we think this is going to continue for a period of time. There a lot of options that are still out there. And we feel very good about our position in the market, and we like what's going on.

The reason we feel very good about it -- here's what I think the real theme is that's important for us over the next couple of years and that's technology. When you start to take a look at the technology that we're putting out there, the interesting thing, too, is you really have to compress the timeframe with which you're introducing this new technology. I'll give you an example. We needed to have a much bigger, a stronger top drive, and we were able to develop our TDX-1250 in less than a year. And this allowed us to have redundancy, much higher torque, did a lot of different things to it. Today, we have sold and have on order, delivered already 12 and have another 34 on order and continue to sell these. We compressed that into less than a year.

That's really what our goal is when you talk about technology. We're doing a lot of things today about remote monitoring, our eHawk system, our BlackBox. Probably the biggest push we have going on is in control systems. We're the logical producer of control systems. We have everything on the surface. We have everything downhole. So we're the people that we think are going to really be able to come to market with the Primo control system that's very important for everybody.

We're doing a lot in APL today. Clay mentioned the -- what we're doing there with the integration of that acquisition, and we're very excited about some of the things that we could do now with LNG vessels that are coming into the marketplace. When we take a look at some of our PS&S businesses, we're looking at some modular frac-ing systems. We're coming out with some new frac pumps in our Mission group. We're doing an awful lot in downhole with new bits. We have new downhole motor designs. We have a vertical drilling tool that we think is going to be very well received in the marketplace. So a lot of neat things going on in technology, and we really think that's going to be a driver as we look to the future.

Finally, I believe our investments are paying off. As we take a look at what we did the last few years, Clay mentioned it earlier, we put an awful lot into infrastructure growth. We put a lot of things into places like reline facilities for downhole motors. We basically doubled our capacity and the capability of doing that. We look at our new Fiberglass Pipe plants. We look at the things that we're doing in other areas, in pipe coating and the like, and we think these investments that we're able to make because of our strong balance sheet in '09 and '10 are really going to be paying off as we look to the future.

Our M&A, Clay mentioned the operations and the companies that we've closed on this quarter, we feel very, very good about it. And we think there's still a lot of good opportunities out there. And with the balance sheet that we have, we're going to have the opportunity to do things that other companies cannot do.

So all in all, we like where we are right now. We think it was a very good quarter. For those employees at NOV that are listening in, I'd like to thank you very much for everything that you've done and the hard work. And we'll continue on with this, and we like what we're seeing for the remainder of this year and as we go into 2012.

So at this point, Dawn, I'd like to open it up for any questions that our listeners might have.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Crandell from Dahlman Rose.

James Crandell - Dahlman Rose & Company, LLC

Clay, could you go into a little bit more detail on the revenue and margin forward outlook at the capital equipment business? I think I understood what you said about the riser business. But from here, is the outlook for the next, let's just say, 2 to 4 quarters or 2 to 3 quarters, one of slight margin erosion? And on the revenue side, I guess it was my understanding that in the early stages of booking revenue that you book mainly the engineering revenue and that, that comes on very slowly, while you're running off backlog and -- on equipment deliveries. So I was expecting that to sort of unfold fairly slowly for the next 2 to 3 quarters.

Clay Williams

Yes. On the revenue picture, Jim, the second quarter benefited from more quicker-turn items and higher completed projects -- or completed contract items. They help drive that. So a lot of smaller well servicing equipment and the like. The margin surprise that I referenced on my comments at the beginning really came out of this reshuffling of our drilling riser production infrastructure, when we moved that -- much of that over into the Eastern Hemisphere to this very large facility that we acquired a couple of years ago in Korea. And the way it works is this -- that impacted mostly our percentage-of-completion projects, in a way that the accounting of that works is that we will continually book towards our expected total cost of the project. And a lot of these big offshore rigs that we're working on have riser as part of their cost -- part of the products that we're delivering. So as we discover the magnitude of cost savings, which was much larger than we expected, what we had to do this quarter then is reconcile towards a little lower margin across those project. So what that does in the quarter is have a -- create a lift in margins in Rig Technology that you saw, which was a bit of a surprise. And then secondly, in future periods, we do expect margin to be better, margins in Rig Technology, from kind of where we were previously. It's -- we're still going to trace a path that drops us I think down into the lower 20% range, but not quite as deep a downturn, looking at last quarter, based upon these efficiency gains. And so that's our expectations for the next couple of quarters. And then in 2012, further out, as these new projects flow in, I think that'll improve the margin picture, and we'll start to see margins go back the other way.

James Crandell - Dahlman Rose & Company, LLC

And Clay, what did you say about the ramp in revenue from here? Would you expect the -- a more modest ramp or -- over the next 2 to 3 quarters?

Clay Williams

The next couple of quarters, I think we're expecting a total of $2.8 billion in revenue out of backlog, which is in line. We have the possibility, Jim, of adding some additional revenue with new orders coming in, in the second half of the year. They might push Q4 up a little bit more. But as -- we're getting deeper into 2011, the opportunity to material push -- materially push up our revenue guidance on -- for revenue out of backlog become more and more limited. So most of the orders that we're taking in now are going to impact 2012, 2013 revenues much more significantly.

James Crandell - Dahlman Rose & Company, LLC

Okay. And my second question, Pete, and this one is for you. How do you feel about additional deepwater new builds besides what's already has letters of intent and what's already in your backlog? And I was wondering if you could address 3 separate categories: one, your traditional customers; two, Norwegian customers; and three, Brazil, and particularly in light of maybe Samsung and Hyundai sort of filling up for the next year?

Merrill Miller

Yes. Jim, I think that really almost all levels that you just mentioned are really -- fairly positive right now. I think the -- you got the traditional western contractors, which have kind of led this most recent order intake surge. And I think those guys, they get off -- a lot of them are continuing to talk about as soon as they get a contract for one, they're got to put another one in the queue. So I think you're going to continue to see that happen. You're seeing a reemergence of some of the Norwegian players. I think that's going to continue to be a very positive deal. And then of course, you mentioned Brazil, and I think Brazil, while it's been a long and arduous journey, that is one that I think will probably come to fruition here pretty soon. The reality is when people think about it, they look at the number of those deepwater rigs that are being built and they see this historically big number. But the reality is when you look at the world that's covered by 60% deep water, it's really kind of, no pun intended, just a drop in the ocean, and you really are going to need a lot more of these rigs. So we feel very good about it. Now let me also talk about -- when you talk about Hyundai and Samsung and capacity, remember, when we were building these back in '06, '07, '08, they had a lot more tankers in those shipyards. So they still have the same key side, but now they have a lot fewer tankers. So I think the capability of them taking on more is probably a little bit more than people realize at this point. So to be -- all in all, kind of a long-winded way to say we're still very bullish on the opportunities out there on new builds.

James Crandell - Dahlman Rose & Company, LLC

Okay. One more quick question, if I could, Pete. Do you see a broadening out of the ordering of new land rigs in the U.S. from the traditional Helmerich & Payne, Nabors, Patterson, Precision to other companies in terms of spec newbuilds or just newbuilds from other customers?

Merrill Miller

Yes, a little bit, Jim. I think that you're starting to see some new entrants into it, and I think that's being driven probably by operators going out there and saying, "Hey, we'd like to get some more people out here doing this, so we'll put these rigs on contracts." So we are -- we're seeing a little bit of that. I don't think it's huge at this point, but it is something that we're experiencing.

Operator

Our next question comes from Robin Shoemaker from Citi.

Robin Shoemaker - Citigroup Inc

On -- Clay, in terms of the nearly $3 billion of new orders, could you give us any color on number of drillships and jack-ups that are in that mix?

Clay Williams

Yes, we booked 8 drillship packages and 6 jack-ups in the quarter, and we also had a pretty good size production platform rig in there as well.

Robin Shoemaker - Citigroup Inc

Okay. Let's see, so it was a pretty big step-up -- I guess it was 6 drillships in the first quarter and then 8, but that's still leaves -- I mean, do you -- your current count of ships that have been ordered, if we go back to that October of 2010 start date, total?

Clay Williams

Yes. We booked in addition on the fourth quarter last year, I think, 2 drillship packages. So that gets us to 16 drillship packages that we booked since that start date, Robin. So given that there were -- the number of ships ordered is in the high 20s and then there's lots of options beyond that, I think there's still quite a bit of work out there. Also, too, I'll reiterate, the second quarter's orders did not include any orders for any of the drillships for Brazil. And so that's still out there in the mix, and we're working hard hopefully to land some of those.

Robin Shoemaker - Citigroup Inc

Right. That actually that was my second question was on Brazil, where they've clearly designated a shipyard. They've got the financing in place for the first 7 rigs. And I think you're expecting possibly third quarter award for those rig packages.

Clay Williams

Well, I learned a long time ago not to get too specific on the timing of signing contracts in Brazil. It's been an arduous lengthy process, but there had been a lot of good developments. Petrobras did set up Sete, the entity to own and finance these rigs. Sete has been executed a contract with EAS on the next 7 drillships. And I think a day or 2 ago, the revised 5-year CapEx plan for Petrobras was approved, and so I think it's -- it looks like things are moving ahead there.

Robin Shoemaker - Citigroup Inc

Okay. Now that you gave us the figures on drillships, jack -- it looks to me like you --- what you must've gotten is really like the full amount that you would potentially get from the drillships and jack-ups and -- to add up to that nearly $3 billion. So is that correct that you kind of got the full?

Clay Williams

Yes, I'd say the level of participation on both was very high and very good. And just as a reminder, the -- we sell everything we can into sophisticated drillship. We can exceed $200 million in orders. In the prior cycle, we were up over $250 million. And then jack-ups, $50 million is kind of a good harsh-environment, highly capable jack rig -- jack-up rig. But actually what we're seeing here lately is some very, very big jack-up rigs, where we've exceeded the $50 million package in a couple of instances. So overall, I think -- again, the marketplace is seeing the value that NOV adds to these new rig construction projects, and I think our participation, thus far, has been very, very strong, and we believe that's going to continue.

Operator

Our next question comes from Kurt Hallead from RBC Capital.

Kurt Hallead - RBC Capital Markets, LLC

I just wanted to follow up first on the commentary about the guide points on PSS [PS&S] as you go into the quarter, some of this may be around semantics. But when you talk about an increase in -- going out into the third quarter, we've had a few of the other players in the business so far suggest that the revenue growth vis-à-vis rig count in the North American market or U.S. market could be 2 times that of rig count. I know you did -- your businesses are not quite as service intensive, so there may be some differential. But if we think about rig count growth being up double digits on a sequential basis, you would have to think that PSS would at least match that. But is there any other things that we need to consider to think that revenues could grow faster than rig count?

Clay Williams

Well, the good part about our business, we do participate in sort of higher-growth areas, things like coiled tubing technologies and some pretty high-performance drilling motor bits. And so I think we have a good mix of businesses within PS&S to participate in whatever rig count movement we have -- have happened. Some of the specific things, Kurt, that I referred to in my comments had to do with seasonal issues in Canada and much more magnified breakup I think this year, given the strong levels of activity in Q1 and then that fell off pretty sharply. We lost 400 rigs this year in Canada. And last year, I think the rig count only went down about 300 rigs. And so it's a much bigger impact this year and exacerbated by flooding in the Bakken region, affected both Saskatchewan and North Dakota. So going into Q3, we expect all that to turn around, and that was really kind of the basis for our guidance for PS&S.

Kurt Hallead - RBC Capital Markets, LLC

Okay. So I guess just going back to it, so the view for NOV would be you're not quite at the same 2x rig count growth as you service companies but you could do better than that -- u could do better than rig count growth.

Clay Williams

Yes. Kurt, we've never been quite that specific on quantifying our forward-looking guidance. I'll say that the things that are positively influencing our outlook for Q3 are a rising level of activity, the turnaround of the seasonal breakup in Canada and the fact that we are getting traction on pricing, which is improving our outlook. Some of the other, like pressure pumpers, other service companies that you may be referring to, may be getting a little more pricing leverage for certain segments, particularly within pressure pumping that have experienced a little more pricing leverage than we've been able to get. Nevertheless, our outlook is -- remains pretty strong.

Kurt Hallead - RBC Capital Markets, LLC

And then just to prior question there. You've referenced kind of what the potential ticket could be for NOV on a deepwater drillship, for example, and a high-end jack-up. You mentioned that the peak for a drillship was somewhere around $250 million. Now I guess it's still under that. And then I guess land rigs are still what -- $15 million to $20 million for the U.S, and if you go internationally, it could be maybe $40 million to $50 million depending on the requirements on the land rigs.

Clay Williams

Yes, that's pretty accurate.

Operator

Our next question comes from David Anderson from JPMorgan.

John Anderson - JP Morgan Chase & Co

A question on drill pipe for the newbuilds. Looks like you got about 21 floaters, 10 jack-ups coming in the second half of the year, and there are 14 floaters and 15 jack-ups in '12. How many of those have ordered drill pipe? And kind of what are some of the trends you're seeing in the timing of orders? Clay, I think you and I talked about that some of these guys are -- because they don't have contracts, they're pushing out further and further towards delivery dates. Can you talk about that? And as that comes through, I would expect those margins to be incremental to PS&S? Am I kind of in the ballpark in my thinking here?

Clay Williams

Yes, we're keeping an eye on that world very, very closely and know that there are a lot of premium landing strings and drill pipe strings to be ordered by that fleet of new rigs that'll be delivered here over the next few years. That's something our sales group within Drill Pipe pays very close attention to. And what we're witnessing is some hesitancy. Not -- hesitancy is quite not the right word, but I think you're seeking the oil and gas companies and joint contractors are seeking a little more clarity on the specific programs those rigs are going to go out and drill. The blossoming of all these different size, weights and grades and technologies within Drill Pipe means that you probably need to be a little more thoughtful about the selection of the type of drill pipe. And so what we think may be gating some of these orders is our joint contractors and our E&P customers waiting to get a little closer to the spudding of the wells and, thereby, seeking to optimize the selection of the pipe that's going to go on to these rigs. Nevertheless, you look at the rig fleet that's coming on line, they're going to have to order -- those rigs don't work without drill pipe. And so we foresee a lot of drill pipe to be ordered and that will be favorable to the mix. That's some of the best margin pipe we sell.

John Anderson - JP Morgan Chase & Co

That's what I thought. I mean, could this potentially be a kind of a 4Q upside surprise event? Or is this more like first half '12?

Merrill Miller

I'd go '12.

John Anderson - JP Morgan Chase & Co

'12?

Merrill Miller

Yes.

John Anderson - JP Morgan Chase & Co

On a different subject. Sounds like you guys are kind of calming people down a little about -- a little bit about the FPSO market, in terms of how this all kind of playing out. But you mentioned about APL integration. Can you just kind of tell us where you stand? Now I know you're talking about shifting some of the manufacturing, the cost control, the overall strategy. I assume this is still going to be a transition year for APL and then next year, we should start seeing the orders. So could you comment on that? And also, you had mentioned kind of an offering from NOV in terms of the FPSO package. Is the Turret -- is there other things around the Turret that we're not familiar with? Or is the Turret separate from, say, kind of your more traditional packages you'd have on, like -- I guess you have cranes and the other metal-bending things?

Merrill Miller

I -- let me take the last part of that question first, and that really is the NOV offerings on that. What we've got -- the Turret is something totally absolutely new to us, and that came with the APL acquisition. And APL is really a creative organization that's able to do things. And in particular, you've got the submersible Turret, which allows you to kind of drop the Turret and you kind of sail the FPSO out of harm's way if you're in harsh environments or in the Gulf of Mexico, things like that, when a hurricane comes in. But we also recently purchased company called Merpro, and Merpro does a lot of things that are additive to what we do there. And then plus with our Norwegian operations and a lot of our craneage and our chain handling and anchor handling and things like that, we offer a pretty wide array of things. It's our intent to continue to do that. But also as I kind of mentioned earlier on my comments about technology, we're also looking at LNG vessels, and APL has offerings for those as well. So we're very excited about where this is going and I think that as we look at the technology that we have out there, we're positioning ourselves very, very well as the independent supplier of that to a lot of the FPSO owners. And I'll let Clay kind of touch on the integration process.

Clay Williams

Yes, this is -- and to reiterate, this is a very long-term strategy. We bought APL not for what we're going to do in FPSO orders this year but rather for where we see this industry going over the next 10 years. And it's really underpinned by a very high number of deepwater offshore discoveries and the need of the oil and gas community to plumb those discoveries in, and we think FPSOs offer a pretty elegant way to move into more remote locations and produce those fields. We'll tell you that when it comes to sanctioning the development of discoveries and moving forward on spending big CapEx dollars and buying an FPSO, it also carries along with it a commitment to engage in much bigger drilling programs, buy a lot more other equipment and hardware and services to develop these fields. So we think that's kind of gating the FPSO orders here in the short run. But given the strong outlook for crude prices, the number of discoveries that are out there, we're absolutely confident these projects are going to go forward. And as Pete mentioned, it's probably much more of a 2012 event.

Operator

Our next call -- question comes from Bill Herbert from Simmons & Company.

William Herbert - Simmons & Company International

Clay, with regard to the margin roadmap for Rig Tech, just a couple of questions and trying to correlate that with your view on margins. You did mention that you had recently implemented a 68% pricing increase for Rig Tech.

Clay Williams

Yes, that is correct.

William Herbert - Simmons & Company International

Yes. And when does that begin to head to P&L? Is that sometime late this year, or is it next year or when?

Clay Williams

I think it's more of a 2012 event. And actually -- though that has a lot to do with our guidance for 2012 margins kind of starting to go the other way.

William Herbert - Simmons & Company International

Got it. And so -- and then also the comment that we made with regard to shipyards, delivery times compressing about 10 months cycle-on-cycle for a high-end drillship, correct?

Clay Williams

Yes, that's correct.

Merrill Miller

Yes, that sounds good.

William Herbert - Simmons & Company International

Yes. So basically, your revenue conversion out of backlog cycle-on-cycle should accelerate, correct?

Merrill Miller

Absolutely, yes. What you're looking at, Bill, is much -- an accelerated delivery, which obviously leads right into coming out of backlog quicker.

William Herbert - Simmons & Company International

Okay. So your Mission's going to be improving, price is going to be up and your absorption's probably going to be better. When does that inflection really begin to take place? Is it at the end of this year, or do we begin to see that happening second half of this year?

Clay Williams

Well, Bill, we've -- it's out there. We said a couple of quarters away. I don't want to call that precisely into this year versus 2012, but we'll say, let's say, couple of quarters away.

Operator

Mr. Miller, I'm turning the call back to you.

Merrill Miller

Okay. Thank you, Dawn, and thanks, everybody, for calling in. And we look forward to talking to you on our next conference call when we discuss third quarter results. Thank you very much.

Operator

Thank you, ladies and gentlemen. This concludes the National Oilwell Varco 2011 Second Quarter Earnings. Thank you for participating. You may now disconnect.

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