National-Oilwell Varco's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: National Oilwell (NOV)

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

Q4 2012 Earnings Call

February 1, 2013 9:00 am ET


Loren Singletary - Vice President of Investor and Industry Relations

Merrill Miller - Chairman of the Board, President, Chief Executive Officer

Clay Williams - President, Chief Operating Officer

Jeremy Thigpen - Chief Financial Officer, Senior Vice President


Brain Uhlmer - Global Hunter Securities

Jim Crandell - Dahlman Rose

Will Herbert - Simmons & Company

Ed Muztafago - Societe Generale

Kurt Hallead - RBC Capital Markets

Marshall Adkins - Raymond James


Welcome to the National Oilwell Varco 2012 fourth and full-year earnings. My name is Dawn, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that the conference is being recorded.

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

Loren Singletary

Thanks Dawn, and welcome everyone to the National-Oilwell Varco fourth quarter and full-year 2012 earnings conference call. With me today is Pete Miller, Chairman and CEO of National Oilwell Varco, Clay Williams, President and Chief Operating Officer and Jeremy Thigpen, Senior Vice President and Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and fiscal year ended December 31, 2012, 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 maybe found within our press release on our website at 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

Thanks Loren, and welcome everyone to our year-end 2012 earnings conference call. Earlier today we announced fourth quarter earnings of $1.56 per share on revenues of $5.7 billion. After excluding $51 million in transaction charges and $69 million tax benefit, earnings were $1.49 per share. For the year, we are in $5.91 per share excluding transaction charges and the tax benefit on revenues of $20 billion.

Our earnings per share in 2012 increased 24% from 2011. We are very pleased with these record revenues and profits and believe they are the direct result of our outstanding employees, delivering great products with exemplary execution. Jeremy and Clay will expand on these results in a moment.

Additionally, we announced new capital equipment orders for the quarter of $2.42 billion or 1.1:1 book to bill ratio. This equates to a quarter ending backlog of $11.9 billion, a record for us. This exceeds our prior record that we achieved in the third quarter of 2008. We will provide more color on this backlog later in the call.

I would like to thank all the wonderful employees of National-Oilwell Varco for producing these record-breaking results by all measures. Thanks for all you do. Now I will turn the call over to Clay.

Clay Williams

Thank you, Pete. As Pete mentioned, we did generate record earnings of $5.91 per share for 2012, up 24% year-over-year and up 17% from our prior feedback in 2008. A very strong result. We also generated record EBITDA of $4.3 billion in the year and record operating profit of $3.7 billion in the year, and as Pete mentioned, we finished the year with a rig technology backlog of a record level of $11.9 billion after having added $9.4 billion in orders through the year. NOV's results are accredited to the hard work and dedication over 60,000 terrific employees and I am grateful for the work that they do and congratulate them on a terrific year.

As we enter 2013, we see cross currents in the markets we serve. Demand for offshore floating rigs and equipment is strong and constructive, but markets for land equipment and services across North America remain hesitant. Underpinned by new build floating rig demand, Rig Technology's book-to-bill order ratio remained above one every quarter this year, successfully surpassing rising revenue out of backlog their total record $7.7 billion for the year.

Offshore drilling contractor steadily committed capital through 2012 to expand our deepwater fleets and we believe that this will continue through 2013. Our outlook for continued strong deepwater orders is a view that appears to be out of step with Wall Street's conventional wisdom, which seems likely to have convinced itself that deepwater rig ordering will slow. Candidly, we do not understand why. Why one unlevered after-tax returns are in the high teens for new rig construction projects. Why one delivery times are shrunk by year or more, bring the first dollar project revenue closure and enhancing IRRs. Why when recent payment terms offered by shipyards, particular Chinese yards entering the fray are extraordinarily attractive like 10%, down 90% upon delivery. Why when risk of cost overruns and late deliveries for established suppliers like NOV had diminished to near zero. Why when oilfield entrepreneurs are now pursuing new build rig opportunities. Why when Brazil has been steadily demonstrating its commitment to order and build rigs in country. Why when 2012 saw a record number of deepwater field discoveries announced and successful application of sub [sold] expiration techniques to West Africa. Why when utilization and day rates for scarce deepwater rig assets remain high, and with me IOCs and NOCs gradually migrating to development drilling falling very successful exploration efforts over the past decade.

A world's view that foresees deepwater orders going down against this backdrop apparently employ some calculus that I just don't get. We believe $100 plus brent and 50% success rates are sufficient to lower the industry into deepwater to discover and capture billions of dollars of petroleum well. We also believe this will take lot of deepwater rigs.

Nevertheless, our above consensus deepwater rig order view does not mean our Rig Technology segment is without challenges. Specifically, despite strong demand, new drilling equipment package pricing has been stubbornly stuck 8% to 10% below the levels of 2007-2008, as new competitors had joined the mix and as contractors proceed with less urgency than before.

Faster hull construction times out of half full Asian shipyards as tightened delivery schedules around NOV components diminishing manufacturing efficiency somewhat as deliveries of major components like drawworks, mud pumps and pipe handling equipment jumped 50% from 2011 levels. Additionally, we are incurring startup costs associated with strategic expansion.

Outside of deepwater, we also see softer demand. Jack-up orders have slowed and most recent interest arises from lower tier contractors. Our competition seem determined to offset NOV's considerable technical and operational advantages with price, sometimes partnering with Chinese shipyards to offer rigs at 10% to 20% discounts to establish yards.

On the land front, demand for rigs and pressure pumping equipment in North America is very weak as major drilling contractors and pressure pumpers has signaled substantial year-over-year reductions in CapEx. Demand will ultimately return high pressure around the clock frac jobs are very tough on pressure pumping equipment and E&P operators continue to push drillers to retool the rig fleets, but we expect 2013 to continue to be slows as we face significant price pressure.

International land markets are far more promising. Numerous tenders are at work for IPM projects throughout Latin America, the Middle East and the Far East, which will require new modern rigs and frac spreads. Interestingly, we see many international land markets finally burning through the rig overhang from the 1970s, and beginning to retool much like their North American counterparts did several years ago with horizontal well capable high-technology drilling assets.

Orders for FPSOs and other subsea development projects totaled over $150 million in the fourth quarter, heavily weighted towards flexible pipe, but as orders for turret mooring systems for FPSOs have remained a little sluggish. However, lately we have seen significant increases in bidding activity for turret mooring systems, which are complementary to the flexible pipe we sell. In fact, we have a couple of signed contracts waiting only for down payments. In the meantime, we are conducting an extraordinarily high number of feed studies on potential subsea FPSO developments while we migrate our business from a project organization to a product organization.

Turning to our petroleum services and supplies group. A strong start to 2012 gave way to sliding North American market conditions over the summer that have persisted through today. Slowing orders for petroleum services and supplies consumables have led to pricing pressure across several product lines that have resulted in lower sequential margins and the general reluctance by drilling and pressure pumping contractors to spend either CapEx or OpEx. Differentiated products and technologies like certain specialized downhole drilling tools have fared better in land markets while offshore markets have generally done well helped by, for example the U.S. Gulf of Mexico recovery.

Several product lines within PS&S enjoyed strong year in shipments but have seen slowing orders through the back half of 2012 and we are therefore braced for a more challenging 2013. For example, in our drill pipe business, we benefited from strong year-end shipments and orders for newbuild rigs while send simultaneously watching demand for high volume shale strings for North America slowed sharply.

Although we have heard others cite Canadian seasonal upturns in Q1, or E&P budget replenishment entering the New Year or potential uplifts in North American gas prices, and various other causes for hope in 2013, that rig activity will rebound, we don’t yet see a rebound happening and we certainly don’t see it soon and we are taking measures to reduce cost and improve efficiencies in the meantime.

As our segment is most heavily weighted to North America, our distribution and transmission group faces a similarly challenging year but our recent acquisitions of Wilson, CE Franklin and Ensco permit us more latitude to aggressively tackle costs and improve margins. The group is performing very well and it sees many of the same market trends as the other two, namely strong international prospects and soft North American demand in traditional upstream areas. Wilson brought more midstream and downstream exposure, strengthened these as partly offsetting sluggish drilling and production demand.

Although we face a difficult market in North America in the short run we remain absolutely committed to enhancing National Oilwell Varco for the long run. We have expanded our aftermarket footprint, our manufacturing capabilities for numerous products and our new plant and machinery. Likewise, we continue to invest in new technologies and products. As market leader, we recognize our commitment to the industry to continually push the bar higher to strive to grow and improve.

2012 was an extraordinarily busy year for acquisitions. We spent $2.9 billion on 17 transactions and we expect to close our previously announced acquisition of Robbins & Myers in just a few weeks. As a group these acquisitions bring us opportunities to affect efficiency gains in our operations, to add new geographic coverage, to complete product offerings, all good things for our customers, our employees and our shareholders, as they help build and grow our business for the long haul.

Despite near-term headwinds I could not be more excited about the future that lay before us, NOV is an equal organization made up of wonderful, dedicated professionals of whom I could not be more proud. Jeremy?

Jeremy Thigpen

Thanks, Clay. As Clay and Pete just mentioned, this was a record-breaking quarter and year. For the quarter National Oilwell Varco earned $668 million, or $1.56 per fully diluted share on $5.7 billion in revenue. Excluding the impact from $51 million in pretax transaction charges and a net $69 million tax benefit related to certain foreign tax credits, we earned net income of $638 million or $1.49 per fully diluted share.

Operating profit for the quarter was $903 million, up $14 million from the third quarter and up $55 million from the fourth quarter of last year on a GAAP basis. Excluding transaction charges from all periods, Q4 operating profit was $954 million, up 1% from the third quarter and up 11% from the fourth quarter of last year.

Operating margins on this basis were 16.8% in the fourth quarter of 2012 compared to 17.8% in the third quarter and 20.2% in the fourth quarter of last year. Sequential operating flow-through or leverage was 2% on a 7% increase in sales which is lower than we typically see for three reasons.

The first and probably most important was product mix in our rig tech business. The second factor was, we referenced in Q3 conference call and Clay reinforced in his opening comments, was the degradation of pricing in a number of our PS&S businesses in the U.S. The final factor was the incremental expense associated with various growth initiatives that are underway throughout the organization, including the cost associated with integrating numerous acquisitions. I will provide more color on each of these areas as I recap the quarter and the year for each the segment.

Despite this lower than typical flow-through, Q4 marked a record finish to a record year for NOV. 2012 for National Oilwell Varco generate record net income of $2.5 billion on record revenues of $20 billion, which excluding transaction charges from both years, represented a 37% increase in year-over-year revenue at 13% operating leverage.

Turning to operations NOV's rig technology segment generated record revenues of $2,896 million in the fourth quarter, up 14% sequentially and up 25% compared to the fourth quarter of 2011.

Operating profit, which was also a record with $648 million, yielding operating margins for the group of 22.4%, a decline of 150 basis points from the third quarter and 360 basis points from the fourth quarter of 2011.

Incremental operating leverage was 11% of the sequential sales improvement of $349 million and incremental leverage was 8% from the fourth quarter 2011 on the $580 million revenue improvement. As previously referenced, the sequential flow through was less than we typically expect due to product mix and incremental expense to support several strategic growth initiatives.

In the fourth quarter, we posted strong revenue growth in coiled tubing units, wireline units and land rigs. Unfortunately, the growth in all three product lines was primarily driven by large end of year international projects that we secured at below average margin. Additionally, Q4 brought a double-digit percentage increase in our FPSO related revenues, which as we communicated on previous calls, is currently diluted to overall rig technology margins.

In addition to the unfavorable shipping mix, we also incurred considerable startup costs associated with the NOV Flexibles plant in Brazil and the opening of a new technical college in Korea. These long-term investments will detrimental the current operating margins are expected to benefit future operating results for many years to come. Finally since in 2013, we are scheduled to deliver twice as many offshore projects to the market than we delivered in 2012, we heightened our efforts to hire and train the additional installation and commissioning personnel required to manage this incremental workload. The combination of these factors negatively impacted our flow through however this segment still posted exceptional results.

Revenue out of backlog increased 16%, sequentially to $2,211 million. This march yet another record for our Rig Tech business and validate all those investment that we have made facility, training and continuous process improvement.

Our fourth quarter orders for Rig Technology were $2,417 million, and included three semis and for drillships, and before you ask, of those new seven floaters, we secured the BOP stacks and riser on six of those vessels. We also sold three spare BOP stacks in the quarter as offshore drillers continue to recognize the benefit in both, safety and operational efficiency of owning and maintaining a back-up stack.

On land, we continue to see demand for new rigs in the international arena. However, demand in North American land market was limited to individual pieces of equipment such as iron roughnecks and top drives as some of our larger contractors are ordering to enhance the performance and value of their existing rigs.

For the year, orders totaled the most $9,350 million giving us a year-end backlog of $11,862 million, which is up 2% from September 30th. Of that total, we expect about $7.4 billion to flow out as revenue during 2013, and the remaining $4.5 billion flow out in 2014 and beyond. As a final note on the backlog, at the end of the quarter the composition of our backlog was 91% offshore with 94% of that being destined for international markets.

As we look at potential order flow for 2013, we are hoping for a recovery in North America that will drive demand for new land rigs, coil tubing units, pressure pumping units and other frac-related equipment. However, as Clay said, we are yet to see it, therefore demand for us such new equipment will likely be limited to the international markets with only selected upgrade opportunities in North America, till we believe demand for pressure pumping equipment will ultimately return, land drillers will continue with their programs to retool and upgrade their fleet and the industry will continue to upgrade an aging jack-up fleet while simultaneously building out its worldwide deepwater and shale infrastructure.

Non-backlog revenue for the group improved 8%, sequentially to $685 million, driven by across the board increases in spare parts, service and repair. For the year, non-backlog revenue increased 17% to almost $2,455 million. And as we move into next year, we expect that our aftermarket revenues will continue to improve for three reasons. An ever-growing installed base, some of which is due for mandatory five-year surveys, a heightened focus around drilling safety and product lifecycle analysis and capacity additions such as the acquisition that we made in Q4 about Algoa to provide improved aftermarket support our customers in sub-Saharan Africa.

For the full year, Rig Tech generating $10,107 million in revenues and $2,380 million in operating profit, or 23.5% compared to $7,788 million in revenues and $2,070 million in operating profit at 26.6% in 2011.

While year-over-year operating margins were down due to product mix and the investments associated with various growth initiatives, the segment continued to produce exceptional results posting returns on capital of greater than 25%, and with a record backlog, strong and growing aftermarket sales, and a positive outlook for future offshore orders, we believe that Rig Technology is well-positioned for the future.

As we look into the first quarter of 2013, we expect Rig Technology revenues to be down in the 10% range following flush year-end shipment and virtually nonexistent demand for pressure pumping equipment, and we expect that margins could pick up slightly from Q4 '12. However pricing pressures in North America coupled with a continuing shift in product mix that includes a growing percentage of Brazil and FPSO related revenue were main challenges.

The petroleum services and supplies segment generated total sales of $1,770 million in the fourth quarter of 2012, up 3% from the third quarter and up 13% year-over-year. Operating profit was $355 million or 20.1% of sales. As expected margins fell from the 22.3% level that the segment recognized in the third quarter as pricing pressures across a number product in the North American land market coupled with a shift in product mix led to lower margins. Most notably the continued reduction of North American land activities with the pricing pressures and an overall reduction in volume for our downhole tools, our fiberglass pipe, our coil tubing and our fluid and expendables business.

While revenue declines in these products were offset by sequential growth our drill pipe XL systems and Tuboscope businesses, overall margins still declined. For the full year 2012, PS&S generated a record $6,967 million in revenue, up 23% from 2011. The segment generated $1,519 million in operating profit, representing 32% leverage on the year-over-year sales growth. Operating margins of 21.8% for the year were up 19.4% in 2011.

Looking into the first quarter of 2013, we expect PS&S segment sales to decline in the low to mid single-digit percentage range as several of our businesses have entered the year with diminished backlog and U.S. based drilling contractors and well service firms have been hesitant release new orders. Due to the expected reduction in volumes and the continued pressures on pricing, we believe that operating margins could tick down into the high teens in Q1.

Turning to distribution and transmission. For the quarter, the group generated $1,268 million in sales and $78 million in operating profit or 6.2% of sales. Compared to the third quarter, sales declined 4% with both the legacy distributions business and the transmission business contributing equally to the $47 million decline. For distribution, gains associated with the start of the winter drilling season in Canada were not enough to compensate for the significant declines in the U.S. and in the transmission business the Mono artificial lift and industrial pump business remained fairly strong. However, the decline in tubular demand in the U.S. coupled with a shift down of our wind towers business in Q4 lead to a sequential decline.

Despite the overall 4% reduction in D&T revenue, operating profit for this segment was essentially flat with Q3 as the group continued to recognize cost savings across several acquisitions. These fourth quarter results cap another strong year for this segment overall with a record $3,927 million in sales and a record $253 million in operating profit and 6.4% operating margins. Year-over-year, revenues were up 110% due primarily to the major acquisitions of Wilson and CE Franklin and flow-through was 6% for the year.

For the first quarter of 2013, we expect distribution and transmission revenues to be up in the low single-digit percentage range at slightly lower margins. So, overall, as you think about Q1 and the full year for 2013, we entered the year with a record backlog in rig tech with an estimated $7.4 billion expected to flow out over 2013. The outlook for new offshore rigs, floaters and even jackups is encouraging, as is the demand for FPSOs. However, we are facing some near-term headwinds in the North American land market that will significantly limit opportunities for land rigs as well as pressure pumping, coiled tubing and other frac related equipment.

Rig tech margins, while still best in class, will continue to be challenged by compressed delivery times of the shipyards, a shifting mix that includes a higher percentage of Brazil and FPSO related revenues and pricing pressures in North American land. Our PS&S businesses are excited about growth opportunities in international markets but we entered the year with depleted backlogs, declining demand in North America, which represented 63% of the segment's revenue in the first half of 2012 and pricing pressures across a number of products. Our D&T business will certainly benefit from a full year of Wilson and CE Franklin and the consolidation benefits that will continue to be realized throughout 2013, but it is important to remember that 84% of this segment's revenues are derived from the U.S. and Canada.

In short, we are excited about our backlog, the prospect for new orders, growth in international markets and the considerable benefits already recognized by the integration of Wilson and CE Franklin but we need activity in North America to pickup in order to meaningfully expand margins.

On the income statement, National Oilwell Varco's consolidated fourth quarter income statement saw SG&A decrease $9 million sequentially, as an increase in our incentive compensation accrual coupled with the addition of four new acquisitions in the quarter were more than offset by the reclassification of a portion of Wilson's SG&A expense to cost of goods sold to be more consistent with in our past practices. SG&A, as a percentage of sales, was 8% in the fourth quarter down from 8.7% in the third quarter and 10% from the fourth quarter of last year.

Transaction costs for the quarter were $51 million, driven primarily by integration efforts to consolidate facilities from recently acquired company. Equity income in our Voestalpine JV was $15 million, up considerably from the third quarter as there was a two-week shutdown in Q3 for mill maintenance that resulted in much lower Q3 volumes. We expect profitability from the JV to be down slightly in the first quarter of 2013 as demand for drill pipe in the U.S. continues to vain and therefore demand for green tube continues to vain.

Interest expense essentially doubled from Q3 to Q4 to $21 million as we issued 3 billion of senior notes in November. Other expense increased $14 million from the third quarter, primarily due to unfavorable FX moves. As you undoubtedly noticed, our fourth quarter tax rate was 23.3%, giving us an effective tax rate on the year 29.2%, which is far lower than our historic rate of 32%, 33%.

During the fourth quarter, the company recorded a net $69 million tax benefit resulting from a strategic work reorganization of certain foreign operations to more fully integrate recently acquired business groups. Excluding this impact, the effective tax rate for the quarter would have been 31.3% and the tax rate for the year would have been 31.6%. We expect the effective tax rate for 2013 to be at or near historic levels.

Unallocated expenses and eliminations on our supplemental segment schedule was $127 million in the fourth quarter, up $2 million from the third quarter. Depreciation and amortization was up $9 million from Q3 to $166 million. And for the fourth consecutive quarter, EBITDA excluding other cost, was a record at $1,109 million for the quarter and $4,332 million for the year.

To the balance sheet, National-Oilwell Varco's December 31, 2012 balance sheet employed working capital excluding cash and debt of $6.7 billion, or 29.5% of annualized sales, up $73 million from the third quarter with higher accounts receivable which were tied to revenue growth being substantially offset by reductions in inventory and accrued taxes and liabilities and higher accrued taxes and liabilities.

Total customer financing on projects in the form of prepayments and billings in excess of cost, less cost in excess of billings, was $569 million at December 31, down only $8 million from September 30.

Cash flow from operations was an impressively $800 million for the fourth quarter, CapEx increased $72 million sequentially in the quarter to $201 million, bringing full year capital expenditures to $583 million versus $483 million in 2011. We expect CapEx in 2013 to move up into the $600 million range as we pursue a number of expansion opportunities that we launched last year, including the completion of our new Flexibles [plant] in Brazil.

Cash spent on four acquisitions in the quarter totaled $575 million. For the year, cash spent on 17 acquisitions totaled $2,880 million. And for the year, NOV paid $209 million in dividend to our shareholders leaving us with the cash balance of $3,319 million at December 31, 2012. Of that balance, approximately 40% of the cash resides in the U.S. and will be used help fund the acquisition of Robbins & Myers.

Our total debt at the end of 2012 was $3,149 million, $3 billion of that related to the successful bond offering that I previously referenced. We are very proud that our effective yield on the $3 billion of bond issued was 2.92% with $500 million due in five years, $1.4 billion due in 10 years and $1.1 billion due in 30 years, a truly outstanding job by our treasury department in getting this done. Net of current long-term debt, cash at the end of the year was $170 million.

Now, let me turn it back to Pete.

Merrill Miller

Great. Thanks, Jeremy, and I would like to talk a little bit about some of the things that we've discussed in the past, because they all seem to remain intact right. And basically that's shales, deepwater, the best-in-class technology that we offer and our international presence. I think all of these things continue to dictate the strategy of the company. I think the shales in particular, when you to the oily shales, whether it's up in the Bakken or down in the Eagle Ford, I think they will continue to give us a great presence in especially with [PS and S-pipe] businesses in our distribution business that really can parlay good things in there.

More interestingly, I really do think you are going to see an escalation of shale drilling internationally. It's gone slow, I think a lot of people are of the opinion that maybe it's not going to ramp up as rapidly as you think, but I think that will change. I'd just give you an example. I was in China earlier this week visiting with some shipyards that have just committed on some semi and jack-ups to us, and at the same time the pollution in Beijing was just unbelievable. I mean, people couldn't even go to work. It's so bad.

China, as we all know will move very rapidly in fixing things and the quick fix on pollution like that is pretty simple. That is called natural gas, and the natural gas they have in the shales in China, I think you will start to see a real escalation of things like that in the international arena. The reality is that natural gas is very clean burning and that you are going to see more demand of that around the world and we are prepared to be able to help them there. I think that’s going to really be situation for us.

As I talk about the international arena, we have referenced on this call, things like Russia. We are expanding very dramatically in Russia. We think that’s going to be a great market over the next five or 10 years and we are also building a new facility there that will be able both rigs and our downhole tools. That’s something that I am excited about. I think Russia really needs the technology that we have and this plays into a couple of things. It plays in international shales, and it also plays in to the best in class technology.

In China, I mentioned that earlier. I was there this past week to take a look at things. I think the Chinese shipyards are going to be much more active. I think they are going to really jump into this situation on deepwater and we are situated very, very well with them to be able to take advantage of the products that we service. It is really interesting because when you look at a shipyard, we are producing equipment all over the world and shipping it to China to be able to put it on the semisubmersibles that those guys are doing.

On Brazil, we mentioned that this quarter we did not have on the floaters that we have got. None of them were Brazil. We expect that to occur in the first quarter. We are excited about that. There is some real opportunity down there. I think Brazil will continue to be quite a nice place for us.

In the Middle East right now, it is improving for us on land rigs. We talked about the lack of land rig demand in North America but in other parts of the world it's picking up. I think you will see it pick up. I will come back to Russia and also you will see it pick up in the Middle East and we are situated very well to be able to take advantage of it right there.

Our backlog is off to a good start in the first quarter. We have had a lot of things come in to it already. We are excited about the prospects of what we are going to see when it comes in the more deepwater and more demand for our technologically advanced equipment.

Then finally, I would like to talk a little bit about technology. You know, that really is going to be the differentiation between us and any of the people that we work with. To give you a good example, I look at our 20,000 psi BOP that we are going to be coming out with very quickly. The neat thing though is that not only do we have a 20,000 psi BOP but we also, because of everything else that we manufacture, we are able to size the rig appropriately.

We are able to do things to the derrick. We are able to do things to the piping system. We are able to do things to the top drive to be able to handle the bigger and heavier BOPs that are associated with that. So when you buy from NOV and get our technology, you get the fully integrated products. That’s going to really dictate well into the future of what the business is that we are going to be getting. So we feel very good about where we are. We are going to continue to invest heavily in training. We are going to continue to grow organically. We think while there are some near-term costs, there is going to be some great longer term returns based upon this type of thing and I am really excited about it.

Finally, I would just like to give a shot out to our distribution folks. They have done a phenomenal job this year on being able to integrate both Wilson and CE Franklin. You saw the margins here, about 6% after less than about six months of those companies being together. I am very excited about everything that those folks are doing.

So that’s just some brief comments on what we are trying to do strategically and some things that we are seeing. Dawn, at this point, I would like to turn it over for any questions that our listeners might have.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Brain Uhlmer from Global Hunter. Please go ahead.

Brain Uhlmer - Global Hunter Securities

Hi, good morning, gentlemen. I have a whole list of questions and I will start with and one follow-up to that. First, Jeremy, I think a great job, your first time on this call, keeping up with Pete and Clay and your alacrity in providing those guidance details.

Jeremy Thigpen

Thank you. I appreciate that.

Brain Uhlmer - Global Hunter Securities

I wanted to start off with some thing that’s material here to your comments on the RBN and your confidence in enclosing that acquisition in the next several weeks because the arm spread has definitely widened. I was curious, are there going to be any stipulations to that closing of that deal that will require you to sell any portions of RBN or what gives you that confidence it is going to close in a couple of weeks, as clearly, it looks like the market makes otherwise right now.

Merrill Miller

Well, Brian, we continue to provide answers to questions that the government might have and we continue to push to a close here in about two or three weeks. I think Robbins & Myers has issued a press release giving the date of the closing and we continue to push to that and believe that's what's going to occur.

Brain Uhlmer - Global Hunter Securities

And that there will be no, you are going to be in its entirety, correct?

Merrill Miller

That is where we are right now.

Brain Uhlmer - Global Hunter Securities

Beautiful. Thank you. And as my follow-up completely unrelated, you say that Rig Tech margins might tick up in Q1. I was curious maybe the progression as we go through the year and the statement might, does that have more to do with a mix issue or more to do with closing out the start-ups and getting everything done like you said in Brazil and Korea or there are some cost on that and what makes it unlike to it will and as that progress as we get through 2013?

Jeremy Thigpen

This is Jeremy. I think, the might is really related to all those things that we talked about on the call. There's a significant impact to all of our pressure pumping equipment, the coiled tubing unit, land rig in North America, that's going to weigh heavily on margins and then we do have a lot of startup cost associated with the Flexibles plan in Brazil. Again, the product mix with more FPSO-related revenues flowing in more reservoir-related revenues flowing in, we just think all of those are going to present some challenges for us and how those work through the system throughout the year kind of remains to be seen.

Merrill Miller

Yes. On the positive side, Brian, aftermarket in that space is doing terrific, particularly wrapped around offshore rigs coming in for the five-year surveys, and then we kind of cover these in our opening comments. There's lots of puts and takes here, but as Jeremy mentioned, lots of negatives and we are hopeful though that the offset will be the aftermarket side of that business, which is very accretive to the market.


Thank you. Our next question comes from Jim Crandell from Dahlman Rose. Please go ahead.

Jim Crandell - Dahlman Rose

Pete, I know you like to look at your sort of order picture on a more than one quarter basis, and looking forward let's say 12 months out by the end of '13, do you think there is absolute chance that your of backlog could be higher than it is today and also could you address in a little bit more detail what you are seeing with sort of granularity in the FPSO market that makes you optimistic today.

Merrill Miller

Jim, we are very optimistic that 2013 is going to see a good order, and I think that obviously the way we do backlog as I told you many times we had to cut it off on a day-specific, but I would expect 2013 to really be an excellent year and I would certainly expect over 1 to 1 book-to-bill on it.

I think as we take a look at the FPSO market, we're getting pretty excited about it. It's not similar to, when you look at a lot of the people that are subsea production and they kind of keep moving out to the right and many of the same ways the FPSO business is moving a little bit to the right, but it's still something that is pretty exciting.

We are starting to see as Clay mentioned in his comments earlier, we've done a lot of the feed studies, but we are also starting to kind of see a lot of the stuff development orders. We have received some orders on some products in the first quarter that are not included in the backlog currently, but the fact of the matter is, if you kind of take a look at it, it's almost inescapable.

You look at all these deepwater rigs that we are putting out there and they are drilling and they are not drilling for practice. They are drilling to discover oil and gas and the approved solution when they discover that oil and gas, in most cases there's going to be the FPSOs, and we think with what we have with NKT and what we have with our APL business that we are going to be positioned to be able to take advantage of that. So, we are still pretty bullish on it and we think as you go more into this year, you will see a lot more materialization of orders.

Jim Crandell - Dahlman Rose

Okay. Thank you, Pete, and my follow-up is that, I guess, Clay, you addressed in your comment about the ultra deepwater market. I think one of the things that would maybe limit the ordering from the large U.S. or formerly U.S.-based contract is that the pressure, at least they feel to returning cash to shareholder, either making large dividend payments, MLPs and the like of that sort of slowing down their process. Do you see actually a difference at this point, Pete or Clay and the likelihood of the U.S. companies ordering more ultradeepwater rigs versus some of your European companies like Seadrill, Pacific, Ocean Rig, Odfjell and those kinds of companies?

Clay Williams

That, you know, Jim, it really varies by company. I know that many of them are wrestling with the decision of allocating capital in to new growth prospects versus returning to shareholders and they are all taking that question very, very seriously. I would also add, a lot of them have a lot of projects underway currently that they are very busy with. But I have got to tell you, as a group, the U.S. based, publicly traded companies are in as good a mood as I have ever seen them.

They see a lot of prospect out there in the marketplace, lots of opportunities to grow their businesses. And candidly, I think you go back five, six years ago the market demonstrated this, if they don’t act on those opportunities, somebody will. You have recently seen a lot of entrepreneurs now getting back in this space as well.

So there are big returns to be had out there. Something like 300 deepwater fields that have been announced that haven’t been developed. 2012 was a record year in terms of announcement of discoveries in the deepwater. As Pete said, there is a lot of drilling and FPSO development to come and that takes a lot of deepwater rigs. So I think whether or not it’s the U.S. based organizations or their European counterparts or others around the globe getting into the fray, I think somebody is going to continue to build lot of deepwater rigs.

Jim Crandell - Dahlman Rose

Okay, and Pete, just as clarification, were you saying that based on your trip to China, you think now that will major contract drillers order ultradeepwater drillships from Chinese yards now going forward?

Merrill Miller

I think they are going to be in the mix, Jim. But I think that a lot of them will be some of the Chinese drillers. You are starting to see people like Cosul and some of the bigger Chinese folks try to be major players. I think you will see some of the Norwegian pipe companies that will be looking at the Chinese shipyards. But I think Chinese shipyards are clearly going to be a player. They are getting in the mix and I think they are getting better at what they do.

Jim Crandell - Dahlman Rose

So you think your customer mix in new ultradeepwater rig orders could change a fair amount going forward from what it has been over the last couple years?

Merrill Miller

You know, Jim, it has been a cyclical deal. If you go back to '06 and '07, you have a lot of what we were called speculators and we said at the time, they weren’t speculators but they were people who were really going to develop in to quite good operations and you see people like Seadrill and Ocean Rig and Odfjell and Pacific today. Then we kind of went in to the more traditional folks, the Transoceans, then the Nobles and the Atwoods and the Rowans and then I think you start to have some other people coming back in to the marketplace today. So it is really kind of a shift in customer base but it is one that we are positioned with very well and we like where we are.


Thank you. Our next question comes from Will Herbert from Simmons & Company. Please go ahead.

Will Herbert - Simmons & Company

Thanks, good morning. Great, thank you. Continuing with the next question, Pete and Clay, with regard to the type of floaters that you are seeing from an increased standpoint. Is it still mostly drillships? Or are you getting more semisubmersibles in the mix?

Clay Williams

Bill, we are starting a few more semis come in the mix. I think as you take a look at it, a lot of the drillships are really exploratory and when you start going into exploitation of fields, the semisubmersibles offer a few advantages there but we are still a lot of drillships as well. But we are starting to pick up a lot on the semisubmersible and of course, we are in a great position either way. Our DEP, our drilling equipment package fits quite well on either way. So we kind of like where we are in that. But it’s a little bit of a shifting mix in that.

Will Herbert - Simmons & Company

And when you talk about a book-to-bill meeting or exceeding one time this year, what's going to be the mix of the inbound on a year-over-year basis in terms of relative to 2012? Do you expect your deepwater DEPs to match the numbers in 2012? Call 24, 25 packages? Or is it a significant ramp in FPSOs? It sounds like North American capital equipment is going to be lower, international possibly higher in terms of onshore. How does that mix configure with regard to reaching both develop one times?

Clay Williams

Bill, you described it pretty well actually. I think you covered all the bases. Yes. What pressure North American land, obviously year-over-year, continued interest in deepwater as Pete said more, we got a high expectations for Brazil to contribute the more deepwater orders as well as broader ordering around the globe in deepwater, so kind of a broadly speaking a shift away from land towards more deepwater.

Will Herbert - Simmons & Company

Okay. And then last one for me, Jeremy, with regard to the roadmap for Rig Tech margins for the balance of the year. Sounds like fat to up in the first quarter, so let's call that, you know, whatever 23%, but how does that evolve over the course of 2013? Do we exit at a higher rate or do we kind of average sort of a sub-25% margins for the year and it's pretty flat for the balance of 2013?

Jeremy Thigpen

Yes. I think pretty flat for the balance of 2013.

Will Herbert - Simmons & Company

Okay. Great. Thank you very much, guys.


Thank you. Our next question comes from Ed Muztafago from Societe Generale. Please go ahead.

Ed Muztafago - Societe Generale

I was wondering if you maybe talk a little bit more about the FPSO dilution side and Rig Tech, and I guess what I am trying to understand there is that just an issue of restructuring of those businesses to get them up to the core Rig Tech margin, or is that business just somewhat price-challenged right now given the activity levels that are going on in order?

Merrill Miller

Yes. Actually, it's not actually price-challenged it's more volume-challenged at this point. We had a big downturn in surf equipment 2010 and 2011, and we've kind of been gradually trying to creep out of that I would say, but volume has been an issue, one number.

Number two, Jeremy spoke to this quite. His comments about fact that we're building a big plant for Flexibles pipe in Brazil, and so that's a specific project-driven drag with start-up costs in Brazil and those are going to continue for some time getting that going in our flexible pipe business, but the I think the main thing we need there are volumes to pick up, because the pricing we've been getting particularly for flexible pipe lately is really pretty good incremental margins on a project-by-project are pretty good, so it's much more kind of, we are I think well-positioned for in the market really comes on strong. And as Pete said a moment ago, we believe the market is going to come on strong

Ed Muztafago - Societe Generale

So, I mean, it sounds to me that absent any further pricing improvements, you can probably get there volume picks up, which you are sort of I guess predicting this year, but if we get a pretty upsurge in ordering then what do you think can happen there on pricing?

Merrill Miller

I think the outlook for pricing improvement obviously rises with demand and as volumes rise, those two things kind of go hand-in-hand and so we always try to be thoughtful about pricing and try to make sure we are getting paid for the good value that we deliver. So, certainly as those opportunities present themselves, we are going to act on them. But at this point, it's really more, right now, we need more loading in our infrastructure and our plans and that would help.

Ed Muztafago - Societe Generale

Okay. I guess, just as second question on the M&A side of the business. Can you guys talk to sort of what you are seeing in terms of the potential for more large scale M&A and really how that might sort of ducktail into what your use of cash might be post closing the RBN acquisition?

Merrill Miller

As you take a look at M&A, we've always been very opportunistic, Ed, and when especially means you are talking about large larger deals, it really is question of just time and patience, and yes we talk about this a lot. I mean, when you are doing those deals, the moon and stars kind of have to align appropriately, you have to make sure that the stock prices are there both, ours and theirs, talking some of the larger deals. So, we'll continue to be opportunistic and take a look at whatever is out there. There is a lot of things that strategically we still want to do, and so we are going to continue to be active in the market.

On the other side though, on especially on our some of the deals, it's always been our experience that it really is advantageous to be able to take advantage of that in down markets. There is a lot o folks that when things are good, they think they are never going to get bad, and they are bad, they think they are never going to get good. So, we like to kind of pounce and be able to do some things when we need to and when things are a little softer.

So, we will continue to be very aggressive in the M&A area and we will continue to look at a lot of different things that fit with our strategic plan that we have got and to fit into the things that we want to do.

Ed Muztafago - Societe Generale

Yes, sure. I mean $500 million in Q4 is not exactly a small amount. Okay, thanks a lot, guys. I really appreciate it.


Thank you. Our next question comes from Kurt Hallead from RBC Capital Markets. Please go ahead.

Kurt Hallead - RBC Capital Markets

So you guys did a great job outlining the prospects and you guys are knowing better and tuned to the market than we guys are. I just want to dig a little bit further on the outlook here as you guys indicated for rig tech and rig tech orders. You identified some opportunity sets. Clay, you mentioned a number of entrepreneurs coming into the market. Last time the entrepreneurs were basically headquartered out of Norway. Where do you see this next rung of entrepreneurs emerging from?

Clay Williams

Some are in Norwegian, but Kurt, we have inbound inquiries from lots of places around the globe. So we are happy to work with whoever we find credit worthy and understands the value that NOV can provide to their new business opportunities. But suffice to say the strong returns that are possible in deepwater rig building haven't gone unnoticed by lots of entrepreneurs around the globe.

Kurt Hallead - RBC Capital Markets

Then I want to follow-up too. Pete, you mentioned you were in China, I guess earlier in the week. You mentioned a number of Chinese yards getting very aggressive in trying to fill their business backlog. I am sure you are finding every way possible to help them in that process. A mutually beneficial operation, I am sure. But I know that there has been a number of questions over the years about the quality and the timeliness of what comes out of the Chinese yards. So what, in your mind Pete, what you think is changing, what has changed and what gives you the kind of confidence that you have that China is going to be able to improve on their quality and delivery times?

Merrill Miller

Kurt, that's a great question. I can answer it pretty simply and it's called the learning curve. As you take look and even if you go back to the Korean yards, it took the Korean yards a period of time to learn and figure out what's going on. If you go back to the mid-90s, there were some issues in all yards about getting this step done appropriately. I think in China, there is a couple of things that give me a little bit more confidence. I think some of the yards have changed management. They have brought different people in. They have brought people in from Korea. They have brought people from Singapore. They have brought folks in that understand the way to do things.

I like the professionalism that I am seeing out of these yards. In particular, I met with the chairman of a couple of yards while I was there this past weekend and I like what I am seeing. I am seeing very much of the western style of management, a very good understanding of safety, a very good understanding of quality and they also know that they need NOV to help them. That's what I like the most about them. And the fact of the matter is that they know that having us there, we can help them scale some of those challenges that they have.

So I feel pretty good, and again, from when I started it comes back to really the learning curve, and I think they have gotten on that learning curve and they are going to do better in the future.

Kurt Hallead - RBC Capital Markets

Great and I don’t want to leave Jeremy out of the mix. So I am going to bend the rule here a little bit. So Jeremy, you were kind enough to answer the question on the prospect for rig technology margins throughout the course of the year. So I am going to ask you about PSS. How do you see PSS margins evolving?

Jeremy Thigpen

I think at the start the year, we will probably see a slight dip as we have referenced earlier in the comments. Then, really it's going to be dependent on return of activity in North America. All those businesses in PS&S are heavily tied to North America land, and as that market goes, so goes the PS&S group in terms of margin.

There are companies out there who have speculated on their calls that rig counts will increase in Q1 and into Q2. We are not yet seeing that. But we are definitely looking for it. As you see those rig counts start to tick up and drilling contractors and well service firms start to work again, they will start buying products and services from us and so will our margins.


Thank you. Our last question comes from Marshall Adkins from Raymond James. Please go ahead.

Marshall Adkins - Raymond James

Good morning, guys. After Clay's diatribe, I feel like I really need to start my question with the word, why. So why are those PS&S margins holding up better than most of us saw? I mean you've seen a lot of the North American names really take a hit with a lower rig count last quarter, but you guys seem to be remarkably resilient. Is it the offshore side? Is it international? Help me understand what's going on there.

Merrill Miller

Sure. Offshore and international certainly helped, but the real issue is a lot of people don't understand that we do have backlog in the PS&S businesses. It's not backlog that we recognize when we report to you guys, but its backlog that's kind of two, three, four-month out. And when you see rig activity decline and you see the drilling contractors and well service firms start to slow down, we still have backlog that we are working off over the next three to four months and so you won't see it really impact us until three or four months after you see activity decline and that's kind of where we are hitting right now in Q1. And so, we've worked up these backlogs in Q4, we are now back kind of that in day-to-day business and now it's when you kind of start to expect, revenues to decline a little bit and margins to erode a little bit.

Marshall Adkins - Raymond James

Okay. Good helpful. On the Rig Tech side, again, very helpful guidance there, the pricing in the backlog, though, it seems like some of the other guys are starting to see the backlog price and they expect the pricing to move up over the course of the year and the flat margin that you foresee for Rig Tech, are we seeing better pricing in that and that being offset by other things out there or is it just flat pricing?

Merrill Miller

Bear in mind, our Rig Tech backlog is heavily dominated by long-term projects and so the margins moved slowly, but, Marshall, and I kind of touched on this in my comments. The pricing we are seeing out there selling rig equipment continues to bump up against ceilings and competitive forces and so forth and has never gotten back to where it was in '07 and '08, so I would say pricing is, it's good.

I don't want to give you a wrong impression. These were good pieces of work and good projects and we are excited about them, I don't think they are going to lead to the kind of margins that we saw a couple of years ago and that's the constraint that we are facing out there, so I would say here in the recent near-term, pricing has been pretty stable across most products in rig offshore, Lands is definitely under pressure. Frac fleets, well service rigs those sorts of things. Land rigs, definitely under pressure with the downturn in North America.

Jeremy Thigpen

I'll also add too, Marshall, that when you buy NOV, you are not buying necessarily on price either. We are selling quality and we are not going to equal the (Inaudible) then we tell all of our customers, if it's about the lowest bid then don't worry about us, because we are not going to be there. We are here to make money, but we are also here to provide outstanding products and that's what we do.

And so, I think that's why we continue to have, even though sometimes we have margin erosion we continue to still have pretty darn solid margins for manufacturing products, so we are going to continue to price aggressively, we have to keep our eye on the competition, but we think we provide value and that value has got some margin behind it.

Marshall Adkins - Raymond James

You mentioned the long lead times in that backlog. If you get more out of Brazil, does that stretch up lead times even longer?

Merrill Miller

Probably it will. I think, as you are taking a look at some of the Brazilian shipyards, that comes back to what I was just mentioning earlier on the Chinese that there is a learning curve there and our guess is the first couple of drillships that some of these yards do will take longer than what traditionally we've seen out of the Korean shipyards.

Marshall Adkins - Raymond James

Yes, makes sense. Thanks, guys.


Thank you. I will now turn the call back to Mr. Miller for closing comments.

Merrill Miller

Thank you all very much for listening in and we look forward to talking to you again on our first quarter 2013 conference call. Thank you very much.


Thank you, ladies and gentlemen. A digital replay is available of this call today. You may dial 188-843-7419, or 1-630-652-3042. The pass code for the replay is 33821804. This concludes today's conference. Thank you for participating. You may disconnect.

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