NOV Inc. (NOV) Q4 2010 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter National Oilwell Varco 2010 Earnings Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] I will now turn the call over to Loren Singletary, Vice President of Global Accounts and Investor Relations. You may begin.

Thank you, John, and welcome, everyone to the National Oilwell Varco Fourth Quarter and Full Year 2010 Earnings Conference Call. With me today is Pete Miller, Chairman, CEO and President of National Oilwell Varco; and Clay Williams, Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and fiscal year ended December 31, 2010, 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 risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Form 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussions of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release, on our website at www.nov.com or in our filings with the SEC. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation. Now, I will turn the call over to Pete for his opening comments.

Thanks, Loren and welcome, everyone from frigid Houston to our 2010 year end conference call. Earlier today, we announced fourth quarter 2010 earnings of $440 million or $1.05 a share on revenues of $3.17 billion. Additionally, we announced earnings of $1.67 billion on revenues of $12.16 billion for the entire year. Clay will expand on these numbers in a moment, but we are very pleased with the results and that they exhibit our ability over the past couple of years to navigate a very difficult market with dexterity and nimbleness. Additionally, we announced new capital order intake of $1.41 billion for our second consecutive quarter of a greater than 1:1 book-to-bill ratio. This order intake reflects the industry need for the highly technical solutions we provide. Our backlog ended the quarter at $5.01 billion, and we will expand during this call on the order outlook that we see for the next couple of quarters. I want to thank all of our employees worldwide for their tremendous efforts they have put forth this year to achieve these results. Their hard work and dedication has been unequaled by anyone in the industry. At this time, I'd like to turn the call over to Clay to give you more color on the numbers I've just talked about.

Thanks, Pete. National Oilwell Varco posted excellent results in the fourth quarter, earning $440 million or $1.05 per fully diluted share on $3.2 billion of revenue. Operating profit was $624 million for the fourth quarter on a GAAP basis. Excluding transaction, devaluation and voluntary retirement charges from all periods, fourth quarter operating profit of $625 million was up from $598 million in the third quarter and up from $622 million in the fourth quarter of last year. Sequential operating flow through or leverage was 17% on a 5% increase in sales, lower than is typical due to items that I'll speak to in the operations discussions. Operating margins for the fourth quarter of 19.7% were generally in line with both the prior quarter and the fourth quarter of last year. For the full year 2010, the company earned $1,667,000,000 or $3.98 per fully diluted share compared to $1,469,000,000 or $3.52 per fully diluted share in 2009 on a GAAP basis. Excluding transaction impairment, voluntary retirement and restructuring charges, 2010 earnings were $4.09 per diluted share, up 4% from the $3.95 per diluted share earned in 2009 due principally to a lower tax rate in 2010. Revenues were $12.2 billion in 2010, down 4% from the $12.7 billion in revenues posted in 2009. Operating profit for the full year 2010, excluding transaction devaluation, voluntary retirement, restructuring charges was $2,465,000,000, down $84 million from 2009, representing 15% decremental operating leverage and excluding unusual charges from both years. Full year results for 2010 highlight the cyclical diversification of NOV's portfolio of Early and Late Cycle businesses. Our Early Cycle businesses, Distribution Services and Petroleum Services & Supplies rebounded with a North American rig count this year and posted 15% and 12% year-over-year sales gains respectively. National Oilwell Varco's later cycle Rig Technology Group carried a strong backlog into the downturn two years ago, which permitted it to actually grow in 2009, but it came in 14% lower year-over-year in 2010. The net consolidated result was a modest 4% decline in revenues and 3% decline in operating profit, excluding charges in 2010 as compared to 2009. For 16 straight quarters since the beginning of 2007, excluding unusual charges, NOV has exceeded $500 million in operating profit and 19% operating margins, a remarkable run within a volatile market that is instructive of NOV's full cycle diversity. We are well positioned for the new year and we've seen many signs of encouragement as we enter 2011. Over the last few quarters, we've discussed blossoming interest in building new offshore rigs, and the recent announcements made this trend more visible to the financial community. Our fourth quarter orders for Rig Technology reflect two new drill ships and several new jack-up packages, along with orders in our new FPSO business, APL, which we closed in December. Importantly, I will again note that we booked new contracts into our backlog only when they are signed and funded. So our orders for the fourth quarter do not yet fully reflect the magnitude of business we expect to gain on the resurgence in new build activity. Bookings in the first few weeks of 2011 have been accelerating, and we expect orders for the first quarter of 2011 to be strong. New contract additions of $1,408,000,000 offset by $1,271,000,000 in revenue out of backlog drove our backlog for capital equipment in our Rig Technology Group 3% higher sequentially, to slightly more than $5 billion at December 31, 2010. Orders destined for offshore markets totaled 86% and land, 14%. International orders account for 86% of the mix and domestic, 14% as well. Scheduled outflow as backlog of orders in the backlog at year end is expected to be approximately $4 billion in 2011 and $1 billion in 2012. Rising demand for new rigs of many types reflect the growing realization among oil companies that newer, more capable rigs offer better efficiency, safety and reliability. This is an evolutionary process for which the seeds were planted several years ago by a handful of entrepreneurial drilling contractors building newer, better rigs and a few foresighted E&P customers willing to try them. Together, they endured a few start-up bugs, retrained crews to run these new machines and ultimately began to reap the benefits embodied in the technology in these sophisticated rigs. This evolution proceeds through a series of small victories, a challenging extended reach well here, a redevelopment infill program there that end up saving the E&P customer money. One at a time, the evolution wins over a company man, a drilling engineer, a drilling superintendent, a drilling department and entire oil company. Enthusiasm spreads and defuses slowly, but steadily as skepticism retreats, and rig day rates begin to reflect the new reality. The now well-documented bifurcation in day rates for rigs, new rigs commanding higher day rates than old rigs offers a real measurement of market preference for this new technology. This is not a new phenomenon. The drilling industry retooled and replaced rigs many times in its past, moving from cable tool rigs to steam powered rotary rigs to diesel mechanical rigs to DC electric rigs through the 20th century. Each success of evolution was catalyzed by slowly diffusing realization by E&P customers that newer technology offered greater efficiencies and safety, and each required 20 to 30 years to fully complete, roughly tracking the expected economic life of a rig. The fact that oil and gas increasingly becomes more difficult to find contributes to these evolutionary cycles. New technologies like deviated well paths, hydraulic stimulation, horizontal drilling, extended reach drilling, deepwater development, subsalt opportunities, Arctic development, require increasingly sophisticated drilling tools. When needed, the industry builds out entire new drilling toolkits to respond to new opportunities like when it launched offshore development out of site of land, with new offshore rigs beginning in 1947 with Kerr-McGee Rig 16. The industry proceeded to order 542 jackups over the next 35 years, averaging about 15 a year as it honed and optimized offshore drilling practices on the continental shelf. Similarly today we believe that the build out of a new drilling toolkit for Deepwater development is well underway. Its target is the roughly 2/3 of the planet covered by Deepwater, which can only be drilled with a Deepwater floating rig. The normal progression of the Oil business starts with exploration and its successful development drilling and production to monetize the discoveries. And within the Deepwater, so far, so good. 182 discoveries have been announced in the last 10 years in water depths of 4,500 feet or more, with a third coming in just the last two years. This appears to us to paint a convincing picture of rising deepwater drilling needs as the industry shifts to drilling intensive development. We should also drive demand for FPSOs where we have been busy strengthening our offering with our APL [Advanced Production and Loading PLC] acquisition last quarter. The industry entered this century with a very old rig fleet, with perhaps 7,000 land and offshore rigs around the globe and with very little investment through the preceding 20 years. If we operated day-to-day, by cannibalizing the overhang of stacked rigs, in essence replacing capital consumed in the drilling process from the excess of idle rigs available. This is an important concept for NOV. From a financial perspective between about 1983 and 2005, the industry appeared able to execute its critical task of drilling year in and year out without having to spend real cash to replace its capital assets. While depreciation is a non-cash cost in the short run, if drillers want to remain in the drilling business in the long run, they absolutely must replace their assets, which does cost cash. Drilling consumes a rig. Depreciation is the imperfect financial measurement of that consumption. Excess rigs ran out in 2005. Depreciation once again became a real cash cost for drillers and new rig building began in earnest. And NOV's fortunes improved. We believe this turning point signaled that rig building got back into a broad normal retooling and replacement macro cycle. Things went great until late 2008 when the financial crisis hit and credit evaporated and commodity prices turned down. I think you all probably remember that. Nevertheless, we believe the macro cycle remains intact and merely took a breather as credit dried up. And now, it's resumed in earnest. Our conviction in the macro cycle wasn't shaken by the downturn. Quite the contrary, oil above $100 a barrel in today's weak economic climate underscores the need to drill more. With nearly three quarters of the jack-up fleet, over half the floater fleet and the vast majority of land rigs around the world more than 25 years old, how does the world grow production over the next 20, 30 years without building a bunch of rigs? The sharp resurgence in orders we are seeing is characterized generally by more established offshore participants placing orders, many in view of their very old fleets. This has been catalyzed by a combination of three factors: First, day rates have remained strong for newer, more sophisticated rigs, but utilizations are running 90% or more compared to 70% or less for older rigs; second, shipyards in Asia are hungry and seeking to replenish their depleted backlogs and therefore, offering lower prices for hulls. This, together with lower pricing from us and other suppliers have reduced the all-in cost of offshore rigs 15% to 20%. Better day rates and lower investments lead to good financial returns on these projects. Lastly, the shipyards have offered easy payment terms: 20% down and 80% at delivery. I'll stress that NOV has not joined in. We remain steadfast in our progress payment requirements, which helped us avoid project cancellations during the downturn. And with regard to our pricing, we have been able to reduce our cost through the deflationary downturn, so we expect to continue to post good margins on the new incremental work. Our Land Rig business turned down somewhat in the fourth quarter surprisingly, after steadily rising in the second and third quarter of 2010, but we believe that this is a momentary pause. Demand for land rigs in the Middle East, Iraq in particular, and the Far East have been strong for the first few weeks in 2011. Interestingly, we see North American drillers anxious to develop quasi-proprietary rig designs, which they can brand as their own, incorporating components from other suppliers or supplying certain owner-furnished equipment or performing their own rig ups, which can and does lead to inefficiencies in the manufacturing process and ultimately higher cost. In contrast, many international drillers, particularly those engaged in IPM work in remote locations, where problems are usually more difficult to remedy, want out-of-the-box NOV solutions. Downtime cost in these operations is exacerbated when the driller also has numerous other completion crews and equipment and capital waiting on the well to TD. NOV's fourth quarter also saw very strong demand for well intervention and stimulation equipment like lenders, frac equipment and coiled tubing units for the blistering hot North American pressure pumping market. Quarter deliveries are beginning to stretch out partly because we find it surprisingly difficult to source components like trailers, truck chassis, cranes and transmissions in a timely manner. Additionally, the market seems to continue to move towards larger diameter coiled tubing solutions. Across all our products, we are hearing rumblings of higher steel and alloy cost within the past few weeks, but we generally place purchase orders soon after we receive signed contracts to hedge against cost inflation. And in certain higher volume products, we purchased a forecast to stay ahead of the cost curve. We were pleased to see Petrobras open a long-awaited tenders for Deepwater rigs during the fourth quarter and set up a holding company to move forward with purchasing rigs following its successful capital raise in September. The energy they've exhibited around these new rigs continues to point towards a forthcoming large order, probably in the first half of 2011 for the first tranche of rigs, but this remains subject to a final decision by Petrobras and could see further delays. We believe NOV is well positioned to execute these projects, and we have been laying preparations for in-country content for the past two years. Interesting to note that the range of bids from $664 million to $824 million per drillship came in considerably lower than predicted by naysayers. This will be a challenging project for all involved, but we are certainly up to the challenge. Interest in shale plays continue to drive North American activity in the fourth quarter, and we share the general concern about a looming gas bubble in the U.S. Nevertheless, we are encouraged by the very high level of interest in shale technology coming from NOCs and IOCs that want to take it to new continents. Unconventional shale production in Europe, Asia, Latin America and the Middle East offer the potential to turn into new incremental sources of demand for new rig, directional drilling and pressure pumping equipment. As I mentioned, we closed APL late in the quarter, so it produced essentially no contribution to the year's P&L. Strategically, this is a terrific addition for us, adding turret technology to NOV's cranes, mooring, riser pull-in and hose reel systems that we can offer as an integrated package into FPSOs that can now exceed over $100 million. We expect the business to add a couple of hundred million in revenue annually, but initially, margins will be low until we are able to complete our integration over the coming year. Quotation activity began rising early last year after essentially nothing in 2009. It appears to be building steadily. We are delighted to welcome the APL employees to the NOV team. Like many, we are watching the events in Egypt closely and have evacuated most of our expats and foreign nationals except for a few safe on-offshore [ph] rigs. Last year, Egypt accounted for $47 million in revenues for NOV. We don't yet know what the financial impact of events will be in the first quarter. Finally, I want to thank, like Pete, NOV's terrific employees for producing such a strong result this year. We move into the new year with a sterling reputation for executing well for our customers, delivering great service, products and technologies to keep the Oil business humming around the globe. This is entirely due to the dedication and professionalism they exhibit daily. Thank you, you are the best in the world. Now let me turn to our segment operating results. National Oilwell Varco's Rig Technology Segment generated revenues of $1,757,000,000 in the fourth quarter, up 6% sequentially and down 11% compared to the fourth quarter of 2009. Operating profit was $501 million, yielding operating margins for the group of 28.5%, a decline of 60 basis points from the third quarter, 10 basis points from the fourth quarter of 2009. Incremental operating leverage or flow through was 20% from the third quarter sales gain of $107 million and decremental leverage or flow through was 30% from the fourth quarter of 2009 on the $220 million revenue decline. We typically expect incremental leverage for the segment to run 30% to 35%, but this quarter saw smaller sequential contribution due mostly to higher levels of incentive compensation accruals at year end, higher receivables reserves and project-cost accruals and a higher mix of lower margin land drilling and stimulation equipment sales leading to 20% sequential flow through. Non-backlog revenue declined 1% sequentially due to lower sales of small capital equipment that doesn't qualify to run through the backlog. Aftermarket sales rose slightly from the third quarter to the fourth of 2010. Overall revenue out of backlog improved 10% in the fourth quarter, but revenues from higher margin large offshore projects declined 9% sequentially, which was more than offset by gains in land rig revenues and other capital items. This mix shift contributed to modestly lower margins for the segment in Q4 and will likely continue to cause margins to move down over the next few quarters. Generally, the higher operating margin seen in the first half of 2010, peaking above 30% reflect projects sold at exceptionally high pricing in 2007 and 2008, being executed in a much lower cost deflationary environment in early 2010. As the mix of this high-margin work has moved down the past two quarters, margins have followed. Within the past several weeks however, we have begun to achieve modest pricing leverage again in certain products, [indiscernible]. For the full year, Rig Technology generated $7 billion in revenues and $2.1 billion in operating profit or 29.7% compared to $8.1 billion in revenue, $2.3 billion in operating profit and 28.3% operating margins in 2009. Year-over-year decremental flow through was held to only 19% as operating margins improved on a lower revenue base due to favorable cost variances year-over-year, steady ascension of the learning curve and continued outstanding execution of the backlog. The Rig Technology Group commissioned nine new offshore rigs during the fourth quarter, bringing our total to 32 for the year and over 100 offshore rigs since 2005. Looking at first quarter of 2011, we expect Rig Technology revenues to decline in the mid-single digit percent range sequentially and post modestly lower operating margins in the mid to high 20% range. The Petroleum Services & Supplies segment generated total sales of $1,137,000,000 in the fourth quarter of 2010, representing a 4% sequential increase from the third quarter and a 21% increase from the fourth quarter of 2009. Operating profit was $170 million, up $6 million from the third quarter, and operating margins were roughly flat at 15%. Year-over-year incrementals were 31% on the $201 million revenue improvement, excluding charges, in line with expectations, but fourth quarter sequential operating leverage or flow through was lower than expected at 13%. This was due to a variety of factors, including start-up cost in new operations in the Middle East and Brazil, mix changes within tubular services as domestic pipe mills and processors slowed, offset by gains in other lower margin pipe services, higher cost in Latin America across a couple of product lines, lower solid control margin and additional incentive compensation accruals within certain business lines within the segment. Additionally, sales of higher-margin drill pipe and coiled tubing products declined sequentially following strong third quarter results for both, another adverse mix shift. Modest sequential revenue growth was evenly spread across most major areas, albeit with mix shifts from product to product. Brazil, Russia and the Middle East posted some of the largest sequential gains along with good sequential improvement in the U.S.-centered and the liquids-rich shale plays, like the Bakken and the Eagle Ford. Downhole Tools posted strong sequential growth on higher sales in the Eastern hemisphere of Canada and U.S. shales, with Drilling Motors and Borehole Enlargement tools in particularly high demand. Drill Pipe order slowed slightly this quarter as dwindling budgets and holidays slowed inquiries late in the year, but the first few weeks of 2011 have seen orders pick back up. Drill Pipe margins improved in the fourth quarter due to a lower mix of Chinese pipe sales. The mix of four-inch XT drill pipe continues to rise as the industry appears to be adopting this as the standard for horizontal shale drilling. Generally, most products throughout the PS&S have begun to face rising steel costs, but are also implementing price increases to offset. For the full year 2010, Petroleum Services & Supplies segment generated $4.2 billion in revenue, up from $3.7 billion in 2009, $585 million in operating profit, up from $453 million in 2009 and operating margins of 14%, up from 12.1% in 2009. Year-over-year operating leverage or flow through was 30%. Looking into the first quarter of 2011, we expect Petroleum Services & Supplies segment sales to grow in the low single-digit percent range sequentially and post improved operating margins in the mid to high teens. Turning to Distribution Services, fourth quarter sales in the segment were roughly flat with the third quarter at $423 million, but operating profit improved nicely to $30 million or 7.1% of sales. Compared to the fourth quarter of 2009, sales increased 28%. Operating margins nearly tripled due to an exceptionally strong flow through of 24% on a year-over-year sales gains. Typical flow through for the group earns about 10% or so, so we are pleased with the strong incremental and resulting margins for the group. The fourth quarter saw sales into the BP clean-up effort on the Gulf Coast move down about $23 million sequentially, but this was offset by improvements in international operations, mono-industrial sales in Europe and artificial lift sales. The Caspian region also posted a nice pick up due to a small acquisition in Kazakhstan. Canada improved nicely sequentially in the Cardium and Bakken Shales as, did the U.S. Bakken across the border. Across North America, the group continued to sell consumables into new land rigs going into service. The group continued to expand its presence in the Eagle Ford shale in South Texas, with two new DSCs. For the full year, Distribution Services segment posted sales of $1,546,000,000, up 15% compared to $1,350,000,000 posted in 2009. Operating profit was $78 million for 2010, up from $50 million in 2009, and margins were 5% compared to 3.7% for 2009. Year-over-year flow through or operating leverage was a solid 14% for the group. For the first quarter of 2011, we expect Distribution Services revenues to come in about flat with the fourth quarter 2010 at comparable margins. Turning to National Oilwell Varco's consolidated fourth quarter income statement. SG&A increased $24 million due to higher incentive compensation accruals, tax-consulting costs and higher bad debt accruals. SG&A as a percent of sales was 11.8% in the fourth quarter, up from 11.6% in the third quarter. Transaction and restructuring costs were $1 million, down slightly from the third quarter. Equity income and Voest-Alpine joint venture was $14 million, up from $8 million in the third quarter due to nonrecurring third quarter maintenance and improved profitability on higher green tube and OCTG sales. We expect similar profitability in the first quarter of 2011. Other expense improved $16 million sequentially due to the non-recurrence of FX losses posted in the third quarter. FX loss within this line was only about $1 million a quarter. The tax rate for the fourth quarter was 30%, up slightly from Q3 and for the full year, the tax rate was 30.8%, substantially better than the 33.3% posted in 2009. We expect the tax rate for 2011 to be in the range of 31%. Unallocated expenses and eliminations on our supplemental schedule was $76 million in the fourth quarter, up $6 million from the third quarter, due mostly to higher legal expenses associated with acquisitions, tax consulting costs and incentive compensation accruals. Depreciation and amortization was $129 million, up $2 million from the third quarter. EBITDA, excluding transaction and restructuring charges, was up $54 million sequentially to $768 million or 24.2% of sales and totaled $3,007,000,000 for the year, up slightly from 2009. National Oilwell Varco's December 31, 2010, balance sheet deployed working capital, excluding cash and debt of $3.5 billion or 27.5% of annualized sales, down $248 million from the third quarter, due primarily to higher billings in excess of costs and lower inventory. Total customer financing on projects in the form of prepayments and billings in excess of cost, less cost in excess of billings, was $25 million at December 31, representing a sequential improvement of $151 million. Cash flow from operations was $807 million for the fourth quarter, up $354 million sequentially and totaled $1.5 billion for the full year. CapEx increased $30 million to $92 million in the fourth quarter, bringing full year CapEx to $232 million. We expect CapEx in 2011 to move up in to the $450 million range as we pursue a number of expansion opportunities launched last year. Free cash flow equaling cash flow from operations less CapEx was $1.3 billion in 2010 before acquisitions and dividends. Cash bill [ph] and acquisitions totaled $556 million and dividends paid to our shareholders totaled $172 million during 2010. Finally, National Oilwell Varco's cash balance was $3.3 billion at December 31, 2010. Now, let me turn it back to Pete.

Thanks, Clay. I just want to make a couple more of brief comments about what's going on with like around the world. And first off, let me kind of hit the driving forces again. Clay mentioned technology and the advances in technology and one of the things that I've been talking to a lot of people about is the differential between chronological age and technological age. And I think many times, we kind of take a look at a rig maybe only be 20 years old, but when you look at that on a technological age aspect, it's a lot older because of the advances that we're making. It's very similar to Moore's law when you take a look at this in IT and you're doing the same sort of thing with rigs. I would offer the difference in a rig from 1980 to 1990 was de minimus, whereas the difference in a rig from 2000 to 2010 is large, it's huge. And I think that's one of the things that's driving the bifurcation of the rig market, and we also think that's what's going to continue to increase the demand for the Deepwater rigs that we're building, the jackups that we're building and also the land rigs that we're building. So we think there's a very bright future out there for this. The second driving force that I talk about all the time are shales. And if you take a look at this and the neat thing right now is that you're seeing the transfer of rigs from the gas shales to the oily shales. You take a look at the Bakken, the Niobrara, the Eagle Ford, Granite Wash, the Monterey Shale in California now, these are starting to pull rigs out of the gas market, but I think everybody is being, kind of waiting for the gas market to get to down, but because of these oils now, they're able to pull these in there so the rig count's staying at fairly decent. So I think they're going to continue to be there. Also CNOOC just announced another investment, I think, this week in the Niobrara. And CNOOC's doing this again to get out ownership, I believe, of some of the gas here, but also to learn. And kind of a little data point I will talk about here is that we have sold in recent weeks a lot of contracts into China. Now top drives in China have been a very good market for us for the last 10 years. However, there's been a little flurry of activity here recently, which would indicate that their getting those rigs set up to be able to drill shale-type wells into China as they learn this. So I think it's, again, small indicator, but I think it's there and so we're excited about the aspect of shales. Poland, there's been a lot of leasing activity there recently and I think recently, Total announced some things in Argentina. So I think you're starting to see the expansion of shales worldwide. It's going to take a little while. It's going to be slow, but I think as that builds up over time, that's going to play very well for us. On the international front today, as Clay mentioned, North Africa's a little dicey right now. There are some things that we think we're getting ready to pop in Algeria and other places. But I think it's going to be a more of a wait-and-see attitude at this time. The other parts of the Middle East though, especially Kuwait, Oman and Iraq look to be very positive. So we think there'll be some good things that will be happening there both on a land-rig basis and some of the shipyards of the Middle East, especially in the UAE are starting to heat up again, I think as the shipyards get filled in Korea and Singapore, those shipyards are going to come on, and I think that will lead to some more incremental business for us. West Africa continues to be a good area. I think it's really going to be a positive area for FPSOs. As you take a look at Latin America, it's a little bit of a mixed bag. Places like Colombia, Argentina and of course Brazil are very positive. Mexico's somewhat iffy and then of course, Venezuela, is I think as you probably heard on a lot of calls, just not a very positive place for anybody at this point in time. But I think you'll see some positives in Latin America and Brazil. It's going to be both -- they're starting to pick up a little bit even onshore. So I think that's going to be some very positive areas for us. Let me just kind of reiterate one thing Clay said and, that's on the backlog. We would tell you announcements don't equal orders. We're very strict in what goes in our backlog and even though we know we're going to be successful on some things, we don't put it in the backlog until we have a contract and some money. So I think we're very positive about what's going on right now, but again, announcements don't necessarily equal orders. So it's always tough to kind of balance that out. But we see a lot of good things happening and I will also mention that we talked about coil tubing an awful lot, and I think coil tubing is finally here. You take a look at it, it's had a lot of promise. But I think there's some really promising developments especially in the shale, our Coil Tubing business at Fort Worth doing wonderfully. We're expanding our Coil Tubing manufacturing line here in Houston. We're going to add a fourth -- or fifth line [ph], and I'm very excited about prospects for Coil Tubing. One final thing I want to talk about is over the last couple of years, the markets have been pretty tough. I think we've weathered very, very well. But one of the things that we've done is we've made sure that we took advantage of the timeframe in which we could do some different things. And just as an example, we're building two new Fiberglass Pipe plants overseas. We've got three coating plants going up. These are state-of-the-art. It allow us to optimize. We've taken our logistics chain on Grant Prideco pipe, and we've been able to compress that so we can become much more flexible in hitting our customers' needs. We've expanded our repair and maintenance facilities in our Rig Solutions Group. So we've been spending money and incurring some cost in anticipation of being able to accelerate out of the downturn when things start improving. And I think we're positioned well to be able to do that. So I like what we're seeing today. I think our results speak for themselves, but I like the backlog starting to build again, and I think things look pretty decent over the next year or two for what we're doing. So given that, John, I'd like to turn it over to any questions that our listeners might have.

[Operator Instructions] And our first question comes from Bill Herbert from Simmons.

Pete, back to the broader narrative here with regard to what Clay described persuasively here as the resumption of the macro retooling and replacement cycle and in Europe, your added observation in terms of differences between chronological and technological age and I guess with regard to comparing this recent blossoming, if you will, or this resumption, if you will, with regard to the new construction cycle versus what prevailed '05 versus '08 when 100 off-loaders were ordered, what are some of the key prominent differences with regard to this next wave versus what prevailed last time? And why don't we start with regard to your market share and how that may have changed?

As you probably know, Bill, visiting with me many times, we don't talk about market share. We just kind of like where we are in the market. And we'll do very, very well. I'm not overly concerned about that. To the first part of your question though, let me kind of tell you. I think one of the big changes right now -- and you hit it right when you said this is a resumption of the cycle. I think some people have said we're in a new cycle, but quite frankly, I think this is just a resumption of the cycle that ended abruptly with some of the problems that occurred in late '08, with Bear Stearns and Lehman and the like. So I think this is a continuation of what started that. What you're seeing today, I think, are two things that are pretty interesting. First off, this is being led by the established drilling contractors. You're talking about the big boys that are getting in there and coming in and buying stuff. And I think last time, it was a little bit more, I wouldn't say speculators, but more of the nontraditional customers were the ones who've started it back in '05 and '06. I think that's a big difference. I think the positive there is that with the established guys doing it, I think you'll also see some of the nontraditional folks come back in. The second one that I think is pretty critical is that there is the understanding now to let the shipyards build it. And you're seeing, it's almost a turnkey-type situation with the shipyard and what's there, whether you're Hyundai or Samsung or whomever you're quoting, $556 million, $620 million, whatever the price might be and then it's incumbent upon them to work with us to get the rig built. And if you take a look at the history, if you go back to '06, '07, '08, the rigs that were built like that came out on time, on budget. They came out very, very good. So I think that those two elements are interacting in there today, and I think you'll see the contractors going in there and say, "Yes, build this thing, deliver and let's go." And those are the two major elements, I think, that are different.

Bill, can I add a third to that? I would say, too that the out-of-the-box standard-proven rig designs are the way to go. The projects that got into trouble were from owners that tried to be too clever with regards to save a little money here or rearranging something there or insourcing from a less-proven supplier. And so I think hopefully, the industry generally, I think, has learned that the way to go is to let the shipyards, to let the drilling equipment providers who do this for a living execute on that, on standard proven rig designs and stay away from the more exotic schemes.

Secondly, how long do you think the current floater construction cost window up about $600 million for a high-end drill ship stays open?

I think it's going to start moving up, Bill. As I mentioned, we're starting to see steel prices move. There's been a lot of inks [ph] build here in the last month or two on commodity prices around the globe. So I think we're developing economies, seeing some inflation. The current window at discounting on offshore rigs, I think, has been helped by lower steel prices. It's been helped by favorable FX moves and really a pretty deflationary environment for the past two years. And it appears to us that, that's going to be going the other way here soon. So I can't tell you precisely, but if customers listening, we'd tell you, "Order now."

Lastly for me, with regard to shipyard capacity, how much headroom is left and with regard to the name brand shipyards, Samsung, Daewoo, Hyundai etc. if you were to order a new rig today, the delivery date would be when? So how much running room do we have and how long before? What's the lead time with regard to getting our rigs back?

I think, Bill that there's still headroom, and I think they're talking -- as you take a look at this, what's going on in the shipyards today, when we started this back in '05, '06, it was like three, three and a half years. Today, they're putting a lot of these in two and a half years. The reason they can do that though is because of the experiences we've gained over the last four, five years. We've really become efficient. We've been able to cut a lot of man hours out of this and so I think you'll see a little bit more rapid throughput. At some point in time, you'll hit some inefficiencies, and that'll change that. But still, I think when you look at the Korean shipyards, Samsung, Hyundai, these guys are big and they know what they're doing. They probably don't have as many tankers as they had back in '06, '07, '08 when they were picking those orders. So I think there's still good headroom. And so I think there's still some promising potential out there.

We also think that the payment terms are probably going to become a little bit tougher. That the easy payment terms that I referenced in my comments are likely to pass, and we're probably going to see the shipyards become a little more demanding on the payment here pretty soon.

Our next question comes from Kurt Hallead from RBC Capital Markets.

On the PSS front, can you talk a little bit about -- you mentioned some things on Drill Pipe. You mentioned in the past about the consumption of Drill Pipe given what's going on in shales and obviously the premium content for the Deepwater. So I was wondering if you could give us just a tad more color on what you see on Drill Pipe order trends. What kind of mix we're talking about and are we at a point here where you can say we're close to an inflection on drill pipe demand?

Yes, I think we are. The last few quarters, we've seen orders rising book to bill through most of 2010, north of one. As I mentioned though, Q4 dipped a little below that and revenues came down a little bit. We think that was kind of a holiday slowdown. People had used up their 2010 budgets, and so we think that was a temporary thing. And the month of January seemed to indicate that as well because it came back better in January. So that's kind of what's going on with the recent orders. Generally, 2010 was characterized by much smaller Drill Pipe purchases for smaller diameter incise Drill Pipe purchases for land rigs, specifically for the shales and we've talked in the past about 4-Inch Drill Pipe with XT premium connections, which is our offering into that market kind of becoming standardized from the shales. And that's kind of a new size, weight and grade of Drill Pipe that works the best in the style of drilling that's underway. So we saw a lot of customers kind of scrambling to get that kind of pipe. What cycled down in 2010 was the sale of large diameter, very sophisticated premium strings for these floaters. There's a bunch of ordering that happened in late '08 and through 2009 for the new builds. That kind of slowed this year. However, there's now over 100 rigs out there that have not yet ordered pipe, and so we think that the outlook for that is pretty good for 2011. That's important for us because that's a little higher margin pipe for us and higher dollar per foot pipe for us, considerably higher dollar per foot pipe for us. And so we think we're pretty well situated. But the usage trend that you're talking about was something we find fascinating. The old rule of thumb, you go back 20 years ago people used to think of terms of Drill Pipe lasting five years under kind of normal circumstances. And today, we're hearing from operators that it's more like two and a half or three years. And it's a combination of things. First, the wells are a lot tougher. That Drill Pipe's being bent around a 90-degree angle. It's being rotated on its side, just the wear and tear because of the complexity of well pads is wearing out Drill Pipe faster. Secondly, if you think about the implications for Drill Pipe usage coming out of more efficient rigs that can move more quickly, that pipe is spending fewer days on a truck being moved between wells and more days actually in the hole drilling each year that would have been under these old rigs that are out there. So these new rigs come on, they're actually spending a lot more time in the whole making hole. And so that's helping speed up the consumption of Drill Pipes. So we're seeing -- our thesis [indiscernible] in 2008 was that Drill Pipe is becoming much more of a consumable and actually it's probably even beating what we expected back then in terms of the rates of consumption.

[indiscernible] if you can, when you take a look at 2011 and your varying product lines within the PS&S Group. On a relative basis, which one do you think has the most opportunity to get net pricing increases in 2011? Which one or two do you think has the best leverage? Which one or two has the least leverage?

Coil tubing certainly been in high demand as Pete mentioned. Again Drill Pipe coming on from the offshore, again looks pretty good. I'll say broadly most of our products and services within PS&S reported, just starting to get a little bit of pricing leverage in the fourth quarter. And it's a percent here and 2% there, so it's not much yet, but starting to stick. We're also -- the inflation we talked about in steel, we're seeing that in labor and a few other things and I think that's well known by our customers. And so I think we're just now starting to get a little traction on pricing leverage. So we think we'll not be able to make some gains there in the coming quarters.

And I'd add, Kurt, that Downhole Tools, we've got a lot of new products coming out. And I think as you talk about these shale wells, when you're talking about hole openers and different type of bids and motors, even wall staters [ph], things like that, I think we'll get some leverage there. That's associated with the increase in technology that we see in these areas. So we continue to push as a company on the envelope that all of our areas on new product development. And I think that in itself enhances your pricing capabilities.

Just on the FPSO side, you said you got a -- it sounds like a good year of integration to work through before you start to see some of the improvement in the margins. So what kind of improvement would you expect to see, say exit 2011 from where you are now? And could you give us some additional color on some of the challenges you're facing?

The business came in at -- it's a great business, large installed base over 50 turrets turns around the world in service, great electrical property, a bunch of engineers who really know what they're doing. They typically outsourced most of their fabrication. And a big part of our business plan now is to insource that into existing NOV facilities. So for instance, in Korea, where we have a large assembly capability that required a couple of years ago and is busy next door to the shipyards, we can also put the turret APL Turret offering into that network. A lot of the suppliers to the business are suppliers that we also use, so I think we'll have some leverage there. But generally, I think this business is pretty similar to other Norwegian, a very Technical Engineering-Oriented businesses that we've acquired in the past that intended to outsource. And so this is a, for us, a pretty well-learned path in terms of how to get the profitability. But it does take some time. So we're not expecting -- we do expect to be modestly accretive to earnings in 2011 and that should improve kind of quarter-by-quarter as we get these improvements, integration improvements later in the year.

Our next question comes from Marshall Adkins from Raymond James. Marshall Adkins - Raymond James & Associates: We've had a bunch of new build announcements obviously the last few months. I think you mentioned you had in this last quarter, a couple of deepwater and a handful of jackups. Without getting too specific, can you give us some sense of what percent of those that have been announced, say over the last quarter or so, have actually been awarded?

Pretty -- it's small.

Yes. Marshall Adkins - Raymond James & Associates: That's what I would assume. But I just want to get -- 10% maybe?

I don't want to quantify. Suffice to say, you've seen a bunch of announcements, a lot more rigs out there. And I think you know these reputation for being able to execute well on these things is positioning us very, very well as the cycle resumes.

And what happens, Marshall, kind of on the process, I did give you a little bit of an indicator. Somebody announces that they may have an LOI with the shipyard. And what happens is we negotiate many times with both the contractor and the shipyard. And we really don't put it in to our book until we've signed the final contract in most cases, the way it's going right now with our shipyards, in some cases put the customer directly. But that's one of the reasons there's a little bit of a time gap. So when you see something that says an LOI, the chances are real good that they're still in the negotiating process with the shipyard. And so that's really the process that's going on. There's a lot of it out there that we know we're going to get, but as we've told you throughout the years, we're real strict on the backlog and we don't -- I think the history of what happened, if you go back to '08, we had $12 billion and everybody was worried about our backlog getting cancelled and it didn't get cancelled, a very small portion of it. I think that's because of the strictness that we have of putting stuff in that backlog. So there's a pretty good time gap between the announcement and the order. Marshall Adkins - Raymond James & Associates: Suffice to say, over the ones we've seen lately, just a fairly small portion of those have seen any -- have been awarded at this stage?

They weren't awarded as of 31 December 2010. They were a month into this and there are some things that have happened in the past month, but that's -- this discounts off 2010.

Clay, you mentioned the financing. We know that the shipyards have been offering pretty attractive financing terms. How much of this new order cycle we're seeing really surge in the last two months is that financing? And are we just kind of bringing forward what might have evolved over a two-year period just because the financing's easy?

I think so, Marshall. I haven't run particularly detailed numbers, but I have seen some other analyses of the intrinsic economics and building rigs right now. And I think the returns are decent. Kind of the old historical rule of thumb is kind of 15% rates of return in these investments, and I think we're at that or better. I think the financing is kind of the icing on the cake, it probably just makes it a little easier for customers to move forward. I'll add too, I think behind the financing that's being offered in a lot of these places, and so there's a lot of government export agency trade financing that's out there. The export agencies, we worked very closely with around the globe, really stepped up when the credit markets turned down two years ago to try to catalyze some or to kind of keep credit flowing. So what you're seeing now is the effect of that. Marshall Adkins - Raymond James & Associates: Just to clarify, last thing here, you mentioned your pricing, of course, from the peak has come down, 15% to 25% depending on what you're looking at. Did you participate in that price reduction pro rata? Or is that more the shipyards and the steel in percentage terms?

They're down a little more than us. We are down, but nevertheless, our margins are pretty good and what's helping our margins is the fact that we've seen the costs come down. And it's a combination of deflation we talked about, but also this is the learning curve effects that Pete mentioned earlier. They will take a lot of hours out of the things that we do, lessons that you learn. Our folks are really good at capturing those and putting them to work on the next version of the rig. So those two things have kind of let us whittle our cost down. And with the downturn of the market last two years, we've shared some of that with our customers.

Our next question comes from Geoff Kieburtz from Weeden. Geoff Kieburtz - Weeden & Co. Research: I'm going to try one more time. You mentioned that there's 100 rigs out there that haven't ordered pipe. Is the number of rigs that haven't ordered drilling packages half of that?

They ordered pipe late in the process, and they'll tend to order pipe -- if you go back to 2008, our Drill Pipe business was very, very busy. Backlog very big, and we were quoting a little later deliveries. And our customers were aware of that. So they tended to get in the queue a little earlier while that pipe flowed out 2009. Well 2009 and 2010, our Drill Pipe business slowed down. So they know they've got a little more time before they move forward with that. But things are heating up and so that's why we think 2011, we'll see more of those folks show up and place orders for pipe for those offshore rigs. Geoff Kieburtz - Weeden & Co. Research: You talked about pricing -- I think you said that pricing leverage is coming back into the Rig Tech product lines. Is that correct?

Yes. Geoff Kieburtz - Weeden & Co. Research: So we're seeing a turning point. When you factor all the dynamics that you're seeing into it and you did say you expect Rig Tech margins to move lower, are we thinking in the vicinity of the 50, 60 basis points kind of range on a sequential basis?

Yes, we've been talking about margins moving lower for some time. We've seen this coming, and you've seen it last two quarters. And again, our guidance sort of guided down through the high 20s down into the mid-20s. Sequentially, we've sort of guided along that glide path. Geoff Kieburtz - Weeden & Co. Research: It seems a little bit more conservative than your actual performance.

Yes well again, what we've been pleasantly surprised is the continued really good execution by our folks after that, quarter-by-quarter. So internally, we've been surprised at how well they've been able to take advantage of the downturn in the economy and lower costs and done a really good job putting up better margins than we expect. Geoff Kieburtz - Weeden & Co. Research: And a clarification. You did close the APL acquisition in the quarter. Where did their backlog go?

It's included in the our $1.4 billion. Geoff Kieburtz - Weeden & Co. Research: Can you give us a little break out on that?

Yes.

Jeff, we're still parsing through it because we had to make some determinations on some risk analysis associated with it because the backlog wasn't quite developed the same way as our rules are. But I would tell you probably about $100 million, right in that vicinity. Geoff Kieburtz - Weeden & Co. Research: About $100 million of the $1.4 billion orders?

Right. Geoff Kieburtz - Weeden & Co. Research: So bringing their backlog in, you just treat it as new orders?

Yes, we're not going to get in there, break the backlog down into little pieces. But that's -- again, there's still some parsing we have to do on that. And as we look at some orders, we're liable to deduct a little bit more there. It just depends, but it's not anything that's overly material.

That will be the last question. I'll now turn it back to you, Mr. Miller for closing remarks.

Thank you, all very much for dialing in, and we look forward to talking to you on our next call for the first quarter of 2011. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.