National Oilwell Varco, Inc. Q1 2010 Earnings Call Transcript

National Oilwell Varco, Inc. Q1 2010 Earnings Call Transcript
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National Oilwell Varco, Inc. (NOV)

Q1 2010 Earnings Call Transcript

April 27, 2010 10:00 am ET

Executives

Loren Singletary – VP of Global Accounts and IR

Pete Miller – President and CEO

Clay Williams – EVP and CFO

Analysts

Kurt Hallead – RBC

Jim Crandell – Barclays

Robin Shoemaker – Citi

Geoff Kieburtz – Weeden & Co.

Collin Gerry – Raymond James

Roger Read – Natixis Bleichroeder

Bill Herbert – Simmons & Company

Presentation

Operator

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Welcome to the National-Oilwell Varco first quarter 2010 earnings conference call. My name is Kim and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Loren Singletary, Vice President of Global Accounts and Investor Relations. Mr. Singletary, please go ahead.

Loren Singletary

Thank you, Kim, and welcome everyone to the National-Oilwell Varco first quarter 2010 earnings conference call. With me today is Pete Miller, Chairman, CEO, and President of National-Oilwell Varco; and Clay Williams, Chief Financial Officer.

Before we begin this discussion of National-Oilwell Varco’s financial results for its first quarter ended March 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 upon 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 Form 10-K National-Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussion of the major risk factors affecting our business.

Further information regarding these, as well as supplemental financial and operating information may be found within our press release on our website at www.nov.com or in our filings with the SEC. Later on this call, we will answer your questions which we ask you to limit to two in order to permit more participation.

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

Pete Miller

Thanks, Loren and good morning. Earlier today, we announced first quarter 2010 net income of $422 million or $1.01 a share on revenue of $3.03 billion. This compares to net income of $394 million or $0.94 a share in the fourth quarter of 2009 on revenues of $3.13 billion.

We are very pleased with these results and they speak to the outstanding execution of performance of our great employees as they continue to provide the best products and services to our customers. Clay will expand upon these numbers in just a moment.

Additionally, we announced new capital equipment orders of $618 million and a quarter-ending backlog of $5.4 billion. I will speak a little later in this call about our operations and the backlog more in-depth, but at this time, I want to turn the call over to Clay.

Clay Williams

Thanks, Pete. National-Oilwell Varco generated first quarter 2010 earnings of $422 million or $1.01 per fully diluted share compared to $0.94 in the fourth quarter of 2009 and $1.13 per share in the first quarter of 2009.

Included in these results are $38 million or $0.09 in charges related to our operations in Venezuela where the bolivar was recently officially devalued against the U.S. dollar. $27 million of this charge relates to the devaluation of monetary assets NOV has in country and $11 million balance was the write-down of receivables in view of deteriorating business conditions there.

Excluding this devaluation charge, first quarter earnings were $1.10 per fully diluted share, up 15% from the fourth quarter of 2009 earnings, excluding $0.02 in transaction charges last quarter and down 3% from the first quarter of 2009. This was a great result for the quarter which rose from the highest operating margins posted by NOV since late 2001 along with a little help from an ascending North American rig count in the first quarter.

Consolidated revenues were $3 billion, down $102 million or 3% from the fourth quarter and down $449 million or 13% from the first quarter of 2009. Operating profit, excluding devaluation charges, was $648 million or 21.4% of sales. Despite the sequential revenue decline, operating profit rose $26 million from the fourth quarter.

All three segments posted higher sequential margins without benefit of significant sequential sales growth for any of the three. There are two big reasons for this. The first is experience. We continue to steadily navigate our way up the learning curve on complex offshore rig-building projects.

Those of you who have followed our company for many years will recall that in 2005 we began to highlight two long simmering challenges that the oil and gas industry would face in the coming decade, mainly a land and jack-up rig fleet that was nearing the end of their useful lives and the need to build out a substantial deepwater fleet to implement new deepwater drilling technologies.

Our rig technology team set about restructuring our manufacturing footprint, urgently implementing quick response and cellular manufacturing technologies to cope with the onslaught of business which followed. They standardized product designs and gently steered customers towards consistency in rig layouts. Now that we have successfully executed the construction of dozens and dozens of land and offshore rigs, our teams have skillfully and successfully navigated the many complexities of rig construction.

Their unparalleled experience in rig-making manifests itself in efficiencies and lower cost. As a result, they posted a record margin once again, above 30% in the first quarter. They candidly exceeded our expectations in view of the lower revenues we expected.

The second big factor in the quarter were lower operating costs across the board. As we noted in earlier costs, the volatility of oilfield services necessitates quick response. They are always either too small as drilling and demand rise quickly or your operations are too big when activity plummets as it did in early 2009.

Quarter-by-quarter throughout last year, we detailed for you our many initiatives to reduce size and cost in view of depressed market conditions. The improved margins in the first quarter are a direct result of the traction achieved through these initiatives. Two factors in the quarter, experience and cost reductions, signified NOV's successful assent of the steep learning curve and resulted in outstanding margins.

Demand for rig equipment was broad-based this quarter with $618 million in bookings, roughly in line with last quarter. We looked three jack-up packages, a handful of land rigs, lots and lots of top drives for land rigs and slew of pressure pumping equipment for both North America and international markets. No floater packages were booked, but we continue to pursue several opportunities around the globe, the largest being a massive tender underway for Petrobras in Brazil.

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