National Oilwell Varco (NOV)

Q2 2011 Earnings Call

July 26, 2011 9:00 am ET


Clay Williams - Chief Financial Officer and Executive Vice President

Merrill Miller - Chairman, Chief Executive Officer and President

Loren Singletary - President


John Anderson - JP Morgan Chase & Co

Kurt Hallead - RBC Capital Markets, LLC

William Herbert - Simmons & Company International

James Crandell - Dahlman Rose & Company, LLC

Robin Shoemaker - Citigroup Inc



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

Loren Singletary

Thank you, Dawn, and welcome everyone to the National Oilwell Varco Second Quarter 2011 Earnings Conference Call. With me today is Pete Miller, Chairman, CEO and President of National Oilwell Varco; and Clay Williams, Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results for its second quarter ended June 30, 2011, please note that some of the statements we make during this call may contain forecast, projections and estimates including, but not limited to, comments about our outlook for the company's business. These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year.

I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information, may be found within our press release, on our website at or in our filings with the SEC. Later on this call, we will answer your questions, which we ask you to limit to 2 in order to permit more participation.

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

Merrill Miller

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

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

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

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

Clay Williams

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

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

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

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

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