National Oilwell Varco, Inc. (NOV)
Q4 2009 Earnings Call Transcript
February 3, 2010 10:00 a.m. ET

Executives

Loren Singletary – Vice President, Global Accounts and Investor Relations
Pete Miller, Jr. - Chairman, President & Chief Executive Officer
Clay Williams - Senior Vice President & Chief Financial Officer

Analysts

Jim Crandell – Barclays Capital
Marshall Adkins - Raymond James
Bill Herbert - Simmons & Company International
Ole Slorer – Morgan Stanley
Robin Shoemaker – Citigroup
Kurt Hallead – RBC Capital Markets

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the National Oilwell Varco fourth quarter 2009 earnings conference 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, Global Accounts and Investor Relations. Mr. Singletary, please go ahead.

Loren Singletary – Vice President Global Accounts & Investor Relations

Thank you, Christine, and welcome everyone to the National Oilwell Varco fourth quarter and full year 2009 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, 2009, please note that some of the statements we make during this call may contain forecasts, 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 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 or 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, Jr. – Chief Executive Officer

Thanks, Loren, and good morning. Earlier today we announced fourth quarter 2009 earnings of $394 million, or $0.94 a share on revenue of $3.13 billion. We also announced full year earnings of about $1.5 billion, or $3.52 a share on revenues of $12.7 billion. Given the challenges faced by the world-wide economy in the past eighteen months, these are very solid results. We greatly appreciate the loyalty, dedication, and efforts of all of our employees throughout the world that created these results. Additionally, we announced year-ending backlog of $6.4 billion, with an order intake of $624 million during the fourth quarter. Clay will expand further on these results and backlog in a moment. Then I will finish with some comments about the market and our operations, and then we will answer any questions that you might have. Clay?

Clay Williams – Chief Financial Officer

Thanks, Pete. National Oilwell Varco posted good results in the fourth quarter, earning $394 million, or $0.94 per fully diluted share on $3.1 billion in revenue. Excluding $14 million in pre-tax transaction charges, earnings were $0.96 per diluted share, up a cent from third quarter and down $0.48, or 33% from the fourth quarter 2008 earnings, excluding transaction and restructuring charges from all periods. Fourth quarter operating margin of 19.8% was down slightly from 20% in the third quarter, and sequential operating flow through or leverage was 9% on the 2% increase in sales. Compared to the fourth quarter of 2008, operating margins declined 320 basis points, and the company posted decremental operating leverage of 38% on a year-over-year sales decline of 18% excluding transaction and restructuring charges from all quarters.

For the full year 2009 the company earned $1.5 billion or $3.52 per diluted share, compared to $2 billion or $4.90 per diluted share in 2008. Revenues were $12.7 billion in 2009 compared to $13.4 billion in 2008 on a GAAP basis. Excluding transaction impairment, voluntary early retirement program and restructuring charges, 2009 full year earnings were $3.89 per diluted share. Adding in the pro forma effect of the Grant Prideco acquisition which closed in April 2008, sales for 2009 declined 9% for the year owing to a much softer level of drilling activity throughout the year as compared to 2008. 2009 pro forma operating profit of $2.5 billion declined 19% from $3.1 billion in pro forma operating profit generated in 2008, all in all a good result for a challenging year. It saw precipitous fall in rig activity in a year-over-year worldwide rig count that was down 31%.

Turning back to the fourth quarter results, the company benefited from a nice recovery in both our petroleum services and supplies and distribution services businesses. We saw resurgence in activity and enthusiasm across North America, along with some selected international markets. Rig Technology continued to execute extremely well, posting margins and revenue out of backlog that pleasantly surprised us, along with landing a few more orders through the quarter. Although we are early in the New Year we are very encouraged by what we see so far and believe that the foundation has been laid for a meaningful recovery.

The back half of 2009 saw oil prices stabilize around $70 a barrel, and North American gas move above $5 per mcf, remarkably strong considering persistently anemic GDP numbers and chronically scarce credit. Operators drove 4% international and double digit North American rig count increases throughout the fourth quarter discovering along the way that the rig consumables cannibalized from stackridge (ph) earlier in the year need to be replaced before these rigs can strut in and go back to work.

About three quarters of our petroleum services and supplies segment sales are consumables and quick turn capital items we manufacture that are used in drilling and production processes. So we benefited from the increased demand and showed 6% sequential growth and 39% flow-throughs in the third quarter. The petroleum services and supplies demand up-tick wasn''t enough to spur any pricing leverage just yet but most products at least saw price stabilization through the fourth quarter after three-quarters of significant price reductions. The new sea level for pricing appears to have settled about 25% or so below peak 2008 price levels, with certain products at greater and certain products at lesser levels of discounting compared to twelve months ago. Cost reductions and continued focus on efficiencies have helped mitigate the margin impact to discounting. If past up-cycles are a guide, pricing leverage is still at least a few quarters away, but again we are encouraged that we are seeing modestly rising demand at stable pricing in the near term within petroleum servicing and supplies.