National Oilwell Varco Earnings Call Insights: N. America Rig Activity, Backlog Timing

On Thursday, National Oilwell Varco, Inc. (NYSE:NOV) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

N. America Rig Activity

Doug Becker – Bank of America: Maybe just starting off on PSS, revenues really seem to be hanging in there very well no matter what the rig count is doing. You did highlight that there could be some margin pressure in the fourth quarter, but just want to calibrate what you’re thinking about in terms of rig activity in North America and how that relationship should be with revenues as we go forward.

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Merrill A. Miller, Jr. – Chairman, President and CEO: Doug, we think – I guess, and first let me qualify, I don’t think our crystal ball is any better than anyone else’s, but in terms of the next quarter or two, a little more the same. We’re hearing specific plans of customers in Canada for instance trimming drilling programs, more cuts to come in North America. The flip side is that we see continued growth overseas, and so net-net, I can’t tell you that ends up in net increase or not, but call it flat to maybe a little bit of a downward bias in terms of activity. The nature of our PS&S business though maybe just a little different than what a lot of investors proceed in that, it is more manufacturing than other service businesses that maybe viewed as comparable or peer and that’s one of the things I tried to highlight in my comments about three quarters of PS&S is manufacturing of consumables and short-lived capital. And so what that does in a way is to just delay by maybe a month or two kind of the effect of a downturn in activity when we see it in PS&S. Some of the businesses are services and they are very rig count-driven and we feel that on rig time but others have a little bit of a backlog, maybe a few weeks of orders that help us kind of buffer that. So that enabled PS&S to post pretty good revenues. They were down 3% sequentially in Q3 and kind of forestalled a downturn in sales, but Q4 we’re calling for maybe little more the same, I would say flat to maybe down slightly.

Clay C. Williams – SVP and CFO: And also Doug one of the things that’s good about our PS&S side, when I talked about the efficiency gains and a lot of the wells being drilled, while the demand for rigs is declining a little bit, the efficiency gains and the footage being drilled is still pretty good, and a lot of the tools that we’re putting in there, whether they’re Helios drilling bits or whether they’re our new downhole motors are really doing very, very well. So it’s kind of a two-sided coin right there, but we do have some positive things because of those efficiency gains.

Doug Becker – Bank of America: Makes sense. So if U.S. rig count were to kind of flatten out as we go into 2013, international presumably still improving, would you expect margins to still be kind of around that 20% level or actually improve?

Clay C. Williams – SVP and CFO: I think if we have growth overseas, that’s a good foundation for the margin expansion as we kind of move through 2013 and so if North America just hangs in there and stabilizes, we can certainly – we’ve got terrific managers who are good at managing the cost side of the equation here and then with little growth overseas and we see the same sorts of adoption of new technologies of these new products blossom in shale plays overseas, that’s you’re moving from one continent to another five or six that’s a pretty good tailwind in 2013 to drive margins a little higher towards the end of the year.

Doug Becker – Bank of America: Pete, I think I know the answer to this, but Clay was mentioning the potential of a new paradigm for rig orders just more stable. I guess I’d argue all else equal, this should mean higher multiples for the stock. What does this make you think about capital allocation just to make sure the purchase is more attractive in your eyes or you still tend to focus more on the acquisition and dividend angle?

Merrill A. Miller, Jr. – Chairman, President and CEO: Doug, we are going to probably continue more on the M&A and the dividend issues, but we look at everything all the time. I mean whenever we have a Board meeting, we review with our Board strategically where we are and what the best allocation of capital is and I’ve got an awfully good Board and astute Board and I think they will chime in and give us their guidance as well, but I would say right now, we still believe we do emanate very, very well and we’ll continue to look at that and of course our dividends will remain there, but you are right, and I think that as we take a look at this new paradigm what we believe is there, we also believe that we do deserve a higher multiple, so I will certainly not argue with you on that one, but again, as I tell everybody, everything is always on the table for us. It’s just a matter of what the best determination is at that point and time.

Clay C. Williams – SVP and CFO: I think a key thing here is we’ve used both acquisitions as well as capital investments internally to support our customers to meet their needs. We’ve seen rising demand across a lot of our businesses and throughout Rig Technology and PS&S both as well as some businesses in Distribution. We’ve deployed a lot of capital. Our plan was that CapEx move up very sharply in 2012, we are actually probably underspend what we budgeted for simply because eyes were a little bigger than our stomach, but the capital is available there to grows these businesses and we are happy to put it to work to take care of our customers.

Backlog Timing

Brad Handler – Jefferies & Company: A couple of unrelated things please and I guess they are probably pretty quick. The first is, I guess, I was surprised – I know you tend not to talk about specific rigs and so I’m just going to ask you to reach however you can, but I was a little surprised that the orders this quarter included five rigs from Brazil, maybe it’s almost that that it didn’t include other things, so I was sort of anticipating less from Brazil and more from the rest of the world. If there’s any color you can add to that to the timing of how that plays out and maybe suggestions about your anticipation for Q4 and Q1 in that context, I’d appreciate it.

Merrill A. Miller, Jr. – Chairman, President and CEO: As we talk many, many times, the timing of the backlog is always a very interesting phenomenon, and we cut it off. If we don’t have an order by the 30th of September, that’s that, and a lot of times, what you will see, what people will be making announcements about, we’re going to do this or we’re going to do that, we also don’t put anything notional on our backlog. It’s got to be – it’s got to have signed document and it’s got money with it normally as well, and so a lot of the things that you read about the people say we’re ordering, they aren’t necessarily ordered last quarter and they will push out into another quarter. And that’s one of the reasons that we talk about this all the time about. As you take a look at backlog, you really have to look at over a more extended period because again of that – they’re certain that we always cut things off and I think if you look over the last four or five quarters, you can see that we’ve always been over – I can’t remember the last quarter that we went over 1 to 1 book-to-bill. The orders have stayed very, very steady and we feel very good about where we’re going into the future.

Clay C. Williams – SVP and CFO: Actually eight of the last nine quarters I think our book-to-bill was in excess of 1. In this quarter, we had record revenue out of backlog and orders exceeded that by 20%, so 120% of record revenue book-to-bill is pretty strong.

Brad Handler – Jefferies & Company: Maybe a constructive question is to ask, were the five coming out of the Sete Brazil orders?

Clay C. Williams – SVP and CFO: Yes.

Brad Handler – Jefferies & Company: The unrelated follow-up if I may, maybe just a little help on the Distribution guidance, in the third quarter, how much of the quarter included CE Franklin, Wilson?

Clay C. Williams – SVP and CFO: We had full quarter of Wilson and almost a full quarter of CE Franklin.

Brad Handler – Jefferies & Company: Almost, okay, so in other words it’s…

Clay C. Williams – SVP and CFO: You’re getting a pretty good window and sort of a go-forward capability of Distribution & Transmission and the other point on that too, and I mentioned this on my comments, but the mix shifted towards North America, which is slowing a little bit, so that’s the headwind in Q4 baked into the guidance on Distribution & Transmission I gave a few minutes ago.

Brad Handler – Jefferies & Company: Understand, all right, so it’s a pretty straight comparison quarter-on-quarter.

A Closer Look: National Oilwell Varco Earnings Cheat Sheet>>