National Oilwell Varco Earnings Call Insights: Selling RBN and Chance of a Higher Backlog

National Oilwell Varco, Inc. (NYSE:NOV) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Selling RBN

Brian Uhlmer – Global Hunter Securities: I have a whole list of questions and I’ll start with one and one follow-up though, but I wanted to – I guess, first Jeremy, I think great job, your first time on this call keeping up with Pete and Clay and your (liquidity) and providing those guidance details. I want to start off with something as material here to your comments on the RBN and your confidence in closing that acquisition the next several weeks, because the offer spread was definitely wide and I was curious, are there going to be any stipulations to that closing of that deal that would require you to sell any portions of RBN, or what gives you that confidence that it’s going to close in a couple of weeks, because clearly it looks like the market thinks otherwise right now?

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Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: Well Brian, we continue to provide answers to any questions that the government might have and we continue to push through a close here in about two or three weeks. I think Robbins & Myers has issued a press release giving the date of the closing and we continued to push to that and believe that’s what’s going to occur.

Brian Uhlmer – Global Hunter Securities: I There’ll be no, you are going to get RBN in it’s entirety, correct?

Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: That’s where we are right now.

Brian Uhlmer – Global Hunter Securities: I And it is my follow-up, completely unrelated you say that rig tech margins might tick up in Q1. I was curious maybe the progression as you go through the year and the statement you made does that have more to do with a mix issue or more to do with closing out the startups and getting everything done like you said in Brazil and Korea are there some cost still waiting on that and what makes it unlike to it will and how does that progress as we get through 2013?

Jeremy Thigpen’s – Senior Vice President and CFO: I think the might is really related to all those things that we talked about in our call. Those have got a significant impact to all of our pressure pumping equipment that coil tubing units land rig in North America, that’s going to weigh heavily on margins and then we do have a lot of startup costs associated with the flexibles plant in Brazil, again the product mix with more FPSO related revenues flowing in, more Brazil related revenues flowing in. We just think all of those are going to present some challenges for us and how those work through the system throughout the year kind of remains to be seen.

Clay C. Williams – President and COO: On the positive side Brian aftermarket in that space is doing terrific particularly wrapped around offshore rigs coming in from their five year surveys and so there is and then we kind of cover these in our opening comments. There is lots of puts and takes here, but as Jeremy mentioned. Lots of negatives and we are hopeful though that the offset will be the aftermarket side of that business which is very accretive to the markets.

Chance of a Higher Backlog

James Crandell – Dahlman Rose: Pete, I know I like to look at your sort of order picture on a more than one quarter basis, and looking forward, let’s say 12 months out by the end of ’13, do you think there is excellent chance that your backlog could be higher than it is today? And also, could you address it a little bit in more detail what you’re seeing with some granularity in the FPSO market that makes you optimistic today?

Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: Jim, we are very optimistic that 2013 is going to see a good order year, and I think that obviously the way we do backlog as I’ve told you many times, we kind of cut it off on a days specific, but I would expect 2013 to really be an excellent year and I would certainly expect over 1 to 1 book-to-bill on it. And I think as we take a look at the FPSO market, we are getting pretty excited about it. It’s not dissimilar to – when you look at lot of the people that are in sub-sea production and they kind of keep moving out to the right, and in many of the same ways, the FPSO business is moving a little bit to the right. But it’s still something pretty exciting. We are starting to see as Clay mentioned in his comments earlier, we’ve done a lot of feed studies, but we are also starting to kind of see a lot of this stuff develop in orders. We have received some orders on some products in the first quarter that are not included in the backlog currently. But the fact to the matter is, if you kind of take a look at, it’s almost inescapable. You look at all these deepwater rigs that we are putting out there and they are drilling, and they are not drilling for practice. They are drilling to discover oil and gas and the approved solution when they had discovered that oil and gas, in most cases those are going to be the FPSOs. And we think with what we have with NKT and what we have with our APL business that we’re going to be positioned to be able to take advantage of that. So, we’re still pretty bullish on it and we think as you go more into this year, you’ll see a lot more materialization of orders.

James Crandell – Dahlman Rose: My follow-up is that, I guess Clay, you do address from your comments about the ultra-deepwater market. I think one of the things that would maybe limit the ordering some large U.S. or formerly U.S. based contract does the pressure at least they feel they feel to return cash to shareholder either making a large dividend payments, MLPs and the like and that sort of slowing down their process. Do you see actually a difference of this Pete or Clay in the likelihood of the U.S. companies ordering more ultra-deepwater rigs versus some of your European companies like Seadrill Pacific Ocean Rig O12 and those kinds of companies?

Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: Jim, it really varies by Company. I know that many of them are wrestling with the decision of allocating capital into new growth prospects versus returning to shareholders and they’re all taking that question very, very seriously and I would also add lot of projects underway currently that they are very busy with, but I got to tell you, as a Group, the U.S. based publicly traded companies are in it’s good a mood as I’ve ever seen them. They see a lot of prospects out there in the marketplace, lots of opportunities to grow their businesses and candidly I think you go back five, six years ago the market demonstrated this, if they don’t act on those opportunities somebody will and you’ve recently seen a lot of entrepreneurs now getting back in this space as well. So, there are big returns to be had out there something like 300 deepwater fields that have been announced but haven’t been developed. 2012 was a record year in terms of announcement of discoveries in the deepwater. As Pete said, there’s a lot of drilling and FPSO development to come and that takes a lot of deepwater rigs. So, I think whether or not it’s the U.S. based organizations or the European counterparts or others around the globe getting into the fray, I think somebody is going to continue to build a lot of deepwater rigs.

James Crandell – Dahlman Rose: Pete, just as a clarification, were you saying that based on your trip to China you think now that the more major contract drillers order ultra-deepwater drill ships from Chinese yards now going forward?

Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: Well, I think they are going to be in the mix, Jim, but I think that a lot of them will be some of the Chinese drillers. You’re starting to see people like Castle and some of the bigger Chinese folks try to be major players. I think you’ll see some of the Norwegian type companies that will be looking at the Chinese shipyards. But I think the Chinese shipyards are clearly going to be a player. They are going to – they are getting in the mix and I think they are getting better on what they do.

James Crandell – Dahlman Rose: So you think your customer mix in new ultra-deepwater rig orders could change a fair amount going forward from what it has been over the last couple of years?

Merrill A. ‘Pete’ Miller, Jr. – Chairman and CEO: Jim, it’s been a cyclical deal. If you go back to ’06 and ’07, you have a lot of what were called kind of speculators and we set up the time. They weren’t speculators, but they were people that were really going to develop into quite good operations. If you see people like Seadrill, and Ocean Rig and (Archfield) and Pacific today. Then we kind of went into the more traditional folks, the Transocean, or the Nobles and the Atwoods and the Rowans and then I think you start to have to some other people coming back into the marketplace today. So, it’s really kind of the shift in customer base, but it’s one that we’re positioned with very well and we like where we are.