Drilling equipment demand in the global offshore, combined with unstoppable pressure pumping activity across North America, boosted the year/year performance for Houston’s National Oilwell Varco (NOV).

The Houston-based equipment provider’s backlog for rig equipment jumped 3% in the final period of 2010 to $5.0 billion on increased demand, including for well stimulation products, CEO Pete Miller said during a conference call with financial analysts. However, the sales recorded in 4Q2010 don’t reflect expected business in 2011, he explained.

“Even though we know we’re going to be successful on some things we don’t put it in the backlog until we have a contract in hand and some money,” he said. “We’re very positive about what’s going on right now, but again, announcements don’t necessarily mean orders.”

NOV’s Land Rig segment “turned down somewhat in the fourth quarter surprisingly, after steadily rising in the second and third quarter of 2010, but we believe that this is a momentary pause,” said CFO Clay Williams. “Interestingly, we see North American drillers anxious to develop quasi-proprietary rig designs, which they can brand as their own, incorporating components from other suppliers or supplying certain owner-furnished equipment or performing their own rig ups, which can and does lead to inefficiencies in the manufacturing process and ultimately higher cost.” By contrast, he said many of the international drillers prefer “out-of-the-box NOV solutions.”

There’s “very strong demand for well intervention and stimulation equipment like lenders, frack [hydraulic fracture] equipment and coiled tubing units for the blistering hot North American pressure pumping market,” said Williams. “Quarter deliveries are beginning to stretch out partly because we find it surprisingly difficult to source components like trailers, truck chassis, cranes and transmissions in a timely manner.”

Particularly strong are orders for equipment in North America’s liquids-rich Eagle Ford, Niobrara and Monterey shales. On the other hand, a concern for NOV and other equipment suppliers is an excess of onshore gas, which has led more rigs to fall, Miller noted.

Beyond North America, NOV sees an uptick in activity in China, which has long been an active market for NOV. However, in recent weeks, “there’s been a little flurry of activity, which would indicate that they’re getting those rigs set up to be able to drill shale-type wells,” he said. Shale drilling also is under way in Poland and Argentina.

The surge in new business isn’t part of a “new” cycle, according to Miller. To NOV, it’s a “resumption of the cycle…We’re not in a new cycle, but frankly, were resuming a cycle from 2008. It’s a continuation of what started then,” which was scuttled by the financial crisis late that year.

However, there is a difference in the restarted cycle. “The big boys are coming in and buying stuff. The last time, there were more speculators, nontraditional buyers,” said the CEO. The surge in buying “started in 2005, 2006…Now the established guys are leading it, and we are seeing some nontraditional businesses coming back in.”

What’s “also pretty critical” about the upturn in the market is that producers have “an understanding now to let the shipyards build [the rigs]” instead of asking for newbuilds using untested designs. “It’s incumbent upon them to get the rigs built,” Miller said of the shipyards. “If you look at history from ’05, rigs were built on time and on budget…

“Those two elements are interacting in there today. Contractors are coming in and saying, ‘build this rig and let’s go.'”

As business began to strengthen last year, the shift in equipment requests was “characterized by smaller drill pipe purchases for land rigs, especially for shales,” said Williams. “The four-inch drill pipe has kind of become standardized…We saw a lot of customers scrambling to get that kind of pipe.”

Twenty years ago onshore “drill pipe lasted five years,” said Williams. “Today we are hearing from operators that it’s more like two-and-a-half, three years. The [shale] wells are a lot tougher on drill pipe…they are drilling through dense rock, rotated on their sides…The wear and tear and complexity of well pads is wearing out drill pipe faster.

“Pipe is spending fewer days on the truck and ore in the well drilling under old rigs. The new rigs come on, more spending to make the hole…it’s speeding up the consumption of drill pipe…It’s become more of a consumable commodity, considering the rates of consumption.”

Miller said there are “a lot of new products” to drill shale wells, and NOV plans to “push the envelope as a company in new product development.”

To capture a larger slice of the drilling equipment market, NOV plans to expand its coiled tubing manufacturing business in Houston. It also plans to build two fiberglass pipe plants overseas, as well as three coating factories.

“We’ve been spending money and incurring some costs in anticipation of being able to accelerate out of a downturn,” said Miller. “2011 looks bright as we enter the year with strong financial resources, a solid backlog, leading technology and an experienced team capable of delivering great service and products to our customers and excellent financial results to our shareholders…” NOV, he said, is attempting to “navigate the market with dexterity and nimbleness.”

Analysts reacted positively to NOV’s report.

“Impressive earnings,” said analysts with Tudor, Pickering, Holt & Co. Inc. The 4Q2010 orders were below “investor guesstimates,” but the last quarter’s orders “shouldn’t be a big deal to the stock with newbuild announcements seemingly daily…orders are coming and will accelerate” in the first quarter. “We’re buyers if underwhelming orders provides [an] opportunity.” As Miller explained, said the analysts, “orders don’t necessarily hit immediately when a newbuild rig announcement is made.”

Determining NOV’s quarterly orders “is a challenge,” said the TPH team. “NOV only books new contracts into backlog when they are signed, thus 4Q2010 orders did not fully reflect the magnitude of business NOV will book from the recent flurry in newbuild announcements. Bookings in the first few weeks of ’11 have accelerated (NOV’s market share is really high…so they certainly will receive their fair share) and orders for the 1Q2011 should be strong…likely $2 billion-plus.”

NOV reported quarterly net profits of $440 million ($1.05/share), versus $394 million (94 cents) a year earlier. Revenue rose 1.2% in 4Q2010 to $3.17 billion and was up 5% sequentially.