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Rig Technology Demand Drives National Oilwell Varco Profits

National Oilwell Varco Inc. (NOV), the largest U.S. oilfield equipment manufacturer, on Tuesday posted higher than expected quarterly profits, in part on rig technology orders, which jumped 26% in the period.

Net income rose almost 20% in 2Q2011 from a year ago to $480 million ($1.13/share) versus $401 million (96 cents). Revenue rose for the third straight quarter, up 19% from a year ago to $3.51 billion. Wall Street had expected the company to earn $1.10/share on revenue of $3.23 billion.

The company has benefited from a demand for both onshore and offshore rig equipment, which led to a backlog of orders in the rig technology segment that rose 60% year/year and 26% sequentially from 1Q2011. Total revenue for the rig technology segment climbed 18% sequentially to $1.9 billion.

The "real theme over the next couple of years is technology," said CEO Pete Miller. NOV now has a backlog of orders worth close to $8 billion and in the last two quarters alone "we've added more than $5 billion in backlog orders on record order intake results. "No question that the best rigs are getting the work. There's also no question you are going to continue to see the best rigs being built."

NOV's 2Q2011 book-to-bill ratio came in at 2.13, up slightly from the 2.07 ratio in the first three months of this year, but continuing the trend of consecutive quarterly increases since the third quarter of 2009 when the financial market meltdown began.

The book-to-bill ratio for NOV represents the amount of additions to the backlog divided by the amount of revenue that was booked from backlog during that same period. While the ratio itself will not explain 100% of the changes in backlog from period to period, since it does not incorporate things such as turns business (orders taken and filled in the same period), cancellations and order push-outs, book-to-bill ratios above one generally indicate that backlog grew (fell) during its measurement period (see chart).

Since 2006 NOV's book-to-bill ratio also has had a fairly high correlation with the U.S. total rig count. From 1Q2006 through 2Q2011, NOV's book-to-bill ratio in one quarter has explained 47% of the variability in the U.S. rig count the following quarter. That R-square statistic moves to an even more robust 73% when using the logarithm of those variables.

Onshore in the United States producers have take their shale gas expertise to the liquids-heavy and oily shales, which has benefited NOV, Miller said during a conference call with energy analysts. "We saw strong demand in the North American shale plays and good international activity," said Miller. "Like others in the industry we are seeing a steady migration in North American activity. Gas prices remain in the $4 neighborhood, leading to levels of gas drilling well below 2008 peaks.

"But this is more than offset by U.S. oil drilling where we are at levels not seen in 25 years, fueled by sustained prices. This has resulted in the first U.S. gains in oil production in a generation...It offers new opportunities for our operations to meet the pressing needs of the petroleum industry."

In response to demand NOV business units have been "expanding rapidly to build out infrastructure required of us," said the CEO. "The Bakken, Utica and Marcellus and Eagle Ford are pulling workers and iron into new frontiers and regions. In older areas, California, the Permian and the Rockies, we are seeing new growth...NOV intends to play a major role and we are exceedingly well positioned to drive the transformation."

The "big theme" in the United States continues to be the shales, he said. "Even though natural gas is priced lower today, rigs are coming off gas wells and moving to oil wells. There's a very nice consistency in the rig count right now...We are very encouraged that this is going to kind of continue on."

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