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NOV's Miller: Buckle Your Seat Belts, Keep Your Eyes On China

National Oilwell Varco Inc. (NOV) CEO Pete Miller believes a slump in North American onshore drilling will continue through this year, but the international energy equipment business is high on his radar, particularly in China.

NOV is internationally known for its rig technology and expertise. The land segment in the United States and Canada slowed last year for all of the oilfield services companies, but beyond 2013, the management team remains optimistic. Overseas markets hold particular promise, said Miller.

"I really do think you are going to see an escalation of shale drilling internationally," Miller said in an earnings conference call last week.

Shale gas development has gone slowly in the international arena, "but I think that will change. I'd just give you an example. I was in China [late last month] visiting with some shipyards that have just committed on some semi and jack-ups to us, and at the same time the pollution in Beijing was just unbelievable. I mean, people couldn't even go to work. It's so bad.

"China, as we all know will move very rapidly in fixing things and the quick fix on pollution like that is pretty simple. That is called natural gas, and natural gas they have in the shales in China. I think you will start to see a real escalation of things like that in the international arena. The reality is that natural gas is very clean burning and that you are going to see more demand of that around the world and we are prepared to be able to help them there. I think that's going to really be a situation for us."

Miller said, "Shales, deepwater and the best-in-class technology...continue to dictate the strategy of the company. I think the shales in particular, when you [look at] the oily shales, whether it's up in the Bakken or down in the Eagle Ford, I think they will continue to give us a great presence in especially [pipe equipment] businesses in our distribution business that really can parlay good things in there.

NOV finished 2012 with a record backlog of rig technology orders, but there's a "cross current" for the markets in 2013, especially in North America's land operations, said COO Clay Williams. A backlog for capital equipment orders within the Rig Technology segment jumped 2% sequentially in the final three months of 2012 and surged 25% from a year ago. Revenue out of the rig technology backlog also rose 25%.

"Additionally, we announced new capital equipment orders for the quarter of $2.42 billion, or 1.1:1 book-to-bill ratio,"Miller said . "This equates to a quarter-ending backlog of $11.9 billion, a record for us. This exceeds our prior record that we achieved in the third quarter of 2008."

Every company segment improved revenues and profits from the year-ago period. Net profits reached $638 million ($1.49/share), down 2% sequentially but up 9% from 4Q2011. Quarterly revenues climbed 7% sequentially to $5.69 billion. Operating profits, excluding charges, totaled $954 million, or 16.8% of sales; they were 1% higher than in 3Q2012.

"As we enter 2013, we see cross currents in the markets we serve," said Williams. "Demand for offshore floating rigs and equipment is strong and constructive, but markets for land equipment and services across North America remain hesitant."

In North America's onshore, demand for rigs and pressure pumping equipment "is very weak," he said. "Demand will ultimately return. High-pressure around-the-clock frack [hydraulic fracture] jobs are very tough on pressure pumping equipment" and "operators continue to push drillers to retool the rig fleets, but we expect 2013 to continue to be slows as we face significant price pressure."

Overseas land markets are "far more promising," especially throughout Latin America, the Middle East and the Far East. "Interestingly, we see many international land markets finally burning through the rig overhang from the 1970s, and beginning to retool much like their North American counterparts did several years ago with horizontal well capable high-technology drilling assets."

A strong start to 2012 "gave way to sliding North American market conditions over the summer that have persisted through today," noted the COO. "Slowing orders for petroleum services and supplies consumables have led to pricing pressure across several product lines that have resulted in lower sequential margins and the general reluctance by drilling and pressure pumping contractors to spend" for capital or operating expenses.

The management team has had heard other operators discuss "causes for hope in 2013," such as a seasonal upturn in Canada drilling early this year, "budget replenishment" by exploration and production companies, and "potential uplifts" in North American natural gas prices," said Williams. NOV's executives "don't yet see a rebound happening, and we certainly don't see it soon...We are taking measures to reduce cost and improve efficiencies in the meantime."

The company faces a "difficult market in North America in the short run."

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