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), executives said Thursday.

The accelerating drilling pace isn't exactly new, CEO Pete Miller and CFO Clay Williams told financial analysts during a conference call. The latest uptick in drilling services and equipment is a continuation of stronger service industry performance that began in late 2005 when the industry began to retool its aging drilling fleet. The surge in activity was derailed, he said, when financial markets collapsed in late 2008. NOV is the largest U.S. drilling equipment supplier.

Today it's back to business, and shipyards are working overtime to get rigs and supplies ready.

"Orders are accelerating and we expect 2011 to be strong," said Miller.

In the final three months of 2010 NOV added $1.4 billion of orders to its capital equipment backlog, which included higher demand for drilling equipment for newbuild offshore rigs, as well as for well intervention and stimulation equipment. The backlog for capital equipment orders for the Rig Technology segment, NOV's largest, rose 3% to $5.0 billion at the end of December, up slightly from 3Q2010.

"For customers listening, we would say order now," Williams said during the conference call. "Our orders for the fourth quarter do not yet fully reflect the magnitude of business we expect to gain on the resurgence in newbuild activity. Bookings in the first few weeks of 2011 have been accelerating and we expect orders for the first quarter of 2011 to be strong."

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.

The backlog of orders reflects only a portion of the gains NOV should reap as it equips many of the dozens of rigs that are being built, Miller explained.

"Even though we know we're going to be successful on some things we don't put 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."

Onshore shale drilling also is benefiting NOV. However, the company's management is concerned about the excess natural gas supplies, which will lead to more producers dropping rigs until prices move higher. What has helped, said Miller, is the move by North America's land drillers to shift to liquids-rich fields, including the Eagle Ford, Niobrara and Monterey shales.

U.S. drillers are "anxious" to develop proprietary rig designs, and that has caused some manufacturing inefficiencies and higher costs, said the CEO. It's better and less costly to stick with the "out of the box" designs, which already have been proven, Williams added.

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.

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."

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