National Oilwell Varco Inc. (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, according to the management team.

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,” CEO Pete Miller said during a conference call last Friday. “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.

COO Clay Williams noted that NOV had finished 2012 with a “right technology backlog of $11.9 billion after having added $9.4 billion in orders through the year.” However, “as we enter 2013, we see cross currents in the markets we serve. Demand for offshore floating rigs and equipment is strong and constructive, but markets for land equipment and services across North America remain hesitant.”

The offshore drilling contracting segment remained steady in 2012, which allows NOV to expand its deepwater fleets, “and we believe that this will continue through 2013,” said Williams. “Our outlook for continued strong deepwater orders is a view that appears to be out of step with Wall Street’s conventional wisdom, which seems likely to have convinced itself that deepwater rig ordering will slow. Candidly, we do not understand why..

“A world’s view that foresees deepwater orders going down…apparently employ some calculus that I just don’t get. We believe $100-plus Brent [crude oil prices] and 50% success rates are sufficient to lower the industry into deepwater to discover and capture billions of dollars of petroleum well. We also believe this will take lot of deepwater rigs.”

However, “our above consensus deepwater rig order view does not mean our Rig Technology segment is without challenges,” said the COO. “Specifically, despite strong demand, new drilling equipment package pricing has been stubbornly stuck 8-10% below the levels of 2007-2008, as new competitors join the mix and as contractors proceed with less urgency than before.”

Beyond the deepwater, NOV’s team sees “softer demand. Jack-up orders have slowed and most recent interest arises from lower tier contractors. Our competition seem determined to offset NOV’s considerable technical and operational advantages with price, sometimes partnering with Chinese shipyards to offer rigs at 10-20% discounts to establish yards.”

In North America’s onshore, demand for rigs and pressure pumping equipment “is very weak,” said Williams. “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.”

Within NOV’s petroleum services and supplies group, a strong start to 2012 “gave way to sliding North American market conditions over the summer that have persisted through today,” said Williams. “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.

Williams said the company 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. 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.”

NOV faces a “difficult market in North America in the short run,” said the COO.

“Shales, deepwater and the best-in-class technology…continue to dictate the strategy of the company,” said Miller. “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.

“More interestingly, I really do think you are going to see an escalation of shale drilling internationally. It’s gone slow. I think a lot of people are of the opinion that maybe it’s not going to ramp up as rapidly as you think, 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 the 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.”

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