Welcome to the National Oilwell Varco Second Quarter 2010 Earnings Conference Call. My name is Kristine, and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Loren Singletary, Vice President, Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Thank you, Kristine, and welcome everyone to the National Oilwell Varco Second Quarter 2010 Earnings Conference Call. With me today is Pete Miller, Chairman, CEO and President of National Oilwell Varco; and Clay Williams, Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its second quarter ended June 30, 2010, please note that some of the statements we make during this call may contain forecasts, projections and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the Federal Securities Laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest form 10-K National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these, as well as supplemental financial and operating information may be found within our press release on our website at www.nov.com, or in our filings with the SEC. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation. Now I will turn the call over to Pete for his opening comments.

Thank you, Loren, and good morning. Earlier today, National Oilwell Varco announced second quarter 2010 earnings of $401 million or $0.96 per fully diluted share on revenues of $2.94 billion. These results compare to second quarter 2009 earnings of $220 million or $0.53 per share on revenues of $3 billion. Clay will expand on these results in just a moment. Additionally, we announced new capital equipment orders of $689 million and a quarter ending backlog of $4.9 billion. Throughout the call, we'll provide a little bit more color on the backlog and some of the things that are happening around the world. We are very pleased with these results and it shows the continued outstanding performance of our employees around the world. I will talk a little bit later about some of the operational issues and some of the things that we're seeing around the world. But at this time, I'll turn it over to Clay for his comments.

Thank you, Pete. National Oilwell Varco posted second quarter 2010 net income attributable to the company of $401 million or $0.96 per diluted share, compared to $1.01 per share for the first quarter of 2010 and $0.53 per share in the second quarter of 2009, all on a GAAP basis. Included in the second quarter 2010 results were $4 million pretax or $0.01 per share after tax and transaction charges. Excluding these earnings were $0.97 per share. This compares to $1.10 per share in the first quarter of 2010 and $0.90 per share in the second quarter of 2009, excluding unusual transaction, restructuring impairment and discrete tax items from these periods too. As I do each quarter, I will focus my comparative remarks on results excluding these unusual items, which are reconciled in our press release to highlight changes in our underlying businesses. Overall, results were solid. Domestic rig activity was robust. Canada breakup was not too bad, and outlook for Canada is rising for the second half of the year. And a steady recovery has taken root in international markets, albeit a bit more subdued than the vigorous recovery we've seen on this continent. Second quarter gross orders of $689 million of capital equipment for our Rig Technology group marked the third quarter in a row, gross orders have exceeded $600 million mark. Revenues out of NOV's backlog of capital equipment were a little less than $1.3 billion comparable to shipment levels generated during the beginning of 2008. Second quarter operating profit of $494 million produced operating margins of 20.2%. Compared to the first quarter, flow-throughs were 59% on a 3% sequential revenue decline due to the underlying mix changes. Compared to the second quarter of 2009, the company generated $5 million higher operating profit, despite a $69 million…

Thanks, Clay. I want to make a few more brief comments on some of the issues and expand upon a couple of things that Clay has said. And then I'll turn it over for questioning from everybody on the call. But I want to really emphasize again the shales, and it's not just natural gas. I think that's what a lot of people have been thinking about. But a lot of these shales, in particular, the Eagle Ford and the Bakken, are really oil plays. And I think that really kind of gives us a lot more long-term visibility into what's going on here, and especially, as Clay mentioned, when you have a sudden [ph] handle on oil prices. We are very aggressively positioning ourselves to be able to take advantage of these oil plays. In Distribution, we're opening up new facilities, we're doing the same thing in our PS&S business. And really, we're positioning our PS&S business to be the primary beneficiary of a lot of the things that are going on specifically, bids, what we're doing with like Downhole Tools, obviously our pipe, and we really like what's going on in that area. And we think, as Clay pointed out, that it's really going to expand worldwide, and that really provides a neat opportunity for us. Someone once said, well, around the world, they don't have the infrastructure in place to be able to do these shales. And I always like to say, by the way, we build infrastructures. So we're kind of ready to go with that. And I think that's going to be a kind of a neat deal. We've also utilized this little bit of softening in the market to make sure that we position ourselves to come out of this much better. In particular,…

[Operator Instructions] The first question comes from Jim Crandell from Barclays.

Pete, I want to ask about a couple of things you didn't touch on during your call. The first one is IntelliServ. I guess, do you still feel that this is going to be one of the most important technological developments in the industry? And whether you want to put numbers on it in terms of jobs or revenues, can you give us some indication of progress on the whole IntelliServ technology and when you think now it might evolve into something meaningful for NOV?

Jim, it's a great question, and it is something that -- when I talk about our technology, and people ask me, are there some game-changers out there, the one game-changer I always point to is IntelliServ. I think it really has some tremendous potential. As you well know, we finalized the JV with Schlumberger last year. We're still kind of getting our feet on the ground and our wings a little bit wet on working with them on it. But I think, everybody's excited about some of the prospects. The hold up, if you will, or some of the issues associated with it, are really getting a lot of the tools to be IntelliServ compatible. You want to have sensored bits as an example. We're doing a lot of work on sensored bits, and I think we have to get a little bit more in there, some of the downhole tools, the other things have to be a little bit more IntelliServ compatible. The rigs themselves have to have a few modifications, specifically, like a top drive. We have to be able to make sure that those things good. So that's taking a little bit of time. I will tell you this, the projects that we put it out on, have been tremendous successes. And the testimonials we're getting back from the customers have been really, really good. What we have to do right now is really, kind of put together a program that can monetize that for our customers, show them where the value added is, and then I think go along with it. It's not going to happen overnight, and I would be very reluctant to put any numbers around it at this point in time. But I will say, I think it has tremendous potential. I can go back in 1985 and tell you about the potential of top drives and it was kind of a slow goal for a while. I think this has the same sort of game-changing capability the top drives have. And today, top drive's ubiquitous, they're everywhere and you have to have them on the rig. So I'm very, very excited about it, Jim. But again, I'd be very reluctant to put any numbers around it. But I think, in four or five years, when we're on this call, we'll be talking about the success of IntelliServ.

My second question is, as NOV makes a huge amount of products that go on an offshore rig, other than the BOP stack, where might you see a plus to NOV's business based on either improved safety standards, or increased repair maintenance requirements?

Jim, there's going to be an emphasis, I think, on maintenance. There always has been an emphasis on maintenance. I don't want to make it sound like this is something that's new. I mean, people have really done a good job. I think there will be an expanded emphasis on maintenance, and I think that will probably play well to everything that we're doing. And I think also, what probably plays well on this situation is that you want to buy your equipment and you want to have the support of the best that's out there. And I think that, again, we've got locations all over the world. If you're running rigs in Brazil, we're there to help you. If you're running rigs in West Africa, we're there to help you. If you're running rigs in the Gulf of Mexico, we're there to help you. So I think because of requirements that'll are probably be strengthened, certainly, we're going to be there to help and help the industry take care of those issues.

Pete, aside from the FPSOs that you went into, I think if I had to say, if there's one thing I'm surprised about over the last couple of years, it's been NOV not being able to do any big transactions, which I think, you attributed to the fact that after let's say, Schlumberger paid for Smith, the price went up and the price that you were willing to pay and the price that sellers wanted just wasn't in sync. Are those getting any closer today? And do you think you'll see a sort of break in this logjam for a potential transaction for NOV?

Yes, I think so, Jim. I mean, one of the things that we're committed to, we're committed to our shareholders and everyone is that we're going to maintain our discipline. And we've had a great track record of buying companies, and we bought them very efficiently and very effectively, and we don't want to change that. And there's some things that are out there that we'd really like. But when the seller's eyes get bigger than their stomach, it's pretty tough to pull through. But I will tell you this, we've got more deals on the table today, we've expanded the size of our Business Development group, and you'll see us make some news. We're patient people. We kind of played out some of these things and they come back to see us. There have been many times when people would walk away from the negotiating table with us, only to see them come back six months later and say, well, maybe that wasn't such a bad deal after all. So we're patient, and I think you'll see us do some deals.

Yes. We've also, Jim, done a lot of small deals. You're right, we haven't announced any blockbuster, billion-dollar size deals. But in the past 18 months, we've done about 15 acquisitions, spending close to $700 million. So they do add up. And these are, frankly, very good compelling economics. They bring a lot of very interesting technologies. They bring us new products, and so we continue to knock those out. The bigger deals, as you know, take a little longer they're more protracted sort of dating period between the parties, and we are not going to lose our discipline.

The next question comes from Marshall Adkins from Raymond James. J. Adkins - Raymond James & Associates: On the PS&S, because I think margins there were higher than we all thought, and it sounded in your discussion, Clay, that it was more utilization, or throughput driven, not pricing. So on that front, is there room for more pricing? Are these margins sustainable? And how high can PS&S margins get over the next few years?

Q2 was up in volume, and what you saw was almost purely all volume-driven. In fact, Marshall, as you know, our incremental leverage a 24% there going from Q1 to Q2 is below what would typically post due to some mix issues, higher Chinese pipe and Canada cycling down with breakup. We are not seeing pricing improvement in most business lines yet. The good news is that we've seen this movie a few times before. And usually, as you move a few quarters into the recoveries when you start to get a little better pricing and you start to get some improvements on that front. So the last time this all played out was a period between 2003 and 2008. We went through an extended growth cycle in the industry. Right now, things look like they did, let's say in '05 when we were kind of had margins in the mid-teens for PS&S. And by '07, we were up into the low to mid-20s and kind of went up to the mid-20s pretty firmly by 2008. So we've got a good clear track record of tracing that out in the past. That exemplifies the power pricing leverage in the Petroleum Services Group. J. Adkins - Raymond James & Associates: I think you mentioned, of the backlog, you have 86% international, I think it was 18% offshore. I want to focus on the backlog you've added, the $660 million net adds, can you kind of break that down by product line, by geographic region, onshore, offshore, that kind of thing, just to help us understand where the new bookings are coming from?

Yes. The big movers this quarter were coiled tubing and pressure pumping equipment, where the book to bill in that group was more than two. And that was mostly centered on North America, but not exclusively. We also sold a lot of pressure pumping into China, which has been a good market for us in the last several quarters, so a lot of interest there. Land repackages ticked up, and as I mentioned, our overall land rig as you point out, our land rig backlog jumped nearly 1/3 sequentially, and now comprises nearly 20% of the backlog. And so that was a good move on that. That was really across-the-board. We had complete rig packages for domestic land drillers, as well as customers in the Middle East and Russia. And also, another really good quarter for top drive demand. I think we have over 70 top drives sold again, this quarter. And again, a lot of those going into the land rig market. So there's really a broad-based order quarter. The offshore floater that we sold late in the quarter as well wasn't quite as big as kind of our usual floater order, because it didn't include some pressure control equipment. So that moved the needle nicely. But it didn't -- I would stress that the orders for the quarter were very broad-based and across all the products that we offer. J. Adkins - Raymond James & Associates: So looking at a year, I mean, should we expect those overall backlog numbers to be more like 60% international offshore? Or give us some of your thoughts there.

Well, as we pointed out, we had big expectations for Brazil. We do think Petrobras is going to move forward. So I think the needle is likely to move back the other way sharply once we have those 28 Deepwater floaters.

The next question comes from Brian Uhlmer from Pritchard Capital.

Talking on the BOP front, as we look out to what your expectations are for potentially new regulations. First off, when you're talking about new BOPs and your new patented technology, are we replacing the entire body of the ram? Or are we just replacing kind of the guts, as well as the bonnets and the components inside of that ram? And what is kind of an estimate of the capital per rig that would be required to kind of upgrade and meet the tougher requirements in your view?

Well, I think Brian, there's going to be a lot of things you can do. Your question is kind of a set quadratic equation. There's a lot of variables there. But we'll be able to upgrade existing equipment that we've manufactured. We'll be able to add a bonnet to things that we've already manufactured. For instance, if you've got a four-ram stack and you have to make it a six-ram stack, we can go out and retrofit that and make it to a six-ram stack. If you've already got a six-ram stack, we can go out and we can retrofit and put in what I was talking about on these new low-force shear rams. So there's a lot of different variables in there. And in some cases, people may want to buy a complete new stack, and like a complete stack just to kind of give you the run-of-the-mill number. And again, if you bought a six-ram stack today, state-of-the-art, it's close to $50 million. However, I don't think a lot of that's going to have to happen. I think you're going to be able to modify and in some cases, you can go ahead and modify for as little as probably $2 million or $3 million. It's going to depend on the particular situation. And there's a lot of stacks out there today that don't need the darn fit. I mean, if you take a look, especially the rigs that have been built new recently, irrespective of, if they're ours or other folks have put them on there, they're going to have a stack that can meet whatever requirements, I think, are going to come out. So that's a little bit of a long-winded answer and there's a lot of different ways to look at it.

And following up, when you're talking about the floater that slipped into the quarter, was that just the joint package? So it didn't include cranes, it didn't include -- was that rig that's being built, possibly but was someone else supplying that essential portion of equipment that you don't normally supply? And what was the magnitude of that?

What I was mentioning on that was the stack and the riser pack, which is a big-dollar item. But everything else, I think, we did real well on.

So just a stack of the riser?

Yes.

The next question comes from Geoff Kieburtz from Weeden & Co. Geoff Kieburtz - Weeden & Co. Research: I've got another question on the backlog. It looked to me, if I'm right, that your backlog for 2011 delivery jumped up by about $600 million sequentially. Is that because of the kind of predominance of the coiled tubing and pressure pumping components?

Exactly, Geoff. That's a quicker-turn stream of orders. And we can deliver land rigs in six months, nine months, a year kind of depending on the model. And so the deliveries are now starting to ramp up in 2011 in the existing backlog. Geoff Kieburtz - Weeden & Co. Research: And I understood your answer there to the earlier question, that as a percentage basis, with Brazil coming in, you'd expect the backlog to shift back toward international offshore. But is there any reason to think that the magnitude of those short-cycle orders is going to diminish in the next several quarters?

What I think is most encouraging. And this is to me, this is the big picture out there, is that day rates for these new rigs continue to move up, the joint contract providers of this new rig technology frankly, just continue to see steadily higher demand and more interest in that technology than their competitors that are offering the old 1970s rigs. This has been a very steady sort of unfolding of an awareness amongst oil and gas companies of the capabilities of the new rig technology, and that's the engine that's driving this. You have all this commodity price cyclicality juxtaposed on this. But behind it all is this very steady gradual move towards new technology. And we are absolutely convinced that, that is going to continue. And that's exactly in line. We have been saying this for five years, the industry is shifting towards this new technology for onshore rigs. Geoff Kieburtz - Weeden & Co. Research: And my other question has to do with -- you gave us a lot of different kind of currents, if you will, related to the Drill Pipe business, sort of pluses, the minuses. Are you able to kind of cut through all of the different factors and give us any sense of what you expect in terms of Drill Pipe volumes and margins as we go over the next several quarters?

Yes. It's certainly picking up. Our backlog rose again this quarter, second quarter in a row, and that's a nice turnaround. We haven't seen, as I mentioned last quarter, we haven't seen book to bill over one in Drill Pipe since, I think, mid-2008. And so it's going the right direction. Big picture last year, we were selling more premium pipe into offshore rigs that were coming out of the shipyards, which is very high margin, big pipe into that customer base. This year, we're selling smaller pipe to more land drillers and alliance accounts. So the revenue per foot dropped, along with we're also selling more pipe into the domestic Chinese market. So neither of those are high-margin businesses as our premium offer pipe. Geoff Kieburtz - Weeden & Co. Research: And those are trends that you think are going to persist here for several quarters?

The small pipe demand is really tied to the shale plays. The industry is kind of standardizing on four-inch drill pipe with XT premium connections, which is great for us. And we're happy to help them put that pipe in the market. Worth noting too, we're also seeing a shift in the customer base, more towards rental tool companies. The shale plays are very, very tough on Drill Pipe and the Drill Pipe offering. It gets torn up. And so the rental tool companies are coming in and providing a pipe for a lot of those drilling programs. Geoff Kieburtz - Weeden & Co. Research: And does that feedback to your outlook for Voest-Alpine? A little bit of an improvement sequentially in the quarter, does that continue?

Hardly. Voest-Alpine also sells OCTG into the North American market as well, Geoff. So that's probably actually the bigger driver for their profitability there.

There is time for one last question. Today's final question comes from Bill Sanchez from Howard Weil and Company (sic) [Howard Weil Incorporated].

Pete, just for a clarification point, so the Brazilian floater you got in 2Q and the two more you've announced on this call for third quarter, does that essentially wrap up now any potential awards from the initial 12 that Petrobras announced back in '08?

There's still some stuff that's hanging out there, Bill. And I don't want to get too definitive about it. And we're not really sure ultimately what's going to happen. Our focus today is really more on the ones that we've talked about plus the technical tenders that were opened recently down in Brazil and the other things coming. But I think there certainly could be something else that could potentially happen.

As far as the margin guidance in Rig Technology, Clay, and they were still looking to see that eventual margin decline here. I was hoping you could talk a little bit about how the mix is shaping up when we look kind of the spares and aftermarket business, if you will, or the component that doesn't meet the 100,000 threshold and, I guess, dump down outside of the capital equipment side. Can you tell me how that's affecting? I'm assuming that's higher margin work for you relative to what's in backlog. Can you talk about how that's supporting margins? And then beyond third quarter, how do you see kind of a trough, if you will, margin quarter shaping up for RT as a whole?

The improvement in spare parts sales is accretive to the margins there. But I'll stress too, Bill, that the work that's kind of dwindling down a little bit, these offshore rig is pretty high margin too. So you kind of got those two going in opposite directions with regard to the margin contribution. The land equipment that we sell isn't quite as good as those two streams of revenue.

Is third quarter -- it may eventually, you get down to this mid to high-20s. Is that a decent assumption to make going forward beyond 3Q as you see it, Clay?

Yes, I think so. We actually outperform margin in the second quarter. We were expecting high 20s when we announced last quarter and ended up being a little over 30%. Again, excellent execution on these projects. And that just continue to do a super job. But they do tell us that hey, as the volumes are coming down, absorption gets a little bit trickier and the mix is shifting towards more of this land work which isn't quite as heroic on the margins. So that's the reason I gave mid to high 20% margin guidance on relatively flat revenues for Rig Technology in Q3.

I guess and maybe it's just a clarification point. But Clay you mentioned, you're looking on the FPSO side to go from $25 million to $100 million per package. I'm just curious, is that going to be achieved based on in-house products you already have, that you guys are going to just be able to sell more of? Or is there something that you guys need additionally on the M&A side to get to that kind of target number?

We're working on a transaction now that we're hoping to get done here soon, and that would bring that additional revenue potential to us.

Gentlemen, that concludes today's question-and-answer session. Please go ahead with any final remarks.

Thanks, Kristine. And I'd like to thank you all for calling in, and we look forward to talking to you again at the end of the third quarter. Thank you very much.

Thank you for participating in the National Oilwell Varco Second Quarter 2010 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.