Welcome to the Third Quarter National Oilwell Varco 2010 Earnings Conference Call. My name is Christine, and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Loren Singletary, Vice President of Global Accounts and Investor Relations. Please go ahead.

Thank you, Christine, and welcome, everyone, to the National Oilwell Varco Third Quarter 2010 Earnings Conference Call. With me today is Pete Miller, Chairman, CEO and President of National Oilwell Varco; and Clay Williams, Executive Vice President and Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its third quarter ended September 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 and Form 10-Q 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. Good morning. Earlier today, National Oilwell Varco announced third quarter 2010 earnings of $404 million or $0.96 a share on revenues of approximately $3 billion. This compares with essentially similar results in the second quarter of 2010 and displays our continued outstanding execution of the Rig Technology business and significant improvement in the margins and operations in our Petroleum Services & Supplies business and our Distribution businesses. Clay will provide more color on these numbers in just a moment. Additionally, we announced new orders for capital equipment of $1.2 billion. This reflects the increasing demand for new state-of-the-art equipment and is the first quarter since the third quarter of 2008 that our book-to-bill ratio was one or greater. We are very pleased with these results as they are representative of hard work of our employees around the world and the improving environment for the products and services that NOV provides to its customers. I will now ask Clay to expand upon these results.

Thank you, Pete. National Oilwell Varco's third quarter 2010 net income attributable to the company was $404 million or $0.96 per fully diluted share, compares to $0.92 per share in the third quarter of 2009 and $0.96 per share in the second quarter of 2010, all on a GAAP basis. Included in the third quarter 2010 results were $2 million of pretax transaction charges. Excluding transaction charges from all periods, third quarter 2010 earnings were $0.97 per share compared to $0.95 per share a year ago and $0.97 per share last quarter. As I do each quarter, I'll focus my comparative remarks on results excluding these unusual items. Once again, the company generated steady strong results. Third quarter 2010 revenues of $3 billion were up about 2% from the second quarter of 2010 and down 2% from the third quarter of 2009. Operating profit, excluding transaction charges, was $598 million or 19.9% of revenue in the third quarter. Within our Petroleum Services & Supplies segment, almost every business unit saw sales rise from the second quarter to the third, as 19% sequential improvements in North American rig counts prompted higher demand for bits, drilling motors, pumps, liners, valves and other consumables, and also a pull-through more services including solids control services, casing, tubing, line pipe inspection and downhole tube rentals. Business units across the board generally posted single-digit sequential sales gains with Drill Pipe sales improving the most, up 10% sequentially. Land activity increases in unconventional shale plays were sufficient to overcome significant reductions in our Gulf of Mexico businesses, which declined $24 million sequentially for the segment due to the Deepwater moratorium and reduced shallow water drilling activity. The impact of the Gulf slowdown affected Drilling Fluids, Waste Management Service, Drill Pipe and Conductor Pipe Connection sales the most.…

Okay, thanks, Clay. And I think Clay really gave us a good overview of the market. I just want to add a couple of things to it, and I'll be pretty brief here. But in particular, I'll emphasize the shales again, and the liquid part of those shales. When you start to talk about the Eagle Ford, the Bakken, the Granite Wash, Niobrara and the western part of the Marcellus, you're really looking at some very interesting plays there with liquids. I think those are going to be plays that are going to take some time to work. And I think the rig count is going to be pretty resilient with that. The other thing that's pretty interesting are the international shale plays. And one of the complaints that I get all the time is our international shale plays are going to be a lot slower because the infrastructure has to be built out. Let me remind everybody on this call, we build infrastructure. And so actually, that will play very nicely into the fairway of what we're doing. Clay also mentioned the bifurcation of the rig market. This is something we've talked about extensively, exhaustively. Those of you that have listened to t e calls are probably tired of hearing it, but the best rig wins. And what we do though to make sure that we continue to produce those is to bring new products out. And I think the lifeblood of any company is developing new products. It's improving the products that you have. And when I talk about R&D, I would tell you that NOV is much bigger on the D side. We do a lot of R. But the D in developing the products that we have and continually improving those is extremely important to us.…

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

First question has to do with, Pete and Clay, are the new builds outside of Brazil. It seems with the jack-ups, we knew that a lot of premium jack-ups were out there. But it seems like a light is going off here. In my count anyway in the last month or so, we have nine jack-ups. So it is -- you're probably aware of more than that. But it seems as if there's a lot more that are getting ready to order jack-ups. And it also seems that the number of companies now, at least looking harder at ordering new ultra-deepwater rigs. How do you see those two segments outside of Petrobras playing out?

Jim, we're actually pretty optimistic about it. I think you've really kind of outlined it there. We've felt like the jack-up market was poised to do some interesting things. And I think what's really manifested itself has been when you look at the marketplace itself, I think a couple of years, everybody said, well, the jack-ups are going to get oversubscribed and you're going to have too much capacity. But what we're finding out again it comes to bifurcation, and you're starting to see these new jack-ups are really what people want. And there's a lot of reasons for that. It's the cantilever, independent leg, it's the control systems, the top drives, the pipe handling, the off-line activity that these things can do that makes them that much more efficient. So I think you're going to continue to see a nice little market for that. Plus I think the shipyards, don't discount the fact that they're getting more aggressive. The shipyards want to continue to have this work done. When Clay talks about the financing of these places in Korea and Singapore, there's a lot of local financing, government financing, because they want to keep those shipyards operating. So I think it's a combination of the best rigs wins, plus, they're probably becoming a little bit more affordable, if you will. And I think some of that is all coming to bear. And we like what we're seeing over the next year or so in this marketplace.

And do you see that also happening, as increased interest and much more activity surrounding the ultra-deepwater space too, Pete?

Yes, I think so. We've contended all along that the ultra-deepwater space really needed more rigs. And I think the only reason you haven't seen much happen the last couple of years has really been financing. I mean it really is a situation when you go back to the third quarter of '08 when the financial system was imploding, making a lot of people have things on the table at that point in time that they pulled off the table. I think what you're getting today, a couple of years later, is the stuff that's being put back on the table. So we think that there will be some activity in that. But also, let me put caution out there. These projects don't just crop up overnight. Somebody had to make the decision, I want to buy that rig, so it's done tomorrow. These are a little bit more time-consuming, and it will take a while to negotiate deals, take a while to spec them out. But the fact of the matter is they're there and they will push into the future, no question about it.

Pete, could you give a little bit more color on Brazil? Recently in the past, you've talked about your expectation that they would order at least seven rigs in the first half of the year, which you reiterated on this call. But you even spoke to, I think, the fact that they could order more than that here in 2011. How do you see things shaking out in 2011 as far as rig orders coming out of Brazil?

Jim, I think what you're going to see is we've talked a lot about the seven-plus-two initial order. And that has got seven drill ships and two semi-submersibles or the potential of that, going to a couple of different shipyards. But the absolute potential of this is 28 rigs. And I think it's hard to gaze into the future to think absolutely what they're thinking down there. But I will tell you this, we're firmly committed ourselves to doing things in Brazil. But the Brazilians are committed to wanting to have some local build in their rigs and they want to do these things in their shipyards. And I think it's going to happen. I think you could see as many as 28 done. My gut feel is it's going to be between the nine and 28. You could have 16 as an example. But clearly, it's going to happen. And we think that the tenders will be opened up probably this quarter, but you never can tell. And this is not -- the thing about this and I've said this before, this is actually fairly normal for an international tender. I mean, for it to extend out like this doesn't mean that there's anything nefarious happening. It's kind of what happens. I mean, I've been in this company for 15 years now and I think I'm still working on some tenders and some parts of the scope that started back 15 years ago. Not that, that will happen here, I don't mean that. I think it's going to happen, Jim, and it's going to be anywhere from about nine to 28 rigs.

And that, Pete, that would be over what period of time?

I think they'd make those orders probably within the next year. Maybe 18 months, but no longer than that.

So you said the most likely case is we could see, again, 16 deepwater rig orders over the next year to 18 months?

I think -- I hope -- I'd say that's most likely -- I'd say the nine is the most likely, but it's just going to be between the nine and the 28.

They need an awful lot of deepwater rigs down there. And to us it's very telling too that Petrobras changed the terms of the tender earlier this year to enable them to move beyond nine that they would, in fact, own or would provide equity financing for us. So that indicated to us that they're still moving forward. That plus the fact that they raised so much capital here a few weeks ago, we think bodes well for orders there.

Our next question comes from Kurt Hallead from RBC Capital Markets.

I just want to follow up that in the context of your PS&S business, a number of different product lines make up that segment. What's been the history of when the pricing improvement will start to roll through some of those business lines after rig count starts to improve? I know you mentioned that there hasn't been really any significance on the pricing power just yet. So I don't know if we're maybe getting on the cusp of that? Or whether you still think it's some time in the 12- to 18-month time period before you get some flow-through on pricing. Can you give us some color on that, please?

Kurt, if I had to guess right now, I think your 12 to 18 months time frame is probably a good time frame. When you move through a sudden sharp downturn and a severe downturn like we did in 2009, our customers pretty much across the board come back in and demand lower pricing and press for longer contracts. And so you end up with some contracts at lower pricing that just sort of have to burn off. You also find that you have to put a lot of more iron and crews and equipment and manufacturing capacity back to work before you get back up into utilization range that permits pricing leverage. And so we feel pretty good that the foundation has been laid, that things are starting to consolidate, we're starting to see some stability across a lot of our markets in PS&S. And to us, that tells us that pricing leverage is out there. And now it's just a question of quarter-by-quarter marching a little closer to each quarter. If you look back on PS&S on a pro forma basis, inclusive of Grant Prideco and excluding all of the merger noise, we looked a lot like we did in 2005. And back then, I think the segment averaged about 14%, 15% sort of operating margins, which this quarter, we did 15.1%. And it was really as we moved into 2006 that we began to see utilization levels hit the necessary threshold to be able to push through pricing increases. And that's resulted in margins for this group moving up into the low 20% range. And so I think, let's say at 2011, we start to see progress on that front, start to see margins really move up a little more strongly.

In the context then if you look at the biggest business elements or I guess bits and pipe and I guess, drill pipe inspection, when you look at the Drill Pipe business, I think you guys have said in the past that you expect kind of a restocking process, maybe toward the latter part of, if I'm not mistaken, later part of this year into the early part of next year. I'm not quite sure given the shale element of how you see that market shifting, how it's changed and maybe how it's changed your perspective of restocking for drill pipe?

I think actually the thesis is unfolding along the lines that we expect, if anything, maybe just a little bit earlier. But it's the mix that we're seeing a much higher mix of four-inch XT pipe for the shale plays. And it appears that is kind of the standard drill pipe that shale play operators are starting to coalesce around. And that's great news for us. The XT connection is a proprietary premium connection that we offer. If there's bad news to that, it's that four-inch is a little smaller than average. It's a little lower-priced product offering. But yes, I think it's all headed in the right direction. The other good news that we see out is that the offshore market, which had carried us a lot through 2009 with the new builds coming into the fleet, buying strings that piped out to those new builds, took a little pause at the end of '09 and through 2010. And now here late in 2010, it looks like the offshore market is starting to come back a little more strongly too. I think again, that's a business that we expect to continue to look better quarter-by-quarter as we move into 2011.

For Pete, you kind of made a reference there on the M&A part. I guess it's kind of like a college recruiting process, right? So you're trying to get a new group of freshmen in there to help your team. Can you give us some general sense as to what the mood is out there with respect to M&A? And whether or not now that we're off the trough and we're heading back into an up cycle, is it getting much more difficult to convince some partners out there to become part of the NOV team? Or is the mood such that there is some more likelihood that additional deals can get done, whether it's for NOV or the industry in general?

Actually, Kurt, I would say that the mood is much more optimistic today on getting things done. It's interesting when you kind of move out of out a trough, it's almost counter-intuitive. When you're in the trough, you don't necessarily want to sell, because you're kind of sitting there going oh, -- and a lot of people don't necessarily want to buy. Because you say, is it going to keep going lower? Or what's the deal? But when you start to see a little but of signs of life , I think both parties become a little bit more optimistic about wanting to do something. So I'm very optimistic as to where we are today. M&A kind of seems to move in waves on us. And I would say today, we've got a lot of opportunity out there. We're always looking at a lot of deals. But I think we're a little bit, as we look at some of the deals that we're seeing today, we're a little bit more optimistic that we can bring these things to the finish line. It's never a guarantee. I mean, there have been deals that we thought we had in the bag that at the last minute fall apart, other deals that we never thought we had a chance on, at the last minute come together. But we're pretty optimistic. And we think that it's probably more of a better and more optimistic market today for M&A to be done, and I think that's really pretty much across the industry, with Schlumberger just kind of completing the Smith deal. You saw the GE-Dresser deal. I just think there's a lot of potential out there today and we're pretty excited about it. We like where we are, with the balance sheet to be able to take advantage of it.

And then you expect NOV to kind of really continue to emphasize and maintain the manufacturing part? Or you think you're going to have to get in some non-traditional NOV-type businesses, services or otherwise?

We still like what we do on manufacturing, and I think that we do it quite well. And I think we're situated for it. We'll look at a lot of different opportunities. But I think that clearly, the thing that matters the most to us is kind of continuing to expand upon the things that we think we do very well and the things that we believe we're situated very well in the market to take advantage of.

Your next question comes from Bill Herbert from Simmons and Company. William Herbert - Simmons & Company International: Clay, back to Drill Pipe here. So book-to-bill in excess of 1x for the last three quarters, been hitting obviously an enormous uptick with the rig activity. In an environment in which we could be flattening out with regard to rig count growth and seeing some slippage with regard to dry gas rigs in exchange for oil and liquids-rich rigs, how do you expect the Drill Pipe story to play out in that environment? Both from a volume and a pricing standpoint.

That's a great question, Bill, and let me inject, I think, a key observation. It's not just raw rig count that matters anymore. It's really the wear and tear exerted by whatever rigs are drilling. And so what we would suggest that you juxtapose on the rig count is how many are these rigs are drilling horizontally or drilling extended-reach wells, are drilling complex well pads to hit multiple geologic targets. Because the wear factor on that pipe goes up some huge multiple of a more traditional vertical rig. And so the rig count's going to rise and fall and continue to be cyclical. But there's a very, very steady trend of more and more operators adopting horizontal drilling and complex well pad drilling and extended reach drilling. And that's the real driver for drill pipe consumption, and so that bodes well for margins and consumption of pipe. William Herbert - Simmons & Company International: So you got a mix shift, for example, from high-service intensity plays such as the Haynesville and to another one such as Eagle Ford, Bakken or what have you. And just the trend of increasing laterals and rising service, intensity wear and tear and what have you, that would drive a multiplier over "activity". How about on the pricing front?

Pricing is actually, that's just one of the few products where we're getting a little pricing leverage for certain site ranges that I referenced here. Where we've seen demand move up, we're starting to get -- it's not big. It's mid to maybe high single-digit type moves. But it speaks to the fact that Drill Pipe is getting tighter. And again, it's not just wear and tear, also too, these complicated well pads also require much higher torques and higher torque connections. And that's where we have a very strong proprietary position. William Herbert - Simmons & Company International: Are most of your alliance sales, if you will, for the big land contracts or large, I guess historically, they've been afforded discounted pricing, have those pretty much been done for next year? Or are those yet to come?

No. They've cycled down a little bit last quarter to -- they sort of buy in big lots. They were largely replaced by rental tool company buying, and we are expecting that the contractors to come back and buy more. So it's kind of -- in any particular quarter, you see swings and floats between groups, but that's kind of the current state of affairs. But what they're finding is they all need pipe and they need the right pipe.

And they need the pipe coded. We happen to code the pipe too and that helps when the pressure losses...

We can hard-band it... William Herbert - Simmons & Company International: I like it, I get the message. Yes, that's all good. Pete, going to FPSO and your M&A strategy on that front. We bought one captive, if you will, technology subsidiary from a prominent FPSO contractor. And we've expanded the revenue per FPSO from call it $20 million thereabouts to, I don't know, on the high-end now, about $120 million or half of a high-end drill ship. I'm just curious as to the remaining M&A opportunities within FPSO, I mean, you've got a number of captive technology subsidiaries remaining within the leading FPSO contractors. Is there value in doing something with those, just on a conceptual basis? Or are we looking for something else? Walk us through in terms of what the road map is for FPSO, in terms of an M&A strategy in front of us?

I think, Bill, as you take a look at -- one of the things you mentioned is the people that have the captive operations, and we think that is very attractive. I think a lot of companies today when they take a look at their strategies, they really want to become more of a pure play. And sometimes, you've got way too many things involved in that and people don't know if you're a manufacture or if you're an FPSO operator or whatever it does. So we think there's opportunity in being able to kind of bring that space together, if you will, and provide us with some more opportunity to add to what we can put on that FPSO. I think that's one part of it. Second part of it is there are other discrete things that are out there. And FPSOs, much like drilling rigs, are advancing in technology. And so we want to make sure that we're staying at the forefront of that technology, so there some other opportunities. As an example, we've made a financial investment in a company up in Aberdeen that's really looking at some new technologies that we think can help define some of the things that FPSOs do. And so we're going to continue to put seed money like that in some of the technology, expand that, and also to look out there at some of these captives and to see if they might be interested in becoming more of a pure play and getting those, selling those to us. And so there's a lot of potential out there. I'm really excited about this FPSO business. William Herbert - Simmons & Company International: Last year, I think sensibly, we were a little bit loath to stretch the balance sheet too hard from an M&A standpoint. And M&A has been a prominent theme that you've installed on this call. Walk us through with regard to your balance sheet, your thoughts with regard to using your ample balance sheet with regard to M&A going forward? I think historically, the threshold in a less certain time was $1 billion or higher we'll use stock. Where do we stand today with regard to that threshold?

Let me clarify that, Bill. Because actually, we were pretty aggressive in 2009 and pressed for all cash deals and had a number that were north of $1 billion that just frankly, we couldn't get the stars to align and the parties to agree, and so we were unable to get those done. Our strong preference is to use cash. So I just want to be real clear about that. We did use -- do you remember back when we acquired Grant Prideco, we used a significant portion of stock on that transaction, but that was pressed for by the sellers. And we actually wanted to use more cash. So we appreciate our cash balance and our strong balance sheet position and believe that with the cash flow we've enjoyed the last few years, as well as attractive financing available today that, that's a much better to go. So we're going to continue to stay on that track.

The next question comes from David Smith from Johnson Rice.

I wonder if you could help us better understand your opportunity on the FPSO market, just in terms of how many FPSOs per year do you think might get ordered going forward? And maybe how do you think about market share opportunity on those? I assume the APL?

You bet. A couple of points on that. As I mentioned, we're aware that there's over 100 potential projects for which FPSOs are being considered that are kind of out there at any given time. So this is sort of true for the drilling rig space, there's going to be a certain number of potential customers thinking about projects. And so I don't want to give you an impression that those are all going to turn into orders, because they probably won't. Suffice to say, though, there is a big healthy level of interest in FPSOs. There have been other industry estimates of FPSOs to be ordered over the next five years, for instance. I'm going to stop short of quoting that to you. But these are pretty widely followed data sources out there that are in a couple of hundred range over the next five years. A couple of things, this is a well-proven technology. There are roughly 160 in service around the globe. They've been at work for two-plus decades as a technology, APL business has over 50 installed through it. So I think this technology has achieved a level of maturity that takes the technical risk out of it, number one. And then number two, it's just very compelling from an economic standpoint. As you're moving into very, very remote deepwater basins and look at the cost of installing a subsea pipeline to build out infrastructure, FPSOs, to me, just make a lot more sense. They offer a lot of flexibility. They're relatively cheap and easy way to bring oil to market. And so we think as the industry moves further away from the beach, the economics of the FPSO are going to become more compelling. And so rather than give you a number or a forecast like that, our interest in this space is really driven by what we think is a pretty bright future for FPSO technology. It goes hand-in-hand with deepwater drilling.

I know that BW [BW Offshore Limited] reported APL separately. But I have to think of their accounting for APL maybe isn't relevant to how that would look in your portfolio. Can you give us some color just on how to think about margin expectations at least relative to how they reported?

I'm a little reluctant to get too detailed before we actually close the transaction. Suffice to say though, we have a good history of improving the margins in businesses like this. There were Hydralift that we acquired back several years ago. Hitec, for instance, in Norway, we acquired several years ago, which had some just brilliant engineering and technical capabilities. And then I think the NOV organization was able to bring a lot of manufacturing expertise to those, and that combination resulted in much better margins from those business. So broadly, that's kind of the template here. We have a lot of fabrication and machining and assembly assets; a lot of very, very experienced, talented professionals within our Rig Technology group that know what they're doing; and a lot of experience working in shipyards on big, complicated marine projects. And so those are all the things going into the mix here. And in the past, that's been a good recipe for us.

Gentlemen, that concludes the question-and-answer session for today. I'll turn it back to Pete, for final remarks.

Well, thank you all for calling in. And we look forward to talking to you when we give the full year 2010 report after the first of the year. Thanks very much for your interest.

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