Welcome to the National Oilwell Varco 2011 Third Quarter Earnings Call. My name is Kim, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I'll now turn the call over to Mr. Loren Singletary, Vice President of Global Accounts and Investor Relations. Mr. Singletary, you may begin.

Thank you, Kim, and welcome, everyone, to the National Oilwell Varco's Third Quarter 2011 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 third quarter ended September 30, 2011, please note that some of the statements we make during this call may contain forecast, 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 risk 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 Forms 10-K and 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 2, 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, everyone. Earlier today, we announced the earnings of $532 million or $1.25 per fully diluted share on revenues of $3.74 billion. This compares to earnings of $481 million or $1.13 per fully diluted share in the second quarter of 2011, and third quarter 2010 earnings of $406 million or $0.97 per fully diluted share. We are very pleased with these results, and they reflect the confidence our customers have in our products and services. Additionally, we also announced today new capital equipment orders in the quarter of $3.94 billion, a new record for the company. These new orders increased the total capital equipment backlog to $10.27 billion, a 33% increase from the second quarter of 2011. Clay will expand on both the financials and backlog in just a moment. I would like to thank all of the National Oilwell Varco employees worldwide for their continued tremendous efforts in achieving these results. In particular, I want to thank the Rig Technology sales groups for their yeoman efforts in establishing a record level of new capital orders. Clay?

Thanks, Pete. National Oilwell Varco performed exceptionally well in the third quarter, generating $532 million in net income, as Pete said, or $1.25 per share fully diluted on $3.7 billion of revenues. Sequentially, earnings per share improved 11% on 6% higher revenues. Year-over-year, third quarter earnings per share improved 30% on 24% higher revenues. Transaction-related charges were $6 million pretax or $0.01 per share in the third quarter, roughly the same EPS impact as in both the second quarter 2011, as well as the third quarter a year ago. Excluding transaction charges, earnings were $1.26 per fully diluted share in the third quarter. Operating profit, excluding transaction charges, was $778 million or 20.8% of sales, up $66 million from the prior quarter, representing 29% flow-through or operating leverage. Compared to the third quarter of 2010, excluding transaction charges, operating profit improved $180 million, representing 25% leverage or flow-through. There is much to highlight this quarter as performance was excellent across the board. All 3 of our segments posted higher revenues and operating profit both sequentially, as well as year-over-year. Rig Technology landed a record level of orders for capital equipment, including the largest order ever in the history of our company, during the third quarter. Petroleum Services & Supplies generated record quarterly revenues and pushed operating margins above the 20% level. Distribution Services posted its third highest quarterly sales ever at very strong margins approaching 8%. Overall, we are pleased with the exceptional performance and grateful for the hard work and terrific execution by NOV's nearly 50,000 employees. Two clear broad themes we've highlighted before, shales and deepwater, continued to shape our industry and drove higher demand for NOV's products and services in the third quarter. First, unconventional shale and tight sand drilling, along with seasonal recovery in Canada, led…

Thanks, Clay, and I'm just going to make a couple of brief comments. As we kind of prepared for this conference call, we really discussed what we could talk about, and it's kind of the same thing we've talked about an awful a lot in the past, and that's shales and deepwater. Those are the things that are really making the industry tick right now. And I think on shales in particular, I know there's consternation over the price of natural gas, but when the rigs are pulled off the natural gas wells, they're really put on the wet shales, whether it be the Bakken, the Eagle Ford, Granite Wash, some of the areas that we're seeing up there. So we continue to believe the shales are going to be very, very active. And one of the things I want to emphasize, that Clay talked about earlier, is what I think has been our prudent spending, and not only had we invested in '09 and '10 downturns, we kept putting money into the business. We expanded our quality tubing lines. We consolidated our supply lines for our Grant Prideco operation. We bought Hochang in Korea. These things have all been very additive to what you see today on these numbers. I think many times, when people buy things, it just kind of gets rolled in. But here, we're starting to see really the benefits of making these investments. And I think it's also the benefit of having the strong balance sheet that we have. One thing I want to point out on the shales. We're really big believers in first mover, and I think in Poland, Australia, China and South America, the opportunity for shales may not be as great as people want it today, but we're investing in those…

[Operator Instructions] And at this time, we have a question from Jim Crandell from Dahlman Rose. James Crandell - Dahlman Rose & Company, LLC, Research Division: Pete, I think you've called the deepwater outlook very well. You and I have talked about that some of the options will probably be picked up, some of which may not be picked up. It could be picked up by others with deepwater day rates continuing to strengthen. Do you have any sort of change in sense about the options, number one, and sort of deepwater rig orders outside of Brazil, number two?

Jim, I think that a lot of the options will be exercised. I think some of the ones that weren't were probably not exercised simply because people were a little skittish about the macroeconomic environment, with what's going on in Europe. Are we looking at a double-dip recession, things like that. But the good news is that some of the options have been extended out. Ultimately, over the next, I think year or so, you're going to see a lot of these options. They're going to go ahead and put them in play. They're going to go ahead and exercise what they've got out there. We're still very bullish about where we are in this marketplace. I think as you take a look at the need for deepwater around the world and you take a look at the way they're getting gobbled up right now, I mean, you take a look at kind of the tightness in the market today, I think most people are just saying, "Why do I want to commit right now when I can probably wait a month or 2 and get a little bit better hopeful visibility on the economy and then make my move then?" So I think it's just going to be a question of timing, but we're still very, very bullish on the demand for deepwater rigs.

And Jim, this is Loren, and I'll tell you that the drilling contractors that we talked to may not exercise these options. But they will buy rigs in the future. The demand out there, and as you mentioned, the day rates that we have for the ultra-deepwater rigs continue to go up. And there is just a lack of deepwater rigs for all the opportunities that the oil companies have out there today. And so we'll continue to see deepwater rigs being bought over the long term. James Crandell - Dahlman Rose & Company, LLC, Research Division: And just a follow-up on deepwater, Pete. If you look at your potential for what you could sell through deepwater rigs, I think you had last cycle, actually maybe one, that was up about $300 million. If you look at just these Brazilian rigs and say, okay, 7 rigs for $1.5 billion, it's materially less than that. Including the reduced price for steel, which I assume makes up a big chunk of that, are these packages including less equipment or is there any kind of -- or would you expect there, and I guess the same type of margins in Brazil, which you're earning in the rest of your rig equipment business or in Korea when you typically have supplier package?

Jim, I think you should you take a look at the rigs that are in Brazil right now, that we're bidding in Brazil, you have to understand these are kind of benign water-type rigs. And so, they have a lot different requirements than you have on the superduper dual-activity-type rigs, the Transocean and Oldpride, now Ensco, that we built. And so the reality is it's just a little different suite of equipment. We're still getting everything on it. Margins are going to be fine on it. It's just the difference in the type of rig. If you take a look at the Transocean-type rigs, those are full dual activity. They've got dual DEPs, or drilling equipment packages, things like that on them. Whereas, the rigs in Brazil, I would say that they want to call them dual activity, but I would say it's kind of 1 1/2 activity, if you will. So the derricks are going to be smaller, you're not going to have a full 2x the drilling equipment package, things like that. So the numbers are still awfully solid, and I think you'll see us monetize the backlog very similar to what we have in the past. James Crandell - Dahlman Rose & Company, LLC, Research Division: Okay. And last question, Pete is how do you see the orders for equipment packages, the FPSO over the next, let's just say 3 to 6 months?

Jim, I think they'll be fine. We're taking it -- the FPSO business is a shade different than the drilling equipment business. And you have FEED studies, and you have a lot of different things. When I say FEED, front-end engineering studies. And they take a little bit longer to materialize, and each one of them today is still kind of a project in and of itself. I mean, you've heard me talked before about one of the things we want to do is standardize FPSOs, and I think we can. We're talking to some customers about that. Our engineering groups that are over in Norway working on that, that's a goal that they have. So it's a little bit longer timeframe, but I think we've kind of guided for we'd start seeing some decent orders in 2012, and we're still pretty consistent with that.

Jim, this is Loren again. We're tracking over 150 FPSOs that we think will materialize for the next 5 to 10 years. And we feel really comfortable with where we are today in the FEED studies. We're participating in all these FEED studies, so I think you'll see some meaningful results here in 2012 or 2013.

Our next question comes from Bill Sanchez from Howard Weil.

Clay, you mentioned with regard to pricing on the capital equipment side, year to year, you're tracking 6% to 8% higher. That percentage is similar to what you discussed on the second quarter call. I was wondering if you just talk about kind of the pricing outlook from here. And was some of that a function of perhaps mix, with the Petrobras rigs being included in there in third quarter? And I guess, as a follow-up, as we think about the margins and the Rig Tech here and the impact of that pricing starting to have a positive effect there, you've mentioned margins flat here or down, I guess, a bit the next couple of quarters. It sounds like a second quarter next-year inflection is kind of what you're expecting. Can you talk a little bit about that as well?

Yes, yes. Bill, as you know, it's such a later-cycle business for us, the results that you see in our income statement kind of reflect what was going on in pricing, 18 months to 2 years ago or even longer, because it takes us a while to build these thing and then recognize revenue going on. But generally, the history that we've had with pricing in Rig Technology, I'm going to stay away from talking about pricing on any particular tender like Petrobras, so these will sort of just be broad statements. But generally, pricing declined obviously, as we came out in 2008, when it was very high in 2009. And a 6% to 8% improvement is really kind of off rock bottom, where we ended up late 2009, early 2010, and has picked up 6% to 8% broadly speaking across a lot of the offshore equipment that we sell. Here of late, I think it's kind of stabilized in that region. We still see good demand. And I think, we're certainly paid a premium for what we sell, vis-à-vis the competition because we do a good job executing and offer a terrific value in the technology that we provide. But I think in the next quarter or 2, at least as far as we can see, pricing is going to be stable. In terms of impacting the P&L again, in 2012, we talked about margins moving down for Rig Technology to the back half of 2011 and then kind of starting to recover in 2012. That's the impact of that pricing increase. More so, though, I think it's really the impact of the higher volumes. We had great order quarters here for the last few quarters, really culminating in the third quarter record orders. And as those projects start to flow in in 2012, 2013, that's when you start to see the margin uptick. And that margin uptick importantly is as much volume driven -- probably more volume driven than it is price driven.

Okay. And as my follow-up, I want to turn to PS&S quickly. Can you talk a little bit about just the Drill Pipe business in general? I know I guess by my math, that's probably about 1/4 of the revenue within that segment. And then on past calls, we've discussed a lot about pending orders here for deepwater rigs, and that's a very high margin work for you. Maybe you could talk about the number of deepwater rigs that you still see needing to order pipe. And then, I guess, more importantly, two, what about an eventual replacement cycle starting on the land side, given this compression in useful life here given the intensity of the shales, Clay, or Pete?

Or Loren.

Or Loren? I don't remember.

Bill, we are tracking closely, approximately 50 offshore rigs that are going to be delivered here in the next year or 1.5 year. And we know and are in contact with those drilling contractors on a weekly and monthly basis to find out exactly what they're going to need based upon the locations that are going to be drilling in around the world. So there's over 50 of them that work, that are out there that are available to us at this point in time. So it's something that we're on top of. We monitor, like I said, on a weekly basis, so we're going to do quite well with that particular type of drill pipe. And again, that is premium pipe, that will be 6 and 5/8 OD, and 5 and 7/8 OD type pipe. Now, on the land business...

Yes. I'll touch on a couple of numbers, Bill, the mix of Drill Pipe in this quarter was a little less than 20%, so you're a little high on your estimate. The business is doing very well, though it's accretive to our PS&S margins overall. And to finish up on Loren's comment, it's really been dominated last few quarters by orders from land operators, specifically for the shale plays. And it's good and bad. It's good in that the pipe that's used in those shale plays typically has premium connections. They can handle a very high level of torque. The bad is it's smaller diameter. 4-inch XT is kind of the dominant kind of pipe that we're going to invest in and getting the most pricing leverage to see the most demand for. And so, it's a nice high margin level of pipe, but not nearly as good as the bigger, beefier offshore pipe that we sell. So once we start to see 5-inch or sizes larger than 5-inch, 5 and 7/8 inch, 6-inch, 6 and 5/8 inch pipe orders start to fill up these offshore rigs, I think that's when you'll see kind of next leg on margin for Drill Pipe.

And then Bill, just to close the loop here from all 3 of us on this one, I'll also mention that when you talk about land pokes on Drill Pipe, and especially in the shales, the big customers are actually the rental companies. And a lot of this, the drilling contractors, once you make the turn on these shale wells and go into the horizontal section, and you go into that 4-inch XT, the drilling contractors usually have the operator then ramp that, and said, that pipe is being worn out, as Clay mentioned earlier, pretty dramatically. So we're really kind of getting a free-for ride here. We've got the land drilling contractors, we've got the rental companies, and then we've got offshore guys. So we really like where we are on the Drill Pipe business right now.

But given, Pete, where those product lines, I guess, across the PS&S spectrum are weighted relative to rig count and perhaps lagging a bit, is the outlook you think for 2012 for you, even though 50% of that revenue is pretty much, say roughly is North America, that margins are going to be fairly resilient versus where you exit 2011, if not up a bit?

Yes, I mean, we've been building on margin through the year as you've seen, and partly that's volume, partly that's price. So as we go into 2012, barring a sharp downturn in the rig count, which we all agree is a possibility, but barring that, we would expect 2012 to really look pretty good.

Our next question comes from Bill Herbert from Simmons & Company. William A. Herbert - Simmons & Company International, Research Division: Clay, with regard to Rig Tech margins, if you back out the benefit from, I guess, the riser issues in Korea last quarter, I think that was it. The margins were actually in the 25-ish percent range versus the 27.3% recorded, correct?

Right, that is correct. William A. Herbert - Simmons & Company International, Research Division: Yes. The 26.8% in the third quarter, walk us through the margin performance on that front. And then moreover, in thinking about 2012, you mentioned the benefits from absorption, primarily driving the uptick in 2012, the expected uptick, plus to a lesser extent, a better backlog mix. Is there any reason why we should not expect to see kind of the 30% to 35% incremental margins that we witnessed historically for Rig Tech during the expansion phase of the cycle?

Yes. We believe that's very doable in that range. We think it's kind of normal, as it were for Rig Technology. In terms of the margin performance this quarter, a couple of things led to the outperformance. If you recall, last quarter, we were looking for volumes that aren't really pretty flat, maybe up 1%, but more or less, quarter to quarter flat. We did just slightly better than that. We did 4% growth, and so a little higher volumes I think helped in the margin front. But again, I think the main performance driver in the third quarter was just very, very good execution by our group, and once again very good cost control. And as a sort of a third factor, I'd throw in their mix, we had a terrific quarter by our well intervention, stimulation equipment group. And a lot of demand for frac fleets and that sort of equipment, they came in at higher margins. So all that kind of culminated in the outperformance in the third quarter. As we're kind of seeing this roll by quarter by quarter, that's causing us to take a little more optimistic view of what the future quarters hold, here as we finish up 2011 and move into 2012 and thinking now that bottom maybe looks like it's going to be in the 25-ish range. Bear in mind, though, that we're a lot better at building rigs than we are at forecasting. William A. Herbert - Simmons & Company International, Research Division: I think you're pretty good at forecasting, but be that as it may, so really, I mean, plausibly here, given your revenue forecast for next year, really a Rig Tech margin in the high 20s is not -- starting with a 3, is not necessarily implausible, correct?

Yes. I caution you, we did -- we had 2 quarters in that group north of 30% in the early part of 2010. And there were a lot of stars that lined up. So I wouldn't want you to get too carried away on the ultimate margin. And I'd stress again, too, that anything in the 20s at all in terms of margin equals a really, really good return of capital for that group. William A. Herbert - Simmons & Company International, Research Division: No, it's simply the math, right?

Right. William A. Herbert - Simmons & Company International, Research Division: Given your revenue forecasts and the incrementals, which are relatively in line with historical precedent, that's the margin that it spits out, I believe. But I hear you.

Yes, yes. And to finish off the story, too, I mean, the incrementals this quarter, both sequential and year-over-year, in the 14%, 15%, much lower than your 30% to 35%. But again, it's because of this, we're gradually shifting mix away from those tremendous rigs sold in 2008 that we've executed at very, very high margins.

Our next question comes from Geoff Keiburtz from Weeden & Co. Geoff Kieburtz - Weeden & Co., LP, Research Division: Pete, you talked a little bit about M&A. And I just wondered with the volatility, let's say, that we've seen in the equity markets, would you say that you have seen increasing opportunities in the M&A market?

Jeff, that's a great question. And it's a difficult answer because right now there's such volatility that until things settle down a little bit, if in fact there ever will, it's pretty difficult to be able to price because obviously, when the stocks are down, we're sitting there and we're likcing or chops going, "We've got a real opportunity here." But then, the sellers are going, "Wait a minute now. My stock price was up 15% a couple of weeks ago. Do I want to get it to the markets and sell it today?" So it's really -- it's one, especially in a public company, and I think when you -- you can almost read through the Ameron materials, and you can see how that whole process plays out. It's just one of timing, it's one of -- you just don't wake up in the morning and go, "Gosh, I'm going to go buy these guys." It's a lengthy process that takes patience, which we have. So I would say, on a public company, the volatility makes it a little bit more difficult right now. Now private companies are totally different. I think that the volatility makes them take a look out there and go, "Gosh, maybe we ought to get what we can for our money." The public market basically prices your company; the private market doesn't. You price your own company. And so, I think the opportunities is there to buy some of the private situations that we're seeing out there are probably going to be more robust for us over the next 12 months. Geoff Kieburtz - Weeden & Co., LP, Research Division: Okay. And in that context and with a strong balance sheet and cash flow and an increasing visibility, how are you thinking about dividend these days?

Geoff, we raised our dividend this year. We started our dividend a couple of years ago at $0.10. I think we're up to $0.11 today. Obviously, we paid a special dividend a couple years back. As we take look at uses of cash, always, number one is going to be M&A, and we talked this with our board, strategically every board meeting, and then we don't -- and I'm talking every board meeting. Our board is on top of the strategy and they're on top of uses of cash. And we'll take a look at whether or not we want to increase our regular dividend. And then, we always revisit the issue of the special dividend. But I would tell you, special is just that, special, and there's no expectation behind it. So those are the 2 major uses of cash, so I think dividend and M&A.

Our next question comes from Michael LaMotte from Guggenheim Securities.

I'd like to just follow up quickly on the Rig Tech margin question and in particular the impact of FPSO orders flowing through with respect to the discussion of a normal 30% to 35% incremental. And especially with this look out to '12 and '13 and start to see orders on that product line start to come through. Are there offsets in efficiency, in pricing, in rig packages that can impact the fact that's a lower-margin product line to begin with?

Yes, that's -- you raised a good point. That's a work in process in FPSOs, and we're trying to fundamentally change how FPSO tariffs are sold and standardize, as Peter mentioned. And so we've got work to do there. But offsetting that, Michael, I'd point to my comments earlier about growth in the aftermarket, which is going to be highly accretive to those flow-throughs. So when we talk 30%, 35%, we're sort of talking a, for what it's worth, or if you can define such a thing, an average mix across the segment. But more deepwater offshore packages, more aftermarket would certainly help us exceed that level. Conversely, more FPSOs, more land rig or service rig volume and mix would pull that down.

Okay. And How big is aftermarket overall within Rig Tech today?

About 25% this quarter.

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

I just wanted to hit you up first on PS&S. Maybe you guys look out over the next 12 months or so, how would you rank your, say top 5 product lines or areas in PS&S, wisely [ph] do you think it will still Drill Pipe would be number 1? Can you just give us some flavor on how you think it might shake out over the course of the next 12 months or so?

Kurt, in terms of how much we love them, we love them all equally. But if you're asking in terms of size?

Yes, just relative size, give me some general sense on how you see things evolving over the next 12 months.

Kurt, this is Loren. Our Downhole Tool group has made tremendous strides here in the last couple of quarters, and they actually, from a revenue standpoint, are the largest segment in the PS&S group. And obviously, you have Drill Pipe, and you have your Tuboscope group, and you have Wellsite Services, and Mission products. Those are the top 5 groups within petroleum services.

And you don't necessarily see that ranking changing over the next 12 months?

I think, Kurt, the one thing about the PS&S business, everybody knows I think we're the leader in rig technology. But when you take a look at a lot of those products that we have out there, being Grand Prideco, Mission products, Brandt, Tuboscope, these are really market-leading names. It's really pretty cool stuff. I almost hate to mention them all because we've so darn many of them. I don't want anybody to feel bad that I've left them out.

And also too, I mean, within the group out there, within their respective spaces, comp businesses like Quality Tubing, which is the leading provider of coiled tubing worldwide, it's not in our top 5 in terms of contribution, but they really do provide a lot of market leadership in that space, XL Systems, the Mission products. Our Intelliserv group has a unique proprietary product that they're -- in service that they're offering to the oilfield.

And in the fiberglass. As we've mentioned earlier in the call, with the acquisition of Ameron, it's a leader in the field.

I hope we mentioned everybody. If we didn't, we're going to hear about it after the call.

And you guys may have mentioned it, I might have missed it. The number of land rigs that you had in Rig Tech orders for the quarter, how many were there?

I don't think we mentioned it. It was a good quarter. Looking forward into Q4, we actually expect the quarter to be even better. So a lot of land rig demand out there both internationally as well as North America.

Yes, yes, yes. But do you have a number you can share with us?

No. Kurt, let me tell you why. As the U.S. guys build land rigs, they do it themselves, and so we sell components to them. And so, we don't -- I can tell you, how many mud pumps, how many drawworks, how top drives, how many derricks, but many times, we're shipping those components to the land guys. Internationally, we sell the entire rig. And so, we've always kind of hesitated. We break down our backlog on offshore versus land, and you can kind of extrapolate in that land business about how many are there. But it's a very difficult thing. It's not that we don't want to tell you. It's just that when someone is buying 15 SCR houses and 15 top drives, that's great business, but those aren't complete rigs.

And north [ph] of the price points on completing rigs, have you been able to move that up at all? I think U.S. you're still around $15 million to $20 million. Internationally, it could be maybe as high as $40 million? Are those numbers still. . .

We're going to still have a price leverage here. If anything, kind of on the higher ends of those ranges.

Okay. All right. And the,n, I think, taken your complete body language here, I think you guys would probably be in relative disagreement that your Rig Tech orders have peaked out here in the third quarter, would that be a fair comment?

You know, Kurt, I can go back and take you back to '06, '07 and '08, we had the same question a lot of times. So we keep looking at that peak going, getting up there a little bit. So as you know, we don't predict what's going on there because there are a lot of a rigs out there.

Thank you. That was our final question. I'll turn the conference back to Mr. Pete Miller.

Thank you all for calling in, and we look forward to talking to you in February when we have our year-end conference call. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.