NOV Inc.
Q1 2008 Earnings Call Transcript

Published: 7 May 2008

[Operator:]

Welcome to the National Oilwell Varco earnings conference call. (Operator Instructions) At this time, I’d like to turn the conference over to Pete Miller, President, CEO, and Chairman.

[Merrill A. “Pete” Miller:]

Welcome to the National Oilwell Varco first quarter 2008 earnings conference call. I am Pete Miller, President and CEO of National Oilwell Varco, and with me on this call today is our CFO, Clay Williams. Earlier today we announced earnings of $398 million, or $1.11 per share on revenues of $2.68 billion. This compares to year-ago earnings of $276 million, or $0.78 a share on revenue of $2.17 billion. We are very pleased with the start to what we expect to be an excellent year. Additionally, we announced new capital equipment orders of $2 billion, which increased our backlog in our Rig Technology group to $9.9 billion. Clay and I will provide more color on this backlog in a moment. Also, after the quarter end on the 21 of April, we closed on the Grant Prideco acquisition. We are excited about the prospects for this business and would like to welcome all the Grant Prideco, ReedHycalog and XL Systems’ employees to the National Oilwell Varco family. We are delighted to have you join us. At this time, I would like to turn the call over to Clay and have him give you some color on our results. When he’s finished I’ll come back and give you a little bit of an operational overview and then we’ll open it up for questions.

[Clay C. Williams:]

Before we begin this discussion on National Oilwell Varco’s financial results for its first quarter ended March 31, 2008, 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 in this call, Pete and I will answer your questions, which we ask you to limit to two in order to permit more participation. National Oilwell Varco generated earnings of $398 million or $1.11 per fully diluted share in its first quarter ended March 31, 2008 on revenues of $2.7 billion. Earnings per share rose 6% sequentially and rose 42% from the first quarter of 2007. NOV’s first quarter revenues improved 1% sequentially and 24% year-over-year. Operating profit was $569 million or 21.2% of sales, an increase of 33% year-over-year but 1% decrease sequentially. Year-over-year flow-through or operating leverage was 27%. As Pete mentioned National Oilwell Varco completed its $7 billion acquisition of Grant Prideco last week. Pete and I are excited about the very bright future that lies ahead for our customers and employees alike as a result of this important strategic step. The merger furthers NOV’s vision of being the manufacturer to the oilfield, supplying critical hardware, industry leading technologies and comprehensive service to oil and gas operations. To our new NOV employees from Grant Prideco who may be listening, let me tell you how delighted we are that you’re now part of the NOV family. Welcome. Later in my remarks, I will discuss financial results from Grant Prideco’s first quarter and update you on our integration efforts. Starting with the second quarter of 2008, we will begin reporting Grant Prideco’s four main operating units

[Merrill A. “Pete” Miller:]

What I want to do at this time is just make a few brief comments about operations and what we’re seeing in the world, and then we’ll turn it over to Q&A. Basically there’s some themes out there today that I think are dictating what’s going to happen to our business over the next three or four years, and quite frankly it makes them very exciting. I think the first one are the shale plays. And you take a look at these non-conventional plays, whether it’s the Barnett, the newly announced Paynesville, and the Marcellus up in the Northeast or the Bakken up in the Dakotas. These are very exciting for all of our businesses. When you take a look at it, when we talk about our bits, our drill pipes, our downhole tools, our mission products, our grant products, or MD Totco products across the board, they’re actually going to go on these rigs and they’re going to be utilized to be able to drill these unconventional wells. Further than that, going I think which is really what’s exciting today is I think there’s going to be more of a land rig demand in the Lower 48, because you have to have some fit for purpose rigs. Specifically, you look at something like the Marcellus and you’re in there up in the Appalachian Mountains and it takes a different type of rig to be able to drill on pads. It’s going to be a different type of rig that’s up there today. And we’re already seeing the excitement that this is creating with a lot of our contractor friends in the United States, and I would offer up that the land rig building in the Lower 48 is going to improve dramatically this year. It was interesting, in October, it looked like it would be a very slow year and many of our customers were telling us they wouldn’t buy for a period of time. In the past six weeks, that’s changed very dramatically. And that really is a direct result of these shale plays. And also, remember this, these shales are not just in the United States. They’re all over the world. And, I think at some point in time, the technology to do these is going to be transported, and it’s going to be exported, outside of the United States, and we’re positioned quite well to be able to take advantage of this. I think the second big thing clearly is deep water. If you take a look at what we’re doing in our backlog, a lot of that is deepwater rigs being built in Korea. Already this quarter, we’ve signed up more deepwater rigs. We do not see an abatement of this right now. The world needs deepwater rigs. I think when you take a look at the basins that are around the world, they’re going to continue to be plays where the major’s going to want to be involved with them. There are going to continue to be areas where the NOCs are going to want to continue to drill deep water. I think the demand for those rigs will continue and, quite frankly, we offer the best technology for those rigs. But, even more importantly, once these deepwater rigs go into service and, specifically, we’ve put a few of them in service here in the last three or four months, they’re really going to be just like the shale plays. They’re going to add to many of things that we do operationally. Whether it’s bits, again downhole tools, distribution across the board. As a matter of fact, one of the deepwater rigs going out here in the next few months is going to have one of the rig stores from our distribution group on the rig. And we anticipate that’s going to happen well into the future. So, these are going to be operations that are going to continue to pay annuities to National Oilwell Varco as we go well into the future. Not only do we get to build the rig, but we get to support the rig, and support the drilling of the wells that those rigs do. I think the international strength is going to continue. And, when you look at the price of oil, needless to say, that means that a lot of people, a lot of countries, are trying to improve their reserves. And we have positioned ourselves, with our template. Currently we’re in 49 countries; we have over 700 locations worldwide. And this allows us to be able to do things that a lot of folks cannot do by being able to support the products and services through this international arena. I’ll come back in just a minute to talk, in particular, about a couple of other places we’re very excited about. I think technology is going to continue to be a theme that’s going to play very well to the things that we do. When you look at these deepwater rigs, the specific bit for purpose land rigs, we have the technology that’s able to do things. When you look at drill pipe, when you look at IntelliServ, drill bits, you look at the things that we do with MD Totco it’s all about technology. We’ll continue to push that and we think that’s going to really differentiate ourselves well into the future, and I think you’ll see these results bode well for 2008 because of this. Execution, Clay mentioned this earlier. We take a look at what we’re able to deliver. We’ll continue to execute well. We’ve opened up some new test stands for different products that will help us get more out the door as we advance through this year. We’re going to continue to have rifle shot investments that are going to enable us to be able to hit our customers’ demands, and we feel very comfortable that we’re able to execute this close to $10 billion; we wanted to make sure that we can execute that flawlessly. And then finally, one of the things that we’re interested in and we’re seeing right now with many of the new contracts being signed by existing rigs, there’s probably going to be more of a demand for refurbishment and upgrades this year. A lot of these rigs are signing up for projects in which they need new equipment, whether it’s a new string of riser, whether it’s new types of subsea BOPs, Iron Roughnecks, top drives or whatever, they’re putting a greater demand on these rigs. So we think that we’ll even see an improvement in the refurbishment and in upgrade as we move forward. Internationally, we continue to see a lot of excitement in Russia. You’ve heard me talk about that many times on these calls. We think that will continue to be a great business. They have a tremendous demand right now for land rigs. We’re looking at many different opportunities to bid on those over there. Last quarter I mentioned that we had won the Shtokman field, the first group of semi-submersibles that are going in there, and I’m very pleased to say that’s going along very well. I think there will be more opportunities there and I’m excited about what we’re doing. The Middle East and North Africa continues to be an area that’s very active. I think you’ll see the Saudis increase their rig count even more. You’re seeing more and more offshore operations there. We repositioned ourselves in Dubai with our downhole tools, with our distribution, with our Brandt group, with just about every group that we have to be able to support the operations throughout that area. I think you’ll see more non-conventional drilling in that and that’s going to be an area that will continue to be really exciting. Brazil, I don’t need to say much about that. I think everybody knows what’s going on in the deep water arena there. It’s been very positive for our industry and I believe will continue to be well, well into the future. And then, finally the one area I’ll talk about is the Lower 48. And when I talk about those shales, we’re getting more and more excited about that. I think you’ll see the continuing increase in the rig count through the year, but more specifically the fit for purpose rigs that I’m talking about and the tremendous demand for the products and services that we have to be able to drill these non-conventional wells that will be drilled into these shales. Overall, we’re very excited about the business. We mentioned the backlog earlier, it’s $9.9 billion. We continue to have a very, very robust bidding cycle in place. We continue to look to the future very positively, and I think overall we’re in very good shape to take advantage of what we believe is a very exciting worldwide oil and gas business. So at this time I’d like to open it up for any questions that anybody might have.

[Operator:]

(Operator Instructions) Your first question is from Jim Crandell – Lehman Brothers.

[Jim Crandell:]

Pete, can you comment on your expectations for orders for floating rigs and for jack-ups going forward? My recollection is that you were looking over the next two years for 18 to 24 floating rigs and jack-ups, maybe a bit less than that. Can you talk about that, particularly in light of the continued strength here this quarter and maybe next quarter in new floating rig orders?

[Merrill A. “Pete” Miller:]

Well, Jim, what we’ve said all along and I’ll start with the jack-ups, is basically we believe that just about every time a jack-up gets delivered there’ll probably be another one ordered. That’s been reasonably consistent over the couple of years, I should say and I think it’ll probably continue on. As with anything there’ll be some lumpiness, but I think last quarter, or a couple quarters ago, there were six or seven jack-ups announced. And that really is a technology play. I think you’re going to see a lot of these jack-ups aren’t necessarily additive as much as they might be replacement jack-ups into the market. So we think that the jack-up market will probably stay pretty steady. It’s not going to spike up so much but it will stay steady. I think on the floater market, what we’ve seen has been a continued demand for these floaters. When you look back at what’s been ordered over the past couple of years, I’m not sure that I would say exactly what the number you’re talking about, but I wouldn’t be far off of that. I think one of the interesting things about the floaters is that now we’re actually talking to folks about floaters that can operate in 12,000 feet of water. And so it’s not so much that they’re going to be adding it as much as they’re going to have floaters that are out there that can differentiate themselves from the floaters that are currently there. And I think that technology is what’s going to drive that a little bit. And it really is, because all floaters aren’t the same. A 400-foot jack-up’s a 400-foot jack-up; but these floaters, some of them can only go on 5,000 feet of water, some are 7,500, some are 10 and now we’re talking about 12. So I think it will continue to be a good market.

[Jim Crandell:]

And how many of the floater orders that you got, or if you even want to include the couple in this quarter, would you say you got the entire package for?

[Merrill A. “Pete” Miller:]

We’re doing real well on that right now. I think I told people in the past, if we get the maximum on these floaters, it’s about $300 million. Generally, when we don’t get the maximum, it will be the subsea BOP, might be the riser system or something like that. Normally, the rest of it though, we’re able to get. We’ve been doing real well in that category, especially, with one of our shipyards in Korea, Samsung, we do very, very well in that regard.

[Jim Crandell:]

Clay, if you look at Grant Prideco, what would you expect now taking into account cost savings, operating performance, etc. would be the net effect of Grant Prideco on your EPS over the rest of this year and look out into ‘09 as well?

[Clay C. Williams:]

Well Jim, we think we got great things ahead and are excited about it but as a matter of policy, we don’t give pre-earnings guidance and somewhat refrain from giving a specific number. But we believe it’s a pretty exciting deal and within that is just a great fit between the bit business that Grant Prideco brings to our own downhole tools business. And then, within drill pipe, we believe we have a fair amount of insight into that business through Tuboscope, and believe the drill pipe is becoming much more of a consumable as well. And so, we think there are good things ahead.

[Operator:]

Your next question is from Collin Gerry - Raymond James.

[Collin Gerry:]

Did you give us how many floater packages were in the order flow this quarter?

[Clay C. Williams:]

There were six total, Collin.

[Collin Gerry:]

Pete, on the refurbs and the upgrades going forward this year, any guess as to what the revenue opportunity there is. I imagine it’s going to vary drastically per rig. But what do you think the opportunity on a per rig basis for some of these floaters coming into the yard would be?

[Merrill A. “Pete” Miller:]

Well, I think that really does vary dramatically Collin. It just depends on what the specific job is. I can think of a couple off the top of my head that’s going to be very significant because we’re already taking a look at some of the demands and they need a lot of stuff. Others will be a little less. And if I told you a number, I’m not sure it’d be too meaningful in the long run. But it’s a neat deal right now because so many of these jobs are going to need different types of equipment, and the contractors are taking the opportunity that if they’re going into a long-term contract they want to make sure that they get that equipment on early. So I do believe it’s going to be a real positive development for us as we go through the year.

[Clay C. Williams:]

Yes, a lot of that equipment will be specified too by the E&P customer.

[Collin Gerry:]

The rosier outlook for North America, you spent a lot of time on that, the shale plays obviously, increase in land demand. Care to venture a guess as to how many maybe incremental land rigs we could add to the fleet over the next 12 or 18 months, whether it come from you or whether it come from somebody else? I’m just thinking from a demand perspective, what are contractors maybe thinking they’re going to need over the next 12 to 18 months?

[Merrill A. “Pete” Miller:]

No, I think it’s going to be though, Collin, There are a lot of things that are impacting this marketplace right now. And I think again, when I talked about the Marcellus Shale, you look up there, and they need a certain type of rig. You talk about different pad drilling. Pad drilling takes a different type of rig than are many rigs today. And I think the technology that people are seeing and again, you look at a [Helmet Complain] as an example, and they’re keeping all their rigs very active because they have some of the higher-tech rigs. So I think there’s going to be a demand there. We’re starting to see it improve pretty significantly and that’s the reason I mention it. And I think it is going to be a very positive market for us as we move forward.

[Collin Gerry:]

So it sounds like we’re in the early stages and we’ll see how that maybe unfolds and maybe a little better guidance in the next couple of quarters as to how we see that play out?

[Merrill A. “Pete” Miller:]

Yes, and I think it all depends too on how rapidly things like the Marcellus and the Haynesville and some of these come into play. And clearly, they’re going to be dependent upon the price of natural gas, too.

[Collin Gerry:]

Some would argue with that.

[Merrill A. “Pete” Miller:]

But if you take a look at that, I think the speed with which those plays play out will really dictate the demand for rigs.

[Operator:]

Your next question is from Kurt Hallead - RBC Capital Markets.

[Kurt Hallead:]

I know you have always been very optimistic about the business but it seems like there’s been even an incremental shift in tone here clearly. Pete, you got a lot of different elements here that are driving the outlook on the rig technology side. And figure when you put them all in a bag, you shake them up, and you compare them to maybe where you were a year ago, two years ago on the prospective orders, you think you’re able to hold things as flat, or do you think that you can actually start to reaccelerate on the order front when you look at the different mix?

[Merrill A. “Pete” Miller:]

Well, Kurt, I think actually there are some positive things happening. I think if you look at what’s gone on in the last three or four years, we had a process that was started by jack-up rigs and then you had some land rig business come into it and then later you had the floater business come into it. And today, you’re probably seeing a little bit of lessening on the jack-up business but the floater business continues to be very good. And I think the land business appears to be picking up a little bit. And so we think we’re in a pretty good mode right now that’s going to continue to see a demand for the products that we have. Now having said that, you also have the law of big numbers. We were starting three or four years ago with a backlog that was a billion dollars, building it up to close to $10 and then today you’ve got a backlog of $10 and you go okay, what are we going to do to keep feeding into that? I think we’re going to keep feeding into it and I feel very good that there’s a lot of stuff out there today and I think the biggest change today are when you look around the world at some of these discoveries in deep water. And those deep-water discoveries are going to need a lot of rigs to develop them. And I think you see it with the announcements of people like Transocean with long term contracts and some of the others, the Seadrill’s of the world that are out there. So we’re still very bullish about the worldwide demand for the products that we make.

[Kurt Hallead:]

You discussed the strategic fit of the Grant Prideco businesses into what you’re doing. You have referenced the benefit that you’re going to get derived from the cost savings. Any stab here on what revenue synergies you can derive from the acquisition.

[Clay C. Williams:]

We are optimistic we’re going to get some additional incremental sales, but it’s never been our style to quantify those or to put them out there publicly. I do think, though, we’ve got an excellent track record on businesses that we’ve acquired and would point to that that I think we’ve done a good job maximizing and optimizing those synergies. So again, I just can’t say enough about how good the fit is between Grant Prideco’s products and NOV’s products and so we think there’s good things ahead.

[Operator:]

Your next question is from Dan Pickering - Tudor, Pickering, Holt.

[Dan Pickering:]

I wanted to look at the Rig Technology business. Clay, it looked like Q1 was a little bit light of where you had indicated it might be in the backlog side of the backlog from revenues on your fourth quarter call, and yet it feels like you’re taking up the rest of the year. And so I’m just wondering, did we have some things that slipped out of Q1 into the back quarters or did business just pick up enough that it looks like we’re going to accelerate through the rest of the year here?

[Clay C. Williams:]

Yes, that’s exactly what happened, Dan. We had some things that didn’t ship, and it was really the equipment that we recognized revenue on a completed contracts basis that was down. The project revenues where we recognized revenue on a percentage of completion basis continued to move up exactly as we’d planned. So we do think that’s a momentary slow-down here this quarter.

[Dan Pickering:]

So no execution issues, more just timing issues?

[Clay C. Williams:]

Right, right.

[Dan Pickering:]

Pete, you mentioned the Marcellus and Appalachia several times, could you just, what is your product offering for that market? Is that a standard thing for you? Would it be a new rig that you developed? How do you attack that market?

[Merrill A. “Pete” Miller:]

Actually, what we’re doing right now, Dan, is we’re working with a couple of specific customers, and really developing a new type of rig. It’s actually, when I say a new type of rig, it’s really going to be one that is going to have a footprint and a design and a deliverability when we move it that’s going to allow it to go in smaller pieces, going to allow it to handle. If you go up into the Marcellus a lot of the roads up there, you have the switchbacks, you’ve got a lot more issues in the Northeast about weight of rigs, you’re going to have a 60,000-pound limit. You are going to have to have trucks that can turn on these switchbacks, and so we’re working with these customers to really develop a rig that can drill in that area very effectively, move fast, and be able to drill multiple wells from the same location. So it really will be a new concept. That’s just from the capital side; the other side of it though is really what it means to our Services business, our petroleum services and supplies. Because again, when you start talking about the things that we do with Tuboscope and Brandt and downhole tools and the bits and pipe, it’s really going to utilize a lot of the products that we have there. And I’m really excited about the Marcellus. I think it’s an area that’s mature, but because of the different technologies that the industry has developed, I think it’s going to be an exciting play and clearly we expect to be, with some of our new design technology, to be a big part of it.

[Operator:]

Your next question is from Scott Gill - Simmons & Company.

[Scott Gill:]

Pete, you talked a lot about technology and Clay, you mentioned rising steel costs and I know you’ve given us the revenue per new build rig opportunity before, but this morning, on upstream you see where there’s $1 billion floater rig being built for the Arctic, can you just refresh us? What is your revenue opportunity now for deepwater rig considering all these things? And if you could contrast an Arctic-style rig to maybe one that we’re seeing in a more benign environments like for Petrobras in Brazil?

[Merrill A. “Pete” Miller:]

I think, Dan, what you’re looking at today, and not standard, but maybe a 10,000-foot deepwater rig that we’re looking at for normal places around the world would, our revenue opportunity is about $300 million, Scott. I think that’s up a little bit from where we’ve been in the past and in some cases and in a lot of cases, we get the entire $300. On an Arctic rig, and when you start talking about $1 billion, depending on the design of the rig, many cases a lot of that money is going into the actual design of the rig itself on the pontoon so that it can withstand all the ice flows associated with what you have there. It’s not so much different on the top side, because once you get to the top side, it’s really just about winterization. We do that on a lot of rigs up in Alaska already. But it’s more about how can the pontoons and then the floating systems withstand the ice that’s going to be created there. So that’s where you see a lot of the incremental cost associated with that, which we wouldn’t participate in.

[Scott Gill:]

On these land rigs, for example, the Marcellus Shale, can you give us a feel for what the revenue per rig opportunity is for those new build land rigs?

[Merrill A. “Pete” Miller:]

I think it could be anywhere from about $8 to $12 million in that area, depending on what the final design looks like. Maybe a little bit more.

[Scott Gill:]

So cheaper than your ideal rigs, correct?

[Merrill A. “Pete” Miller:]

They’re smaller rigs for the most part. And in many cases the smaller rigs, less steel, less cost. So they would be a little bit smaller in that regard.

[Scott Gill:]

Clay, on your guidance when we look at rig technology and you look at the revenue that’s supposed to come from backlog, it looks like at least the backlog sales will be much greater than the 5% that you gave for the overall segment. As a matter of fact, they should be well into double-digits. Is that mostly going to be in Q3 and Q4 or is that going to be somewhat just conservative guidance for Q2 here?

[Clay C. Williams:]

Yes. Scott, it ramps up through the year quarter-by-quarter.

[Operator:]

Your next question is from Analyst for Roger Reid - Natixis Bleichroeder.

[Analyst for Roger Reid:]

I wanted to ask a little bit about the Russian land market. Could you characterize the types of land rigs that you’re shipping into that market and whether they’d be more garden variety standardized or you’re looking to build more fit-for-purpose rigs there?

[Merrill A. “Pete” Miller:]

In the Russian market, it’s really a panoply of a lot of different things. In some cases, you’ve got some bigger rigs depending if you’re in the southern part of the market there. You could do as much as 2,000 horsepower rigs with winterizations and then you go into parts of Eastern Siberia, and you’re dealing with much smaller rigs, things that are maybe a Cabot 900-type rig, which in some cases are trailer mounted. But you’re seeing a little bit of a demand for just about every type of rig in there. There’s places like on the Yamal Peninsula that they want to have rigs that can drill to about 14, 15,000 feet and then if you get into places like Kazakhstan, they want to have rigs that are 20 and 25,000 feet. So, really what you see in the Russian market is an array of products and not that much that’s fit-for-purpose. They’re fairly standard rigs with the differential being you’re going to have a significant amount of winterization on them.

[Analyst for Roger Reid:]

In the Saudi market, sounds like anecdotally on the ground, things are still humming along pretty nicely for you. Can you comment a little bit about what they’ve said recently in terms of reevaluating their major projects once [Al-Kurasom] and IFIR are done with? It doesn’t sound like that’s what you’re seeing.

[Merrill A. “Pete” Miller:]

No. I think what we’re seeing is probably a continuation of wanting to expand what they’re doing. I think many times, what’s going to be said maybe publicly versus what’s being done is not necessarily the same, but we continue to see at least an interest in what they might be able to do to take a look at continuing to drill wells. Because I think for the Saudis what’s more important than production is having reserves. And I think to develop those reserves; I think they’ll continue to look at the type of equipment and things that we do to be able to develop that.

[Operator:]

Your final question is from Michael LaMotte – JP Morgan.

[Michael LaMotte:]

Clay, on the cost side, you mentioned labor as inflation. We all know what’s going on the material side. Can you remind us how you’re hedged materials-wise and what your purchasing schedule looks like relative to your delivery schedule? And then on the labor side, I’m wondering how much of that squeeze is really ex-pat labor and dollar related and maybe could we see some relief on that front over the next twelve months if the dollar strengthens?

[Clay C. Williams:]

First on the hedging, when we win a contract we very aggressively get out and place purchase orders with our suppliers to make sure that we’ve got material costs locked in, and that’s not instantaneous. So we’ll have a few months there where we do have some exposure on things moving. But by and large, we recognize the potential to have margins erode because of higher costs of what goes into these projects, so we get out and move pretty quickly to try to get that locked in. On the labor side, yes, we have very extensive international manufacturing operations and so a lot of the cost inflation that we’re seeing on the things that we’re making, is really the translation of pounds and kroner and other currencies around the world back to dollars and FX has really taken a toll. And as a side story on that, we’re hearing the same thing from our joint contractor customers. When they go to get bids on building these new rigs in foreign shipyards, the foreign shipyards face the same effect. It’s just costing more to build things in yuan and Sing dollars than it did a short while ago. So the meltdown of the dollar is definitely having an impact on our business.

[Michael LaMotte:]

In terms of quantification, is it costing you 100 basis points, 200 basis points? Is there any measure gauge that you can give us?

[Clay C. Williams:]

Well, it’s hard to measure. We measure costs everyday and we’re seeing it in standard cost rules that we’ve done on some of our standard products that are made overseas. But what we’re trying to do is very aggressively offset that with pricing. So pricing is moving up, but the net-net is I don’t think you’re going to see a lot of price-driven margin expansion.

[Michael LaMotte:]

So the balance will focus on efficiency, is the way we should think about margins going forward.

[Clay C. Williams:]

You bet. You bet. Just keep up with cost increases.

[Michael LaMotte:]

Just with the credit market turmoil of the first quarter, I know you’ve got some speculative rigs in the backlog and that you’ve been very good about getting pre-payments and your working capital is certainly not an issue. Do you see any risk in the backlog related to credit-related issues?

[Merrill A. “Pete” Miller:]

No. It’s not in our backlog. In our existing contracts, we have a lot of confidence, our customers are credit worthy, and as you point out, we’re getting very good payment terms so that we don’t get exposed from a working capital standpoint. I’ll add though, that in addition to FX, I think we have a group of customers that rely on structured project financing for their projects. So as we work through these projects and put these bids out there, that particular group of customer is facing a little more headwinds with regards to securing financing for these projects. So incrementally it’s getting a little tougher for them.

[Operator:]

And at this time, I’d like to turn the call back over to Mr. Miller for any closing remarks.

[Merrill A. “Pete” Miller:]

We appreciate everybody calling in today, and I’d also like to invite everybody to stop by our booth at the Offshore Technology Conference next week. Thank you and we’ll talk to you at the end of the second quarter.