NOV Inc.
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Welcome to the Third Quarter Financial Results Earnings Call. My name is Paulette, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. (Operator Instructions) Please note that this conference is being recorded. I will now turn the call over to Loren Singletary, Vice President of Investor and Industry Relations. Please go ahead.

[Loren Singletary:]

Thank you, Paulette, and welcome everyone to the National Oilwell Varco third quarter earnings conference call. Joining me today is Pete Miller, Chairman and Chief Executive Officer; Clay Williams, President and Chief Operating Officer; and Jeremy Thigpen, Senior 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, 2013, 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 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, maybe found within our press release on our website at www.nov.com or in our filings with the SEC. (Operator Instructions) Now, let me turn the call over to Pete.

[Pete Miller:]

Thank you, Loren and good morning everyone. Earlier today, National Oilwell Varco announced third quarter 2013 earnings of $1.49 per share on revenues of $5.7 billion. Included in this number were pre-tax transaction charges of $10 million and a pre-tax gain of $102 million from a litigation settlement. Netting these out provided a net income of $573 million or $1.34 per fully diluted share. Jeremy will provide more color on these results later in the call. Additionally, we reported new capital equipment orders for the quarter of $3.31 billion, resulting in a quarter ending record capital equipment backlog of $15.15 billion. This reflects a continued preference for the industry leading high technology products provided by National Oilwell Varco. New orders for the year have surpassed $9.5 billion. I would like to thank all of our employees worldwide for their continued dedication to excellence as we serve the oil and gas industry. I will come back later in the call to add some color on our operations, but at this time, I will turn the call over to Clay.

[Clay Williams:]

Thank you, Pete and good morning. We have long discussed four big trends that we expect to continue to shape National Oilwell Varco’s destiny over the next decade. One, the build out of a fleet of floating drilling rigs to explore and develop deepwater frontiers open by technology developments of the past 20 years; two, the blossoming of floating production systems, which we expect to produce most deepwater discoveries; three, the replacement of old jack-up rigs with better shape or new jack-up rigs; and four, the steady progression of unconventional shale technologies into new onshore plays overseas, which will continue to drive steady retooling of land rigs and spur demand for other oilfield technologies. This morning, I would like to update you on what we see within each of these four, how they drove our third quarter results and how they are shaping our strategies. Demand for floating rigs has remained high underpinned by we believe strong driller economics on these investments, good day rates, low cost rigs, quick delivery and available financing. We sold another six deepwater drilling packages into newbuild projects during the third quarter bringing our total for the year to 22. Strong floater demand contributed to Rig Technology’s third quarter capital equipment orders of $3.3 billion, our second highest level ever. Our year-to-date orders totaled $9.5 billion through three quarters and we are not done. We expect fourth quarter orders to be good, maybe great, but down a little from Q3’s grand performance. There are many new potential projects under discussion, but we know the holidays may interfere with contract signings and sometimes we just run out of calendar. Nevertheless, Q4 is off to a solid start and should wrap up an extraordinary year for orders. We recognize offshore rig orders are cyclical exhibiting periods of diminished demand from time-to-time, but we expect deepwater orders to remain good more years than not for the next several. The reason for this is that we see the opening of deepwater provinces by new technology as presenting an unprecedented opportunity to the oil and gas industry, one that requires the unique sophisticated drilling tools, National Oilwell Varco and our shipyard partners provide. The engine driving this demand, the possibility of monetizing billions of barrels of oil beneath the world’s deepest oceans is powerful. Technology has literally opened up two-thirds of the planet to oil and gas exploration, which requires a substantial fleet of floating drilling rigs. This leads me to the second major trend. Once oil companies discover deepwater hydrocarbons, they will produce these and we believe floating production systems will emerge as a preferred method in most deepwater basins. Over the past few years, we have invested in unique products required for floating production systems, including flexible risers, turret mooring systems, specialized deck machinery pumps, sand handling and product equipment and composite piping solutions. Category leading products, superb project management skills and close shipyard relationships position NOV extraordinarily well to emerge as a preferred supplier of floating production solutions. FPSO construction projects have historically had a pretty bad record. Most, in fact nearly all, are late and over budget. Our strategy is to bring configurable designs and modern manufacturing techniques to this industry analogous to what we have done successfully in the drilling rig construction world. We are making steady progress. Many projects began to translate into orders this year. In fact, our APL turret mooring business expects to post record orders this year. Project margins are rising modestly as we work to standardize component designs to reduce engineering and commercial risk. Additionally, we will mark the startup of our new flexibles plant in Brazil this quarter, which will lead our NKT Flexibles business to new records in the future. While it will take time to develop, we believe that FPSOs will create the next major growth lag for National Oilwell Varco. The third trend affecting National Oilwell Varco jack-up rig demand has been white hot lately as operators seek to replace aging fleets, 54% of the marketed jack-up fleet is more than 30 years old and as NOCs in Mexico, Saudi Arabia and elsewhere seek to ramp shallow water production to offset onshore production declines. In the third quarter, we sold 13 jack-up packages bringing our total so far this year to 42 jack-ups. We expect the fourth quarter demand will remain very strong as well to complete a truly brilliant year for jack-up demand. Generally, we see strong demand looking to establish yards in Singapore, but Chinese yards are pursuing projects aggressively, including offering attractive financing and entrepreneurs are signing up with them. The fourth major trend driving our fortunes at National Oilwell Varco is the proliferation of technologies enabling unconventional shale production. Shale technologies were more accurately unconventional technologies, because these are techniques being applied to enhance production from all sorts of rocks are positive for virtually everything NOV does and sells. Profitable, unconventional developments require new modern rigs capable of drilling horizontally. Specialized premium drill pipe which must be coated and carefully inspected, mud motors and bips [ph] are needed to drill horizontally. Frac leads full line equipment, frac heads, coiled tubing and coiled tubing units are all needed to hydraulically stimulate on conventional reservoirs. Composite tubing encoded and thoroughly inspected OCTG is required to transport, produce fluids, drill cuttings and water and waste management technologies are applied to minimize environmental impact. NOV is the leading provider of almost all the major hardware and technology required for unconventional shale success and as we survey our products and services in this round we see two unconventional production markets at different stages of evolution. First North America the birth place of unconventional shale technologies appears to be evolving most rapidly towards a more industrial efficiency based approach. Reproductivity and well cost management are top of mind for EMP customers and while much that NOV does enhances and enables such efficiencies this isn't 100% good news for us or our oil field service peers. By that I mean the EMP customers are focusing on supply chain management reprice for their drilling programs. A few years ago dozens of speculative shale plays were being probed today these are coal lessening down to a handful to a handful of the most profitable. So even in a flat rig count environment the most active basins steadily become more competitive as oil fields service company reposition our assets and by their way into the game in this handful through discounting and the least active basins become more competitive as companies get desperate and discount the (indiscernible). The winning strategy in this tonight fight must therefore focus on adding value, i.e. reducing well cost, increasing productivity, enhancing efficiency. NOV seeks to provide differentiated products and services that do just that and our unique positioning enables us to drive value for our customers throughout the oil field food chain. Much that we make is consumed at a steady rate by rigs and frac fleets operating 24x7 near red line RPMs in this place. Our outlook for North America in 2014 is cautiously positive. Given the strong oil driven wellhead cash flows to EMP companies and the relatively low reinvestment rates of the past year. If oil remains near $100 we believe we will see more spanning in 2014 and NOV is well positioned to enjoy an activity uptick in North America. This thesis should be helped by a large inventory of drill sites across North America with minimal geologic risk and steadily rising take away capacity which tends to enhance producer cash flow at the wellhead. The second major shale market encompasses basically the rest of the world outside North America. Here is where infrastructure is less developed, we view this market as considerably less evolved with tremendous potential and work to be done that will likely span a generation. It is not coincidental that the shale revolution was born on the continent with 2/3rds of the world’s working rigs and the highest level of geologic understanding. Shale plays unconventional plays are by definition marginally economic requiring established efficient oil services infrastructure capable of earthing a well the cost of which is marginally exceeded by the value of the hydrocarbons produced from it at some reasonable expected commodity price. Carrying the unconventional shale style of play build on finely tuned well construction cost into regions with less developed oil field infrastructure will predictably count our headwinds and delays after all it took the industry here in Texas a couple of decades to figure it out. I will submit that one of the most interesting economic opportunities in this scenario would be for a company that actually builds out oilfields services infrastructure. A company like NOV, hunger for infrastructure for new modern rigs and drill pipes and downhole tools help fuel our third quarter orders and results. Land rig sales jumped with more than two dozen sold in the quarter almost all overseas and most going into more sophisticated horizontal drilling applications and pulling unconventional techniques. In particular we saw strong demand from Latin America where Mexico seeking to add new modern land rigs and where Argentina has lifted duties on rig imports for the next several months. The Middle-East, Russia and the Fareast also saw strong demand for land rigs. Our overseas expansion projects continued to strengthen our capabilities as we make strategic investments in manufacturing a service infrastructure and promising international markets. NOV is uniquely positioned to provide the tools required to bring the shale revolution to these new areas, an opportunity that we remain extremely excited about. The evolution of the vast international shale market will shape NOV’s fortunes for decades. Last quarter, we talked about some of delivery challenges we face in our Rig Technology segment. We are making good progress against these and saw margins improve slightly, but we continue to wrestle with very high volumes moving through our system and with record levels of installation and commissioning activity in shipyards. Strong orders continue to load up our manufacturing plants filling up the capacity we have been adding aggressively, which requires we continue to outsource more and to spend a little more than we would like to expedite equipment. As a consequence, we foresee challenges continuing, but expect steady progress quarter-by-quarter. We have also made progress on pricing and commercial terms on new projects flowing into the backlog although it will be a while before consolidated segment margins reflect this. Notably, we continue to face a very soft market for pressure pumping equipment in North America and rising FPSO product sales are somewhat dilutive to the segment’s EBIT margin. Reviewing our progress, I am again reminded of how very fortunate we are to have such talented professionals at work executing our business. Our Rig Technology segment by itself would generate over $11 billion in revenues this year at EBIT margins north of 20%. This is nearly double the size of all of NOV when we first merge in 2005 and would rank midway through last year’s Fortune 500 list with far better than average profitability of most public companies. This accomplishment would not be possible without an extraordinarily talented team and we are grateful for the tremendous results that they and all NOV employees produce. Many, many thanks to all of you. Now, I am going to turn it over to Jeremy for a more detailed review of the third quarter.

[Jeremy Thigpen:]

Thanks Clay. National Oilwell Varco generated earnings of $1.49 per fully diluted share in the third quarter of 2013 on $5.7 billion in revenues, excluding $10 million in pre-tax transaction charges and $102 million in pre-tax gains resulting from the settlement of an outstanding legal claim. Third quarter 2013 earnings were $1.34 per fully diluted share, up $0.01 per share from the second quarter 2013 and down $0.18 per share or 12% from the third quarter of 2012. Sales of $5.7 billion improved 2% sequentially largely driven by resumption of activity in Canada post breakup and grew 7% year-over-year despite a 3% year-over-year reduction in the number of drilling rigs worldwide. Excluding transaction charges from all periods and the gains resulting from the outstanding legal claim in the third quarter of 2013, operating profit for the quarter was $853 million, up 3% sequentially and down 10% from the third quarter of last year. Operating margins on this basis were 15% for the third quarter 2013 compared to 14.7% for the second quarter of 2013 and 17.8% for the third quarter of last year. Sequentially, operating profit flow through our leverage with 31%. Now let’s turn to our segment operating results. The Rig Technology segment generated revenues of $2.8 billion in the third quarter, flat sequentially and up 12% compared to the third quarter of 2012. Operating profit for the segment was $606 million and operating margins were 21.3%, up 60 basis points from the prior quarter. On the Q2 conference call, we expected Rig Tech revenues to decrease in the low single-digit percentage range as continued declines in the sale of intervention and stimulation equipment and somewhat lower project revenues would more than offset continued growth in our aftermarket business. Well as expected, revenues for intervention and stimulation equipment declined an additional 13% sequentially. However, our Q3 Rig Tech revenues were slightly improved from Q2 as revenues out of backlog, which were flat at $2.1 billion and individual component sales both outperformed our expectations and albeit at a slightly slower pace, which was simply a function timing. Our aftermarket business continued to grow to a new quarterly record of $627 million which represented 22% of total Rig Tech revenues in the quarter. Needless to say, we are excited by the fact that our aftermarket business continues to grow both in total dollars and as a percentage of our total Rig Tech revenues. Turning to Rig Tech margins, we were pleased to see the 60 basis point sequential uplift as we had successfully avoided some, but not all but the cost overruns that impacted us in Q1 and Q2. Still we continue to face the same three challenges that we detailed in the Q2 conference call, including one, the strength on our supply chain; two, product mix with continuing declines in our North American land-related businesses; and three, the incremental expenses associated with numerous strategic growth initiatives and capacity expansions. However, with each passing quarter, we have become increasingly more confident that we are taking the appropriate steps in each area to further expand our already industry leading margins. From a supply chain standpoint, everyone is working hard to bring our new manufacturing capacity online which will ultimately lead to operational efficiencies. However it's important to remember that we’re continuing to secure orders at a very rapid pace, as Clay mentioned this year alone we have already secured 22 floaters and 42 jackups. It's also important to remember that the lead time for jackups is 6 to 8 months shorter than the lead time for floaters which applies additional pressure on our plants. Still with our new capacity and our skilled and dedicated team of employees we have complete confidence that we’re up for the challenge. From a product mix standpoint we do not expect to see any near term meaningful orders for new frac spreads, coiled tubing units or land rigs in the North America market but we know that our customers are utilizing and therefore consuming their existing equipment and we will ultimately need to return to us for repairs or the complete replacements. From an expense standpoint many of our large strategic growth initiatives and capacity expansion are nearing completion which will help to elevate some of our recent margin pressures but we still have some large projects that have yet to conclude including the new flexible pipe manufacturing facility in Brazil, a new riser manufacturing facility in Brazil and a new rig building facility in Russia that will all carry over into 2014. Additional we will likely add to our footprint in the Kingdom of Saudi Arabia as the outlook for that market remains very positive and local content requirements are every increasing. And well not previously Mitch [ph] referenced as one of our three challenges to expanding margins the new contractual terms that we implemented in Q2 for our offshore equipment component and packages will overtime help us to expand margins as revenues from this new higher priced backlog begin to start flowing out later next year. So overall we’re clearly moving in the right direction but it will take some time to return our margins to the 24% level that we have established as our target for the same. Now let’s transition to the Q3 capital equipment orders and our resulting backlog. As evidenced by the 3.3 billion in new orders industry demand for floaters and jackups remain very strong and our customers continue to recognize National Oilwell Varco for our industry leading technology, our proven track record of delivering projects on time and our unmatched ability to support our equipment globally. For the quarter we booked five drill ships, one semi and 13 jackups. Of the six floaters that we booked in Q3 we secured the subsea BOP stacks on four plus two spare stacks and of the 13 total jackups that we booked in Q3 we secured five of the stacks. In addition to the strong orders offshore we awarded a number of international land rig packages both drilling and work over destined for Mexico, Argentina, the UAE, Indonesia and Australia. Rounding out the order intake story we secured a number of sizeable orders for our NKT products including flowline and riser reconfirming our belief that we are still on pace to book roughly 1 billion in flexibles and new floating production equipment for the year. All of these new orders were partly offset by revenues out of backlog of almost 2.1 billion resulting in a book to bill of almost 1.6 times and another record quarter ending backlog of 15.2 billion which was up 9% from Q2 which by the way was a previous record and up 30% year-over-year. Off the total backlog approximately 92% is offshore and 94% is destined for international markets. We expect a little over 2 billion to flow out of backlog in Q4. Looking into the fourth quarter of 2013 we expect orders for new offshore drilling equipment packages and floating production equipment to remain strong and we hope to see continued demand for new land drilling rigs in Latin America and the Middle-East and perhaps some work over rigs in Russia. Well we do not yet know if we will see a fourth consecutive quarter of new orders above 3 billion we have enjoyed a very strong start to the quarter and we’re in the middle of some very encouraging and constructive discussions that could soon materialize into new orders. However as you all well know timing is everything, if we do not receive the signed contract and the down payment by December 31 we will not book it in this quarter. As of now we’re planning for rig technology revenues to increase in the mid-single digit percentage range as continued declines and the sale of intervention and stimulation equipment will be more than offset by an increase in land related revenue associated with our Q3 bookings. Higher offshore project related revenues as we help the shipyards to get back on schedule and continued growth in our aftermarket business. And although we realize some slight improvements in Q3 we remain cautious about Q4 margins sticking to our previous guidance of 20% to 21%. As Q4 is expected to be the busiest quarter for installation and commissioning work in the history of NOV. Transitioning to petroleum services and supplies the segment posted revenues of 1.8 billion up 3% sequentially and up 5% year-over-year. Operating profit improved 7% sequentially to 324 million and operating margins were 17.9% up 50 basis points from the second quarter of 2013. On the Q2 call we guided the revenues in this segment to improve in the low to mid single-digit percentage range, primarily driven by increasing activity in Canada as it rebounded from breakout. We also forecasted margins to remain relatively flat as many of our groups were – are still actively integrating acquisitions that were consummated late last year or earlier this year. Well, as it turned out, our revenue guidance was spot on. However, the source of the revenue was somewhat surprising. As expected, Canada was the primary driver of the improvement, but we were pleased to finally experience some growth in the U.S. market, which posted an 8% sequential gain. From a margin perspective, the quarter played out a little better than expected as well with 33% leverage or flow-through on the 3% sequential increase in revenue. As we entered the fourth quarter 2013, we believe Petroleum Services & Supplies segment sales will improve in the low to mid single-digit percentage range as Canada drilling activity reaches the seasonal highs and we benefited from some end-of-year project sales into international markets. We believe that growth in these regions will be partially offset by a U.S. market that typically slows during the holiday season. Still since we have right-sized our businesses in this segment, we expect margins to move modestly higher on the incremental revenue. The Distribution & Transmission segment posted revenues of $1.3 billion, up almost 4% sequentially and up 2% compared to Q3 of last year. Operating profit dollars improved 10% sequentially to $78 million and were flat as compared to Q3 of 2012. And operating margins improved 30 basis points from Q2 to 5.8%. Like PS&S, we forecasted revenue within the Distribution & Transmission segment to improve in the low to mid single-digit percentage range, again primarily driven by increasing activity in Canada. This occurred as expected. However, we were very pleased to see continued growth in our international operations, which posted a 13% sequential improvement on top of the 9% gain that we posted from Q1 to Q2. We also suggested that segment margins would likely remain fairly flat. However, the incremental volumes help margins to expand in Q3 to 5.8%. Looking into the fourth of 2013, we expect Distribution & Transmission group revenues to decline in the low single-digit percentage range as increasing activity in Canada will be more than offset by reductions in the U.S. where the holiday season will result in fewer billing days in the quarter. As a result of the slightly lower revenues, we will likely experience some margin erosion as well in Q4. On the topic of distribution, I would like to briefly cover two important and exciting topics. First, the integration of Wilson and CE Franklin is progressing exceptionally well with facility consolidations and ERP implementations proceeding as planned. Second on September 24, we announced that company’s Board of Directors had authorized management to explore a plan to spin-off NOV’s distribution business from the remainder of the company creating two standalone publicly traded corporations. As Pete mentioned in the press release, we believe that company’s distribution business now has the size and scale to operate as the standalone world-class distribution company. And as the standalone entity, we believe that distribution will be better positioned for future growth, because one, it can more aggressively pursue opportunities outside of the upstream oil and gas base; two, it will not be competing for capital with higher margin, higher return businesses within NOV; and three, the separation will remove any conflicts that currently exit between distribution and NOV’s manufacturing competitors, which will open up opportunities to sell products to NOV’s competitors and to market those competitors’ products through its distribution network. In addition to being a great opportunity for the distribution business, we also believe that the proposed spin will help to highlight the remaining portion of NOV as a technology and manufacturing company that is focused on designing, manufacturing, delivering and then inspecting servicing and supporting the most advanced, robust and reliable equipment in the industry. Needless to say, we are excited about the opportunities for both businesses. If approved, we would expect to close the transaction in the second quarter of 2014. Now, let’s turn to National Oilwell Varco’s consolidated third quarter 2013 income statement. Gross margins improved 20 basis points sequentially to 23.8%, SG&A increased $8 million sequentially, but as a percentage of revenue, SG&A remained unchanged from Q2 at 8.8%. Transaction costs primarily related to the Robbins & Myers acquisition totaled $10 million in the quarter, which were more than offset by $102 million gain associated with the settlement of some outstanding litigation. Interest expense in the quarter declined $4 million sequentially to $26 million largely attributable to the launching of our commercial paper program. Due to our strong financial condition, favorable market outlook, our leading market position and a track record of solid execution, we were able to secure top ratings from both Moody’s and Standard & Poor’s, which enabled us to meaningfully reduce our already low borrowing cost through the conversion of existing bank debt to commercial paper. Equity income in our Voest-Alpine JV was $13 million down 2 million sequentially as the plant was temporarily shut down for it's annually scheduled maintenance. We expect equity income for the JV to decline even further in Q4 as demand for drill pipe and therefore green tube in the U.S. will continue to be somewhat needed. Other expense for the quarter was 15 million which represented a 28 million delta sequentially but is more consistent with historical trends. The effective tax rate for the second quarter was 30.8% which was just slightly lower than Q2. Unallocated expenses and eliminations on our supplemental segment schedule was 155 million in the third quarter except 19 million sequentially on higher volumes of inter-segment business. Depreciation and amortization was 191 million up 1 million from second quarter and EBITDA excluding transaction charges and the gains and the legal settlement was 1 billion or 18.4% of sales. Turning to the balance sheet, National Oilwell Varco September 30, 2013 balance sheet employed working capital, excluding cash and debt of 7.2 billion let down 78 million from the second quarter as wait for the second consecutive quarter realize the slight sequential reduction in inventory. As importantly we also experienced a turn-around in customer financing which improved by 378 million sequentially as prepayments and milestone invoicing on major projects outpaced cost incurred. Current and long term debt net of cash was 1 billion at the end of the quarter versus 1.8 billion at the end of the second quarter. With 3.7 billion in debt offset by 2.7 billion in cash, off the 2.7 billion in cash only 11% of the balance was in the U.S. at September 30. Cash flow from operations was $1 billion for the third quarter which was an all-time quarterly record, the past in the old record of 912 million which was in Q2 of 2011. During the quarter we paid down debt by 371 million, made cash tax payments of 218 million, made dividend payments totaling 111 million and we spent a 164 million in CapEx bringing our year-to-date CapEx spending to 484 million. We expect CapEx spend to increase slightly in Q4 to finish the year just under 700 million in total. Now let me turn it back to Pete.

[Pete Miller:]

Thanks Jeremy and you know I think both Clay and Jeremy have really given you a very comprehensive overview of both our financials and our operational situation so I’m just going to make a couple of really brief comments. First you know as you take a look at a catalyst that I think you’re going to project out over the next two or three years. You know I keep my eye on a couple of international plays I think number one will be Russia, I think the Russians are going to be very aggressively doing things in the next few years. We have felt that way for a long time and the consequence of that is that we started building a plant over in Russia and we’re going to be prepared to be able to really take advantage of that as we move into the latter half of 2014 and the early part of 2015. I think another area that’s going to very exciting, certainly you should keep your eye on it will be Mexico. You have the changeable laws down there, I think as we move into the rest of the year you will have a constitutional amendment hopefully and then you will have the laws that will come out in the first quarter. I think that’s going to really open up a tremendous area for a lot of the service companies and in particular National Oilwell Varc. So those are two areas I keep eye on, third one for us and Clay mentioned in his comments it's not, I think as you take a look at John and especially the aggressiveness of the shipyards over there we’re uniquely positioned to be able to take advantage of that and to help those shipyards and add the legitimacy that they need to be able to go out and increase the business. I think that’s going to be a very positive catalyst force as we continue to move forward and then finally the old standby is Brazil. You know Brazil is very important to us today but I think we’re going to move into another plateau or not plateau but another tier if you will which is going to be the production and FPSO and the flexibles. So as we bring our flexible plant online as we take a look at some of these different engineering ideas we have on FPSOs as Clay mentioned earlier I think Brazil is going to be a very, very positive area for us so if I’m looking into the future I’m really keeping my eyes on those. I can go on, I can talk about the Middle-East, I could talk about Gulf Coast of Africa but the point is there is going to be a lot of international catalyst out there I believe they are going to help drive our business over the next few years. So with those brief comments, Paula I would like to open it up to questions that any of our listeners might have.

[Operator:]

Thank you. (Operator Instructions) And our first question comes from Jim Crandell from Cowen. Please go ahead.

[Jim Crandell:]

Good morning guys. Great quarter. Great orders.

[Pete Miller:]

Thanks.

[Jim Crandell:]

Pete, first question, could you talk to how the new Brazilian yards are progressing in terms of their building rigs and how this might affect the delivery of rig equipment packages from NOV?

[Pete Miller:]

Sure. Jim, actually, the Brazilian yards are we think moving along very, very well. We have – we are in process of doing some – a lot of different work down here today. We are basically talking about four different yards that we are involved with. Now, Jim, by definition, the deliveries are going to be slower in Brazil. When you look at the Koreans, I mean, we are getting those rigs out much, much faster, but even the Koreans if you go back to the early part of this decade had a harder time. You got to get on that learning curve. And that’s going to happen in these yards. And so the revenue that we actually have in backlog for these orders will have a much slower velocity coming out of backlog that we will have, for instance, for something coming out of one of the Korean or Singaporean yards, but overall, it’s been very positive. We are seeing good things down here and progressing is being made every day.

[Jim Crandell:]

Okay, good. Clay, a question for you, can you talk about some of the cost reduction initiatives you’ve put through since you became COO and can you also talk to how these new facilities coming on will impact Rig Tech margins?

[Clay Williams:]

You bet. Jim, we have had a lot of activity and lot of progress in Rig Technology this past quarter and it really continuing through the year, specifically around adding capacity. A lot of initiatives we launched a couple of years ago and they are designed to be able to let NOV meet the needs of our customers with all these orders flowing in. And so as you could imagine, it’s been a little disruptive to our production schedule. Those are continuing week-by-week, quarter-by-quarter. We are making progress. And as we did get those set, we can expect to see benefits from them. Probably, the main initiative underway right now in Rig Technology is to get through this first group of rigs. I think we talked about this a little bit on the last call, but the rigs that we are building today and the rigs that we are delivering now and through the next couple of quarters, really are new designs or new rig floor layouts. We are satisfying new class requirements in the post-Macondo era ABS 2012 be it the other class requirements. And so in a lot of ways, rigs that we built from 2005 to 2010/11 were different designs and we are kind of – we have lost a lot of learning curve effects on those. So in terms of margin progression over the next several quarters, a lot will hinge upon getting the engineering completed on these new rig designs actually getting them constructed in the shipyards and getting them out the door. And as we make the second and third and fourth copies of those same rig designs, I think that’s where you are really going to see the benefits flow through. It’s really pretty much a repeat of what we saw in the 2006, ‘07, ‘08 era. And so we are very confident of how this plays out. Some other things we have underway. We are doing a lot to ease some of the congestion in some of our plants. So for example, we are moving some land BOP products, for example, out of our BOP plant and moving those to a different operation to free up more bandwidth within that plant to be able to handle the extraordinarily high volumes moving through there. We have got plans to also move our rubber components out of that particular plant as well. And so – and that’s just one operation, I would say across the board, lots of things going on manufacturing wise to make our business more efficient.

[Jim Crandell:]

Okay, thank you. And one quick final one for you Pete, you had a substantial increase in your dividend earlier this year, can you review with us your current thinking about how you are viewing the dividends?

[Pete Miller:]

Well, Jim, we have doubled the dividend in May. And what we want to be able to do in this company is continue to increase the dividend on a fairly systematic basis, where we want to return money to our shareholders. We think the dividend is absolutely the best policy. We made a very significant jump in May, but our Board is committed to continue to try to increase the dividend as we move forward. And I think you will see that happen, whether or not I’d say it will double if that’s a little bit different but at the end of the day we’re going to continue to try to increase our dividend to return what we get shareholders in that regard.

[Operator:]

Our next question comes from Jeff Tillery from Tudor Pickering. Please go ahead.

[Jeff Tillery:]

On the spinoff of your recent business I think it makes a lot of sense to strategically. I’ve gotten a fair number of questions it's just kind of was this part of the plan all along in terms of scaling the business up a little bit of confusion just around purchasing two of those businesses last year and then spinning them out so quickly. So just interested to hear your color around that.

[Loren Singletary:]

And it was not the plan initially, what we really did there is we had the opportunity to consolidate from a strategic standpoint the upstream distribution business in North America and around the world and once we started the integration process it became apparent that the stars hadn’t aligned [ph] and that we had the critical mass to actually have a company that standalone, compete world-class in it's own right and so that was really the genesis of why we did that. It was not because of the initial purchase of Wilson and CE (indiscernible) because those are targets that we looked at for many, many years but add value to our shareholders we think this is something that’s going to be very important going forward and just another way that we can return capital to our existing shareholders.

[Jeff Tillery:]

And then my second question is just on the PSNS consumables this is their here in North America, are you seeing anything change on the order front there or do you think or going through something structurally different in terms of the way your customers manage inventories.

[Jeremy Thigpen:]

Yeah I think it's probably more the latter there, Jeff. We’re seeing the kind of the inventory overhang come down but it's not really changing customers buying habits. As Clay mentioned in his remarks you know our customers have consolidated into a handful of basins. All of our competitors who are supplying them with similar products as consolidated basin as well so our customers have ready access to supply and so what we’re seeing now is they are being really more efficient in the management of their supply chain and they are only ordering products when they need them as opposed to ordering them for additional inventory and so it's almost kind of hand to mouth approach that we’re seeing today and until we see some more rigs and kind of spraying out of some more basin, it will probably be like definitely for the foreseeable future.

[Pete Miller:]

Yeah I think we overshot inventories a little bit a couple of years ago when the supply chain was very tight and deliveries were months our customers tend to double order and over order a little bit when the rig count started creeping down. They took delivery on those inventories and so that’s we have ended up with this overhang that we are working through. I can’t tell you when we’re going to get through it but we do know day by day they are chipping a way at it.

[Jeff Tillery:]

It's going to be tough to calibrate if we were on a flattish rig count, we’re still consuming drill pipe or still using products and services and it's simple we are going to see the increase in that without and necessarily associating increasing rig count I just didn’t know if you guys see anything turn yet?

[Pete Miller:]

Yeah I don’t think we’re seeing it turn yet I mean Q3 was promising, we did see an uptick in the U.S., Q4 we expect to kind of take down as I mentioned just really more the holiday season than anything. A couple of things that they head picked us a little bit but broadly speaking we don’t see the term just yet so probably sometime hopefully in 2014.

[Operator:]

Our next question comes from Jud Bailey from ISI Group. Please go ahead.

[Jud Bailey:]

A follow-up on the some of the comments Clay you made regarding some of the new design rigs that will be coming out of the yard here soon and getting those behind you. Could you give us a little bit more color, are those going to be largely delivered in 2014 and be done by ’15 or can you give us a little more color on what timing it is deliveries?

[Clay Williams:]

Yeah they are being delivered throughout, that’s exactly right through 2014 and then to 2015 these new class designs. The real benefit of all this work is that once you have built that first rig you have got all the engineering done, you have all the lessons learned through the first copy of it. You apply those lessons and this is what I think our team is extraordinarily good at is capturing those lessons and benefiting from them on the next copy. So it's the second and third copies that you really start to see the benefit that’s exactly what we saw in 2008, 2009, 2010 as we kind of got deeper into that wave we start seeing a lot of positives and a lot of efficiency gains. Those were in contrast candidly to issues and problems we faced earlier in that buildup when you are making the first copy. So that learning curve effect is well-established and we are looking forward to benefiting from it as we get into the back half of next year and into 2015.

[Jud Bailey:]

Okay. And then my follow-up would be my understanding is several contractors right now are for their next the newbuilds are actually looking at new designs or enhanced designs, do you take a little bit different strategy in taking the next, when looking at the next generation given some of the problems you have had, do you take any pricing strategy and whatnot?

[Pete Miller:]

We do. I mean, we try as best as we can to factor all that’s in, but it’s when you are building something for the first time, you are always going to face some challenges are a little bit unexpected. And we – I would stress we encourage our customers to stick with proven designs. It really I think reduces the cost and risk of their newbuild programs.

[Jud Bailey:]

Okay. And then a question for Jeremy, Jeremy, you may have mentioned it, but I may have missed it do you have a revenue out of backlog number updated for 2014?

[Jeremy Thigpen:]

We didn’t say it, but it will look similar to 2013.

[Jud Bailey:]

Okay, got it. Alright, thank you. I will turn it back.

[Pete Miller:]

Thank you.

[Operator:]

Our next question comes from Brad Handler from Jefferies. Please go ahead.

[Brad Handler:]

Thanks. Good morning guys. I guess I was – the last question was one I was going to ask as well. So maybe Jeremy, you can fill it in a little bit, so the revenue out of backlog for ‘14, sorry, I am not looking at my notes, but is it been roughly $8 billion for ‘14 and then how much would it be in ‘15?

[Jeremy Thigpen:]

That’s probably about right. That’s probably about right, Brad.

[Brad Handler:]

Okay, got it. And then do you have a ‘15 reference?

[Pete Miller:]

No, I don’t think so yet.

[Jeremy Thigpen:]

Just stand beyond so in the $5 billion, Pete, yes, $5 billion range.

[Brad Handler:]

Right.

[Jeremy Thigpen:]

Based on what we have today, yes.

[Brad Handler:]

Okay, okay. Maybe I have a multi-part follow-up, but I think it’s all kind of in the same context and it’s coming back to Rig Tech margins. We have had a conversation, you have helped us in understanding kind of your challenges and we appreciate that. The – how the past of getting back to the 24% margin, I mean, I would certainly appreciate if you, does it happen at some point in 2014 or what are the challenges to having that happen at some point in 2014? And then maybe before I just turn it back to you, related to that is we have – it’s easy for me to certainly understand some efficiencies in learning curve as you are describing them. It’s also easy to understand capacity additions and so some of the expediting costs go down, but it does sound like installation and commissioning challenges have been real as well. And I don’t know how those are enhanced or have those costs come down if you are delivering a lot of rigs in ‘14, but perhaps you can help describe why that also gets a little easier or cheaper or what have you?

[Clay Williams:]

That’s a great question, Brad. Let me explain it. When we have setup our initial plans to build a rig, installation and commissioning on a drillship, we typically budget five to six months to accomplish that. What we find is delays some of our own making, many not, some from our shipyard partners, but we are all building a new rig for the first time. So we typically launch those INC projects late and into a project that may drift beyond its delivery deadline and we are under a lot of pressure to speed up our INC activity. So we get asked, hey, can you guys shorten that up to four months or three months. And to accomplish that, it cost us money. We have to – we have taken the extraordinary step of going to 24-hour operations on certain things that we are doing on the INC world. We are paying extra to expedite equipment and people and move resources around our system to try to get back on track on these projects or as close as we can there too. So that’s costing us extra money. So all this – this is all tied together and the installation and commissioning is the last thing we do on a rig and so it shows up there as well. But on that subject, more broadly, I have touched on a number of the factors and I don’t think these are new to anybody for probably worse delineating them all again. The new designs that we are building right now for the first time and the loss of the copy effect from the preceding cycle is an issue, the expansion in our plants has been an issue and the installation and commissioning efforts being that are underway right now as Jeremy mentioned where we are going to be at record levels of INC here in the second half of this year. And as we move into 2014, we are all contributing to this, but I would say on all three fronts we see this getting better. We get better as we progress through it. I would add to this the resumption of land rig demand that we saw on the third quarter will help the segments margins and the last factor is the fact that our aftermarket piece of rig technology in the third quarter it grew but only by a couple of percent so you didn’t get sort of the positive impact on margin expansion out of aftermarket that you would otherwise expect, I would stress that aftermarket is a transit thing you know quarter-to-quarter. It's a timing thing and we’re going to see that business continue to grow we’re very confident so that will help contribute to margin expansion. However some of the risk and headwinds that we face first we’re glad to see rising demand for FPSO products but those are a little bit diluted to our EBIT margin. Second as we mention demand is down for pressure pumping equipment particularly for North America so that business has really kind of being at rock bottom on order-

[Brad Handler:]

And margin in that business are accretive to overall rig tech?

[Jeremy Thigpen:]

Yep. And the third is the shortened deliveries that we have on these rigs means that we have a little less head room and safety factor than we have had in the past, we have talked about this in the past too. We’re making these offshore rigs faster and faster and so to the extent we run into unexpected problems the time frame that we have to recover is much more limited. So that’s a little bit of a risk and finally the fourth issue is in the third quarter, again we had very strong demand once again for jackup rigs, we sold 42 jackup rig packages that’s a little quicker term kind of capital and so we’re putting more volume through our system and so that makes our congestion issues a little more challenging. So those were the kind of the puts and takes going into our margin outlook overall.

[Pete Miller:]

And as you, you know to your first question around when you get back to the 24% margins. I would expect as we get through Q1 of next year to see some slow steady progression in margins in the rig tech business but I wouldn’t expect to get to 24% next year. 2015 I think is more likely and if we can get some help as Clay said on the you know orders for pressure pumping equipment that we can ship and turn it into revenue and margin. I think we can get there 2015.

[Operator:]

And your next question comes from Stephen Gengaro from Sterne, Agee. Please go ahead.

[Stephen Gengaro:]

Just wanted to hit on the PSNS business and can you give us a sense there and I know you’ve had the U.S. rig count has been everybody is being expecting I think higher more rapidly but you’re still at a very healthy level. How should we think about sort of the structure of the business right now and what you see from a demand perspective in ’14 is it simply rig count intensity driven or is there a sort of an inventory that could help growth there?

[Pete Miller:]

Yeah I think we’re cautiously optimistic as how I would describe but we think producer of cash flows have been pretty strong and so we think there is good financial resources to see an uptick in the rig count. As I mentioned in my comments increasingly we see North America become more and more competitive, this inventory overhang issue has been out there. The fact that the industry is kind of restructuring and coal lessening into these the handful of most profitable basins has created some headwinds but I would add this rig efficiency phenomenon that everyone is being talking about we believe ultimately will grow the pie. It's going to make some of the less economic basins now more attractive and more economic and so with ample financial resources and kind of growing opportunities perhaps in another basins you know we think that’s a pretty good backdrop to see expansion sometime out there in 2014. We haven’t seen it yet but I think it's you know we’re entering with a pretty good backdrop for 2014 and I would also reiterate that the very intensive nature of drilling and completion operations in the major shale plays is consuming what NOV makes and so we know day by day these inventories are being wedeled the way by day to day operations.

[Jeremy Thigpen:]

Yeah I think if you look at PSNS you almost had to segment it by product types I mean things like drill pipe and downhole tools as long as well count is high which it has been those products get consumed and they get consumed pretty quickly. So there was a definitely an inventory overhang for both of those types of products, the downhole tools, and drill pipe. We will work through that at some point in time next year and we will start to see more demand for those products. As you get into the more consumable type items like fluid end expendables, valve, seat liners, pistons. Those are probably going to be consumed as customers need them as opposed to really building up inventory levels, because there is ample supply out there. So it’s just going to be a bit of a mix between the products.

[Stephen Gengaro:]

Okay, thank you. And then as an unrelated follow-up, as we think about CapEx and we think about the tax rate for ‘14, what’s the impact of the spin? Does it change the tax rate much or the CapEx number?

[Jeremy Thigpen:]

Yes, I think it’s too early to answer that right now. We are still working through the process ourselves. And as we get closer to the finish line, we will come back with more information.

[Stephen Gengaro:]

Okay, thank you.

[Pete Miller:]

Thanks.

[Jeremy Thigpen:]

Thank you, Stephen.

[Operator:]

Our next question comes from Marshall Adkins from Raymond James. Please go ahead.

[Marshall Adkins:]

Good morning guys.

[Pete Miller:]

Good morning Marshall.

[Marshall Adkins:]

We have heard from the seasonal offshore drillers talk about rig equipment delays and this quarter we see your backlog burn slowing a little bit. Is there anything we should read into that? Are lead times getting along? Is there anything going on there? Is it something else?

[Pete Miller:]

No. I mean, we are as we talked about on lots of calls we are pretty loaded up $15.2 billion to our backlog. And so we are having to be very careful about what we sign up to do on deliveries. I think some of the issues you are talking about some of the deliveries, again go back to this, the fact that we are building the first versions of rigs under new class standards with new rig floor layouts for all of us. And we have collectively faced some issues, but would stress that NOV has moved heaven and earth to try to get those rigs back on schedule as best we can and many we have not all, but many. And so I think we are moving progressively towards of that learning curve. We are getting better and better at it month by month.

[Jeremy Thigpen:]

The other thing I would add, Marshall, just real quickly the backlog burn is pretty high level $2.1 billion, which was consistent with last quarter and just slightly below our peak at Q4. So we are getting better at delivering I think.

[Marshall Adkins:]

So don’t read too much into it other than the new rig design.

[Pete Miller:]

Well, that’s about right.

[Marshall Adkins:]

Okay. Second question on the backlog, I will stay on the subject. We have seen a pretty good ramp up this year in the jack-ups you are doing, I can’t believe these numbers are right, but I had like 8 last year and 50ish by the time we end this year and deepwater rigs are going from 24 last year to high 20s this year. Where are we going to go next year? I mean, I am just kind of trying to get my arms around right you are almost at 30 deepwater rigs, you are going to order another 30, it sounds like in your guidance for backlog we fall off a little bit from that. And is that – am I reading that correctly?

[Clay Williams:]

Well, there is probably a little conservatism baked in that, but yes, I mean, our customers are pretty busy. They have ordered a lot of rigs. They have a lot of projects underway. Well, time will tell where we end up next year. But I think bigger picture and this is some of the part of the themes that I touched on in the opening comments where it’s an enormous opportunity out there. And with high commodity prices, we are seeing a lot of oil companies, lot of drillers avail themselves to these opportunities. And so we think again, the backdrop, the fundamentals are very strong, day rigs are strong, financings available, the shipyard infrastructure is offering holes at very, very low cost. The risk around building these things is low. And so you are seeing drillers go after that opportunity and grow their businesses by investing in these assets. And with regards to the jack-ups, there is still an awful lot. Over half of the marketed jack-ups are still more than 30 years old. And so there is a lot of rigs to build. On the floater side of things, you take all the floaters that were in existence prior to 2005 and you add all the floaters built since 2005 and you add all the floaters that are on order to be built. You are almost up to half of the rigs working in the state of Texas to go out and drill up the rest of the – two-thirds of the planet covered by deepwater. So we think that’s again a huge opportunity.

[Pete Miller:]

And Marshall I might add that the same sort of question was asked of us in ‘07, it was asked of us in ‘08, probably it was asked in ‘09, I just can’t remember, that before of last year – it was asked before of last year, and we continue to be very bullish on the need for the equipment and the rigs that we make for oil exploration and gas exploration in the rest of the world.

[Marshall Adkins:]

Well, the difference this time is you are also going to get a kick from the FPSO even if it does slow a little bit, that would be ramping up I would suspect?

[Pete Miller:]

Absolutely, absolutely. As we tell people, these drillships aren’t drilling for practice, they are drilling to discover oil and the approved [ph] solution on that production is going to be the FPSO business.

[Operator:]

I will now turn the call back over to Pete Miller, Chairman and CEO to close the call.

[Pete Miller:]

Thank you all very much and we look forward to talking to you when we do our year-end results in February. Thank you very, very much.

[Operator:]

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