National Oilwell Varco 2010 Annual Report Download - page 36

EXECUTIVE SUMMARY
During 2010 National Oilwell Varco, Inc. generated nearly $1.7 billion in net income attributable to the Company, or $3.98 per fully diluted
share. Earnings increased 13 percent from prior year levels of $1.5 billion or $3.52 per fully diluted share. Excluding intangible asset impairment
and transaction, devaluation and voluntary retirement charges from both years, diluted earnings per share of $4.09 in 2010 increased four percent
from $3.95 per share in 2009.
2010 revenues declined four percent from 2009, to $12.2 billion, but operating profit improved from $2.3 billion to $2.4 billion. Generally, 2010
benefitted from higher drilling activity when rig counts increased nearly 30 percent from 2009. This market improvement enabled revenues from
two of the Companys reporting segments, Petroleum Services & Supplies and Distribution Services, to increase from the prior year. However
the Companys largest segment, Rig Technology, declined in revenue in 2010 as it worked down its backlog of capital equipment mostly ordered
by customers in 2007 and 2008.
For its fourth quarter ended December 31, 2010, the Company generated $440 million in net income attributable to the Company, or $1.05 per
fully diluted share, on $3.2 billion in revenue. Compared to the third quarter of 2010, revenue increased five percent and net income attributable
to the Company increased nine percent. Compared to the fourth quarter of 2009, revenue increased one percent and net income attributable to the
Company increased 12 percent.
The fourth quarter of 2010 included pre-tax transaction charges of $1 million, the third quarter of 2010 included pre-tax transaction charges of
$2 million, and the fourth quarter of 2009 included pre-tax transaction charges of $14 million. Excluding transaction charges from all periods,
fourth quarter 2010 earnings were $1.05 per fully diluted share, compared to $0.97 per fully diluted share in the third quarter of 2010 and $0.96
per fully diluted share in the fourth quarter of 2009.
Operating profit excluding transaction charges was $625 million or 19.7 percent of sales in the fourth quarter of 2010, compared to $598 million
or 19.9 percent of sales in the third quarter of 2010 excluding transaction charges. Operating profit excluding transaction charges was $622
million or 19.8 percent of sales for the fourth quarter of 2009.
Following the Macondo well blowout and oil spill, a moratorium on deepwater drilling in the Gulf of Mexico was enacted during the second
quarter of 2010 and was lifted during the fourth quarter of 2010. Nevertheless drilling activity in the U.S. Gulf of Mexico remains lower than
pre-blowout levels due to the industrys difficulty in securing drilling permits. The drilling moratorium reduced the Companys earnings by
approximately four cents per fully diluted share during 2010, with most of the impact affecting the Petroleum Services & Supplies segment. The
Distribution Services segment posted higher sales in the Gulf Coast as it helped outfit the response effort with basic supplies during the second
and third quarters of 2010, but most of these previously incremental sales disappeared in the fourth quarter as cleanup operations were completed.
The Rig Technology group saw modestly higher purchases of spares and consumables among the affected rigs, which appear to be utilizing this
period of low drilling activity in the Gulf of Mexico to conduct upgrade and maintenance activities. Some offshore drilling contractors appear to
be pausing to see the ultimate resolution of new pressure control equipment requirements, and as a result some specific purchases, such as drill
pipe and conductor pipe connections, are at risk pending the outcome of this pause.
Oil & Gas Equipment and Services Market
Worldwide developed economies turned down sharply late in 2008 as looming housing-related asset write-downs at major financial institutions
paralyzed credit markets and sparked a serious global banking crisis. Major central banks responded vigorously through 2009, but a credit-driven
worldwide economic recession continues to dampen economic growth in many developed economies. As a result asset and commodity prices,
including oil and gas prices, declined. After rising steadily for six years to peak at around $140 per barrel early in 2008, oil prices collapsed back
to average $42.91 per barrel (West Texas Intermediate Crude Prices) during the first quarter of 2009, but recovered into the $70 to $90 per barrel
range by the end of 2009 where they are holding steady (the fourth quarter of 2010 averaged $85.10 per barrel). North American gas prices
declined to average $3.17 per mmbtu in the third quarter of 2009, but recovered slightly and have traded in a range of $3 to $5 per mmbtu since
(the fourth quarter of 2010 averaged $3.80 per mmbtu). The steadily rising oil and gas prices seen between 2003 and 2008 led to high levels of
exploration and development drilling in many oil and gas basins around the globe by 2008, but activity slowed sharply in 2009 with lower oil and
gas prices and tightening credit availability. Commodity prices appear to have recovered more quickly than economic activity through 2010,
leading to solid increases in drilling activity during 2010. 36