National Oilwell Varco 2011 Annual Report Download - page 38

Index to Financial Statements
EXECUTIVE SUMMARY
During 2011 National Oilwell Varco, Inc. earned $2.0 billion in net income attributable to Company, or $4.70 per fully diluted share. Earnings per diluted share increased
18% from prior year levels of $1.7 billion or $3.98 per fully diluted share. Excluding transaction, restructuring, impairment and devaluation charges from both years, diluted
earnings per share of $4.77 in 2011 increased 17% from $4.09 per share in 2010.
During 2011 revenues grew 21% from 2010, to $14.7 billion, and operating profit grew 20% from 2010 as well, to $2.9 billion. Generally 2011 benefitted from higher drilling
activity, which saw world-wide rig counts (as measured by Baker Hughes) increase 16% from 2010. This market improvement enabled all three of the Companys reporting
segments to post higher year-over-year revenues in 2011.
For its fourth quarter ended December 31, 2011 the Company generated $574 million in net income attributable to Company, or $1.35 per fully diluted share, on $4.3 billion
in revenue. Compared to the third quarter of 2011 revenue increased 14% and net income attributable to Company increased 8%. Compared to the fourth quarter of 2010
revenue increased 34% and net income attributable to Company increased 30%.
The fourth quarter of 2011 included pre-tax transaction charges of $12 million, the third quarter of 2011 included pre-tax transaction charges of $6 million, and the fourth
quarter of 2010 included pre-tax transaction and restructuring charges of $1 million. Excluding transaction and restructuring charges from all periods, fourth quarter 2011
earnings were $1.37 per fully diluted share, compared to $1.26 per fully diluted share in the third quarter of 2011 and $1.05 per fully diluted share in the fourth quarter of
2010.
Operating profit excluding transaction charges was $860 million or 20.2% of sales in the fourth quarter of 2011, compared to $778 million or 20.8% of sales in the third
quarter of 2011 excluding transaction charges. Operating profit excluding transaction and restructuring charges was $625 million or 19.7% of sales for the fourth quarter of
2010.
Oil and 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 developed nonetheless.
Developed economies struggled to recover throughout 2010 and 2011, facing additional economic weakness related to potential sovereign debt defaults in Europe. As a result,
commodity prices, including oil and gas prices, have been volatile. After rising steadily for six years to peak at around $140 per barrel earlier in 2008, oil prices collapsed back
to average $43 per barrel (West Texas Intermediate Crude) during the first quarter of 2009, but slowly recovered into the $90 to $100 per barrel range by the end of 2010
where they held relatively steady throughout 2011 (the fourth quarter of 2011 averaged $93.99 per barrel). After averaging $6 to $9 an mmbtu 2004-2008, North American gas
prices declined to average $3.17 per mmbtu in the third quarter of 2009. Gas prices recovered modestly, trading up above $5 six months later, but then slowly settled into the
$3 to $4 per mmbtu since. The fourth quarter of 2011 averaged $3.32 per mmbtu; however, North American gas turned down sharply around year end 2011, trading below
$2.50 per mmbtu, reflecting rising supplies of gas produced from new unconventional shale reservoirs.
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. Strengthening oil prices since then have led to steadily rising drilling
activity over the past two years.
The count of rigs actively drilling in the U.S. as measured by Baker Hughes (a good measure of the level of oilfield activity and spending) peaked at 2,031 rigs in September
2008, but decreased to a low of 876 in June, 2009. U.S. rig count has since increased steadily to average 2,010 rigs during the fourth quarter of 2011. Many oil and gas
operators reliant on external financing to fund their drilling programs significantly curtailed their drilling activity in 2009, but drilling recovered across North America as gas
prices improved. Recently low gas prices have caused operators to trim drilling, driving the U.S. gas rig count down 21% to 720 in the past year. However, with high and
stabilizing oil prices many redirected drilling efforts towards unconventional shale plays targeting oil, rather than gas. Oil drilling has risen to 64% of the total domestic
drilling effort and at 1,263 rigs drilling, is at the highest levels in the U.S. since the early 1980s.
Most international activity is driven by oil exploration and production by national oil companies, which has historically been less susceptible to short-term commodity price
swings, but the international rig count has exhibited modest declines nonetheless, falling from its September 2008 peak of 1,108 to 947 in August 2009. Recently international
drilling rebounded due to high oil prices, climbing back to 1,171 in January 2012.
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