National Oilwell Varco 2011 Annual Report Download - page 4

Index to Financial Statements
Distribution & Transmission
Our Distribution & Transmission segment provides maintenance, repair and operating supplies (MRO) and spare parts to drill site and production locations worldwide. In
addition to its comprehensive network of field locations supporting land drilling operations throughout North America, the segment supports major offshore operations for all
the major oil and gas producing regions throughout the world. The segment employs advanced information technologies to provide complete procurement, inventory
management and logistics services to its customers around the globe. The segment also has a global reach in oil and gas, waste water treatment, chemical, food and beverage,
paper and pulp, mining, agriculture, and a variety of municipal markets and is a leading producer of water transmission pipe and fabricated steel products, such as wind
towers, and specialized materials and products used in infrastructure projects. Demand for the segments services is determined primarily by the level of drilling, servicing,
and oil and gas production activities and is also influenced by the domestic economy in general, housing starts and government policies. This segment has benefited from
several strategic acquisitions and other investments completed during the past few years, including additional operations in the United States, Canada, the United Kingdom,
Kazakhstan, Singapore, Russia, and Malaysia.
The following table sets forth the contribution to our total revenues of our three operating segments (in millions):
Years Ended December 31,
2011 2010 2009
Revenue:
Rig Technology $ 7,788 $ 6,965 $ 8,093
Petroleum Services & Supplies 5,654 4,182 3,745
Distribution & Transmission 1,873 1,546 1,350
Eliminations (657) (537) (476)
Total Revenue $ 14,658 $ 12,156 $ 12,712
See Note 15 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for financial information by segment and a geographical breakout of
revenues and long-lived assets. We have included a glossary of oilfield terms at the end of Item 1. Business of this Annual Report.
Influence of Oil and Gas Activity Levels on the Companys Business
The oil and gas industry in which the Company participates has historically experienced significant volatility. Demand for the Companys services and products depends
primarily upon the general level of activity in the oil and gas industry worldwide, including the number of drilling rigs in operation, the number of oil and gas wells being
drilled, the depth and drilling conditions of these wells, the volume of production, the number of well completions and the level of well remediation activity. Oil and gas
activity is in turn heavily influenced by, among other factors, oil and gas prices worldwide. High levels of drilling and well remediation activity generally spurs demand for
the Companys products and services used to drill and remediate oil and gas wells. Additionally, high levels of oil and gas activity increase cash flows available for oil and
gas companies, drilling contractors, oilfield service companies, and manufacturers of oil country tubular goods (OCTG) to invest in capital equipment that the Company
sells.
Beginning in early 2004, increasing oil and gas prices led to steadily rising levels of drilling activity throughout the world. Concerns about the long-term availability of oil and
gas supply also began to build. Consequently, the worldwide rig count increased 11% in 2006, 2% in 2007, and 7% in 2008. As a result of higher cash flows realized by many
of the Companys customers, as well as the long-term concerns about supply-demand imbalance and the need to replace aging equipment, market conditions for capital
equipment purchases improved significantly between 2006 and 2007, resulting in higher backlogs for the Company at the end of 2008 compared to the end of 2006 and 2007.
However, as a result of the financial crisis and significantly lower commodity prices, the worldwide drilling rig count declined 31% in 2009 and customers were far less
willing to commit to major capital equipment purchases in 2009. As a result, our order rates were substantially lower in 2009. In 2010, as the financial crisis eased and oil
prices recovered, order rates began to improve across a broad array of rig equipment, with a particular focus on continued build out of the deepwater fleet. 2011 saw a further
improvement in order rates as commodity prices remained at levels supporting sustained capital spending by our customers. The rig count rose 16% in 2011 compared to
2010. Backlog for the Company was approximately $10.2 billion at December 31, 2011 compared to approximately $5.0 billion and $6.4 billion for December 31, 2010 and
2009, respectively.
In 2009, 2010 and 2011, most of the Companys revenue from Rig Technology resulted from major capital expenditures of drilling contractors, well servicing companies, and
oil companies on rig construction and refurbishment, and well servicing equipment. These capital expenditures are influenced by the amount of cash flow that contractors and
service companies generate from drilling, completion, and remediation activity; as well as by the availability of financing, the outlook for future drilling and well servicing
activity, and other factors. Generally, the Company believes the demand for capital equipment lags increases in the level of drilling activity. Most of the remainder of the Rig
Technology segments revenue is related to the sale of spare parts and consumables, the provision of equipment-repair services, and the rental of equipment, which the
Company believes are generally determined directly by the level of drilling and well servicing activity.
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