National Oilwell Varco 2012 Annual Report Download - page 39

Index to Financial Statements
During 2009 the Company saw its Petroleum Services & Supplies and its Distribution & Transmission margins affected most acutely by a drilling downturn, through both
volume and price declines. Resumption of drilling activity since enabled both of these segments to gain volume, stabilize and lift pricing, and improve margins since the third
quarter of 2009. The Companys Rig Technology segment was less impacted by the 2009 downturn owing to its high level of contracted backlog which it executed on very
well. It posted higher revenues in 2009 than 2008 as a result. Its revenues declined in 2010 as its backlog declined, but increased 12% in 2011 as orders for new offshore rigs
began to increase.
The recent economic decline beginning in late 2008 followed an extended period of high drilling activity which fueled strong demand for oilfield services between 2003 and
2008. Incremental drilling activity through the upswing shifted toward harsh environments, employing increasingly sophisticated technology to find and produce reserves.
Higher utilization of drilling rigs tested the capability of the worlds fleet of rigs, much of which is old and of limited capability. Technology has advanced significantly since
most of the existing rig fleet was built. The industry invested little during the late 1980s and 1990s on new drilling equipment, but drilling technology progressed steadily
nonetheless, as the Company and its competitors continued to invest in new and better ways of drilling. As a consequence, the safety, reliability, and efficiency of new,
modern rigs surpass the performance of most of the older rigs at work today. Drilling rigs are now being pushed to drill deeper wells, more complex wells, highly deviated
wells and horizontal wells, tasks which require larger rigs with more capabilities. The drilling process effectively consumes the mechanical components of a rig, which wear
out and need periodic repair or replacement. This process was accelerated by very high rig utilization and wellbore complexity. Drilling consumes rigs; more complex and
challenging drilling consumes rigs faster.
The industry responded by launching many new rig construction projects since 2005, to 1) retool the existing fleet of jackup rigs (according to Offshore Data Services, 70% of
the existing 476 jackup rigs are more than 25 years old); 2) replace older mechanical and DC electric land rigs with improved AC power, electronic controls, automatic pipe
handling and rapid rigup and rigdown technology; and 3) build out additional deepwater floating drilling rigs, including semisubmersibles and drillships, to employ recent
advancements in deepwater drilling to exploit unexplored deepwater basins. We believe that the newer rigs offer considerably higher efficiency, safety, and capability, and
that many will effectively replace a portion of the existing fleet.
As a result of these trends the Companys Rig Technology segment grew its backlog of capital equipment orders from $0.9 billion at March 31, 2005, to $11.8 billion at
September 30, 2008. However, as a result of the credit crisis and slowing drilling activity, orders declined below amounts flowing out of backlog as revenue, causing the
backlog to decline to $4.9 billion by June 30, 2010. The backlog increased steadily since as drillers began ordering more than the Company shipped out of backlog, and
finished 2011 at $10.2 billion. Approximately $6.6 billion of these orders are scheduled to flow out as revenue during 2012; $1.8 billion are scheduled to flow out as revenue
during 2013; and the balance thereafter. The land rig backlog comprised 14% and equipment destined for offshore operations comprised 86% of the total backlog as of
December 31, 2011. Equipment destined for international markets totaled 86% of the backlog.
Segment Performance
The Rig Technology segment generated $7.8 billion in revenues and $2.1 billion in operating profit or 26.4% of sales during 2011. Compared to the prior year revenues
improved 12%, but generated no incremental operating profit year-over-year due to a broad change in the segments business mix, which led to lower margins. Offshore
projects contracted at high prices in 2007 and 2008 were manufactured in low cost environments in 2010, resulting in high margins (29.6%) for the group. As these projects
were completed and replaced with lower priced projects, 2011 margins declined 310 basis points from the prior year. For the fourth quarter of 2011 the segment produced
revenues of $2,316 million, representing an 18% improvement from the third quarter and a 32% improvement from the fourth quarter of 2010. Segment operating profit was
$597 million and operating margins were 25.8% during the fourth quarter. Operating leverage or flow-through was 21% sequentially, and 17% year-over-year, lower than the
30% that is typical for the group owing to the mix effect described above. Revenue out of backlog grew 26% sequentially and 40% year-over-year. Non-backlog revenue,
which is predominantly aftermarket spares and services, declined four percent sequentially and increased 11% from the fourth quarter of 2010. Orders for three deepwater
floating rigs, six jackup drilling packages, and higher land drilling rig, pressure pumping and stimulation equipment demand contributed to total order additions to backlog of
$1,668 million during the fourth quarter, capping a year in which orders for the segment set a new record of $10.8 billion. Interest in offshore rig construction has remained
strong as announced dayrates for deepwater offshore rigs appears to be increasing, rig building costs have stabilized, and financing appears to be available for most established
drillers. The Company booked an order for seven drillships for Brazil in the third quarter of 2011, and continues to tender additional new offshore rig projects for Petrobras to
shipyards and drilling contractors, which are to be built in Brazil. However, further potential bookings of any additional offshore rigs for Brazil are likely to continue to be
subject to delays.
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