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Article by DailyStocks_admin    (09-19-08 04:42 AM)

National Oilwell Varco Inc. CEO MERRILL A JR MILLER bought 10000 shares on 9-16-2008 at $47.47


National Oilwell Varco, Inc. (“NOV” or the “Company”), a Delaware corporation incorporated in 1995, is a leading worldwide provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company conducts operations in approximately 700 locations across six continents.
On March 11, 2005, we acquired all of the outstanding shares of Varco International, Inc. (“Varco”) with the issuance of 0.8363 shares of National-Oilwell, Inc. common stock for each Varco common share (the “Merger”). The Company then changed its name from National-Oilwell, Inc. to National Oilwell Varco, Inc. We have included the financial results of Varco in our consolidated financial statements beginning March 11, 2005, the date Varco common shares were exchanged for NOV common shares. We believe that the Merger has better positioned us to compete more effectively in the global marketplace and provide greater scale to increase service to our customers, increase our investment in research and development to accelerate innovation, and increase shareholder value. The fiscal year ending December 31, 2006 represented the first full year of operations of the combined entities.
On December 16, 2007, we agreed to acquire 100% of the outstanding shares of Grant Prideco, Inc. for a combination of $23.20 cash per share and 0.4498 shares of National Oilwell Varco, Inc. common stock. Consummation of the merger requires approval by the stockholders of Grant Prideco and also approval from various regulatory agencies. We anticipate completion of the merger during the second quarter of 2008.
The Company’s principal executive offices are located at 7909 Parkwood Circle Drive, Houston, Texas 77036, its telephone number is (713) 346-7500, and its Internet website address is http://www.nov.com . The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and all amendments thereto, are available free of charge on its Internet website. These reports are posted on its website as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s Code of Ethics is also posted on our website.
The Company has a long tradition of pioneering innovations which improve the cost-effectiveness, efficiency, safety and environmental impact of oil and gas operations. The Company’s common stock is traded on the New York Stock Exchange under the symbol “NOV.” The Company operates through three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services.
Rig Technology
Our Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells. The segment offers a comprehensive line of highly-engineered equipment that automates complex well construction and management operations, such as offshore and onshore drilling rigs; derricks; pipe lifting, racking, rotating and assembly systems; coiled tubing equipment and pressure pumping units; well workover rigs; wireline winches; and cranes. Demand for Rig Technology products is primarily dependent on capital spending plans by drilling contractors, oilfield service companies, and oil and gas companies, and secondarily on the overall level of oilfield drilling activity, which drives demand for spare parts for the segment’s large installed base of equipment. We have made strategic acquisitions and other investments during the past several years in an effort to expand our product offering and our global manufacturing capabilities, including adding additional operations in the United States, Canada, Norway, the United Kingdom, China, Belarus, and India.
Petroleum Services & Supplies
Our Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service pipelines, flowlines and other oilfield tubular goods. The segment manufactures, rents and sells a variety of products and equipment used to perform drilling operations, including transfer pumps, solids control systems, drilling motors and other downhole tools, rig instrumentation systems, and mud pump consumables. Demand for these services and supplies is determined principally by the level of oilfield drilling and workover activity by drilling contractors, major and independent oil and gas companies, and national oil companies. Oilfield tubular services include the provision of inspection and internal coating services and equipment for drill pipe, linepipe, tubing, casing and pipelines; and the design, manufacture and sale of coiled tubing pipe and advanced composite pipe for application in highly corrosive environments. The segment sells its tubular goods and services to oil and gas companies; drilling contractors; pipe distributors, processors and manufacturers; and pipeline operators. This segment has benefited from several strategic acquisitions and other investments completed during the past few years, including adding additional operations in the United States, Canada, the United Kingdom, China, Kazakhstan, Mexico, Russia, Argentina, India, Bolivia, the Netherlands, Singapore, Malaysia, Vietnam, and the United Arab Emirates.

Distribution Services
Our Distribution Services 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 drilling contractors through locations in Mexico, the Middle East, Europe, Southeast Asia and South America. Distribution Services employs advanced information technologies to provide complete procurement, inventory management and logistics services to its customers around the globe. Demand for the segment’s services are determined primarily by the level of drilling, servicing, and oil and gas production activities.

See Note 15 to our 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.
The Company has included a glossary of oilfield terms at the end of Item 1 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 spur 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 drilling contractors, oilfield service companies, and manufacturers of oil country tubular goods 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 15% in 2005, 11% in 2006, and 2% in 2007. As a result of higher cash flows realized by many drilling contractors and other oilfield service companies, as well as the long-term concerns about supply-demand imbalance and the need to replace aging equipment, market conditions for capital equipment purchases have improved significantly since 2005 and 2006, resulting in higher backlogs for the Company at the end of 2007 compared to the end of 2005 and 2006. Backlog for the Company was at approximately $9.0 billion at December 31, 2007 compared to approximately $6.0 billion and $2.3 billion for December 31, 2006 and 2005, respectively.
In 2007, most of the Company’s Rig Technology revenue 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. The remainder of the Rig Technology segment’s revenue in 2007 was 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.
The majority of the Company’s Petroleum Services & Supplies revenue is closely tied to drilling activity, although a portion is related to the sale of capital equipment to drilling contractors, which may somewhat lag the level of drilling activity. Portions of the segment’s revenue that are not tied to drilling activity include (i) the sale of progressive cavity pumps and solids control equipment for use in industrial applications; (ii) the performance of in-service pipeline inspections; (iii) the sale of fiberglass and composite tubing to industrial customers, which is generally unrelated to drilling or well remediation activity but may be tied somewhat to oil and gas prices; and (iv) the sale of pipe inspection equipment to the manufacturers of oil country tubular goods, which is indirectly related to drilling activity.
The Company’s revenue from Distribution Services is almost entirely driven by drilling activity and oil and gas production activities.
Drilling and well servicing activity can fluctuate significantly in a short period of time. The willingness of oil and gas operators to make capital investments to explore for and produce oil and natural gas will continue to be influenced by numerous factors over which the Company has no control, including: the ability of the members of the Organization of Petroleum Exporting Countries (“OPEC”) to maintain oil price stability through voluntary production limits of oil; the level of oil production by non-OPEC countries; supply and demand for oil and natural gas; general economic and political conditions; costs of exploration and production; the availability of new leases and concessions; and governmental regulations regarding, among other things, environmental protection, taxation, price controls and product allocations. The willingness of drilling contractors and well servicing companies to make capital expenditures for the type of specialized equipment the Company provides is also influenced by numerous factors over which the Company has no control, including: the general level of oil and gas well drilling and servicing; rig dayrates; access to external financing; outlook for future increases in well drilling and well remediation activity; steel prices and fabrication costs; and government regulations regarding, among other things, environmental protection, taxation, and price controls.
Overview of Oil and Gas Well Drilling and Servicing Processes
Oil and gas wells are usually drilled by drilling contractors using a drilling rig. A bit is attached to the end of a drill stem, which is assembled by the drilling rig and its crew from 30-foot joints of drill pipe and specialized drilling components known as downhole tools. Using the conventional rotary drilling method, the drill stem is turned from the rotary table of the drilling rig by torque applied to the kelly, which is screwed into the top of the drill stem. Increasingly, drilling is performed using a drilling motor, which is attached to the bottom of the drill stem and provides rotational force directly to the bit, rather than such force being supplied by the rotary table. The use of a drilling motor permits the drilling contractor to drill directionally, including horizontally. The Company sells and rents drilling motors and downhole tools through its Petroleum Services & Supplies segment.
During drilling, heavy drilling fluids or “drilling muds” are pumped down the drill stem and forced out through jets in the bit. The drilling mud returns to the surface through the space between the borehole wall and the drill stem, carrying with it the drill cuttings drilled out by the bit. The drill cuttings are removed from the mud by a solids control system (which can include shakers, centrifuges and other specialized equipment) and disposed of in an environmentally sound manner. The solids control system permits the mud, which is often comprised of expensive chemicals, to be continuously reused and recirculated back into the hole.
Through its Rig Technology segment, the Company sells the large “mud pumps” that are used to pump drilling mud through the drill stem. Through its Petroleum Services & Supplies business, the Company sells transfer pumps and mud pump consumables; sells and rents solids control equipment; and provides solids control and waste management services. Many operators internally coat the drill stem to improve its hydraulic efficiency and protect it from corrosive fluids sometimes encountered during drilling, and inspect and assess the integrity of the drill pipe from time to time. The Company provides drill pipe inspection and coating services, and applies “hardbanding” material to drill pipe to improve its wear characteristics. These services are provided through the Company’s Petroleum Services & Supplies segment.
As the hole depth increases, the kelly must be removed frequently so that additional 30-foot joints of drill pipe can be added to the drill stem. When the bit becomes dull or the equipment at the bottom of the drill stem – including the drilling motors – otherwise requires servicing, the entire drill stem is pulled out of the hole and disassembled by disconnecting the joints of drill pipe. These are set aside or “racked,” the old bit is replaced or service is performed, and the drill stem is reassembled and lowered back into the hole (a process called “tripping”). During drilling and tripping operations, joints of drill pipe must be screwed together and tightened (“made up”), and loosened and unscrewed (“spun out”). The Company’s Rig Technology business provides drilling equipment to manipulate and maneuver the drill pipe in this manner. When the hole has reached certain depths, all of the drill pipe is pulled out of the hole and larger diameter pipe known as casing is lowered into the hole and permanently cemented in place in order to protect against collapse and contamination of the hole. The casing is typically inspected before it is lowered into the hole, a service the Company’s Petroleum Services & Supplies business provides. The Company’s Rig Technology segment manufactures pressure pumping equipment that is used to cement the casing in place.

The raising and lowering of the drill stem while drilling or tripping, and the lowering of casing into the wellbore, are accomplished with the rig’s hoisting system. A conventional hoisting system is a block and tackle mechanism that works within the drilling rig’s derrick. The lifting of this mechanism is performed via a series of pulleys that are attached to the drawworks at the base of the derrick. The Company’s Rig Technology segment sells and installs drawworks and pipe hoisting systems.
During the course of normal drilling operations, the drill stem passes through different geological formations, which exhibit varying pressure characteristics. If this pressure is not contained, oil, gas and/or water would flow out of these formations to the surface. The two means of containing these pressures are (i) primarily the circulation of drilling muds while drilling and (ii) secondarily the use of blowout preventers should the mud prove inadequate and in an emergency situation. The Company’s Rig Technology group sells and services blowout preventers.
Drilling muds are carefully designed to exhibit certain qualities that optimize the drilling process. In addition to containing formation pressure, they must (i) provide power to the drilling motor, (ii) carry drilled solids to the surface, (iii) protect the drilled formations from being damaged, and (iv) cool the drill bit. Achieving these objectives often requires a formulation specific to a given well and can involve the use of expensive chemicals as well as natural materials such as certain types of clay. The fluid itself is often oil or more-expensive synthetic mud. Given this expense, it is highly desirable to reuse as much of the drilling mud as possible. Solids control equipment such as shale shakers, centrifuges, cuttings dryers, and mud cleaners help accomplish this objective. The Company’s Petroleum Services & Supplies group rents, sells, operates and services this equipment. Drilling muds are formulated based on expected drilling conditions. However, as the hole is drilled, the drill stem may encounter a high pressure zone where the mud density is inadequate to maintain sufficient pressure. Should efforts to “weight up” the mud in order to contain such a pressure kick fail, a blowout could result, whereby reservoir fluids would flow uncontrolled into the well. To prevent blowouts to the surface of the well, a series of high-pressure valves known as blowout preventers (“BOPs”) are positioned at the top of the well and, when activated, form tight seals that prevent the escape of fluids. When closed, conventional BOPs prevent normal rig operations. Therefore, the BOPs are activated only if drilling mud and normal well control procedures cannot safely contain the pressure. BOPs have been designed to contain pressures of up to 20,000 psi.
The operations of the rig and the condition of the drilling mud are closely monitored by various sensors, which measure operating parameters such as the weight on the rig’s hook, the incidence of pressure kicks, the operation of the drilling mud pumps, etc. Through its Petroleum Services & Supplies business, the Company sells and rents drilling rig instrumentation packages that perform these monitoring functions.
During the drilling and completion of a well, there exists an ongoing need for various consumables and spare parts. While most of these items are small, in the aggregate they represent an important element of the process. Since it is impractical for each drilling location to have a full supply of these items, drilling contractors and well service companies tend to rely on third parties to stock and deliver these items. The Company provides this capability through its Distribution Services segment, which stocks and sells spares and consumables made by third parties, as well as spares and consumables made by the Company.
After the well has reached its total depth and the final section of casing has been set, the drilling rig is moved off of the well and the well is prepared to begin producing oil or gas in a process known as “well completion.” Well completion usually involves installing production tubing concentrically in the casing. Due to the corrosive nature of many produced fluids, production tubing is often inspected and coated, services offered by the Company’s Petroleum Services & Supplies business. Sometimes operators choose to use corrosion resistant composite materials (which the Company offers through its Petroleum Services & Supplies business), or corrosion-resistant alloys, or operators sometimes pump fluids into wells to inhibit corrosion.
From time to time, a producing well may undergo workover procedures to extend its life and increase its production rate. Workover rigs are used to disassemble the wellhead, tubing and other completion components of an existing well in order to stimulate or remediate the well. Workover rigs are similar to drilling rigs in their capabilities to handle tubing, but are usually smaller and somewhat less sophisticated. The Company offers a comprehensive range of workover rigs through its Rig Technology segment. Tubing and sucker rods removed from a well during a well remediation operation are often inspected to determine their suitability to be reused in the well, which is a service the Company’s Petroleum Services & Supplies business provides.
Frequently coiled tubing units or wireline units are used to accomplish certain well remediation operations or well completions. Coiled tubing is a recent advancement in petroleum technology consisting of a continuous length of reeled steel tubing which can be injected concentrically into the production tubing all the way to the bottom of most wells. It permits many operations to be performed without disassembling the production tubing, and without curtailing the production of the well. Wireline winch units are devices that utilize single-strand or multistrand wires to perform well-remediation operations, such as lowering tools and transmitting data to the surface. Through the Rig Technology group, the Company sells and rents various types of coiled tubing equipment, and wireline equipment and tools. The Company also manufactures and sells coiled tubing pipe through its Petroleum Services & Supplies segment. Rig Technology
The Company has a long tradition of pioneering innovations in drilling and well servicing equipment which improve the efficiency, safety, and cost of drilling and well servicing operations. The Rig Technology group designs, manufactures and sells a wide variety of top drives, automated pipe handling systems, motion compensation systems, rig controls, BOPs, handling tools, drawworks, risers, rotary tables, mud pumps, cranes, drilling motors and other drilling equipment for both the onshore and offshore markets. The Rig Technology group also manufactures entire rig packages, both drilling and workover, in addition to well servicing equipment such as coiled tubing units, pressure pumping equipment, and wireline winches.
The Rig Technology group sells directly to drilling contractors, shipyards and other rig fabricators, well servicing companies, national oil companies, major and independent oil and gas companies, supply stores, and pipe-running service providers. Demand for its products, several of which are described below, is strongly dependent upon capital spending plans by oil and gas companies and drilling contractors, and the level of oil and gas well drilling activity.
Land Rig Packages . NOV designs, manufactures, assembles, upgrades, and supplies equipment sets to a variety of land drilling rigs, including those specifically designed to operate in harsh environments such as the Arctic Circle and the desert. Our key land rig product names include the Ideal Rig™ and Rapid Rig ® . NOV’s recent rig packages are designed to be safer and fast moving, to utilize AC technology, and to reduce manpower required to operate a rig.
Top Drives . The Top Drive Drilling System (“TDS”), originally introduced by NOV in 1982, significantly alters the traditional drilling process. The TDS rotates the drill stem from its top, rather than by the rotary table, with a large electric motor affixed to rails installed in the derrick that traverses the length of the derrick to the rig floor. Therefore, the TDS eliminates the use of the conventional rotary table for drilling. Components of the TDS also are used to connect additional joints of drill pipe to the drill stem during drilling operations, enabling drilling with three joints of drill pipe compared to traditionally drilling with one joint of drill pipe. Additionally, the TDS facilitates horizontal and extended reach drilling.
Drilling Motors. NOV has helped lead the application of AC motor technology in the oilfield industry. We are now transitioning from buying motors from third parties to building them in our own facilities and further developing motor technology, including the introduction of permanent magnet motor technology to the industry. These permanent magnet motors are being used in top drives, cranes, mud pumps, winches, and drawworks.
Rotary Equipment . The alternative to using a TDS to rotate the drill stem is to use a rotary table, which rotates the pipe at the floor of the rig. The Rig Technology group produces rotary tables as well as kelly bushings and master bushings for most sizes of kellys and makes of rotary tables. In 1998, NOV introduced the Rotary Support Table for use on rigs with a TDS. The Rotary Support Table is used in concert with the TDS to completely eliminate the need for the larger conventional rotary table.
Pipe Handling Systems . Pipe racking systems are used to handle drill pipe, casing and tubing on a drilling rig. Vertical pipe racking systems move drill pipe and casing between the well and a storage (“racking”) area on the rig floor. Horizontal racking systems are used to handle tubulars while stored horizontally (for example, on the pipe deck of an offshore rig) and transport tubulars up to the rig floor and into a vertical position for use in the drilling process.
Vertical pipe racking systems are used predominantly on offshore rigs and are found on almost all floating rigs. Mechanical vertical pipe racking systems greatly reduce the manual effort involved in pipe handling. Pipe racking systems, introduced by NOV in 1985, provide a fully automated mechanism for handling and racking drill pipe during drilling and tripping operations, spinning and torquing drill pipe, and automatic hoisting and racking of disconnected joints of drill pipe. These functions can be integrated via computer controlled sequencing, and operated by a driller in an environmentally secure cabin. An important element of this system is the Iron Roughneck, which was originally introduced by NOV in 1976 and is an automated device that makes pipe connections on the rig floor and requires less direct involvement of rig floor personnel in potentially dangerous operations. The Automated Roughneck is an automated microprocessor-controlled version of the Iron Roughneck.
Horizontal pipe transfer systems were introduced by NOV in 1993. They include the Pipe Deck Machine (“PDM”), which is used to manipulate and move tubulars while stored in a horizontal position; the Pipe Transfer Conveyor (“PTC”), which transports sections of pipe to the rig floor; and a Pickup Laydown System (“PLS”), which raises the pipe to a vertical position for transfer to a vertical racking system. These components may be employed separately, or incorporated together to form a complete horizontal racking system, known as the Pipe Transfer System (“PTS”).
Pipe Handling Tools . The Company’s pipe handling tools are designed to enhance the safety, efficiency and reliability of pipe handling operations. Many of these tools have provided innovative methods of performing the designated task through mechanization of functions previously performed manually. The Rig Technology group manufactures various tools used to grip, hold, raise, and lower pipe, and in the making up and breaking out of drill pipe, workstrings, casing and production tubulars including spinning wrenches, manual tongs, torque wrenches and kelly spinners.
Mud Pumps. Mud pumps are high pressure pumps located on the rig that force drilling mud down the drill pipe, through the drill bit, and up the space between the drill pipe and the drilled formation (the “annulus”) back to the surface. These pumps, which generate pressures of up to 7,500 psi, must therefore be capable of displacing drilling fluids several thousand feet down and back up the well bore. The conventional mud pump design, known as the triplex pump, uses three reciprocating pistons oriented horizontally. Recently, NOV has introduced the HEX Pump, which uses six pumping cylinders, versus the three used in the triplex pump. Along with other design features, the greater number of cylinders reduces pulsations (or surges) and increases the output available from a given footprint. Reduced pulsation is desirable where downhole measurement equipment is being used during the drilling process, as is often the case in directional drilling.
Hoisting Systems . Hoisting systems are used to raise or lower the drill stem while drilling or tripping, and to lower casing into the wellbore. The drawworks is the heart of the hoisting system. It is a large winch that spools off or takes in the drilling line, which is in turn connected to the drill stem at the top of the derrick. The drawworks also plays an important role in keeping the weight on the drill bit at a desired level. This task is particularly challenging on offshore drilling rigs, which are subject to wave motion. To address this, NOV has introduced the Active Heave Drilling (“AHD”) Drawworks. The AHD Drawworks uses computer-controlled motors to compensate for the motion experienced in offshore drilling operations.
Cranes. NOV provides a comprehensive range of crane solutions, with purpose-built products for all segments of the oil and gas industry as well as many other markets. The Company encompasses a broad collection of brand names with international recognition, and includes a large staff of engineers specializing in the design of cranes and related equipment. The product range extends from small cargo-handling cranes to the world’s largest marine cranes. In all, the Company provides over twenty crane product lines that include standard model configurations as well as custom-engineered and specialty cranes.
Motion Compensation Systems . Traditionally, motion compensation equipment is located on top of the drilling rig and serves to stabilize the bit on the bottom of the hole, increasing drilling effectiveness of floating offshore rigs by compensating for wave and wind action. The AHD Drawworks, discussed above, was introduced to eliminate weight and improve safety, removing the compensator from the top of the rig and integrating it into the drawworks system. In addition to the AHD Drawworks, NOV has introduced an Active Heave Compensation (“AHC”) System that goes beyond the capabilities of the AHD Drawworks to handle the most severe weather. Additionally, NOV tensioning systems provide continuous axial tension to the marine riser pipe (larger diameter pipe which connects floating drilling rigs to the well on the ocean floor) and guide lines on floating drilling rigs, tension leg platforms and jack-up drilling rigs.
Blowout Preventers . BOPs are devices used to seal the space (“annulus”) between the drill pipe and the borehole to prevent blowouts (uncontrolled flows of formation fluids and gases to the surface). The Rig Technology group manufactures a wide array of BOPs used in various situations. Ram and annular BOPs are back-up devices that are activated only if other techniques for controlling pressure in the wellbore are inadequate. When closed, these devices prevent normal rig operations. Ram BOPs seal the wellbore by hydraulically closing rams (thick heavy blocks of steel) against each other across the wellbore. Specially designed packers seal around specific sizes of pipe in the wellbore, shear pipe in the wellbore or close off an open hole. Annular BOPs seal the wellbore by hydraulically closing a rubber packing unit around the drill pipe or kelly or by sealing against itself if nothing is in the hole. NOV’s Pressure Control While Drilling (“PCWD”) ® BOP, introduced in 1995, allows operators to drill at pressures up to 2,000 psi without interrupting normal operations, and can act as a normal spherical BOP at pressures up to 5,000 psi.
In 1998, NOV introduced the NXT ® ram type BOP which eliminates door bolts, providing significant weight, rig-time, and space savings. Its unique features make subsea operation more efficient through faster ram configuration changes without tripping the BOP stack. In 2004, NOV introduced the LXT, which features many of the design elements of the NXT, but is targeted at the land market. In 2005, the Company began commercializing technology related to a continuous circulation device. This device enables drilling contractors to make and break drill pipe connections without stopping the circulation of drilling fluids, which helps increase drilling efficiency.
Derricks and Substructures. Drilling activities are carried out from a drilling rig. A drilling rig consists of one or two derricks; the substructure that supports the derrick(s); and the rig package, which consists of the various pieces of equipment discussed above. The Rig Technology segment designs, fabricates and services derricks used in both onshore and offshore applications, and substructures used in onshore applications. The Rig Technology group also works with shipyards in the fabrication of substructures for offshore drilling rigs.


Robert E. Beauchamp
Mr. Beauchamp has been a Director of the Company since August 2002. Since 1988, he has served in various capacities at BMC Software, Inc., a leading provider of enterprise management solutions, most recently as President and Chief Executive Officer and as a director. During his career with BMC, he also served as senior vice president of research & development, vice president of strategic marketing and corporate development, and director of strategic marketing.

Jeffery A. Smisek
Mr. Smisek has been a Director of the Company since March 2005. Mr. Smisek served as a Director of Varco (and its predecessor, Tuboscope Inc.) from February 1998 until its merger with the Company on March 11, 2005. Since December 30, 2004, Mr. Smisek has served as President and a director of Continental Airlines, Inc. Mr. Smisek previously served Continental Airlines, Inc. as: Executive Vice President from March 2003 until December 2004; and Executive Vice President — Corporate from May 2001 until March 2003.

Merrill A. Miller, Jr.
Mr. Miller has been a Director of the Company since May 2001 and Chairman of the Board since July 22, 2005. He also served as Chairman of the Board from May 2002 through March 11, 2005. He served as the Company’s Chief Operating Officer from November 2000 through March 11, 2005. He has served as President since November 2000 and as Chief Executive Officer since May 2001. He has served in various senior executive positions with National Oilwell since February 1996. Mr. Miller also serves as a director of Chesapeake Energy Corporation, a company engaged in the development, acquisition, production, exploration, and marketing of onshore oil and natural gas properties in the United States.

Greg L. Armstrong
Mr. Armstrong has been a Director of the Company since March 2005. Mr. Armstrong served as a Director of Varco from May 20, 2004 until its merger with the Company on March 11, 2005. Since 1998, he has been the Chairman of the Board and Chief Executive Officer of Plains All American GP LLC, the general partner and controlling entity of Plains All American Pipeline, L.P., a publicly traded master limited partnership engaged in the business of marketing, gathering, transporting, terminalling and storing crude oil. Mr. Armstrong is a member of the National Petroleum Council and a member of the Board of BreitBurn Energy Partners.

Ben A. Guill
Mr. Guill has served as a Director of the Company since 1999. Until April 2007, he was President of First Reserve Corporation, a corporate manager of private investments focusing on the energy and energy-related sectors, which he joined in September 1998. Prior to joining First Reserve, Mr. Guill was the Managing Director and Co-head of Investment Banking of Simmons & Company International, an investment-banking firm specializing in the oil service industry. Mr. Guill also serves as a director of the general partner of Cheniere Energy Partners, L.P. and as a director of Trico Marine Services, Inc.

David D. Harrison
Mr. Harrison has been a Director of the Company since August 2003. He has served as Executive Vice President and Chief Financial Officer of Pentair, Inc., a diversified manufacturer in water technologies and enclosures businesses, since February 2000 until his retirement in February 2007. He also served as Executive Vice President and Chief Financial Officer of Pentair, Inc. from 1994 to 1996. From 1972 through 1994, Mr. Harrison held various domestic and international finance positions with a combination of General Electric and Borg-Warner Chemicals. Mr. Harrison serves as a director of Navistar International Corporation, a holding company whose wholly owned subsidiaries produce International ® brand commercial trucks, MaxxForce brand diesel engines, IC brand school buses, and Workhorse brand chassis for motor homes and step vans.

Roger L. Jarvis
Mr. Jarvis has been a Director of the Company since February 2002. Since 2007, he has served as Chairman, Chief Executive Officer and President of Common Resources LLC, a privately held company engaged in the business of exploration for and production of hydrocarbons in the United States. He served as President, Chief Executive Officer and Director of Spinnaker Exploration Company, a natural gas and oil exploration and production company, from 1996 and as its Chairman of the Board from 1998, until its acquisition by Norsk Hydro ASA in December 2005. 2002

Eric L. Mattson
Mr. Mattson has been a Director of the Company since March 2005. Mr. Mattson served as a Director of Varco (and its predecessor, Tuboscope Inc.) from January 1994 until its merger with the Company on March 11, 2005. Mr. Mattson has served as Senior Vice President and Chief Financial Officer of VeriCenter, Inc., a private provider of managed hosting services, since 2003, until its acquisition in August 2007. From November 2002 until October 2003, Mr. Mattson worked as an independent consultant. Mr. Mattson was the Chief Financial Officer of Netrail, Inc., a private Internet backbone and broadband service provider, from September 1999 until November 2002. From July 1993 until May 1999, Mr. Mattson served as Senior Vice President and Chief Financial Officer of Baker Hughes Incorporated, a provider of products and services to the oil, gas and process industries.


General Overview
The Company is a leading worldwide provider of highly engineered drilling and well-servicing equipment, products and services to the exploration and production segments of the oil and gas industry. With operations in approximately 700 locations across six continents, we design, manufacture and service a comprehensive line of drilling and well servicing equipment; sell and rent drilling motors, specialized downhole tools, and rig instrumentation; perform inspection and internal coating of oilfield tubular products; provide drill cuttings separation, management and disposal systems and services; provide expendables and spare parts used in conjunction with our large installed base of equipment; and provide supply chain management services through our distribution network. We also manufacture coiled tubing, provide in-service pipeline inspections, manufacture high pressure fiberglass and composite tubing, and sell and rent advanced in-line inspection equipment to makers of oil country tubular goods. We have a long tradition of pioneering innovations which improve the cost-effectiveness, efficiency, safety, and environmental impact of oil and gas operations.
Our revenues and operating results are directly related to the level of worldwide oil and gas drilling and production activities and the profitability and cash flow of oil and gas companies and drilling contractors, which in turn are affected by current and anticipated prices of oil and gas. Oil and gas prices have been and are likely to continue to be volatile. See “Risk Factors”. We conduct our operations through three business segments: Rig Technology, Petroleum Services & Supplies and Distribution Services. See Item 1. Business for a discussion of each of these business segments.
Operating Environment Overview
Our results are dependent on, among other things, the level of worldwide oil and gas drilling, well remediation activity, the price of crude oil and natural gas, capital spending by other oilfield service companies and drilling contractors, pipeline maintenance activity, and the worldwide oil and gas inventory levels. Key industry indicators for the past three years include the following:

Natural gas prices increased slightly in 2007 in comparison to 2006, and oil prices generally increased throughout 2007. The average price per barrel of West Texas Intermediate Crude reached historic heights in 2007, peaking at just over $99 in November. The 2007 average price for the year was the highest ever-annual average oil price at $72.33 per barrel, an increase of 9.6% over the average price for 2006. Natural gas prices were $6.97 per mmbtu, an increase of 3.4% compared to the 2006 average. Higher oil prices led to stronger rig activity worldwide, increasing 2.4% for the full year in 2007 compared to 2006.
At February 15, 2008, there were 1,773 rigs actively drilling in the U.S., compared to 1,782 rigs at December 28, 2007. The company believes that most current industry projections are forecasting commodity prices to remain strong, and, as a result, U.S. and international drilling rig activity is expected to continue at a high level. However, numerous events could significantly alter these projections including political tensions in the Middle East, the acceleration or deceleration of the recovery of the U.S. and world economies, a build-up in the world inventory levels, or numerous other events or circumstances.

Executive Summary
National Oilwell Varco generated earnings of $1,337.1 million or $3.76 per fully diluted share in its fiscal year ended December 31, 2007, on revenues of $9,789.0 million. Earnings per share increased 95 percent and revenue increased 39 percent from the Company’s 2006 earnings and revenues, respectively, as we experienced rising demand for our products and services through the year. Our backlog for capital equipment increased 50 percent throughout the year, despite steadily rising shipments out of backlog, due principally to growing numbers of new offshore drilling rig construction projects initiated during 2007 which placed orders with the Company.
Oil & Gas Equipment and Services Market
Oil and gas prices have increased significantly over the past five years and remain near historic highs, which have led to high levels of exploration and development drilling in many oil and gas basins around the globe. The count of rigs actively drilling during 2007 as measured by Baker Hughes (a good measure of the level of oilfield activity and spending) increased 2.4 percent from 2006, representing the fifth straight year of increasing average annual rig count. Year-to-year growth in domestic, Latin American and Eastern Hemisphere drilling activity was partly offset by Canadian activity declines. Activity in the U.S. and the Eastern Hemisphere grew modestly throughout the year, while Canada declined sharply during the second quarter, as it typically does, and remained weak throughout the second half of 2007. Latin American drilling activity was essentially flat throughout the year.
The level of drilling activity underway is the highest seen since the early 1980’s, which is fueling high demand for oilfield services. Much of the new incremental drilling activity is occurring in harsh environments, and employs increasingly sophisticated technology to find and produce reserves. Higher utilization of drilling rigs has 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.
The rise in demand for drilling rigs has driven rig dayrates higher over the past few years, which has increased cash flows and available financing to drilling contractors. Many have invested in new rigs or placed older rigs back into service. The Company has played an important role in providing both new rigs as well as the equipment, consumables and services needed to reactivate many older rigs. Oil and gas producers demand top performance from drilling rigs, particularly at the premium dayrates that are being paid today. As a result of this trend, the Company has benefited from incremental demand for new products (such as our small iron roughnecks for land rigs, our LXT BOP’s, our Safe-T-Lite pump liner systems, among others) to upgrade certain rig functions to make them safer and more efficient.
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. Higher dayrates magnify the opportunity cost of rig downtime, and rigs are being pushed to maximize revenue days for their drilling contractor owners. The drilling process effectively consumes the mechanical components of a rig, which wear out and need periodic repair or replacement. This process has been accelerated by very high rig utilization and wellbore complexity. Drilling consumes rigs; more complex and challenging drilling consumes rigs faster.
Changing methods of drilling have further benefited the Company’s business. Increasingly, hydraulic power – in addition to conventional mechanical rotary power – is being used to apply torque to the drill bit. This is done using downhole drilling motors powered by drilling fluids. We are a major provider of downhole drilling motors, and we have seen demand for this application of our drilling motors increase over the last few years. This trend has also increased demand for our high pressure mud pumps, which create the hydraulic power in the drilling fluid which drive the drilling motors.
While the increasingly efficient equipment provided by us has mitigated the effect, high activity levels have increased demand for personnel in the oilfield. Consequently, the Company, its customers and its suppliers have experienced wage inflation in certain markets. Hiring experienced drilling crews has been challenging for the drilling industry; however, we believe crews generally prefer working on newer, more modern rigs. Our products which save labor and increase efficiency (such as its automatic slips and pipe handling equipment) also make the rig crew’s jobs safer and easier, and make the rig a more desirable place to work.
The world is actively building nearly 170 new offshore rigs, and schedules call for 27 new drillships, 45 new semisubmersibles, and 80 new jackup rigs to be delivered into the fleet by the end of 2011. The 628 offshore rig fleet they will join is old; the average age is approximately 25 years. The existing fleet was engineered and constructed prior to many technical advancements,

and 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. Additionally, the large number of floating rig construction projects will add new capacity required to press exploration into new deepwater frontiers.
Land rig construction is strong, and new orders brisk, with most interest directed towards international markets where customers are adopting newer rig technologies. Our domestic land rig backlog has fallen by about half from peak 2006 levels due to lower dayrates in the U.S. as compared to early 2007; however, newer, better rigs are consistently posting meaningfully higher dayrates and utilization than older rigs in the domestic market. We believe the retooling of the U.S. land rig market will continue as favorable operator experience with higher technology rigs will continue to “pull” more of these into the marketplace.
Overall we expect to continue to sell into three important trends in the rig fleet worldwide: the secular buildout of additional deepwater capabilities, the retooling of the jackup fleet with newer, more capable rigs, and the replacement of older land rigs with improved technology.
Segment Performance
Revenues for the Rig Technology group in 2007 were $5,744.7 million, up 60 percent from 2006 group revenues of $3,584.9 million. Operating profit was $1,393.6 million or 24.3 percent of revenue in 2007, compared to $608.5 million or 17.0 percent of sales in 2006. Operating profit flow-through or leverage (the period-to-period increase in operating profit divided by the increase in revenue) was 36 percent from 2006 to 2007. The 2007 results benefited from higher new rig construction volumes, higher sales of aftermarket goods and services, rising manufacturing efficiencies and improving pricing, partly offset by higher employee and material costs.
The Company’s Rig Technology group reported a backlog of capital equipment orders totaling $9,003.5 million at December 31, 2007, up 50 percent from December 31, 2006. The group was awarded $7,080.1 million in new capital equipment orders in 2007, an increase of 18 percent over orders won in 2006. Fourth quarter 2007 orders of $2,192.1 million were the largest quarterly order level ever achieved by the group, and year-ending backlog achieved record levels as well. The Company has the capability to supply up to $50 million of equipment for a jackup rig, more than $250 million of equipment for a new floating rig, and effectively all of a new land rig (which can range in price from less than $1 million for a well service rig to over $50 million for a large harsh environment rig). Backlog for drilling equipment at December 31, 2007 was approximately 85 percent offshore and 15 percent land rig equipment. The delivery of this equipment is typically tied to the construction schedule of the rig, which can take as long as four years to complete. While substantially all of the current backlog will be delivered by the end of 2009, a portion extends out as far as 2011. Approximately 88 percent of the drilling equipment in backlog is destined for international markets.
The Company’s Rig Technology group manufacturing base relies on a combination of internal and external capabilities, and we have significantly increased the output of our manufacturing plants in response to the high demand. This has been accomplished by optimizing the manufacturing infrastructure between Varco and National Oilwell to enhance efficiency following the March 2005 merger, the rollout of Quick Response Manufacturing (QRM) and lean manufacturing techniques across a number of facilities, and a 37 percent increase in capital expenditures in the group as compared to 2006. We are also providing our vendors with longer range forecasts to assist their planning, placing longer term orders to match our backlog, and qualifying new suppliers throughout North America, Europe and Asia.
The Company’s Petroleum Services & Supplies generated $3,061.0 million in revenue in 2007, an increase of 26 percent from 2006 revenues of $2,425.0 million, due to rising demand for oilfield goods and services the group provides, the impact of acquisitions, and several international expansion initiatives launched by the group including new facilities opened in the Middle East and Far East. Additionally the group benefited from investments made in its coiled tubing and composite pipe manufacturing infrastructure last year. The group’s operating profit for the year was $731.6 million or 23.9 percent of sales, an increase from 2006 operating profit of $545.6 million or 22.5 percent of sales. The group generated 29 percent operating profit flow-through from 2006 to 2007.
Margins for the Petroleum Services & Supplies group improved in 2007 as a result of the higher volumes and better pricing, offset by higher personnel and materials costs. The strong results were broad-based, with all major product and service lines up year-over-year. Domestic and international revenues continued to grow throughout the year; however, results in Canada softened on a seasonally-adjusted basis as many of our customers in Canada reduced activity in response to lower gas prices, a stronger Canadian dollar, and higher royalty expenses in Alberta. The group’s mix of non-North American revenue rose steadily throughout the year, from 38 percent in the first quarter to 43 percent in the fourth quarter, as overseas business grew. The flattening of the rig count in the U.S., and the declining level of activity in Canada compared to the prior year, reduced overall pricing leverage in North America; however, pricing trends remain very regional and product line specific, with pricing of certain products continuing to increase.

The Company’s Distribution Services group generated revenues of $1,423.7 million in 2007, a four percent increase from 2006 revenues of $1,369.6 million. Operating profit was $94.0 million, unchanged from the prior year. Operating margins were 6.6 percent, down slightly from 2006 operating margins of 6.9 percent. The group generated no incremental operating profit flow-through in 2007, due mostly to a sharp decline in business in its Canadian operations. Revenue growth in overseas markets fully offset lower Canadian sales, but startup costs in several new international locations led to lower flow-throughs from these areas. Domestic operations posted good year-over-year growth at strong flow-throughs, but the business began to experience increasing domestic price pressure through the second half of 2007.
Strategic alliance agreements with new customers fueled much of the Distribution Services group’s international growth. Once in place the strategic alliances provide the group a stable platform of business around which it can open new locations at lower risk and cost. The group has expanded around the world by following our customers’ rigs into new regions. The group is also selling more MRO supplies internally to legacy Varco organizations, which increased our leverage through greater purchase volumes.
We believe that the outlook for the Company for 2008 remains positive, as historically high commodity prices are expected to keep overall oil and gas activity high, and as the Company enters 2008 with a record level of backlog for capital equipment for its Rig Technology group.
Oil prices and supply remain subject to significant political risk in many international regions. The growth of China and other emerging economies has added significant demand to the oil markets, and new sources of supply continue to prove challenging to find and produce economically. The Company expects the high oil prices that have resulted to sustain high levels of oilfield activity in 2008, provided the world’s major economies remain strong, and OPEC discipline keeps oil prices high. High commodity prices, drilling activity levels, and drilling rig dayrates are expected to continue to fuel demand for the Company’s Rig Technology group. The supply of offshore rigs remains tight in many markets, and quotation activity for the Rig Technology group remains brisk. In particular, the Company expects recent deepwater lease awards and announcements of discoveries in Brazil to continue to fuel a high level of interest in floating drilling rig construction projects. Additionally, interest in new international land rigs remains very high, while domestic rig demand has stabilized.
Our outlook for the Company’s Petroleum Services & Supplies segment remains good, given continuation of high levels of drilling across the U.S., Middle East, North Africa, the Far East, Latin America and the North Sea. While Canadian activity remains slow, we believe the long term outlook there is good given the difficulties the industry has faced in meaningfully growing gas production across North America. Gas production from resource plays (coal bed methane, tight sands and shales) has increased to about 40 percent of total U.S. gas production, and is believed to exhibit higher decline rates than conventional reservoirs.
The Company’s Distribution Services segment operates in very competitive markets, but we are targeting further international expansion underpinned by new strategic alliances in 2008 to fuel additional growth. The business also continues to be challenged by weak demand in Canada.

Results of Operations
Years Ended December 31, 2007 and December 31, 2006

Rig Technology revenue for the year ended December 31, 2007 was $5,744.7 million, an increase of $2,159.8 million (60.2%) compared to 2006. The increase is due to the growing market for capital equipment, as evidenced by backlog growth, price increases implemented in 2006, and increases in spare parts and service revenue. The increase in orders and backlog resulted from increased rig construction projects and higher capital investment by drilling contractors in 2007 as compared to 2006.
Operating profit from Rig Technology was $1,393.6 million for the year ended December 31, 2007, an increase of $785.1 million (129.0%) over the same period of 2006. The increase in operating profit was largely due to the increased activity and pricing discussed above.
The Rig Technology group monitors its capital equipment backlog to plan its business. New orders are added to backlog only when we receive a firm written order for major drilling rig components or a signed contract related to a construction project. The capital equipment backlog was $9.0 billion at December 31, 2007, an increase of $3.0 billion (50.0%) over backlog of $6.0 billion at December 31, 2006. Substantially all of the current backlog will be delivered by the end of 2009.
Petroleum Services & Supplies
Revenue from Petroleum Services & Supplies was $3,061.0 million for 2007 compared to $2,425.0 million for 2006, an increase of $636.0 million (26.2%). The increase was attributable to the higher demand for all products and services offered by the segment. Downhole tools sales and rentals, drill pipe coating services, and inspection equipment sales achieved revenue increases ranging from 40% to 72%.
Operating profit from Petroleum Services & Supplies was $731.6 million for 2007 compared to $545.6 million for 2006, an increase of $186.0 million (34.1%). The increase was attributable to higher profitability across virtually all product lines, driven

by higher volumes discussed above. Operating profit dollar increases ranging from 48% to 144% were achieved from downhole tool sales and rentals, drill pipe coating services and pipeline inspections.
Distribution Services
Revenue from Distribution Services totaled $1,423.7 million, an increase of $54.1 million (4.0%) from the prior period. The number of drilling rigs actively searching for oil and gas is a key metric for this business segment. Worldwide rig count increased 2.4% in 2007 compared to 2006, with increases of 7.2% and 8.6% in the U.S. and international rig activity, offset almost entirely by a 26.8% decline in Canada rig activity. The Company’s Distribution Services segment efforts to expand in international markets along with the increasing international market activity resulted in a 22% increase in international revenue. The international revenue growth over the prior period reflects additional large contract awards, the extension of US-based contracts into the international arena, increased volume from our global alliance customers and increased export activity.
Operating income remained the same in 2007 at $94.0 million while margins decreased slightly to 6.6% of revenue in 2007 compared to 6.9% of revenue in 2006. The decrease in margin was primarily due to weak demand in Canada and resulting lower operating profit in Canada.
Unallocated expenses and eliminations
Unallocated expenses and eliminations were $174.8 million for the year ended December 31, 2007 compared to $137.0 million for 2006. The increase in operations costs was primarily due to greater inter-segment profit eliminations, an increase in employee compensation expense and greater stock-based compensation expense. The stock-based compensation expense was $43.1 million and $31.2 million for the years ended December 31, 2007 and 2006, respectively. The 2006 results also included $7.9 million of integration costs related to the 2005 merger with Varco.
Interest and financial costs
Interest and financial costs were $50.3 million for 2007 compared to $48.7 million for 2006. The increase was primarily due to unfavorable interest rate movements on the Company’s outstanding interest rate swap agreements.
Other income (expense), net
Other income (expense), net was an expense of $17.8 million and $31.3 million for the years ended December 31, 2007 and December 31, 2006, respectively. The decrease in expense was primarily due to a net foreign exchange loss which was $7.0 million for the year ended December 31, 2007, as compared to a net foreign exchange loss of $21.0 million for the year ended December 31, 2006. The 2007 foreign exchange losses were primarily due to the strengthening in Norwegian Kroner, British Pound Sterling, and Euro currencies compared to the U.S. Dollar. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” Foreign Currency Exchange Rates.
Provision for income taxes
The effective tax rate for the year ended December 31, 2007 was 33.3% compared to 33.9% for 2006. The lower 2007 tax rate was due primarily to a higher percentage of earnings in foreign jurisdictions with lower tax rates, favorable resolution of uncertain tax positions associated with prior years and increased tax benefits in the US from manufacturing activities. These benefits were partially offset by increased state income tax in the US from the new Texas Margins tax, incremental US tax on repatriated foreign earnings and the loss of tax benefits in the US associated with export sales in 2006 that was fully terminated for 2007. The US laws granting this export tax benefit were modified as part of the American Jobs Creation Act of 2004 and this benefit is no longer available. A new tax benefit associated with US manufacturing operations passed into law under the same Act will be phased in over a five year period beginning in 2005. Whereas the timing of the phase out of the export tax benefit and the phase in of the manufacturing tax benefit may differ, we expect the tax reduction associated with the new manufacturing deduction, when fully implemented, to be similar in amount to the export benefit. We anticipate our tax rate for 2008 to be in the range of approximately 32% to 34% for continuing operations.


Results of Operations

Rig Technology
Three Months Ended June 30, 2008 and 2007. Rig Technology revenue in the second quarter of 2008 was $1,911.1 million, an increase of $501.9 million (36%) compared to the same period of 2007. Backlog rose to $10.8 billion, up 50% from the same period last year. Backlog and non-backlog revenue increased 40% and 27%, respectively, from the prior year periods reflecting the rise in demand for new rigs as well as the equipment, consumables and services needed to reactivate and/or refurbish many older rigs due to higher oil and gas prices.
Operating profit from Rig Technology was $506.4 million for the second quarter ended June 30, 2008, an increase of $165.6 million (49%) over the same period of 2007. Operating profit % increased to 26.5%, up from 24.2% for the same prior year period. Despite rising costs, particularly related to steel and utilities, margins improved due primarily to manufacturing, engineering, and operational efficiency initiatives, favorable product mix and higher production volumes resulting in greater overhead absorption.
Six Months Ended June 30, 2008 and 2007. Revenue for the first half of 2008 was $3,514.0 million, an increase of $885.0 million (34%) compared to the same period of 2007. Backlog and non-backlog revenue increased 41% and 18%, respectively, reflecting a rise in demand for new rigs and products and services to reactivate and/or refurbish many older rigs due to higher oil and gas prices as discussed above.
Operating profit for the first six months of 2008 was $912.4 million, an increase of $302.8 million (50%) compared to 2007. Operating profit % increased to 26.0%, up from 23.2% for the same prior year period. These increases reflect operational efficiency initiatives mentioned above, favorable product mix and higher production volumes resulting in greater overhead absorption.

Petroleum Services & Supplies
Three Months Ended June 30, 2008 and 2007. Revenue from Petroleum Services & Supplies was $1,123.8 million for the second quarter of 2008 compared to $746.1 million for the second quarter of 2007, an increase of $377.7 million (51%). The increase was primarily attributable to incremental revenues from the acquisition of Grant Prideco on April 21, 2008, which is included in this segment from the acquisition date.
Additionally, this segment benefited from revenue increases in this segment’s Mission business unit due to increased rig construction and reactivations fueling demand for pumps and liners and increased solids control and waste management technologies from this segment’s Brandt business. Revenues also increased at this segment’s Tuboscope business due to higher mill and processor activity in response to increased OCTG inventories and higher pricing.
Operating profit from Petroleum Services & Supplies was $221.1 million for the second quarter of 2008 compared to $177.8 million for the same period in 2007, an increase of $43.3 million (24%), and operating profit percentage decreased to 19.7%, down from 23.8% for the same period, which includes the $46.1 million charge related to a fair value step up adjustment to inventory included in the Grant Prideco acquisition, mentioned above. Excluding the inventory adjustment, operating profit increased due to the increase in revenue (see discussion above) and operating profit percentage remained relatively flat year-over-year.
Six Months Ended June 30, 2008 and 2007. Revenue from Petroleum Services & Supplies was $1,953.6 million for the first six months of 2008 compared to $1,437.9 million for the first six months of 2007, an increase of $515.7 million (36%). The increase is primarily attributable to the acquisition of Grant Prideco in April 2008 coupled with increases in virtually all of this segment’s products and services.
Operating profit from Petroleum Services & Supplies was $416.3 million for the first six months of 2008 compared to $348.8 million for the same period in 2007, an increase of $67.5 million (19%), and operating profit percentage decreased to 21.3%, down from 24.3% for the same period, which includes the $46.1 million charge related to a fair value step up adjustment to inventory included in the Grant Prideco acquisition, mentioned above. Excluding the inventory adjustment, the increase in operating profit was due to the increase in revenue (see discussion above). Additionally, operating profit percentage was negatively affected due to inflationary pressures increasing costs on steel, labor, and fuel; however, these increases were mostly offset by recent price increases and a strong focus on efficiency initiatives.
Distribution Services
Three Months Ended June 30, 2008 and 2007. Revenue from Distribution Services was $425.6 million, an increase of $80.8 million (23%) during the second quarter of 2008 over the comparable 2007 period with increases across all geographic regions, but primarily in the international markets and Canada, reflecting rig count increases of 8.2% and 21.6%, respectively.
Operating profit of $24.8 million in the second quarter of 2008 increased $1.7 million over the second quarter of 2007. Operating profit % decreased to 5.8%, down from 6.7% for the same prior year period. Operating profit increased due to higher revenue; however, operating profit % decreased slightly due to competitive pricing pressures in the U.S. due to lower drilling rig day rates, inflationary pressures increasing costs for steel and fuel coupled with costs related to further expansion into international markets, notably in the Middle East.
Six Months Ended June 30, 2008 and 2007. Revenue from Distribution Services increased $94.6 million (14%) in the first half of 2008 to $791.3 million when compared to the first six months of 2007 with increases across all geographic regions reflecting higher rig counts year-over-year.
Operating profit in the first half of 2008 of $43.6 million decreased by $4.4 million (9%) and operating profit % decreased from 6.9% to 5.5% compared to the comparable period in 2007. These decreases reflect competitive pricing pressures in the U.S. due to lower drilling rig day rates coupled with increases in certain costs as discussed above.

Unallocated expenses and eliminations
Unallocated expenses and eliminations were $44.2 and $95.7 million for the three and six months ended June 30, 2008, respectively, compared to $44.5 million and $82.1 million for the same periods in 2007. The increase in unallocated expenses and eliminations was primarily due to greater inter-segment profit eliminations.
Transaction costs
Transaction costs of $16.4 million for the three and six month periods ended June 30, 2008 were comprised of $6.0 million for accelerated vesting of stock-based compensation, $4.0 million for bridge loan fees, $5.8 million related to transaction costs for the disposition of certain tubular businesses of Grant Prideco in May 2008 and $0.6 million of other costs.
Interest and financial costs
Interest and financial costs were $24.2 million and $34.2 million for the three and six months ended June 30, 2008, respectively, compared to $13.1 million and $25.4 million for the respective periods in 2007. The increase in interest and financial costs was primarily due to debt incurred to finance the acquisition of Grant Prideco.
Other income (expense), net
Other income (expense), net was an expense of $14.6 million and $1.1 million for the three and six months ended June 30, 2008, compared to expense of $0.8 million and $3.7 million for the same periods in 2007, respectively. The increase in expense was primarily due to a net foreign exchange gain (loss) of $(8.4) million and $6.9 million for the three and six months ended June 30, 2008, respectively, compared to a net foreign exchange gain of $1.5 million and $0.2 million for the respective period in 2007. Our exposure to the Canadian, Euro and Norwegian currencies as remeasured against the U.S. dollar were the leading contributors to the foreign exchange movement in 2008. Additionally, bank charges were $4.7 million and $7.7 million for the three and six months ended June 30, 2008, respectively, compared to $2.4 million and $4.4 million for the same periods in 2007, respectively.
Provision for income taxes
The effective tax rate for the three and six month periods ended June 30, 2008 were 37.5% and 34.9%, respectively, compared to 34.9% and 34.2% for the same periods in 2007. The higher 2008 rates reflect additional tax provisions related to the Company’s decision to repatriate earnings from certain foreign subsidiaries during the three month period ended June 30, 2008. This was partially offset by increasing benefits in the U.S. from the tax incentive for manufacturing activities and a net incremental benefit resulting from the movement in exchange rates after the change of the functional currency to the U.S. dollar for our operations in Norway. This net benefit included a tax benefit in Norway of $3.7 million and $26.9 million for the three and six month periods ended June 30, 2008, respectively, resulting from realized foreign exchange losses on U.S. dollar denominated assets and liabilities and a $1.5 million and $15.1 million loss for the same respective periods, which was reported as income tax expense, from the remeasurement into U.S. dollars of foreign currency denominated deferred tax assets and liabilities in the balance sheet.

Liquidity and Capital Resources
At June 30, 2008, the Company had cash and cash equivalents of $1,652.4 million, and total debt of $1,713.5 million. At December 31, 2007, cash and cash equivalents were $1,841.8 million and total debt was $890.7 million. The Company’s outstanding debt at June 30, 2008 consisted of $800.0 million related to our new revolving credit facilities, $200.0 million of 5.65% Senior Notes due 2012, $200.0 million of 7.25% Senior Notes due 2011, $150.0 million of 6.5% Senior Notes due 2011, $150.0 million of 5.5% Senior Notes due 2012, $174.6 million of 6.125% Senior Notes due 2015, and other debt of $38.9 million.
On April 21, 2008, the Company replaced its existing $500 million unsecured revolving credit facility with an aggregate of $3.0 billion of unsecured credit facilities and borrowed $2.0 billion to finance the cash portion of the Grant Prideco acquisition. These facilities consist of a $2.0 billion, five-year revolving credit facility and a $1.0 billion, 364-day revolving credit facility. At June 30, 2008, there were $800.0 million borrowed against these facilities, and there were $338.4 million in outstanding letters of credit, resulting in $1,861.6 million of funds available under this revolving credit facility. Interest under this multicurrency facility is based upon LIBOR, NIBOR or EURIBOR plus 0.26-0.28% subject to a ratings-based grid, or the prime rate.
In connection with the Merger of Grant Prideco, the Company completed an exchange offer relative to the $174.6 million of 6.125% Senior Notes due 2015 previously issued by Grant Prideco. On April 21, 2008, $150.8 million of Grant Prideco Senior Notes were exchanged for National Oilwell Varco Senior Notes. The National Oilwell Varco Senior Notes have the same interest rate, interest payment dates, redemption terms and maturity as the Grant Prideco Senior Notes.
For the first six months of 2008, cash provided by operating activities was $1,356.8 million compared to cash provided by operating activities of $315.1 million in the same period of 2007. Cash was provided by operations primarily through net income of $819.3 million plus non-cash charges of $167.9 million, dividends received in the second quarter of 2008 of $112.7 million offset by equity income from our equity method affiliate of approximately $17.1 million, increases in prepaid and other current assets of $74.0 million, increases in costs in excess of billings of $38.5 million, increases in billings in excess of costs of $555.6 million and increases in other assets/liabilities, net of $375.4 million. The increase in billings in excess of costs and increases in other assets/liabilities were mainly due to increases in customer deposits and customer prepayments on rig construction projects. These positive cash flows were offset by increases in receivables of $507.4 million and increases in inventories of $297.0 million. Receivables increased due to greater revenue in the first six months of 2008 compared to the same period in 2007, while inventory increased due to growing backlog orders.
For the first six months of 2008, cash used by investing activities was $2,321.5 million compared to cash used of $358.4 million for the same period of 2007. The Company used $2,994.5 million for acquisitions in the first six months of 2008, including the business and operating assets of Grant Prideco. The Company received approximately $783.9 million related to the disposition of certain Grant Prideco tubular businesses. Capital expenditures totaled approximately $160.4 million in the first six months of 2008, primarily related to expansion of Rig Technology operations and the Petroleum Services & Supplies service and rental businesses.
For the first six months of 2008, cash provided by financing activities was $761.5 million compared to cash provided of $86.9 million for the same period of 2007. During the first six months of 2008, the Company borrowed $2,576.7 million, primarily to finance the cash portion of the Grant Prideco Inc. acquisition, from financial institutions and has repaid $1,928.4 million. Cash proceeds from exercised stock options were $76.8 million for the first six months of 2008.
The effect of the change in exchange rates on cash flows was a positive $13.8 million and $31.7 million for the six month periods ended June 30, 2008 and 2007, respectively. The 2007 positive cash flow from exchange rate changes was primarily due to cash holdings in the Norwegian Kroner as a result of customer prepayments on contracts in that country, and the strengthening of the Norwegian Kroner to the U.S. dollar by approximately 5.4% during the first six months of 2007.
The Company’s cash balance as of June 30, 2008 was $1,652.4 million. We believe that cash on hand, cash generated from operations and amounts available under the credit facilities and from other sources of debt will be sufficient to fund operations, working capital needs, capital expenditure requirements and financing obligations. We also believe any significant increases in capital expenditures caused by any need to increase manufacturing capacity can be funded from operations or through debt financing.

We intend to pursue additional acquisition candidates, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund future cash acquisitions primarily with cash flow from operations and borrowings, including the unborrowed portion of the credit facility or new debt issuances, but may also issue additional equity either directly or in connection with acquisitions. There can be no assurance that additional financing for acquisitions will be available at terms acceptable to us.
Inflation has not had a material impact on our operating results or financial condition in recent years. We believe that the higher costs for labor, energy, steel and other commodities experienced in 2007 and 2008 have largely been mitigated by increased prices and component surcharges for the products we sell. However, higher steel, energy or other commodity prices may adversely impact future periods.


Pete Miller

Thank you Andrew and good morning. Welcome to the National Oilwell Varco second quarter 2008 earnings conference call. I am Pete Miller, Chairman and CEO of National Oilwell Varco, and with me today on this call are Clay Williams, our Chief Financial Officer and Mark (inaudible), the President of our Rig Solutions Group.

Earlier today we announced earnings of $421.7 million or $1.04 per share on revenues of $3.3 billion. Included in this were pre-tax charges of 40.7 million or $0.16 a share related to the Grant Prideco merger and a new tax charge due to the earnings repatriation that we made out some monies from overseas. Excluding these charges, net income from the period was $486 million or $1.20 a share.

Clay will expand upon these numbers in a moment but we are very pleased with the results we had both year over year and on sequential basis. Additionally today we announced record new capital equipment orders of $2.2 billion. We also shipped a record 1.34 billion from backlog this quarter but still ended up with a $10.8 billion backlog total. This backlog number is our traditional capital equipment number and does not include anything that came from the Grant Prideco acquisition, most specifically drill pipe. However, I will say that drill pipe backlog increased 19% since the end of the second quarter.

We're extremely pleased with these numbers and we're also very pleased about the direction of the business in the future.

At this point in time, I'm going to ask Clay to give you a little bit of color on these numbers, and I'll ask Mark to give an overview of what we're seeing in the marketplace. But suffice it to say, that we're excited about what we've accomplished, but even more excited about what the future looks like. Clay?

Clay Williams

Great. Thanks Pete. Before beginning this discussion of National Oilwell Varco's financial results for the second quarter ended June 30, 2008, please note that some of the statements, 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 Form 10-K 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 may be found within our press release on our website at www.nov.com or in our filings with the SEC.

Later on in this call, Pete, Mark, and I will answer your questions. We ask that you limit your questions to two in order to permit more participation.

National Oilwell Varco generated earnings of $422 million or $1.04 per fully diluted share in its second quarter ended June 30, 2008 on revenues of $3.324 billion. On April 24, we were pleased to close our acquisition of Grant Prideco for a combination $3 billion in cash and the issuance of 56.9 million shares of NOV stock. As a result during the second quarter, National Oilwell Varco recognized transaction related charges totaling $62.5 million pretax or $0.10 per share after tax, and additional tax provisions associated with financing the transaction of $29 million or $0.07 per share. Additionally, we generated $7.2 million pretax or $0.01 per share after tax in earnings from Grant Prideco that were later sold during the quarter. Excluding all these items, earnings were $1.20 per share, reflecting very solid operational performance by National Oilwell Varco.

Under GAAP purchase accounting, the company's financial statements include results only from the last 70 days of Grant Prideco operations in the second quarter, including additional prorated amortization and depreciation of 31.6 million, a step up to fair market value of Grant Prideco's assets and liabilities.

In order to provide better comparability of operations on a quarterly basis, if supplementally disclosed adjusted financial statements for the company by quarter, starting from the first quarter of 2005, as if we had combined operations for all periods.

Last quarter, we informed you that Grant Prideco operations would be included in our existing petroleum services and supplies segment. And the supplemental disclosure in our press release and on our website depicts the combined adjusted results on this basis.

Include the expected additional depreciation and amortization charges for Grant Prideco's stepped up balance sheet for fixed assets, tangibles, and revaluation of liabilities for each period but did not include expected cost savings and periods before the merger do not include the results of divested Grant Prideco businesses in any period, and also do not include the amortization of inventory step up which will transition out of the next couple of quarters and be reported separately within transaction costs. Later on, our comments on operations will discuss results on this combined adjusted basis, but first let me touch on a number of transaction items related to the transaction in Q2.

Charges of $62.5 million in the second quarter consisted of costs associated with the accelerated vesting of options, financing fees; transaction costs related to Grant Prideco's previously agreed sale of portions of its Tubular Technology and Services segment of (inaudible) and the amortization of inventory step up. We expect additional transaction costs of approximately $30 million in the third quarter and $16 million in the fourth quarter of 2008 and stepped inventories continue to roll out, and we will continue to disclose these separately.

The completion of the sale of the TTS business of (inaudible) in Q2 brought in approximately $785 million in cash. This amount will be reduced later this year as we pay $270 million in tax on the gain. As I mentioned these businesses generated a little over $7 million in operating profit in the quarter under National Oilwell Varco ownership before they were sold in June.

$29 million additional tax provision I mentioned earlier was incurred due to our decision in the quarter to repatriate $194 million from overseas to pay down some of our revolver borrowings, and it drove our effective book tax rate up to 37.5% in Q2. We expect that most and perhaps all of this to be offset by foreign tax credits held by Grant Prideco prior to the merger, minimizing the cash impact. Excluding this additional tax provision, our rate was 33.2% in the quarter, in line with our expected tax rate going forward.

During the second quarter, we were pleased to settle some of the outstanding litigation Grant Prideco had related to its bit technology receding net $127 million in settlements. They do not show up in the gain in the quarter but are instead booked into purchasing accounting of Grant Prideco's assets. We will continue to vigorously pursue our claims against other infringing parties related to this important technology that (inaudible) business pioneer.

Finally, our press release notes that we transferred certain NOV product lines out of our Petroleum Services & Supplies segment at the beginning of the second quarter, which totaled about $98 million in revenue during Q2. Approximately 71 million of this was the movement of rig instrumentation products into the Rig Technologies segment and a $27 million balance was the transfer of artificial lift and industrial products into the Distribution Services segment. These changes were made in accordance with FAS-131 to reflect in a realignment of management's responsibilities following the Grant Prideco acquisition.

Given the small amounts involved, we have not adjusted for this move in prior periods. The integration of Grant Prideco's operations has gone like clockwork. We achieved savings of $6 million pretax during Q2 on overhead reductions and we expect this to increase to $9.7 million in each of the third and fourth quarters and to rise to approximately $11 million per quarter beginning in 2009 based on steps we've already taken.

This will result in an annual saving rate slightly higher than the $40 million per year we expected when we announced the transaction last December. Most importantly, the merger further strengthens NOV's position as a manufacture to the oil field supplying the critical hardware, technologies and comprehensive service to oil and gas operations worldwide. We are pleased to welcome this vibrant and capable organization to the National Oilwell Varco family and we thank the Grant Prideco legacy employees for their hardwork in helping put the new NOV together. You're doing a super job and we are grateful.

On an overall adjusted combined basis, excluding the transaction related (inaudible) second quarter results were excellent. Consolidated revenues were $3.445 billion, up 9% from Q1 and up 21% year over year. Operating profit was $778 million or 22.6% of sales, up 160 basis point from Q1 markets. Operating profit flow through or leverage was 40% sequentially and 30% year over year.

Now let me turn to specific segment operating results for Q2 on this adjusted combined basis.

Rig Technology generated 1.9 billion in revenue and $506 million in operating profit in the second quarter, yielding an operating margin of 26.5%. Excluding the transfer of the instrumentation products from Petroleum Services & Supplies, the group generated 33% follow-throughs on 15% revenue growth sequentially, and 33% follow-throughs on 31% revenue growth year over year.

Revenue out of backlog increased 18% sequentially to $1.337 billion and reported non-backlog revenue increase 22% due in part to the additional $71 million in instrumentation products revenues, all of which flow through the non-backlog revenue. Excluding these additional instrumentation products revenues, our base rig aftermarket business surged 30% on higher spare parts sales, partially offset by lower sequential sales of small capital equipment that does not go into the backlog. Recall that in Q1, we had a very high level of handling tool sales that didn't repeat this quarter.

As of June 30th, our backlog per capital equipment sales from the Rig Technology's segment stood at a record $10.8 billion due to a record level of orders of $2.216 billion received during the quarter. Seven floating rig packages, surging demand for land rigs, both domestically and overseas, and steady demand for jack up equipment fueled the strong showing.

Equipment for international markets was 91% and orders for offshore equipment totaled 87% of the total backlog at June 30th. We expect revenue from backlog to continue to rise and as of June 30th, the scheduled outflow of revenue from backlog is expected to be a little over $3 billion for the remainder of 2008, about $5 billion in 2009 and nearly $3 billion balance thereafter.

Our Rig Technology segment continues to wrestle with riding costs particularly steel, utilities, logistics and foreign currency related costs, but our efficiency initiatives such as quick response manufacturing and broader outsourcing; our wide manufacturing footprint and modest price improvements are helping us maintain margins, which have remained stable on newly won projects.

In a moment, Mark will share more color on our execution and outlook for Rig Technology, but overall looking forward into Q3, we expect modest growth in revenue and comparable margins to Q2.

Our Petroleum Services and Supplies segment generated revenues of $1.244 billion in Q2, down $69 million from Q1, including a full quarter contribution from continuing Grant Prideco operations in both quarters. However excluding the $98 million in products transferred out on April 1st, revenues were up about 2% sequentially at 23% leverage and revenues increased 10% year over year at 20% leverage.

Our services businesses in Canada saw revenues and operating profit decline from the first quarter to the second due to the annual spring breakup there this year, with revenues dropping $59 million at high leverage from Q1 to Q2. Spring breakup occurs every year in Canada and is a result of transport restrictions on heavy rig movements by the authorities to prevent damage to roads during the spring (inaudible).

Activity and outlook in Canada are both rising, falling the listing of these ban several weeks ago. Fortunately, this seasonal Canadian decline was offset by strong results overall in most of our other businesses.

Drill pipe sales posted sharply higher margins, owing to favorable mix improvements in the types of pipe sold, with premium and large diameter drill pipe rising to 48% and 39% of the mix respectively. We content that the large premium segment, our drill pipe sales will continue to grow as oil and gas companies push complex well path designs behind the (inaudible) capabilities of standard API pipe designs. And NOV is well positioned to capitalize on steadily increasing usage of premium drill pipe in horizontal, directional, and extended reach drilling programs.

Nevertheless drill pipe revenue fell slightly due to shipping vessel delays and disruptions caused by the earthquake in China. Although we do not intend to report drill pipe backlog in future periods, I would nevertheless point out a backlog for drill pipe increase 19% sequentially from Q1 to Q2. The first increased since 2006 as orders surged 85% sequentially, with strong North American land contractor -- with North American land contractors re-entering the market and new build rigs ordering pipes.

Integration of Grant Prideco's drill pipe business is going well, and we are rolling out new drill pipe tracking products and expanding OEM repair and maintenance offerings through NOV's worldwide pipe service operations.

ReedHycalog Bits business acquired with Grand Prideco also performed well in Q2, despite a short downturn in Canada related to breakup. Revenues increased 4% at solid follow-throughs on higher sales in Latin America, Europe, Russia and the Fareast. The Intergauge business also acquired Grant Prideco, delivered a record quarter, and the integration of this business with NOV's leading downhole tools business is proceeding well.

As part of the integration, we are consolidating a number of sales facilities worldwide and leveraging our combined manufacturing capabilities and capacities to improve lead times and reduce cost. The addition of Grant Prideco's bits and downhole products to NOV's offering of drilling motors, monels (phonetic), jars and shock tools completes and impressive comprehensive package of bottom hole assembly hardware, making us a one stop shop for critical iron needed to drill complex well paths, and we are now exceptionally well positioned to capitalize on continued growth in horizontal, directional, and extended reach drilling.

Our Other Petroleum Supplies & Services businesses continued to execute well in the quarter and benefited from rising activity associated with shale gas plays in the US and steadily rising activity overseas. Increased rig construction and reactive basins are fueling demand for the pumps and liners for emission, and solids control and waste management technologies from Grant. Tuboscope is benefiting from sharply higher mill and processor activity in response to pipe OCTG inventories and higher pricing and expansion of its drill pipe repair and maintenance operations.

Overseas demand for fiberglass pipe for large projects began to increase during the quarter, and demand for drilling motors, non-mag, drill collars, and fishing tools in the Middle-East continued to push higher following the opening of our new facility in Dubai last year. Waste management demand in the North Sea and US land also picked up nicely in Q2.

(inaudible) pressures particularly steel, labor and fuel continued to pressure the business for recent price increases most in the mid or in the high-single digit range, and a relentless focus on efficiency have generally been able to hold margins. For Q3, we expect mid-single digit revenue growth and solid flow-through as we emerge out of Canadian breakup and continue to benefit from rising drilling activity.

Our Distribution Services segment revenues of $426 million were up 16% from the first quarter. Excluding the transfer of artificial lift and industrial products from Petroleum Services and Supplies, revenues increased 9% sequentially with strong follow-throughs.

Operating profit was $24.8 million or 5.8% of sales. US revenues ascended to recorded levels fueled by high demand for operating supplies by rigs moving into emerging shale place. Service companies and oil and gas operators also increase consumption of MRO supplies in the phase of higher service activity and high commodity prices during Q2, and margins improved sharply on line pipe sales this quarter. Albeit pressures remain fierce in many mature regions, pricing pressures appear to be abating in new high-growth domestic areas.

Canada declined overall due to breakup, but the business there benefited from cost cutting initiatives executed in prior quarters and rising demand in Southeast Saskatchewan and high shale activity in British Columbia, which drove better than expected results. International sales improved as a number of overseas locations opened up over the past few quarters began to gain traction, notably in the Middle east, Africa and Norway. A large valve project into the Fareast also contributed to strong results as been high cable sale into international offshore rig ups.

In the third quarter, the Distribution Services segment expects to open a handful of new locations to improve coverage of the emerging shale plays across the US and the continue to expand overseas including supporting very high levels of interest by drilling contractors for stores on new build offshore rigs. The group currently has three stores physically located on offshore rigs staffed by NOV personnel.

Third quarter Distribution Services revenues are expected to increase in high-single digit range at very solid follow-throughs.

Turning back to National Oilwell Varco’s consolidated second quarter income statement. Interest expense increased $14.2 million and interest income decreased 5.2 million as a result of borrowing to finance the Grant Prideco acquisition and lower cash balances. That's along lightly as we drew down $2.1 billion on our new revolver to finance the acquisition in April, then repaid most of the borrowings from cash flows out of operations during the quarter and from proceeds from the sale of the TTS businesses sold later in the quarter.

Other expenses went from a credit in the first quarter to a debit of $14.6 million in Q2, due to FX movements on Grant Prideco and Norwegian NOV businesses and much higher bank fees associated with letters of credit issued to back cash down payments to National Oilwell Varco by drilling contractors for new rig orders.

Equity income from our Voest-Alpine joint venture increased slightly to $17.1 million, and we expect some results in Q3. This is a joint venture that supplies green tubes to seamless pipe use for our drill pipe manufacturing business that came in with the acquisition.

Weighted average fully diluted shares outstanding of 404 million shares represent the partial quarter impact of the shares issued for Grant Prideco's shareholders, and we expect the full-quarter Q3 amount to be approximately 420 million shares.

Unallocated expenses and eliminations on our supplemental segment schedule which is pro forma for the Grant Prideco acquisition in all periods were $49.7 million, down $22.1 million sequentially. This item benefited from overhead cost savings coming out of the Grant Prideco merger of about $6 million, the turnaround of high payroll taxes paid in Q1 on incentive compensation by both organizations, and net lower profit eliminations on inter-company sales between segments.

Depreciation and amortization was $106.4 million in Q1, up $44.9 million sequentially due to the effect of the acquisition. We expect total Q3 consolidated National Oilwell Varco depreciation and amortization to be in the range of $120 million excluding inventory step-up amortization.

Q2 amortization of inventory step up of $46.1 million is not included in the DD&A on the supplemental EBITDA schedule, but it's rather included as part of the transaction costs reported on the line below.

Our June 30th, 2008 balance sheet employed working capital excluding cash and debt of $2.3 billion, up $485 million sequentially due to the acquisition. Working capital excluding cash and debt was about 17% of annualized revenue, generally consistent with recent prior quarters.

Cash flow from operations was a record $753 million in the second quarter and leveraged cash flow was $528 million. Customer prepayments and billings in excess of costs, a measure of customer financing of our working capital needs increased $524 million to over $2.6 billion. This contributed greatly to the company's strong cash generation in Q2. It will be reinvested in inventory abroad as we execute our large rig construction backlog.

CapEx was $106.1 million in the second quarter and we expect it will continue to rise quarterly a little over $400 million for the full year. Our cash balance was $1.6 billion, down 487 from the first quarter, and our debt totaled $1.7 billion as of June 30th, up about $1 billion from the prior quarter.

NOV’s corporate credit rating was raised by both major ratings agencies during the second quarter in view of our strong financial condition.

Now let me turn it over to Mark for his comments. Mark?

Mark Reese

Thanks Clay. Good morning. Over the last quarter, our overall inquiry and coding activities remained brisk for all product lines and rig categories, with new land rig inquiries rapidly increasing. As a whole, we're seeing very little softening across many of our product segments.

Let me start with the overview of our three major rig categories. To start with floaters. Inquiries for both our drill ships and semis remained very high with a tremendous amount of emphasis being put on the assets needed to meet Brazil's growth strategies. Other areas driving this demand are deepwater Gulf of Mexico, West Africa and Central Asia.

Jack up inquiries and orders remained very stable, with demand being driven by many of the shower plays such as Persian Gulf, the North Sea and Asia. Land packages, as you probably already aware, the land market has made a bad phase since the first of the year, specifically North America. We started this year believing that the new rig and refurb activity in North America was going to be somewhat larger than we've seen in 2007. however, beginning in Q1, that made a quick switch in going into Q2.

(inaudible) increased our forecast program for ideal, rapid and our newly designed drill rig. This demand is really being driven by the increase in oil and gas prices with majority of the rigs destined to (inaudible).

Moving on to the Middle east and North Africa, we're really excited about these areas. Inquiries on orders are very active for our traditional 1500 horsepower ideal rigs. But we're also seeing more inquiries for our test and design higher horsepower rigs with desert moving systems at high ambient temperature packages. Our MD TOTCO organization has also received very positive feedback from the contractors in this area, then to expand their instrumentation and monitoring services.

Moving on to Russia, this is a mark that holds up a lot of opportunities for NOV and our joint technology. There's a tremendous demand for our higher technology drilling equipment that has a proven track record in drilling and safety performance. We're estimating a potential between 200 and 250 land rigs for this market over the next five years. Most of the applications be driven in (inaudible) and North-central Russia.

We're always looking at expanding our global footprint so we can better serve our customers. A few of the expansions that you should expect to see over the next 12 months; starting at Russia, we're working on plans to expand our land manufacturing business and service capabilities for services growing market. Our current plans on that facility up and operational some time in the first half of 2009.

Middle-east is another area that we're looking at, with a growing demand for these land rigs in this region. We're in the process of expanding our current rig-up capabilities to extend to a four-rig path rig-up facility. This expansion will be fully operational in Q2 of 2009.

And moving back to the States, up in the northeast with all the activity plan for this area, we're working on the final details for the new rig-up facility and service facility to support the projected growth in (inaudible). Will be located in the area of Pittsburg Pennsylvania and we'll house other NOV operation so we can better service our customer base in that area.

In June we held an executive open house for our Houston-based Technical College. This facility is the second that we have opened over the last year. The first thing is located in Kristiansand, Norway. Third is targeted for Singapore in 2009. These facilities are designed to deliver over 700 trained (inaudible) and service engineers into the market over the next 12 months. As everyone is well aware, for decades our industry is under-invested developing trained and experienced personnel.

My thanks go to NOV's Board and Mr. Miller for making this tremendous investment in our people and our industry's future. These colleges are staffed with professional educators and state of the art simulators and learning schools. There are three core curriculums; mechanical, electrical and controls. And the students will not only receive classroom time but they'll work alongside with experienced service engineers getting hands-on experience.

NOV has always been committed to training our employees. It has also made a very large investment to train our customers. In 2007, we ran over 2000 customers through our training facilities. In 2008, we're forecasting to almost double that number.

We're also introducing our new NOV mobile training unit which is really a 50-foot school, and take this trailer straight to our customers' locations or to well site, and we can actually train the crews on the equipment that they're going to run that day. It's been a very successful tool for us as well as for our customers.

I'd like to take this opportunity as well to announce our intention to open up another technical college in Monte, Brazil. This investment will be designed to train our customers' personnel on safe and efficient operations and then on the equipment. We believe this investment will create a huge enabler not only for our customers but for the local workforce to operate the large inventory of NOV equipment either currently operating or under construction for Brazilian waters.

As always NOV continues to lead the charge in bringing new technology into the drilling industry. Our design criteria is deliver safer, lighter and higher performing products for our global customers.

I'll give you a quick update on where we're at with some of these recent developments. Our TDX-1250 Top Drive; we shipped or have on order ten of these revolutionary top drives. This technology delivers an industry-leading 105,000 foot pounds of continuous torque, a very compact and easily maintained package. First of all 50 F80 took place in Q1 in our Orange California facility and the F80 exceeded everyone's expectation.

The next product is our CRT-350. This casing running tool has a tremendous market acceptance and is designed to deliver our customers safer and faster casing operation. As of this call, we have either shipped or have on our order over 85 of these CRT-350. As I mentioned earlier, our newest product is the Drake Rig (phonetic). This rig was designed specifically to accommodate at tight road restrictions and small locations our land contractors are experiencing.

Drake Rig is a 1000 horsepower rig with a 3-piece telescoping mask and a record design that can accommodate some of the harsh terrains raising under sea as well can also accommodate a moving system for pad drilling sign.

Looking into the future as in the past, our biggest challenge is execution. And going forward, we're going to continue to execute. I'm very confident with our ability to deliver on our commitments, but there are always going to be bumps in the road. We currently have over 600 INC and service engineers working in 13 ship yards around the globe. To date we have commissioned and delivered 29 joint packages by working extremely close with the shipyards, contractors and vendors. NOV has not impacted the delivery of any of these vessels.

Before I turn the call over to Pete, I want to personally thank the hard working people of NOV for their commitment to making this happen. They are the best people in the industry and day in and day out they deliver on their commitments. As well, I would like to thank the thousands of vendors that support NOV around the globe. Pete?

Pete Miller

Thanks Mark, and at this point I would like to just kind of summarize on a few things and talk about a few things we have in place. But the reality of the business today, it's about the shale plays, it's about deepwater and it's about continuing to re-tool this business. Technology and efficiency wins. We're able to provide the products and services that people need to be able to win this. I think the shale plays are going to be exciting all throughout the US and quite frankly the world. If you think that the shales are only in the Marcellus and Ainsville, and not at Argentina and Russia and other places, you're wrong. They’re all over and the technology that we learn there is going to be expanded.

And again, I can't emphasize enough the re-tooling of the fleet. The best rig wins. I think that's pretty indicative as you look throughout the United States. We're prepared to make sure that we take care of this.

I'd like to talk about a couple of initiatives that we have in place in our PS&S group. For instance, we're utilizing the same sort of business model that we utilize in drilling. When you looked at what we did when we started building this company ten years ago, it was really to integrate the package to make things easier on our customers. Today, when you look at Tuboscope and Grant Prideco, we're really starting to integrate a pipe management system. We call this the LEON system, and what this enables you to do is you can engineer, manufacture, coat, inspect, repays, re-thread and monitor that pipe, all through the life of the pipe.

And the interesting thing is we're able to take some of the electronics that we learn in the drilling site with MD TOTCO, with our VIC system and things like that, and be able to monitor this pipe. And I think it really has an opportunity to revolutionize the way that people are able to use drill pipe. In our (inaudible) operations we've recently acquired a company that we call portable power that not only enables us to take a lot of the brand equipment out into the field, but also be able to use as portable power to be able to power it up and do it much more efficiently than just depending on the rig. And interestingly enough a lot of those portable power has really cool emissions control and noise pollution. Things that you're going to need as you're drilling these shales in the towns of Freeport, Fortworth and other places around the world. So we think these are the sorts of initiatives that we're on that are really pretty exciting.

If you look at down-hole tools, today we can provide the bits, the motors, the shock subs, the stabilizers, the monel collar, the intergauge openers, we can do these things and provide our customers with this hardware that works just seamlessly, and by the way we also have a really cool product called the telesurb (phonetic) which we think we're going to be able to really develop over the years to be able to take that information that come from all of this and ratchet it to the surface at about 10,000 times the speed with which it's done today.

So these are the kind of things that are going to bode very well for the technology of this industry and I think position ourselves to take advantage of it. And finally in our distribution business, we're using the same sort of business model. As pipe went out earlier, we're integrating, we're putting rig stores on these drilling rigs where we're talking inventory away from our customers, reducing their total cost of ownership, taking care and ensuring that we got the products and the services in place.

And when you look at the number of these deepwater rigs that are going out and the types of rig stores that we're putting on these, we think it's a really, really cool business that's going to expand well into the future. So, we're excited about where we're going, but it takes good people. And I want to make one mention of one thing that we've done over the years and this is our next generation program. And just to kind of give you an example of how this works, we just hired our NextGen 9 program. We have 8 prior to that and the books are out and again our company today doing great business and great work, and they're providing great leadership. And you look today, we just recruited 50 people. And to give you an example of how that worked out, 16 came from the US, five from Canada, six from the Middle-East, five from Singapore, two from Norway, five from China, five from Latin America, two from Russia, and four from the UK. They're all college grads in many disciplines and this is a type of program that's building us with the future.

You know, a lot of companies just try to hire away and move around. We want to build from within. We think that's extremely important and we think it's going to dictate what happens in this company for the next 20 years.

So I would also like to echo Clay and Mark, and thank the 36,000 employees in this company for the great job they're doing. Welcome to Grant Prideco people, I think it's a wonderful company, and we are very bullish, needless to say on where we're going in the future.

So at this point, Andrew, I’d like to open it up to any questions that our listeners might have.

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