national oilwell varco 2007 Proxy Statement/2006 Annual Report on Form 10-K
Published on: Mar 3, 2016
Transcripts - national oilwell varco 2007 Proxy Statement/2006 Annual Report on Form 10-K
2007 Proxy Statement and
2006 Annual Report to Stockholders
Notice of 2007 April 25, 2007
Annual Meeting Fellow Stockholders:
and Proxy On behalf of your Board of Directors and your management, we
Statement are pleased to invite you to attend the Annual Meeting of
Stockholders of National Oilwell Varco, Inc. It will be held on
Tuesday, June 5, 2007 at 10:00 A.M., local time, at the Houston
Marriott Westchase, 2900 Briarpark Drive, Houston, Texas
You will find information regarding the matters to be voted on
at the meeting in the formal Notice of Meeting and Proxy
Statement, which are included on the following pages of this
2006 Annual booklet.
Report to Whether or not you plan to attend, please sign and return the
enclosed proxy in the accompanying envelope as soon as
Stockholders possible so that your shares will be voted at the meeting. The
vote of each and every stockholder is most important to us.
Please note that your completed proxy will not prevent you
from attending the meeting and voting in person should you so
• Management’s Also included in this booklet as Appendix A is National Oilwell
Discussion and Varco’s 2006 Annual Report on Form 10K, which we are
distributing to the company’s stockholders in lieu of a separate
Thank you for your continued support of and interest in
National Oilwell Varco.
Merrill A. (Pete) Miller, Jr.
Chairman, President and
Chief Executive Officer
TABLE OF CONTENTS
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
PROXY STATEMENT ................................................................................................................. 1
Proposal No. 1 – Election of Directors .......................................................................................... 4
Committees and Meetings of the Board......................................................................................... 9
Board Compensation...................................................................................................................... 9
Audit Committee Report.............................................................................................................. 13
Proposal No. 2 – Ratification of Independent Auditors............................................................... 15
Corporate Governance ................................................................................................................. 17
Executive Officers ....................................................................................................................... 19
Stock Ownership.......................................................................................................................... 21
Compensation Discussion and Analysis ...................................................................................... 24
Executive Compensation ............................................................................................................. 40
Certain Relationships and Related Transactions.......................................................................... 44
Compensation Committee Report on Executive Compensation.................................................. 44
Director Compensation ................................................................................................................ 46
Section 16(a) Beneficial Ownership Reporting Compliance....................................................... 47
Stockholder Proposals for the 2008 Annual Meeting .................................................................. 47
Annual Report and Other Matters................................................................................................ 47
ANNUAL REPORT TO STOCKHOLDERS
Risk Factors .............................................................................................................................A-16
Glossary of Oilfield Terms ......................................................................................................A-20
Submission of Matters To A Vote of Security Holders...........................................................A-28
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.................................................................................................A-29
Selected Financial Data............................................................................................................A-30
Management’s Discussion and Analysis of Financial Condition and Results of Operations..A-31
Quantitative and Qualitative Disclosures about Market Risk..................................................A-45
Controls and Procedures ..........................................................................................................A-47
Management’s Report on Internal Control Over Financial Reporting ....................................A-52
Report of Independent Registered Public Accounting Firm....................................................A-53
Report of Independent Registered Public Accounting Firm on Internal Control Over
Consolidated Financial Statements ..........................................................................................A-55
Notes to Consolidated Financial Statements............................................................................A-59
Valuation and Qualifying Accounts.........................................................................................A-79
Annual Report to Stockholders
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
YEAR ENDED DECEMBER 31, 2006
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12317
NATIONAL OILWELL VARCO, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10000 Richmond Avenue
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 New York Stock Exchange
(Title of Class) (Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant as of June 30, 2006 was $11.09
billion. As of February 16, 2007, there were 175,803,638 shares of the Company’s common stock ($0.01 par value) outstanding.
Documents Incorporated by Reference
Portions of the Proxy Statement in connection with the 2007 Annual Meeting of Stockholders are incorporated in Part III of this report.
ITEM 1. BUSINESS
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 over 600 locations across six
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 represents the first full year of operations of the
The Company’s principal executive offices are located at 10000 Richmond Avenue, Houston, Texas 77042, its telephone number
is (713) 346-7500, and its Internet web site 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.
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 new
operations in Canada, Norway, the United Kingdom, China, and Belarus.
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 drillpipe, 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 operations in Canada, the United Kingdom, China, Kazakhstan, and
Our Distribution Services segment provides maintenance, repair and operating supplies 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 and servicing activity, and oil and gas production activities.
The following table sets forth the contribution to the Company’s total revenues of its three operating segments for December 31,
2006, 2005, and 2004 (in millions):
Years ended December 31,
2006 2005 2004
Rig Technology $ 3,584.9 $ 2,216.8 $ 1,085.5
Petroleum Services & Supplies 2,425.0 1,645.8 505.5
Distribution Services 1,369.6 1,074.5 905.1
Eliminations (353.7) (292.6) (178.0)
Total Revenue $ 7,025.8 $ 4,644.5 $ 2,318.1
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 technical 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 which the Company sells.
On a worldwide basis, drilling activity was generally high in 2001, but began to decline toward the end of the year due to lower
oil and gas prices. This situation persisted throughout 2002. However, beginning in late 2002, higher gas prices in the U.S. led to
rising gas drilling activity in Canada and most U.S. onshore areas. Higher oil prices also led to higher drilling activity levels in
2003 in several international markets, including the Middle East, the Far East and several key Latin American markets. However,
other historically important markets for the Company remained slow in 2003, including the Gulf of Mexico, the North Sea, and
Venezuela. At the same time, due to the fact that the demand for capital equipment tends to lag drilling activity, the demand for
the Company’s capital equipment generally weakened in 2003. This resulted in declining backlogs through the year.
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 10% in 2004, 15% in 2005 and 11% in 2006. 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 2004 and 2005, resulting
in higher backlogs for the Company at the end of 2006 compared to the end of 2004 and 2005. Backlog for the Company was at
approximately $6.0 billion at December 31, 2006 compared to approximately $2.3 billion and $0.6 billion for December 31,
2005 and 2004, respectively.
In 2006, 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 2006 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
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 drillpipe 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
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
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 drillpipe inspection and coating
services, and applies “hardbanding” material to drillpipe 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
drillpipe. 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
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 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
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.
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, as well as 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 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 7500 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.
Blow-out Preventers. BOPs are devices used to seal the space (“annulus”) between the drill pipe and the borehole to prevent
blow-outs (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
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.
Coiled Tubing Equipment. Coiled tubing consists of flexible steel tubing manufactured in a continuous string and spooled on a
reel. It can extend several thousand feet in length and is run in and out of the wellbore at a high rate of speed by a hydraulically
operated coiled tubing unit. A coiled tubing unit is typically mounted on a truck or skid (steel frames on which portable
equipment is mounted to facilitate handling with cranes or flatbed trucks) and consists of a hydraulically operated tubing reel or
drum, an injector head which pushes or pulls the tubing in or out of the wellbore, and various power and control systems. Coiled
tubing is typically used with sophisticated pressure control equipment which permits the operator to continue to safely produce
the well. The Rig Technology group manufactures and sells both coiled tubing units and the ancillary pressure control equipment
used in these operations. Through its acquisition of Rolligon in late 2006, the Company enhanced its portfolio by adding
additional pressure pumping and coiled tubing equipment products.
Currently, most coiled tubing units are used in well remediation and completion applications. The Company believes that
advances in the manufacturing process of coiled tubing, tubing fatigue protection and the capability to manufacture larger
diameter and increased wall thickness coiled tubing strings have resulted in increased uses and applications for coiled tubing
products. For example, some well operators are now using coiled tubing in drilling applications such as slim hole reentries of
existing wells. NOV engineered and manufactured the first coiled tubing units built specifically for coiled tubing drilling in
Generally, The Rig Technology group supplies customers with the equipment and components necessary to use coiled tubing,
which the customers typically purchase separately. The group’s coiled tubing product line consists of coiled tubing units, coiled
tubing pressure control equipment, pressure pumping equipment, snubbing units (which are units that force tubulars into a well
when pressure is contained within the wellbore), nitrogen pumping equipment and cementing, stimulation, fracturing and
Wireline Equipment. NOV’s wireline products include wireline drum units, which consist of a spool or drum of wireline cable,
mounted in a mobile vehicle or skid, which works in conjunction with a source of power (an engine mounted in the vehicle or
within a separate “power pack” skid). The wireline drum unit is used to spool wireline cable into or out of a well, in order to
perform surveys inside the well, sample fluids from the bottom of the well, retrieve or replace components from inside the well,
or to perform other well remediation or survey operations. The wireline used may be “slickline,” which is conventional steel
cable used to convey tools in or out of the well, or “electric line,” which contains an imbedded single-conductor or multi-
conductor electrical line which permits communication between the surface and electronic instruments attached to the end of the
wireline at the bottom of the well.
Wireline units are usually used in conjunction with a variety of other pressure control equipment which permit safe access into
wells while they are flowing and under pressure at the surface. The company engineers and manufactures a broad range of
pressure control equipment for wireline operations, including wireline blowout preventers, strippers, packers, lubricators and
grease injection units. Additionally, the Company makes wireline rigging equipment such as mast trucks.
Facilities. The Company conducts Rig Technology manufacturing operations at major facilities in Houston, Galena Park, Sugar
Land, Conroe, Anderson, Fort Worth and Pampa, Texas; Tulsa and Duncan, Oklahoma; Orange, California; Calgary, Nisku and
Edmonton, Canada; Mexicali, Mexico; Kristiansand and Stavanger, Norway; Etten-Leur, the Netherlands; Carquefou, France;
Lanzhou and Shanghai, China; and Jebal Ali, UAE. The Rig Technology group maintains sales and service offices in most major
oilfield markets, either directly or through agents.
Customers and Competition. The Rig Technology segment sells directly to drilling contractors, other rig fabricators, well
servicing companies, pressure pumping companies, national oil companies, major and independent oil and gas companies,
supply stores, and pipe-running service providers. Demand for its products 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.
The products of the Rig Technology group are sold in highly competitive markets and its sales and earnings can be affected by
competitive actions such as price changes, new product development, or improved availability and delivery. The group’s primary
competitors are Access Oil Tools; Aker Kvaerner AS; American Block; Bomco; Canrig (a division of Nabors Industries); Cavins
Oil Tools; Cameron; DenCon Oil Tools; Hydril Company; Hong Hua; IDM; LEWCO (a division of Rowan Companies); M&I
Electric; Tesco Corporation; Wirth M&B GmbH; Stewart & Stevenson, Inc.; ASEP; Crown Energy Technologies; Huntings,
Ltd.; Vanoil; Parveen Industries; and Weatherford International, Inc. Management believes that the principal competitive factors
affecting its Drilling Equipment business are performance, quality, reputation, customer service, availability of products, spare
parts, and consumables, and breadth of product line and price.
Petroleum Services & Supplies
The Company provides a broad range of support equipment, spare parts, consumables and services through the Petroleum
Services & Supplies segment. The Petroleum Services & Supplies group sells directly to drilling contractors; well servicing
companies; oil and gas producers; national oil companies; tubular processors, manufacturers and distributors; oilfield
distributors; and pipeline operators.
The Petroleum Services & Supplies group provides a variety of tubular services, composite tubing, and coiled tubing to oil and
gas producers, national oil companies, drilling contractors, well servicing companies, pipeline operators, and tubular processors,
manufacturers and distributors. These include inspection and reclamation services for drill pipe, casing, production tubing,
sucker rods and line pipe at drilling and workover rig locations, at yards owned by its customers, at steel mills and processing
facilities that manufacture tubular goods, and at facilities which it owns. The group also provides internal coating of tubular
goods at several coating plants worldwide and through licensees in certain locations. Additionally, the Company designs,
manufactures and sells high pressure fiberglass and composite tubulars for use in corrosive applications and coiled tubing for use
in well servicing applications; and provides in-service inspection of oil, gas and product transmission pipelines through its
application of instrumented survey tools (“smart pigs”) which it engineers, manufactures and operates.
The Company’s customers rely on tubular inspection services to avoid failure of tubing, casing, flowlines, pipelines and drill
pipe. Such tubular failures are expensive and in some cases catastrophic. The Company’s customers rely on internal coatings of
tubular goods to prolong the useful lives of tubulars and to increase the volumetric throughput of in-service tubular goods. The
Company’s customers sometimes use fiberglass or composite tubulars in lieu of conventional steel tubulars, due to the corrosion-
resistant properties of fiberglass and other composite materials. Tubular inspection and coating services are used most frequently
in operations in high-temperature, deep, corrosive oil and gas environments. In selecting a provider of tubular inspection and
tubular coating services, oil and gas operators consider such factors as reputation, experience, technology of products offered,
reliability and price.
The Company’s Petroleum Services & Supplies group also provides products and services that are used in the course of drilling
oil and gas wells. The Downhole Tools business sells and rents drilling motors and specialized downhole tools that are
incorporated into the drill stem during drilling operations (“Downhole Tools”), and are also used during fishing, well
intervention, re-entry, and well completion operations. The Solids Control business is engaged in the provision of highly-
engineered equipment, products and services which separate and manage drill cuttings produced by the drilling process (“Solids
Control”). Drill cuttings are usually contaminated with petroleum or drilling fluids, and must be disposed of in an
environmentally sound manner. Additionally, efficient separation of drill cuttings enables the re-use of often costly drilling
fluids. The Instrumentation business rents and sells proprietary drilling rig instrumentation packages and control systems which
monitor various processes throughout the drilling operation, under the name MD/Totco (“Instrumentation”). The Pumps &
Expendables business provides centrifugal, reciprocating, and progressing cavity pumps and pump expendables (“Pumps &
Expendables”) into the global oil and gas and industrial markets.
Tubular Coating. The Company develops, manufactures and applies its proprietary tubular coatings, known as Tube-Kote®
coatings, to new and used tubulars. Tubular coatings help prevent corrosion of tubulars by providing a tough plastic shield to
isolate steel from corrosive oilfield fluids such as CO2, H2S and brine. Delaying or preventing corrosion extends the life of
existing tubulars, reduces the frequency of well remediation and reduces expensive interruptions in production. In addition,
coatings are designed to increase the fluid flow rate through tubulars by decreasing or eliminating paraffin and scale build-up,
which can reduce or block oil flow in producing wells. The smooth inner surfaces of coated tubulars often increase the fluid
through-put on certain high-rate oil and gas wells by reducing friction and turbulence. The Company’s reputation for supplying
quality internal coatings is an important factor in its business, since the failure of coatings can lead to expensive production
delays and premature tubular failure. In 2005, NOV created a 60%-owned joint venture in China with the Huabei Petroleum
Administration Bureau, which coats Chinese produced drill pipe using NOV’s proprietary coatings.
Tubular Inspection. Newly manufactured pipe sometimes contains serious defects that are not detected at the mill. In addition,
pipe can be damaged in transit and during handling prior to use at the well site. As a result, exploration and production
companies often have new tubulars inspected before they are placed in service to reduce the risk of tubular failures during
drilling, completion, or production of oil and gas wells. Used tubulars are inspected by the Company to detect service-induced
flaws after the tubulars are removed from operation. Used drill pipe and used tubing inspection programs allow operators to
replace defective lengths, thereby prolonging the life of the remaining pipe and saving the customer the cost of unnecessary
tubular replacements and expenses related to tubular failures.
Tubular inspection services employ all major non-destructive inspection techniques, including electromagnetic, ultrasonic,
magnetic flux leakage and gamma ray. These inspection services are provided both by mobile units which work at the wellhead
as used tubing is removed from a well, and at fixed site tubular inspection locations. The group provides an ultrasonic inspection
service for detecting potential fatigue cracks in the end area of used drill pipe, the portion of the pipe that traditionally has been
the most difficult to inspect. Tubular inspection facilities also offer a wide range of related services, such as API thread
inspection, ring and plug gauging, and a complete line of reclamation services necessary to return tubulars to useful service,
including tubular cleaning and straightening, hydrostatic testing and re-threading.
In addition, the Company applies hardbanding material to drillpipe, to enhance its wear characteristics and reduce downhole
casing wear as a result of the drilling process. In 2002, the Company introduced its proprietary line of hardbanding material, TCS
— 8000ä. The group also cleans, straightens, inspects and coats sucker rods at 11 facilities throughout the Western Hemisphere.
Additionally, new sucker rods are inspected before they are placed into service, to avoid premature failure, which can cause the
oil well operator to have to pull and replace the sucker rod.
Mill Systems and Sales. The Company engineers and fabricates inspection equipment for steel mills, which it sells and rents. The
equipment is used for quality control purposes to detect defects in the pipe during the high-speed manufacturing process. Each
piece of mill inspection equipment is designed to customer specifications and is installed and serviced by the Company.
Fiberglass & Composite Tubulars. When compared to conventional carbon steel and even corrosion-resistant alloys, resin-
impregnated fiberglass and other modern plastic composites often exhibit superior resistance to corrosion. Some producers
manage the corrosive fluids sometimes found in oil and gas fields by utilizing composite or fiberglass tubing, casing and line
pipe in the operations of their fields. In 1997, the Company acquired Fiber Glass Systems, a leading provider of high pressure
fiberglass tubulars used in oilfield applications, to further serve the tubular corrosion prevention needs of its customers. Fiber
Glass Systems has manufactured fiberglass pipe since 1968 under the name “Star®,” and was the first manufacturer of high-
pressure fiberglass pipe to be licensed by the API in 1992. Through acquisitions and investments in technologies, the Company
has extended its fiberglass and composite tubing offering into industrial and marine applications, in addition to its oilfield
Coiled Tubing. Coiled tubing provides a number of significant functional advantages over the principal alternatives of
conventional drill pipe and workover pipe. Coiled tubing allows faster “tripping,” since the coiled tubing can be reeled quickly
on and off a drum and in and out of a wellbore. In addition, the small size of the coiled tubing unit compared to an average
workover rig or drilling rig reduces preparation time at the well site. Coiled tubing permits a variety of workover and other
operations to be performed without having to pull the existing production tubing from the well and allows ease of operation in
horizontal or highly deviated wells. Thus, operations using coiled tubing can be performed much more quickly and, in many
instances, at a significantly lower cost. Finally, use of coiled tubing generally allows continuous production of the well,
eliminating the need to temporarily stop the flow of hydrocarbons. As a result, the economics of a workover are improved
because the well can continue to produce hydrocarbons and thus produce revenues while the well treatments are occurring.
Continuous production also reduces the risk of formation damage which can occur when the flow of fluids is stopped or isolated.
Under normal operating conditions, the Coiled Tubing string must be replaced every three to four months. NOV designs,
manufactures, and sells coiled tubing under the Quality Tubing brand name at its mill in Houston, Texas.
Pipeline Inspection. In-service inspection services for oil and gas pipelines identify anomalies in pipelines without removing or
dismantling the pipelines or stopping the product flow, giving customers a convenient and cost-effective method of identifying
potential defects. The Petroleum Services & Supplies group inspects pipelines by launching a sophisticated survey instrument
into the pipeline. Propelled by the product flow, the instrument uses electromagnetics, ultrasonics, and mechanical measurements
received on digital and analog media to monitor the severity and location of internal and external pitting-type corrosion as well
as other mechanical anomalies in the pipeline, providing a basis for evaluation and repair by the customer. Once the test is
complete, the survey instrument is returned to the Company, refurbished and used for future pipeline inspections.
Downhole Tools. NOV designs, manufacturers and services a wide array of downhole motors used in straight hole, directional,
slim hole, and coiled tubing drilling applications. These motors are sold or leased under the brand names TrudrillTM and
VectorTM. This business also maintains a wide variety of motor power sections, which it incorporates into its own motors and
also sells to third parties. Downhole drilling motors utilize hydraulic horsepower from the drilling fluid pumped down the drill
stem to develop torque at the bit. Motors are capable of achieving higher rotary velocities than can generally be achieved using
conventional surface rotary equipment. Motors are often used in conjunction with high speed PDC bits to improve rates of
The Downhole Tools group also manufactures and sells drilling jars and fishing tools, which are marketed under the GriffithTM
and BowenTM brand names. Drilling jars are placed in the drill string, where they can be used to generate a sudden, jarring
motion to free the drill string should it become stuck in the wellbore during the drilling process. This jarring motion is generated
using hydraulic and/or mechanical force provided at the surface. In the event that a portion of the drill string becomes stuck and
cannot be jarred loose, fishing tools are run into the wellbore on the end of the drill string to retrieve the portion that is stuck.
Recently, the Downhole Tools business introduced an electronic jar placement program that determines the optimum jar
placement in the drill string as well as the effects of hole angle, hole curvature, and frictional drag on the activation of the
drilling jar. This program has proven suitable for straight, directional, and horizontal wellbore analysis, and improves the overall
efficiency of the drilling process.
NOV acquired NQL Energy Services, Inc. (“NQL”) in late 2006 for approximately $300 million in cash. NQL manufactures,
leases, sells and services downhole tools — including drilling motors, jars, shock tools, reamers, and EM-MWD systems — in
23 locations across seven countries. This transaction will help expand NOV’s downhole tools portfolio and increase exposure to
directional drilling services.
Solids Control. The Solids Control product line uses a variety of technologies to separate drill cuttings from drilling fluids, and to
transport, dry and refine drill cuttings for safe disposal under the Brandt NOV brand name. The Company believes the regulatory
and industry trends toward minimizing the environmental impact of drilling operations in a number of environmentally sensitive
oil and gas producing regions will lead to greater demand for solids control products and waste management services. Waste
management services cover many areas associated with the drilling of a well included solids removal, solids transport, solids
treatment and solids disposal. The Company further believes the trend towards more technically complex drilling, including
highly deviated directional wells and slim-hole completions, will favorably impact the demand for solid controls technology
because of its ability to reduce costly downhole problems. As environmental constraints are increased and as awareness of
environmental protection grows, the Company believes that its drill cuttings separation, cuttings transport and treating processes
will experience increased demand.
The Company has a history of introducing new solids control products and services obtained both through its internal
development and through acquiring or licensing technologies from others. Current product offerings are circular, elliptical and
linear motion shale shakers and shale shaker screens that comply with the November 2004 API Recommended Practice 13C,
degassers, desanders, desilters, high speed/high capacity centrifuges and conventional centrifuges, thermal desorption units,
cuttings conveyance systems and closed loop drilling fluids systems at its facilities in Conroe, Texas; Houston, Texas; Aberdeen,
Scotland; Leduc, Alberta; and Trinidad.
Through development of new product offerings and strategic acquisitions the Company has become a leading provider of
thermal desorption cuttings processing services to the drilling industry. Similar efforts have been successful in developing a
broad range of services, including centrifugal dryers, and the Brandt NOV FreeFlow system.
Instrumentation. The Company’s Instrumentation business provides drilling rig operators real time measurement and monitoring
of critical parameters required to improve rig safety and efficiency. In 1999, the Company introduced its RigSense™ product,
which combines leading hardware and software technologies into an integrated drilling rig package. This product permits access
of drilling data from offsite locations, enabling company personnel to monitor drilling operations from an office environment,
through a secure link. Systems are both sold and rented, and are typically comprised of several sensors placed throughout the rig
to measure critical drilling parameters such as weight on bit, hookload, standpipe pressure, mud pump strokes, drilling mud
levels, torque, and others, all networked back to a central command station for review, recording and interpretation. The rig
instrumentation packages typically provide multiple screens and hazardous area touch-screen displays around the rig for various
rig personnel to perform individual jobs more effectively, and cameras for certain areas to promote safety and permit remote
monitoring. The Company has evolved from data collection to a leading drilling information provider by using state-of-the-art
satellite communications to reduce the gap from rigs to corporate office. The reports on drilling activities and process are now
provided from the rig site information as a part of the business solution, DrillSuite™, to assist the contractor in managing their
business of drilling. DrillSuite™ allows contractors to streamline administration by eliminating manual entry of data, promotes
accurate payroll processing and invoicing, and includes asset tracking and maintenance programs. The real time information
provided also allows the Company to advance the drilling process using advanced drilling algorithms and applying electronic
controls such as to our Wildcat Auto Drilling System for better well planning, enhanced rates of penetration, reduced program
costs, and improved wellbore quality.
Pumps & Expendables. The Company’s Pumps & Expendables business designs, manufactures, and sells pumps that are used in
oil and gas drilling operations and production applications. These pumps include reciprocating, centrifugal, and progressive
cavity pumps. (High pressure mud pumps are sold within the Rig Technology segment.) These pumps are sold as individual units
and unitized packages with drivers, controls and piping. This group also manufactures fluid end expendables (liners, valves,
pistons, and plungers) fluid end modules, and a complete line of dies and inserts for pipe handling. The group offers popular
industry brand names like Wheatley, Gaso, and Omega reciprocating pumps, acquired in September of 2000; Halco Centrifugal
Pumps, acquired in January of 2002; Petroleum Expendable Products (PEP), acquired in May of 1997; and Phoenix Energy
Products, acquired in 1998.
The group, through its Mono/Monoflo business, is also a worldwide leader in the design and manufacture of a wide range of
progressive cavity pumps, grinders and screens used in various industrial applications. Mono/Monoflo also manufactures a broad
range of oilfield products which include fluid transfer, artificial lift and power sections.
The group manufactures its pump products in Houston, Odessa and Marble Falls, Texas; Tulsa and McAlester, Oklahoma; Scott,
Louisiana; Manchester, England; and Melbourne, Australia.
Customers and Competition. Customers for the Petroleum Services & Supplies’ tubular services include major and independent
oil and gas companies, national oil companies, drilling and workover contractors, oilfield equipment and product distributors and
manufacturers, oilfield service companies, pipeline operators, steel mills, and other industrial companies. The Company’s
competitors include, among others, Ameron International Corp, EDO Corporation, Pipeline Integrity International Ltd. (a
division of General Electric), ShawCor Ltd., Smith International, Inc., Frank’s International, Inc., H. Rosen Engineering, GmbH;
T.D. Williamson, Inc.; Baker Hughes Incorporated; Diascan; Magpie; Weatherford International Ltd.; Patterson Tubular
Services; and Precision Tube (a division of Maverick Tube). In addition, the group competes with a number of smaller regional
competitors in tubular inspection. Certain foreign jurisdictions and government-owned petroleum companies located in some of
the countries in which this group operates have adopted policies or regulations which may give local nationals in these countries
certain competitive advantages. Within the Company’s corrosion control products, certain substitutes such as non-metallic
tubulars, inhibitors, corrosion resistant alloys, cathodic protection systems, and non-metallic liner systems also compete with the
Company’s products. Management believes that the principal competitive factors affecting this business are performance,
quality, reputation, customer service, availability of products, spare parts, and consumables, and breadth of product line and
The primary customers for drilling services offered by the Petroleum Services & Supplies group include drilling contractors, well
servicing companies, major and independent oil and gas companies, and national oil companies. Competitors in drilling services
include Smith International (“SWACO”); Derrick Manufacturing Corp.; Fluid Systems; Oil Tools Pte. Ltd; Peak Energy
Services, Ltd.; Petron Industries, Inc.; Epoch (a division of Nabors Industries); Pason Systems, Inc.; Robbins & Myers; Kem-
tron, Inc.; Double Life Corporation, Inc.; Oteco, Inc.; Southwest Oilfield Products; Forum Oilfield Technologies; P-Quip
Oilfield Products; and a number of regional competitors. The Petroleum Services & Supplies group sells drilling services into
highly competitive markets. Management believes that on-site service is becoming an increasingly important competitive
element in this market, and that the principal competitive factors affecting the business are performance, quality, reputation,
customer service, product availability and technology, breadth of product line and price.
Through its network of over 180 locations worldwide, the Distribution Services group provides supply chain management
services to drilling contractors and operators around the world. This group stocks and sells consumables maintenance, repair and
operating supply (“MRO”) and spare parts that are needed throughout the drilling, completion and production process. The
supplies and equipment stocked by our distribution service centers vary by location. Each distribution point generally offers a
large line of oilfield products including valves, fittings, flanges, spare parts for oilfield equipment and miscellaneous expendable
NOV’s e-Distribution solutions leverage the flexible infrastructure of SAP™ to extend the customer’s investment in systems and
address the total cost of ownership by streamlining the acquisition process from procurement to payment, by digitally managing
approval routing and workflow, and by providing robust reporting functionality.
Approximately 84% of the Distribution Services group’s sales in 2006 were in the United States and Canada. The remainder
comes from key international markets in Mexico, the North Sea, Middle East, South America and the Far East.
Strategically the group continued to expand its alliances with oil and gas companies and certain drilling contractors to increase
its revenues in 2006. Additionally the group seeks to leverage its extensive purchasing power to reduce the costs of the goods it
purchases. In 2006, the group built on the new vendor relationships it established with Chinese suppliers in 2005.
Customers and Competition. The primary customers for Distribution Services include drilling contractors, well servicing
companies, major and independent oil and gas companies, and national oil companies. Competitors in Distribution Services
include Wilson Supply (a division of Smith International), CE Franklin, Redman Pipe and Supply, and a number of regional
2006 Acquisitions and Other Investments
In 2006, the Company made the following acquisitions and outside investments:
Operating Date of
Acquisition Form Segment Transactions
Retsco Oilfield Field Equipment, Ltd. Asset Petroleum Services & Supply February 2006
Soil Recovery A/S Stock Petroleum Services & Supply March 2006
D.M.I. est SARL Asset Petroleum Services & Supply April 2006
Core Motion, Inc. License Rig Technology August 2006
In-Situ Oilfield Services Limited Asset Petroleum Services & Supply September 2006
Longhorn Machine, L.P. Asset Rig Technology September 2006
Rolligon, Ltd. Asset Rig Technology November 2006
FITIRI, Inc. Asset Petroleum Services & Supply November 2006
Toolbox Drilling Solutions Limited Stock Petroleum Services & Supply December 2006
NQL Energy Services Inc. Stock Petroleum Services & Supply December 2006
The Company paid an aggregate purchase price of $339.5 million ($329.7 million in net cash and $9.8 million of notes payable)
for acquisitions and outside investments in 2006.
Seasonal Nature of the Company’s Business
Historically, the level of some of the Company’s businesses has followed seasonal trends to some degree. In general the Rig
Technology group has not experienced significant seasonal fluctuation although orders for new equipment may be modestly
affected by holiday schedules. There can be no guarantee that seasonal effects will not influence future sales in this segment.
In Canada, the Petroleum Services & Supplies segment has typically realized high first quarter activity levels, as operators take
advantage of the winter freeze to gain access to remote drilling and production areas. In past years, certain Canadian businesses
within Petroleum Services & Supplies and Distribution Services have declined during the second quarter due to warming
weather conditions which resulted in thawing, softer ground, difficulty accessing drill sites, and road bans that curtailed drilling
activity (“Canadian Breakup”). However, these businesses have typically rebounded in the third and fourth quarter. Petroleum
Services & Supplies activity in both the U.S. and Canada sometimes increases during the third quarter and then peaks in the
fourth quarter as operators spend the remaining drilling and/or production capital budgets for that year. Petroleum Services &
Supplies revenues in the Rocky Mountain region sometimes decline in the late fourth quarter or early first quarter due to harsh
Within Petroleum Services & Supplies, the Pipeline Inspection business has typically experienced reduced activity during the
first quarter of the calendar year. The high winter demand for gas and petroleum products in the northern hemisphere and the
consequent curtailment of pipeline maintenance and inspection programs often results in less opportunity to perform pipeline
inspection during this time. The segment’s fiberglass and composite tubulars business in China has typically declined in the first
quarter due to the impact of weather on manufacturing and installation operations, and due to business slow downs associated
with the Chinese New Year.
The Company anticipates that the seasonal trends described above will continue. However, there can be no guarantee that
spending by the Company’s customers will continue to follow patterns seen in the past or that spending by other customers will
remain the same as in prior years.
Marketing & Distribution Network
Substantially all of our Rig Technology capital equipment and spare parts sales, and a large portion of our smaller pumps and
parts sales, are made through our direct sales force and distribution service centers. Sales to foreign state-owned oil companies
are typically made in conjunction with agent or representative arrangements. Products within our Petroleum Service & Supplies
segment are rented and sold worldwide through our own sales force and through commissioned representatives. Distribution
Services sales are made through our network of distribution service centers. Customers for our products and services include
drilling and other service contractors, exploration and production companies, supply companies and nationally owned or
controlled drilling and production companies.
The Rig Technology segment’s customers include drilling contractors, shipyards and other rig fabricators, well servicing
companies, pressure pumpers, national oil companies, major and independent oil and gas companies, supply stores, and pipe-
running service providers. Demand for its products 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. Rig Technology purchases can represent significant
capital expenditures, and are often sold as part of a rig fabrication or major rig refurbishment package. Sometimes these
packages cover multiple rigs, and often the Company bids jointly with other related product and services providers, such as rig
fabrication yards and rig design firms.
The Petroleum Services & Supplies group’s customers for tubular services include major and independent oil and gas companies,
national oil companies, oilfield equipment and product distributors and manufacturers, drilling and workover contractors, oilfield
service companies, pressure pumpers, pipeline operators, pipe mills, manufactures and processors, and other industrial
companies. Certain tubular inspection and tubular coating products and services often are incorporated as a part of a tubular
package sold by tubular supply stores to end users. The Company primarily has direct operations in the international
marketplace, but operates through agents in certain markets.
The Petroleum Services & Supplies group’s customers for drilling services are predominantly major and independent oil and gas
companies, national oil companies, drilling contractors, well servicing companies, providers of drilling fluids, and other oilfield
service companies. This group operates sales and distribution facilities at strategic locations worldwide to service areas with high
drilling activity. Strategically located service and engineering facilities provide specialty repair and maintenance services to
customers. Sales of capital equipment are sometimes made through rig fabricators, and often are bid as part of a rig fabrication
package or rig refurbishment package. Sometimes these packages cover multiple rigs, and often the Company bids jointly with
other related service providers.
Distribution Services sales are made through our network of distribution service centers. Customers for our products and services
include drilling and other service contractors, exploration and production companies, supply companies and nationally owned or
controlled drilling and production companies.
The Company’s foreign operations, which include significant operations in Canada, Europe, the Far East, the Middle East, Africa
and Latin America, are subject to the risks normally associated with conducting business in foreign countries, including foreign
currency exchange risks and uncertain political and economic environments, which may limit or disrupt markets, restrict the
movement of funds or result in the deprivation of contract rights or the taking of property without fair compensation.
Government-owned petroleum companies located in some of the countries in which the Company operates have adopted policies
(or are subject to governmental policies) giving preference to the purchase of goods and services from companies that are
majority-owned by local nationals. As a result of such policies, the Company relies on joint ventures, license arrangements and
other business combinations with local nationals in these countries. In addition, political considerations may disrupt the
commercial relationship between the Company and such government-owned petroleum companies. Although the Company has
not experienced any significant problems in foreign countries arising from nationalistic policies, political instability, economic
instability or currency restrictions, there can be no assurance that such a problem will not arise in the future. See Note 15 of the
Notes to the Consolidated Financial Statements for information regarding geographic revenue information.
Research and New Product Development and Intellectual Property
The Company believes that it has been a leader in the development of new technology and equipment to enhance the safety and
productivity of drilling and well servicing processes and that its sales and earnings have been dependent, in part, upon the
successful introduction of new or improved products. Through its internal development programs and certain acquisitions, the
Company has assembled an extensive array of technologies protected by a substantial number of trade and service marks,
patents, trade secrets, and other proprietary rights.
As of December 31, 2006, the Company held a substantial number of United States patents and had several patent applications
pending. Expiration dates of such patents range from 2007 to 2026. As of this date, the Company also had foreign patents and
patent applications pending relating to inventions covered by the United States patents. Additionally, the Company maintains a
substantial number of trade and service marks and maintains a number of trade secrets.
Although the Company believes that this intellectual property has value, competitive products with different designs have been
successfully developed and marketed by others. The Company considers the quality and timely delivery of its products, the
service it provides to its customers and the technical knowledge and skills of its personnel to be more important than its
intellectual property in its ability to compete. While the Company stresses the importance of its research and development
programs, the technical challenges and market uncertainties associated with the development and successful introduction of new
products are such that there can be no assurance that the Company will realize future revenues from new products.
Engineering and Manufacturing
The manufacturing processes for the Company’s products generally consist of machining, welding and fabrication, heat treating,
assembly of manufactured and purchased components and testing. Most equipment is manufactured primarily from alloy steel,
and the availability and price of alloy steel castings, forgings, purchased components and bar stock is critical to the production
and timing of shipments. Primary manufacturing facilities for the Rig Technology segment are located in Houston, Galena Park,
Sugar Land, Conroe, Anderson, Fort Worth and Pampa, Texas; Duncan and Tulsa, Oklahoma; Orange, California; Calgary,
Nisku and Edmonton, Canada; Mexicali, Mexico; Aberdeen, Scotland; Kristiansand, and Stavanger, Norway; Etten-Leur, the
Netherlands; Carquefou, France; Singapore; Perth, Australia; Lanzhou and Shanghai, China; and Jebal Ali, UAE.
The Company’s Petroleum Services & Supplies segment manufactures or assembles the equipment and products which it rents
and sells to customers, and which it uses in providing services. Downhole tools are manufactured at facilities in Houston, Texas;
Nisku and Edmonton, Alberta. Solids control equipment and screens are manufactured at facilities in Houston and Conroe,
Texas; New Iberia, Louisiana; Aberdeen, Scotland; Nisku and Alberta, Canada; Trinidad; and Macae, Brazil. Instrumentation
equipment is manufactured at Cedar Park and Houston, Texas facilities. Pumps are manufactured at facilities in Houston, Odessa
and Marble Falls, Texas; McAlester and Tulsa, Oklahoma; Manchester, England; and Melbourne, Australia.
The group manufactures tubular inspection equipment and instrumented pipeline inspection tools at its Houston, Texas facility
for resale, and renovates and repairs equipment at its manufacturing facilities in Houston, Texas; Celle, Germany; Nisku and
Alberta, Canada; and Aberdeen, Scotland. Fiberglass and composite tubulars and fittings are manufactured at facilities in San
Antonio and Big Spring, Texas; Little Rock, Arkansas; Tulsa, Oklahoma; Wichita, Kansas; and Harbin and Suzhou, China
facilities, while tubular coatings are manufactured in its Houston, Texas facility, or through restricted sale agreements with third
Certain of the Company’s manufacturing facilities and certain of the Company’s products have various certifications, including,
ISO 9001, API and ASME.
The Company believes that materials and components used in its servicing and manufacturing operations and purchased for sales
are generally available from multiple sources. The prices paid by the Company for its raw materials may be affected by, among
other things, energy, steel and other commodity prices; tariffs and duties on imported materials; and foreign currency exchange
rates. The Company experienced higher steel prices and greater difficulty securing necessary steel supplies in 2004 and 2005
than it experienced during the preceding several years. In 2006, the price for mild steel and standard grades stabilized while
specialty alloy prices continued to rise driven primarily by escalation in the price of the alloying agents. The Company has
generally been successful in its effort to mitigate the financial impact of higher raw materials costs on its operations by applying
surcharges to and adjusting prices on the products it sells. Furthermore, NOV continued to expand its supply base in 2006
throughout the world to address our customers’ needs. However, higher prices and lower availability of steel and other raw
material the Company uses in its business may adversely impact future periods.
The Company monitors its backlog of orders within its Rig Technology group to guide its planning. Backlog includes orders
greater than $250 thousand for most items and orders for wireline units in excess of $75 thousand, and which require more than
three months to manufacture and deliver.
Backlog measurements are made on the basis of written orders which are firm, but may be cancelable by the customer. Most
require reimbursement to the Company for costs incurred in such an event. There can be no assurance that the backlog amounts
will ultimately be realized as revenue, or that the Company will earn a profit on backlog work. Our backlog for equipment at
recent year-ends has been:
December 31, 2006 $6.0 billion
December 31, 2005 2.3 billion
December 31, 2004 0.6 billion *
* excludes Varco backlog
At December 31, 2006, the Company had a total of 26,861 employees, of which 3,885 were temporary employees.
Approximately 117 employees in the Company’s fiberglass tubulars plant in Little Rock, Arkansas, and 100 employees of the
Company’s downhole tools product line, are subject to collective bargaining agreements. Additionally, certain of the Company’s
employees in certain foreign locations are subject to collective bargaining agreements.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, in addition to other information contained or incorporated by reference
herein. Realization of any of the following risks could have a material adverse effect on our business, financial condition, cash
flows and results of operations.
We are dependent upon the level of activity in the oil and gas industry, which is volatile.
The oil and gas industry historically has experienced significant volatility. Demand for our services and products depends
primarily upon the number of oil 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, capital expenditures of other oilfield service
companies and the level of workover activity. Drilling and workover activity can fluctuate significantly in a short period of time,
particularly in the United States and Canada. The willingness of oil and gas operators to make capital expenditures to explore for
and produce oil and natural gas and the willingness of oilfield service companies to invest in capital equipment will continue to
be influenced by numerous factors over which we have no control, including:
• the ability of the members of the Organization of Petroleum Exporting Countries, or OPEC, to maintain price stability
through voluntary production limits, the level of production by non-OPEC countries and worldwide demand for oil and
• level of production from known reserves;
• cost of exploring for and producing oil and gas;
• level of drilling activity and drilling rig dayrates;
• worldwide economic activity;
• national government political requirements;
• development of alternate energy sources; and
• environmental regulations.
If there is a significant reduction in demand for drilling services, in cash flows of drilling contractors, well servicing companies,
or production companies or in drilling or well servicing rig utilization rates, then demand for the products and services of the
Company will decline.
Volatile oil and gas prices affect demand for our products.
Oil and gas prices have been volatile since 1990. In general, oil prices approximated $18-22 per barrel from 1991 through 1997,
experienced a decline into the low teens in 1998 and 1999, and have generally ranged between $25-75 per barrel since 2000.
Spot gas prices generally ranged between $1.80-2.60 per mmbtu of gas from 1991 through 1999, then experienced severe spikes
into the $10 range in 2001 and 2003. Absent occasional spikes and dips due to imbalances in supply and demand, prices have
generally ranged between $5.00-10.00 per mmbtu during the last two years.
Expectations for future oil and gas prices cause many shifts in the strategies and expenditure levels of oil and gas companies and
drilling contractors, particularly with respect to decisions to purchase major capital equipment of the type we manufacture. Oil
and gas prices, which are determined by the marketplace, may fall below a range that is acceptable to our customers, which could
reduce demand for our products.
Competition in our industry could ultimately lead to lower revenues and earnings.
The oilfield products and services industry is highly competitive. We compete with national, regional and foreign competitors in
each of our current major product lines. These competitors may have greater financial, technical, manufacturing and marketing
resources than us, and may be in a better competitive position. The following competitive actions can each affect our revenues
• price changes;
• new product and technology introductions; and
• improvements in availability and delivery.
In addition, certain foreign jurisdictions and government-owned petroleum companies located in some of the countries in which
we operate have adopted policies or regulations which may give local nationals in these countries competitive advantages.
Competition in our industry could lead to lower revenues and earnings.
We have aggressively expanded our businesses and intend to maintain an aggressive growth strategy.
We have aggressively expanded and grown our businesses during the past several years, through acquisitions and investment in
internal growth. We anticipate that we will continue to pursue an aggressive growth strategy but we cannot assure you that
attractive acquisitions will be available to us at reasonable prices or at all. In addition, we cannot assure you that we will
successfully integrate the operations and assets of any acquired business with our own or that our management will be able to
manage effectively the increased size of the Company or operate any new lines of business. Any inability on the part of
management to integrate and manage acquired businesses and their assumed liabilities could adversely affect our business and
financial performance. In addition, we may need to incur substantial indebtedness to finance future acquisitions. We cannot
assure you that we will be able to obtain this financing on terms acceptable to us or at all. Future acquisitions may result in
increased depreciation and amortization expense, increased interest expense, increased financial leverage or decreased operating
income for the Company, any of which could cause our business to suffer.
Our operating results have fluctuated during recent years and these fluctuations may continue.
We have experienced fluctuations in quarterly operating results in the past. We cannot assure you that we will realize expected
earnings growth or that earnings in any particular quarter will not fall short of either a prior fiscal quarter or investors’
expectations. The following factors, in addition to others not listed, may affect our quarterly operating results in the future:
• fluctuations in the oil and gas industry;
• the ability to service the debt obligations of the Company;
• the ability to identify strategic acquisitions at reasonable prices;
• the ability to manage and control operating costs of the Company;
• fluctuations in political and economic conditions in the United States and abroad; and
• the ability to protect our intellectual property rights.
There are risks associated with our presence in international markets, including political or economic instability and
Approximately 55% of our revenues in 2006 were derived from operations outside the United States (based on revenue
destination). Our foreign operations include significant operations in Canada, Europe, the Middle East, Africa, Southeast Asia,
South America and other international markets. Our revenues and operations are subject to the risks normally associated with
conducting business in foreign countries, including uncertain political and economic environments, which may limit or disrupt
markets, restrict the movement of funds or result in the deprivation of contract rights or the taking of property without fair
compensation. Government-owned petroleum companies located in some of the countries in which we operate have adopted
policies, or are subject to governmental policies, giving preference to the purchase of goods and services from companies that are