TEXT-Moody's release on National Oilwell Varco

(The following statement was released by the rating agency)

April 21 - Moody's Investors Service upgraded the senior unsecured ratings
of National Oilwell Varco, Inc. (NOV.N) (NOV) to A3 from Baa1, concluding the
ratings review initiated on December 17, 2007 following NOV's announced merger
with Grant Prideco, Inc. (GRP). The upgrade reflects NOV's strong financial
profile and business outlook, as well as the business profile enhancements
resulting from the merger. The ratings on GRP have been withdrawn and an A3
rating has been assigned to the new 6.125% senior notes due 2015 offered by NOV
in exchange for GRP's senior notes. The outlook is stable.
Pro forma for the merger and the pending sale of certain of GRP's tubular
businesses, NOV had revenues of approximately $11.6 billion in 2007, which
makes it the third largest oilfield services company that Moody's rates, behind
Schlumberger (A1) and Halliburton (A2). The merger diversifies NOV's offerings
of products and services. GRP is one of the largest manufacturers and suppliers
of drill stem products including drill pipe, drill collars, and related
accessories. Through its ReedHycalog segment, GRP also is a leading
manufacturer and supplier of premium and standard drill bits. Even though these
businesses are cyclical, their addition gives NOV's business mix more equal
exposure to different stages in the oilfield cycle. The combination of NOV and
GRP also makes sense from an industrial logic standpoint given NOV's
manufacturing expertise and broad distribution and marketing channels.
Additional benefits resulting from merger are expected to include cost savings
through the consolidation of facilities and integration of GRP's businesses.
In connection with the merger, GRP shareholders will receive 0.4498 of a share
of NOV stock and $23.20 in cash for each share of GRP they own. The cash
component of the purchase price is approximately $3 billion, which NOV will
fund with cash on hand and borrowings under a new $3 billion credit facility.
Net of expected after-tax cash proceeds of approximately $535 million
associated with the sale of certain of GRP's tubular businesses to Vallourec,
the merger is expected to increase NOV's debt by approximately $1.5 billion.
Including Moody's standard adjustments for pensions and operating leases (which
together total approximately $750 million), NOV's pro forma EBIT/interest and
debt/EBITDA was approximately 13x and 1x, respectively, and its debt/book
capitalization was approximately 23% as of December 31, 2007. These metrics are
consistent with or better than its similarly-sized oilfield service peers.
On a pro forma basis, NOV's businesses include: (i) Rig Technology
(approximately 49% of pro forma revenues), which manufactures and sells a
variety of oilfield capital equipment including complete systems for drilling,
completing, and servicing wells; (ii) Petroleum Services & Supplies
(approximately 26% of pro forma revenues), which provides consumable goods and
services to the oilfield in addition to manufacturing and selling a variety of
products and equipment such as transfer pumps, downhole tools, solids control
systems, drilling motors, instrumentation systems, and mud pump consumables;
(iii) Distribution Services (approximately 12% of pro forma revenues), which
provides maintenance, repair, and operating supplies through 180 locations
throughout the world; (iv) Drilling Products & Services (approximately 10% of
pro forma revenues), which includes GRP's offerings of drill pipe and related
products and services; and (v) ReedHycalog (approximately 5% of pro forma
revenues). Most likely, GRP's businesses will be folded into NOV's existing
reporting segments after the merger.
NOV is well diversified geographically as it offers products and services in
all major oilfield markets throughout the world. Based on revenue destination,
approximately 59% of NOV's revenues in 2007 were derived from operations
outside of the United States. Grant Prideco derived approximately 42% of its
revenues in 2007 from facilities outside the United States. NOV also has a
commanding market position in many of its businesses, according to Spears &
Associates. These include rig equipment (#1, approximately 60% market share),
unit manufacturing (#1, approximately 30% market share), downhole tools (#1,
approximately 41% market share), and inspection and coating (#1, approximately
68% market share). NOV also has a strong market position in solids control
equipment (#2, approximately 22% market share). GRP has the leading market
position in the drill pipe market with an estimated market share of about 50%,
according to GRP's management. ReedHycalog is the third largest player in the
drill bits segment with a market share of approximately 18%.
The near- and medium-term business outlook for NOV is favorable, particularly
for its Rig Technology segment which had a backlog of approximately $9 billion
as of December 31, 2007, up from $8 billion as of September 30, 2007 and $6
billion as of December 31, 2006. Approximately $5.5 billion of the backlog is
expected to flow through to revenues in 2008. New orders continue to be strong,
particularly for offshore rig equipment. GRP's backlog was approximately $783
million as of December 31, 2007 (nearly all of which will flow through to
revenues in 2008), down from $1.2 billion the year before. The decrease
reflects a lower level of new land rigs entering the North American market and
also capacity additions which have sped up deliveries. Despite the downward
trend in GRP's backlog, revenues from Drilling Products & Services are expected
to only decrease somewhat in 2008 (~10%) while margins are expected to remain
strong, largely due to continued strength in price per foot driven by growth in
the higher end of the market (offshore and premium land products).
Restraints on the rating include integration risks associated with the merger,
weaker returns on assets than peers primarily due to substantial goodwill and
intangible assets, somewhat greater cyclicality and amplified exposure to
drilling activity due to the addition of GRP's drill pipe business, event risk
due to the company's acquisitive business strategy, and the longer term outlook
for rig equipment once the current building boom subsides.
National Oilwell Varco, Inc. is headquartered in Houston, Texas.
(New York Ratings Team)