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NOV Ready to Go Global

Heather Brilliant, CFA

Heather Brilliant: Hello. I am Heather Brilliant, the global director of equity and corporate credit research here at Morningstar. And joining me today is Pete Miller, from National Oilwell Varco. Pete is our 2012 CEO of the Year award winner. Pete, thanks for joining me.

Merrill (Pete) Miller Jr.: My pleasure, Heather.

Brilliant: Congratulations on winning this award. We're very happy to designate you as our 2012 CEO of the Year. Clearly, you have had many accomplishments during your tenure as CEO. One I'd like to ask you about in particular is how you have built the business really into a company that has a wide moat and a positive moat trend. There are really a very small handful of companies in our entire coverage universe that have achieved this. So, tell me a little bit about your accomplishments and what you're most proud of having accomplished at NOV?

Miller Jr.: Well, it's a great question, Heather. I think as we take a look back, we can go as far back as 1996 when I first joined the company, and the drilling equipment business was still very fragmented. There were many people that were in financial trouble, but it was also pretty clear to people that understood the industry that at some point in time we were going to have to retool the industry. And I think it was just a question of getting the pieces in place, making sure that you have things that quite frankly at that time, other people didn't want.

So, we were able to make a lot of acquisitions early on companies that had financial issues, but we were able to bring them into a larger company and be able to provide that financial wherewithal that later when it came time that people really did understand the necessity of retooling that we was there to take advantage of it. I think the thing I am most proud about is the fact that a lot of people thought, "Gosh, why are you doing that?" because historically some of these companies haven't done very well. But I think we proved them wrong.

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Brilliant: Your company, as you alluded to in some of your comments, drives its source of moats from several of different sources actually: scale, intellectual property, and variety of cost advantages. Which of these do you think is the most important? What do you think really differentiates NOV in the marketplace today?

Miller Jr.: Heather, I think early it was scale, but I think today its IP. As we started scaling up back in the late 1990s, then I think that was really advantageous for us. But today, and really about 2005, people started realizing that the IP and technology was the most critical thing, and we'd always invested heavily in that. So I think a combination of the scale and IP is really what's given us the advantages that we have today.

Brilliant: What do you feel that you work the hardest to foster? Do you think you purposely made investments in the IP area as a result?

Miller Jr.: Absolutely. That's always the toughest one to probably see your ultimate results. When you work on scale and you buy companies, you kind of know where you are going almost immediately, and you have those companies in-house and you could do things. But making that investment in IP, in many times you have failures before you have the winners. So you have to stay with it. You have to be committed to it. You have to understand exactly what you're putting your money into, and then ultimately you start to garner the results from that.

And in this industry, it's a little bit more difficult garnering the results because nobody wants to be serial number one. They want to have it proven someplace else. And so, talking to a lot of my friends in the industry and giving us a shot on this, that takes a lot of time and effort.

Brilliant: Let's turn a little bit to that the industry dynamics. Clearly, there has been a real boom in drilling for natural gas in the United States. Is that something that you think is sustainable? What do you see going forward there?

Miller Jr.: Absolutely, it's sustainable. But even more importantly, I think it's sustainable around the world. I think one of the issues that I always tell people is, God didn't just put shales in the United States. They are all over the world. I think you look at places like Argentina, China, North Africa, and Australia; they have a lot of opportunity for the same sort of shale boom that we're having in the United States.

It's clear that natural gas is clean-burning. It's also clear that what people said a long time ago that the U.S. couldn't be energy-independent may now be false because of the technology that we put forth. But I think you take these same technologies and move them overseas and scale them over there, and there are some tremendous opportunities for companies like NOV. So I'm excited about this, and I think it's exceedingly sustainable.

Brilliant: The market seems have a lot concerns lately with what's been going on with your company from a weak outlook for the industry overall for 2013, to some new competitors coming into the market. What would you say to address those concerns?

Miller Jr.: I would say, we have had it happen before. Historically as I look back over my tenure as a CEO, the stock goes up, but when it comes down, I hear people say things. To give you a good example, in 2008, we had a backlog of $11.8 billion and our stock cratered when the financial crisis hit. And I had lot of prognosticators saying that two thirds of our backlog would be canceled.

Well, about 2% later, that's not what happened. Very little of our backlog ever gets canceled. So, today I'm sitting at $11.7 billion, even if things don't go in 2013, the way people want, I've got a cushion that other companies don't have. And it's rather sad that people don't see that. But I think if you look at our performance from '08 to today, you'll see that we never fell anywhere near as much as some of our competitors, and we continue to go up a little bit when things change.

And so, all I could say is, I wish they would buy and hold the stock longer because if they do they'll find that they will have a real winner. Recently Berkshire Hathaway bought into us, and I'm very pleased with that because they're long-term holders and they clearly understand value.

Brilliant: And in this environment where you have a very strong and dominant position in certain of the markets in which you operate, I do think that there is some reasonable concern that some competitors are starting to get a little bit more traction than maybe we had seen in the past. Is that a concern that that raises any flags for you?

Miller Jr.: Well, I'm always concerned about competition. But I'll always also tell you that nobody ever got fired for buying IBM, and nobody gets fired for buying NOV. I like where we are. I think we'll continue to do very well. We've had competitors come and go throughout my career and the same thing will happen. And I just like where we are. I certainly wouldn't want to be competing against us. We know what we're doing.

Brilliant: So, what's in store for the next decade at NOV?

Miller Jr.: I think that the big push now, Heather, really is, I tell people we are the only really true full-cycle play in the industry. You take a look at us. We're early-, mid- and late-cycle. We sell to everybody in the industry. We sell to every E&P company. We sell to every drilling contractor. We actually sell to every service company. And so I think as you take a look in the future, it's almost what I call post-cycle, and that really is going to be the production opportunities that we're seeing.

We're building a lot of the deep-water rigs today for the world, and those rigs aren't drilling for practice. They're drilling to discover oil and gas. And so I think the next step is going to be the production of that, and that's the FPSOs--that's the floating, production, storage, and offloading vessels--and I think it's also going to be the connections that those vessels make to the production manifolds that are on the ocean floor.

In 2012, we bought a company called NKT, which is one of the world's leaders in flexible pipe that connect the FPSOs. [In 2011] we bought a company called APL, which has really the best technological idea and solution for the FPSOs. So, we think that's really going to be a big push as we go into the future--how can we now produce all the things that we were helping people drill to find.

Brilliant: Well, that's great. Congratulations again and thanks for taking the time.

Miller Jr.:  Well, my pleasure Heather, and I'm very humbled and honored to have been honored by Morningstar and thank you very much. It is very nice talking with you.