National Oilwell, Inc. Business Information, Profile, and History

Company Perspectives:

National Oilwell designs, manufactures and sells the major mechanical components for both land and offshore drilling rigs as well as complete land drilling and well servicing rigs.

History of National Oilwell, Inc.

National Oilwell, Inc. is the worldwide leader in providing oil and gas drilling equipment and supplies for offshore and land-based drilling, including mobile and fixed systems, and units for harsh desert and arctic conditions. The company designs, manufactures, refurbishes, and repairs drilling systems and components. Major capital equipment includes drawworks, mud pumps, power swivels, rotary tables, SCR houses, as well as solids control, pipe handling, and traveling equipment. Downhole tools include motors, valves, and measurement and steering systems. Other oil and gas drilling components include a complete line of pumps and expendable products, as well as derricks, pedestal cranes, masts, and substructures. National Oilwell offers state-of-the-art computer control systems and electric power technology. The company supplies the oil industry through 150 distribution service centers and 61 satellite repair, refurbishment, and manufacturing facilities worldwide.

Troubles in Oil Industry Leading to Consolidation: Early 1980s

The decrease in oil prices and in oilfield exploration in the early 1980s prompted Armco, Inc. and U.S. Steel Corporation to form National Oilwell, a joint venture. In 1986, when the price of oil dropped to $11 per barrel, the two steelmakers found plant closures, employee layoffs, and organizational restructuring to be insufficient in resolving the economic difficulties that ensued from the oil industry's decline. In an effort to continue their oilfield supply operations, Armco and U.S. Steel decided to combine their oilfield supply businesses. National Oilwell combined U.S. Steel's Oilwell division with Armco's National Supply Company. Founded in 1862 and purchased by U.S. Steel in 1930, Oilwell manufactured drilling equipment, production and fluid control systems, and hydraulic, rod, and centrifugal pumps. National Supply, owned by Armco since 1958, produced hydraulic, fluid, and plunger pumps, engines, and other oil drilling equipment. Although both companies were capable of constructing new oil rigs, orders were rare at this time. Oilwell filled its last order two years previously and National Supply completed construction on three land rigs in 1986, its only order in several years. Thus the business stemmed from rig refurbishment, repair, and supply.

Armco and U.S. Steel continued to downsize before National Oilwell began operations in April 1987. When the two companies agreed to the joint venture Oilwell counted 1,200 employees, 60 oilfield supply stores, and 69 other facilities. National Supply counted 2,200 employees and 82 oilfield supply stores and plants. The combined operation involved 2,200 employees, nine manufacturing plants, 80 oilfield supply stores, and 20 sales offices. National Oilwell was located in the former offices of National Supply in Houston with David A. Higbee as president and chief operations officer and Robert A. Smith as chairman of the board.

During its first years in operation, business continued to be uncertain at National Oilwell. Highlights involved the sale of five refurbished oil rigs to Iran, delivered in early 1991, and the development of automated drilling equipment. The drilling system integrated the power swivel and top head for ease of use and efficiency, allowing for uninterrupted drilling over a longer period of time. The system improved worker safety as drilling took place at the top of the derrick instead of from the rotary tables. Armco and U.S. Steel sought buyers for National Oilwell, but rejected a bid from a private firm in Mexico in late 1992. That year the company recorded revenues of $569.9 million and a net loss of $35.1 million.

In early 1993 the company entered into a joint venture with Caterpillar, Inc. and Uralmashzavod, a privatized industrial and engineering group located in Russia. Uralmashzavod provided 97 percent of deep oil drilling equipment in Russia. The cooperative project, UNOC Equipment & Supply, combined state-of-the-art technologies from Russia and the United States with the intention of refurbishing oil rigs in Russia and the Commonwealth of Independent States. In October 1994 UNOC received a $13.5 million grant from Russia's Fund for the Support of Large Enterprises, intended to accelerate the process of oil rig refurbishment. UNOC had completed three new designs at this time.

Under the leadership of Joel Staff as president and chief executive officer, appointed in July 1993, National Oilwell streamlined operations. Staff prepared the company for sale by focusing operations on its oilfield and industrial reciprocating pump business. National Oilwell sold its wellhead system business, its fluid control systems product line, and its hydraulic pumping business in 1994. The company became profitable that year, with $562 million in revenues and $23.9 million in net income. The company continued to streamline operations with the sale of the Wilson-Snyder centrifugal pump and coker switch valve businesses in 1995.

In September 1995 Armco and U.S. Steel agreed to sell National Oilwell to an investor group led by National Oilwell management for $180 million. Investors included Duff & Phelps Corporation, Inverness Group, Inc., and Bain Capital. National Oilwell became a publicly traded company in October, offering four million shares of common stock at $17 per share. Funds from the offering paid debt incurred to acquire the company from Armco and U.S. Steel.

Becoming an Industry Leader in the Mid-1990s

As drilling activity increased in 1995 and 1996, National Oilwell had certain advantages in the oil exploration industry. Of all mobile offshore oil rigs in operation, 65 percent used machinery and components manufactured by National Oilwell and its predecessor companies. The majority of land rigs worldwide used National Oilwell products as well. The company's equipment was among the best in the industry, providing higher horsepower machinery for drawworks, mud pumps, and power swivels. New technology at this time included a 750-ton capacity power swivel, a 4,000-horsepower drawworks, and a disc brake system operated by remote control.

In 1996, after a full year of operation as a public company, National Oilwell recorded $761.8 million in revenues and $6.1 million in net income. Of oilfield equipment revenues, 48 percent originated outside of North America, and 28 percent of overall revenues came from distribution service centers. The increased demand for oilfield equipment and supplies resulted in a $38 million backlog of orders at the end of 1996, compared with $3 million in 1995.

By 1997 National Oilwell was positioned for expansion through acquisition and development of its oilfield supply operations. In April 1997 the company purchased the drilling businesses of Ross Hill Controls and Hill Graham Controls for $19 million. In a stock swap the company acquired PEP, Inc., manufacturer of expendable parts for drilling fluids and pumps. In May National Oilwell merged with Dreco Energy Services, a stock transaction valued at $366 million. Dreco produced drilling rig equipment and well-servicing tools, specializing in arctic, desert, and offshore drilling; these services complemented National Oilwell's existing equipment capabilities.

Acquisitions continued in 1998 with the purchase of Phoenix Energy Products, Inc. for $115 million cash plus $35 million in assumed debt. In addition to broadening National Oilwell's drilling products line, Phoenix Energy was notable for its electronic guidance equipment and a manufacturing facility in Britain. National Oilwell purchased Roberds-Johnson Industries, Inc., a parts manufacturing subcontractor, through a stock transaction valued at $53.3 million. That company's services included custom design, engineering, and fabrication. In November National Oilwell purchased Westburne Industrial's Dosco division, an oilfield distribution operation, as well as its Technical Sales and Maintenance subsidiary, and Regulator Repair Service subsidiary, all in Canada. The transaction involved three million shares of stock plus a $10 million short-term note.

In late 1997 and into 1998 a decline in the demand for oil lowered demand for the company's products and services, but acquisitions provided stability in revenues and income. National Oilwell reported $1 billion in sales in 1997 and $1.2 billion in sales in 1998. A 19 percent decline in sales from distribution services in 1998 was offset by an increase in sales of major capital equipment, including rigs, mud pumps, cranes, and SCR equipment. Net income increased from $50.7 million in 1997 to $68.9 million in 1998. The order backlog decreased, however, from $291 million at the end of 1997 to $83 million at the end of 1998, leading to lower revenues in 1999.

As National Oilfield continued to focus operations on drilling products and services, the company sold certain product lines. In the summer of 1999 the tubular division and the drill bit product line were sold for $15 million and $12 million, respectively. Acquisitions that helped to build a comprehensive line of drilling services and products included the Dupree Supply Company for $36 million in July and CE Drilling Products for $65 million in September.

National Oilwell's October merger with Hitec ASA of Norway stemmed from a cooperative design activity. Hitec and National Oilwell designed the ActiveHeave Drilling System, which integrated a state-of-the-art computer control system into the drawworks. ActiveHeave compensated for the heaving motion caused by currents of water at offshore oil rigs and eliminated the requirement for the more expensive passive motion system. Hitec brought to National Oilwell other integrated control system solutions, such as the Cyberbase operator system. The basis for the driller's cabin control system, Cyberbase replaced the old technology, consisting of gauges, lights, and switches, with computer software, keypads, and joysticks. In addition, Hitec created an automated system for handling and joining drill pipe or casing. National Oilwell purchased Hitec in a stock transaction valued at $125 million, after Hitec sold its businesses not related to oil drilling.

In August 2000 National Oilwell introduced a new customer service on the company web site. "Customer Connect" provided online access to customer purchasing data for analysis by date, project number, product category, company division, specific well, or other characteristics of buying activity. The service was designed to help customers manage their oilfield operations, as well as to verify billings.

National Oilwell sales and income rebounded in 2000 as the oil industry remained stable and the company continued its expansion strategy. In September National Oilwell purchased the Wheatley Gaso and Omega pump product lines, and piston and plunger pumps, from Halliburton for $13 million in cash. The $29 million cash acquisition of Baylor Company and its subsidiaries provided National Oilwell with braking systems design and manufacturing capabilities. Significantly, National Oilwell purchased IRI International, a competitor, for $360 million in stock. The acquisition increased the company's share of the mobile well-service market.

National Oilwell reported sales and net income of $1.15 billion and $13.1 million, respectively. The company's order backlog more than doubled to $282 million. Significant customer purchase orders at this time included Pride International's purchase order for three mobile drilling rigs and two high-performance workover rigs for oil exploration in Central Africa.

21st-Century Technology and Continuing Acquisitions

National Oilwell's expansion strategy in 2001 involved a total of nine acquisitions. For $16.5 million National Oilwell purchased Maritime Hydraulics Canada. That company designed and produced truck-mounted wireline and nitrogen pumping units and a line of coiled tubing injectors and computer controlled systems for automation of oilfield operations. Two acquisitions expanded National Oilwell's SCR unit options. These included Integrated Power Systems, specializing in the manufacture, sale, and service of SCR houses for land-based oil rigs, and Tech Power Controls Company, which designed, manufactured, and serviced SCR systems. The $11 million acquisition of Tech Power Controls involved a patented Digital Driller, which accurately controlled the weight on the drill bit and increased the drilling speed.

Having developed its product lines, National Oilwell's next step involved improving its distribution through cooperative agreements and acquisitions. In 2001 the company began to distribute products through PetroCosm Corporation and renewed an alliance with Nabors Industries, to continue through 2006. In June National Oilwell acquired Rye Supply Company and its eight distribution centers in west Texas and New Mexico, areas with minimal National Oilwell presence.

National Oilwell developed new technology to sustain its leadership position in the oil industry. In February 2001 Santa Fe International ordered two state-of-the-art jackup rigs. Santa Fe and National Oilwell cooperatively developed the new horizontal-to-vertical (HTV) pipe handling technology for the newbuild jackups. The technology streamlined the process of constructing and dismantling oil rigs for quicker mobility and worker safety.

In July the first completely automated oil rig went into operation near Corpus Christi, Texas. Built for Pioneer Drilling Company, the equipment used electrical rather than mechanical power, allowing it to be computer-operated from a remote location. The system provided real-time data and graphical display for operator analysis. Utilizing alternating current for the drawworks, fewer engines, and a new mud pump system, the equipment provided more control and power for deeper, faster, and more efficient drilling. The oil rig was more compact as well. Half the size of a regular derrick, the new rig required 24 hours to fold, relocate, and reset, in contrast to four days for standard oil rigs. A second rig went into operation in September. The two rigs were the first completely new oil rigs to be built in the United States since the early 1980s.

Revenues for 2001 reached $1.8 billion as capital equipment sales doubled to $454 million, for total product and technology sales of $1.1 million, a 64 percent increase. Sales at distribution services increased 36 percent to $708 million. National Oilwell reported net income of $104.1 million and a backlog of $385 million in purchase orders.

As oil prices declined in the last half of 2001, and the company's debt increased, National Oilwell changed from its strategy of growth through acquisition. In March 2001 the company reorganized its debt with the issuance of $150 million in ten-year senior unsecured notes, paying its revolving credit facility. In January 2002 National Oilwell did acquire HALCO Oilfield Pump & Equipment Company. In addition, the company experienced a change of leadership as Merrill "Pete" Miller, who became CEO in May 2001, was appointed as new chairman in April 2002 to replace Joel Staff, who retired. Although revenues for 2002 stood at $1.5 billion, two key acquisitions--Hydralift and Mono Pumps--were expected to boost 2003 revenues by some $425 million.

Principal Subsidiaries: Dreco Energy Services, Ltd.; National Oilwell, L.P.; National Oilwell DHT, Inc.; National Oilwell Holdings Norway AS; NOW International, Inc.

Principal Operating Units: Rig Equipment Group; Rig Systems and Controls Group: Downhole Tools Group; Mission Products Group; Distribution Services Group.

Principal Competitors: Bechtel, Inc.; Halliburton Company; Schlumberger Ltd.

Chronology

• Key Dates:
• 1987: Armco and U.S. Steel form National Oilwell as a joint venture.
• 1995: An investor group purchases National Oilwell and takes the company public.
• 1997: National Oilwell begins a series of acquisitions to create a comprehensive line of products and services.
• 1999: The acquisition of Hitec ASA of Norway enhances National Oilwell's capacity to provide integrated control systems.
• 2001: The first completely automated oil drilling equipment is put into operation.