NOV Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

There are 10 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the NOV First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce you to your host for today's conference, Mr.

Operator

Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin. Will

Speaker 1

welcome everyone to NOV's Q1 2023 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO and Jose Bayardo, are Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward looking statements within the meaning of the federal securities laws. May involve risks and uncertainty and actual results may differ materially. No one should assume these forward looking statements remain valid later in the quarter or later in the year.

Speaker 1

For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10 ks and 10 Q filed with the Securities and Exchange Commission. Or comments also include non GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U. S.

Speaker 1

GAAP basis for the Q1 of 2023, NOV reported revenues of $1,960,000,000 and net income of 126,000,000 are $0.32 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question and answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Speaker 2

Thanks, Blake. For the Q1 of 2023, NOV reported revenue of $1,960,000,000 down 5% sequentially on seasonality and project timing are up 27% compared to the Q1 of 2022. The company posted fully diluted earnings of $0.32 per share for the Q1, are up $0.45 year over year. EBITDA was $195,000,000 or 9.9 percent of revenue, up $92,000,000 year over year. Demand remains strong.

Speaker 2

Our consolidated orders exceeded revenue out of backlog for the 8th consecutive quarter, yielding a book to bill of 109%. For most of our business units, it was a good quarter, but overall EBITDA came in softer than we expected due to a couple of discrete charges, one related to an environmental accrual top up and another related to litigation, along with a significant supply chain issue we encountered in our drill pipe business. This led to an EBITDA shortfall and a significant build in inventory are for the Wellbore Technologies segment. Revenues and EBITDA for our other two segments, Rig Technologies and Completion and Production Solutions, were generally in line with our expectations for the quarter. Unplanned events at 1 of our vendor steel mills within the past few months led to a lack of raw materials for drill pipe, specifically bar stock for tool joint material, which goes into the connections at each end of every joint.

Speaker 2

Lack of raw materials disrupted our production schedules and impacted our manufacturing efficiency. As we were required to double the number of production line setups we typically perform each quarter in order to conform our manufacturing schedule to the materials we had on hand. Consequently, we lost valuable manufacturing time and faced higher costs as we scrambled to secure more expensive supplies from alternative vendors, which led to far fewer shipments and a roughly $10,000,000 EBITDA shortfall versus our earlier expectations for the unit in the Q1. Drill pipe inventory increased significantly as green tubes and other raw materials continued to arrive as per our original plan, but couldn't be converted. While some disruptions are continuing to affect the unit's 2nd quarter results, we are working closely with our vendor to catch up and expect the situation to be resolved by the time we get to the 3rd quarter.

Speaker 2

Elsewhere around the business, we are generally seeing steady improvement in supply chain challenges as freight reliability and costs have improved and certain raw material supplies are becoming more reliable. While many exceptions to this remain, engines, electrical components, certain and customers remain scarce and deliveries elongated, for example. Other components are catching up quickly. Rig Technologies saw inventory rise and forgings, which are needed to support the group's high backlog of spare parts, rig refurbishment and equipment repair, began to flow at a greater rate. This inventory will support revenue growth in the Q2 and beyond.

Speaker 2

Much of our inventory growth in the Completion and Production Solutions segment came in our flexible pipe manufacturing operation, which was required to buy out the rest of its 2022 allocation from our polymer vendor to secure its 2023 allocation required to meet our 2023 production schedule. These increases, along with other modest growth in Wellbore Technologies apart from drill pipe are pegged to specific orders and projects that will contribute positively to the remainder of our 2023 performance. Notwithstanding our drill pipe manufacturing challenges, our Wellbore Technologies segment executed very well and has continued to advance Several new technologies leading to market share gains in bits and digital products. Customers running our Kaizen artificial intelligence drilling optimization software are delighted with its results. And we are preparing to spud wells for 2 new wire drill pipe customers in the Middle East.

Speaker 2

Interest in our new shale shakers and waste management technologies for drill cuttings is rising too as the offshore market puts more rigs back to work. Turning to our later cycle segments. 1st, Completion and Production Solutions has line of sight on several large projects we are bidding that are tied to higher levels of offshore FIDs expected later this year. We foresee tightening industry capacity and flexible pipe for deepwater developments and rising demand for gas processing technologies from NOV are in support of global LNG demand. We continue to see strong demand for intervention and stimulation equipment during the Q1, with quotations up 31% sequentially, pointing to the need to replenish the industry's toolkit with higher efficiency, lower emission technologies.

Speaker 2

Bookings were up 5%, including a lot of interest in our lower emission electric equipment. Our new MAX completions product was introduced during the Q1 to rave reviews as pressure pumpers and their customers are embracing the power of real time big data to optimize frac jobs. The Rig Technologies segment made significant supply chain strides during the Q1 with record levels of centrifugal pump shipments. Shipments of spare parts into repair jobs and in support of offshore rig reactivations as well as spares to support our Arabian rig manufacturing joint venture all accelerated. The segment continues to see growing activity in the offshore space with 55 recertification, upgrade and or reactivation projects now underway in shipyards.

Speaker 2

The segment posted orders of $251,000,000 and a book to bill of 140%, which included $60,000,000 related to an offshore wind turbine installation vessel. Revenues were down sequentially though as expected due to high 4th quarter shipments of jacking systems, the completion of a handful of older offshore projects, plus the Q4 sale of a land rig out of inventory that did not repeat. Our outlook for the remainder of the year for all three segments is robust, Despite recent commodity price weakness, after 8 years of capital starvation that saw more than 600 bankruptcies in E and Ps and oilfield service companies, the world is getting back to reinvesting in its critical energy infrastructure. The floating rig count has recovered quickly off the bottom it established during the pandemic and has now recovered more than 35% with the current contracting pace and FID outlook indicating many more needed by 2024. Drillships in good working condition have already been reactivated and with the low hanging fruit going, contractors will have to go deeper into their stack to find rigs to meet growing demand.

Speaker 2

The complexity and cost of future reactivations will grow and even more so if the owner wants to add, for instance, a second BOP stack to comply with BSEE regulations or our Power Blade technology to reduce OpEx and greenhouse gas emissions. The rising cost of these reactivation projects has led drilling contractors to require both multiyear contracts at higher rates as well as operator provided financing for reactivation capital and mobilization expenses. As the original OEM for the vast majority of these rigs, NOV plays a critical role in these projects and as more rigs go back to work, of the E and P operators are seeing firsthand how impactful new NOV technology developed and launched during the downturn can be. We are pleased to report that, for instance, ExxonMobil has standardized on NOV's toolkit for its offshore rigs in Guyana, including our Novos operating system with multi machine control, are condition based monitoring system and our new automation offerings. We're also pleased to report gathering momentum in the international land market, particularly in the Middle East, and expect this to translate into tangible orders in the near future.

Speaker 2

Unlike North America, which saw its Shell Revolution miracle preceded by a complete retooling of its land rigs to AC technology, international land markets have seen very little rig replacement higher levels of technology going back decades. That began to change with the decision by Saudi Aramco to establish a joint venture with us to build rigs in the kingdom a few years ago, backed by a contract for 50 new build rigs that we are now building. And with production growth targets announced by the national oil companies around the Gulf slated to come from far more complex wells and reservoirs is becoming clear to operators that the region has no choice but to upgrade its fleet of rigs, simulation equipment, bits and downhole tools. Our customers face lower commodity prices and global recession fears during the Q1. They show no signs of diminished appetite for the goods we provide.

Speaker 2

To the contrary, our orders remain strong and customer conversations robust. In all likelihood, North American activity is at best flat for a while constrained by $2 gas and tepid oil prices, but offshore activity in Brazil, Guyana, the Gulf of Mexico and in West Africa, along with land and offshore activity around the Arabian Gulf, point to strong growth over the next several years, underpinned by expected project FIDs in double digit E and P CapEx growth plans. The focus of the national oil companies has been on satisfying their own local needs for natural gas, The recovery of global oil demand with the reopening of the Chinese economy, their growing confidence that U. S. Unconventional growth is slowing significantly and the fact that the world has been under investing in production for nearly a decade.

Speaker 2

Thus, we believe we are seeing growing confidence from our NOC customer base to make longer dated capital investment decisions. As a leading independent manufacturer of equipment and technology to the oilfield, Our business blossoms later in each up cycle than other business models in the oil patch, as prosperity cascades through the ecosystem. For now, our consolidated margins remain below what we consider normalized levels due to this late cycle nature, along with the residual pandemic related supply chain disruptions we continue to battle. As the cycle progresses, we expect supply chain issues to abate, lower margin backlog to burn and pricing to continue to improve, which will boost our margins and earnings. NOV's installed base of equipment and new automation and digital technology products introduced through the downturn place it in a uniquely advantaged position to drive higher efficiencies for its customers throughout the oilfield as capital spending and activity return.

Speaker 2

Our mission, one that we are intently focused on, is translating that unique competitive advantage into acceptable shareholder returns. We recognize we still have a ways to go on this journey. Before I hand it over to Jose, for those NOV employees listening today, I want to thank you for all that you do to take care of our customers and keep their programs on track despite of cost inflation, labor shortages, broken supply chains and global volatility. You're simply the best and our customers appreciate you and I want you to know that I do too. With that, I'll turn it over to Jose.

Speaker 3

Thank you, Clay. EBITDA in the Q1 of 2023 totaled $195,000,000 or 9.9 percent of sales, A decrease of $36,000,000 sequentially and an increase of $92,000,000 year over year. EBITDA was negatively impacted by Supply chain issues and related operational disruptions in our drill pipe business that Clay described as well as $8,000,000 in charges related to environmental reserves and legal expenses. Cash flow used by operations was $202,000,000 during the Q1, driven primarily by ordinary Q1 payments associated with and reflected in are accrued liabilities as well as a sizable increase in inventory. While Clay spoke earlier of the inventory challenges we faced during the Q1, I think it's worth recounting why this was such a significant use of cash during the period.

Speaker 3

First, in several of our businesses, the limited availability and uncertainty around deliveries of certain raw materials and components prevent us from completing the manufacturing of products in a methodical and efficiently planned process. Were having to set uncompleted products to the side while we await missing materials to finish the project, resulting in excessive levels of work in process or WIP and assemblies in our inventories. 2nd, we continue working to build buffers of critical materials and components in order to avoid the WIP build situation I just described. 3rd, while we're still experiencing significant delays of a limited number of materials, the broader global supply chain is healing at an accelerating rate, resulting in certain materials arriving faster and in greater quantities than expected, including items for which we had been on limited allocations. Lastly, we are continuing to see growing demand for our products and services and our operations are gearing up for meaningful growth through the back half of the year.

Speaker 3

The total effect of all this is that we built up $60,000,000 to $65,000,000 of extra inventory during the quarter. While the inventory build was a sizable use of cash during the quarter, we welcome the accelerated healing of the global supply chain, which will ultimately allow us to more efficiently manage and other participants improve working capital metrics and generate meaningful free cash flow as we work through the remainder of the year. We currently expect free cash flow to total between 100 and $300,000,000 for the full year. During the quarter, we increased our investment in Keystone Tower Systems, which resulted in NOV obtaining a controlling interest in the business. Accordingly, we have consolidated Keystone's results into our financial statements in the Q1.

Speaker 3

We remain encouraged by the potential for Keystone's proprietary we expect will continue to report losses in the near to midterm. NOV's extensive market presence in wind tower installation, offshore, heavy lift cranes and manufacturing makes us uniquely well positioned to capitalize on the efficiencies that taller towers bring through Keystone. Are in the range

Speaker 4

of $1,000,000 Moving on

Speaker 3

to segment results. Our Wellbore Technologies segment generated $745,000,000 in revenue during the Q1, a decrease of $17,000,000 or 2% compared to the 4th quarter and an increase of 23% compared to the Q1 of 2022. The sequential decline in revenue was driven by seasonal slowdowns in key international markets and shipment delays due to the previously discussed supply chain issues for our Grant in the Prideco Drills Pipe Business. EBITDA declined $133,000,000 or 17.9 percent of revenue as the aforementioned disruptions and high margin sales from the 4th quarter that did not repeat combined to drive outsized decremental flow through. As Clay mentioned, our Grant Prideco drill pipe business experienced supply chain challenges, which disrupted operations during the Q1.

Speaker 3

While the issue has not been completely resolved, we expect much improved throughput from the operation in the second quarter and further improved results in the back half of the year. Drill pipe demand remains strong and orders increased from already high levels in Q4 with an increasingly favorable mix of premium pipe for the Eastern Hemisphere and for offshore markets. Our ReedHycalog drill bit business realized an upper single digit sequential revenue growth with solid EBITDA flow through during the Q1. The strong results were driven primarily by the seasonal recovery in Canada as well as market share gains and pricing improvement in the Middle East and North America. While the Canadian breakup and slowdown in U.

Speaker 3

S. Gas basins will serve as headwinds for the business in the Q2, we expect continued market share gains in North America and incremental activity in the Gulf of Mexico and international markets to drive improved results for the unit in the second quarter. Our Downhole Tools business reported a mid single digit sequential decrease in revenue, primarily resulting from large sales of fishing tools and service entered into the Middle East and Asia Pacific during the Q4 that did not repeat. Partially offsetting the decline was a meaningful which has been constrained due to challenges procuring certain high grade steel and elastomers. These stators power our industry leading Series 55 motors, one of which was used to drill a 4.7 mile long section of a well in a single run, averaging 188 feet of drilling per hour.

Speaker 3

Looking ahead, we expect increased activity in the Eastern Hemisphere and our ability to recapture additional high spec drilling motor market share, resulting from the continued ramp in manufacturing capacity to drive solid growth for this business unit in the 2nd quarter. Our MD Totco business realized a low single digit sequential decrease in revenue during the Q1. Market share gains and pricing improvement drove low to mid single digit revenue growth in the U. S. For the operations surface data acquisitions offerings, but were more than offset by the seasonal decline in equipment sales into the Eastern Hemisphere.

Speaker 3

Revenues from the operations evolved wired drill pipe optimization services were flat sequentially, but the business is preparing to ramp up several new projects, which are expected to commence in the second half of the year. The business unit also expects to continue gaining wider adoption of its digital solutions through arrangements with other customers similar to a recent global agreement signed with a major integrated oil company to provide edge computing, edge to cloud and cloud based solutions that enable real time insights will be able to drive operational efficiencies for the customer. Our Tuboscope Pipe Coating and Inspection business posted a low single digit percent increase in revenue with outsized EBITDA flow through, resulting in the unit achieving its highest level of profitability in the last 4 years. The business' coating operations benefited from growing sales in the Middle East, strong backlog in North America and solid global demand for its are in the same period of time. The unit continues to increase market penetration of its technologically advanced product portfolio in the Middle East and recently won a 5 year contract to provide its TK-two thirty six Epoxy NovoLac coating system and through coat leaves for joint operations in the Wafrab field based on the product's ability to withstand high pressures, temperatures and aggressively sour oil and gas.

Speaker 3

Our Well Site Services business posted a small decline in revenue, primarily due to the seasonal fall off in capital equipment sales from Q4 to Q1. Despite softening activity in the Western Hemisphere, the business unit is gearing up for a meaningful ramp in both its solids control and managed pressure drilling businesses with sizable projects scheduled to kick off in the second half of the year. Looking forward to the Q2 for our Wellbore Technologies segment, We expect the recovery in our drill pipe manufacturing operations and activity growth in the Eastern Hemisphere will more than offset headwinds from softening activity in North America, resulting in a sequential revenue improvement in the mid single digit percent range. Additionally, improvements in facility absorption, pricing and project mix should yield incremental margins in the mid-40s. Our Completion and Production Solutions segment generated revenues of $718,000,000 in the in the Q4 of 2023, a decrease of 3% compared to the 4th quarter, but an increase of 35% compared to the Q1 of 2022.

Speaker 3

EBITDA for the Q1 was $54,000,000 down $12,000,000 sequentially and up $44,000,000 year over year. After the segment achieved its highest quarterly bookings since 2014 and 8 straight quarters with a book to bill greater than 1, Orders decreased to $407,000,000 in the Q1, resulting in a book to bill of 96%. Increase in Q1 order intake is attributed to typical seasonality in certain businesses. Additionally, we are pushing price so that new projects are accretive to project margins in our current backlogs and to drive improving segment margins and returns. 1 of our business units within CAPS walked away from 3 projects during Q1 worth over $100,000,000 where we were the preferred vendor and given the opportunity to match the price of other vendors.

Speaker 3

Despite this example in a market where global manufacturing availability is mostly absorbed, we are starting to see competitors become more rational in their pricing and those who remain undisciplined will soon exhaust their capacity and likely disappoint their customers. Our Intervention and Stimulation Equipment business posted a low double digit percent increase in sequential revenue and revenue is up roughly 50% year over year. The solid sequential increase in revenue was primarily driven by strong shipments of both conventional DGB and e Frac pressure pumping equipment. During the quarter, we shipped 50,000 horsepower of pressure pumping equipment, including 10,000 horsepower of e frac units. We also sold and shipped our 1st all electric ideal processing plant, which can deliver more than 200 barrels per minute of water and £30,000 per minute of proppant and is equipped with NOV's latest digital capabilities, making it very simple to configure and operate.

Speaker 3

On its 1st day in use, our customer was able to exceed its average number of stages completed in a day. Despite oil price volatility and low natural gas prices, which we believe caused some customers to defer or cancel certain orders we expected book to bill remains north of 100%. Our service provider customers have been running equipment are extremely hard, achieving healthier returns and generating more cash, all of which we believe will continue to drive meaningful demand for replacement equipment in the U. S. Despite a slowly softening market, while we've seen customers put indefinite holds on plans to add expansion capacity, quoting activity related to replacing tired equipment with new more efficient dual fuel or electric capabilities has remained robust.

Speaker 3

Our fiberglass business posted a mid single digit sequential decrease in revenue, but was up more than 50% year over year. The seasonal decline in Q1 revenue was partially offset by backlog that remains near record highs and stronger than usual mid quarter shipments of fuel handling related equipment with customers eager to beat price increases that went into effect on March 1. Orders came in just shy of a 100% book to bill with relatively soft orders from U. S. Are oil and gas customers.

Speaker 3

Since quarter end, we've seen U. S. Customers return to the table and the outlook remains strong across the businesses various markets. Our Process and Flow Technologies unit posted a mid single digit sequential revenue decrease in the 1st quarter with a strong sequential improvement in its production and midstream operations being more than offset by lower progress on large projects nearing completion within the business units, wellstream processing and APL operations. Production and midstream operations benefited from an improving supply chain, which led to improved manufacturing output allowing the operation to capitalize on its strong backlog and from continued robust order intake of production chokes, Pumps and Sand Traps.

Speaker 3

In the unit's offshore oriented well stream processing and APL operations, order intake has remained soft over the last few quarters and operators have been recalibrating the impact of inflation on projects and as we've passed on low margin opportunities. However, discussions surrounding large offshore project FIDs accelerated during the quarter and we're gaining confidence in the order outlook for the remainder of the year. Or XL Systems conductor pipe connections business experienced a sizable sequential decrease in revenue after completing several large project deliveries in the 4th quarter. Despite several operators in the Eastern Hemisphere pushing new projects to the right, citing delays and uncertainty on the timing and availability of large diameter casing and wellheads, Bookings remain solid in Q1. Offshore activity is continuing to ramp, setting a very compelling backdrop for our XL Systems business, are expecting significant improvement in its results as we move through the year.

Speaker 3

Our Subsea Flexible Pipe business experienced a mid single digit decrease see remains limited and demand for Subsea Flexible Pipe for sanctioned projects remains strong. For the Q2, we expect our Completion and Production Solutions segment and projects winding down and higher margin projects coming on, which should result in steadily improving margin progression for the next several quarters, and we expect the segment to end the year with an EBITDA margin in the low double digits. Our Rig Technologies segment generated revenues of $550,000,000 1st quarter, a decrease of $70,000,000 or 11% compared to the 4th quarter and an increase of 25% compared to the Q1 of 2022. The sequential decline was the result of normal seasonality in our aftermarket operations and a fall off in capital equipment sales, which resulted from the completion of some major projects and the rush to ship equipment at year end. The 25% year over year revenue growth better reflects the strengthening fundamentals we're seeing for our Rig Technologies segment.

Speaker 3

Adjusted EBITDA declined $19,000,000 sequentially and improved $33,000,000 year over year to $69,000,000 or 12.5 percent of sales. New capital equipment orders totaled $251,000,000 representing a book to bill of 140% and driving total backlog up to $2,880,000,000 The recovery in the offshore and Middle East markets is continuing to gain momentum, which helped drive our 4th straight quarter of improved bookings for conventional rig equipment. During the quarter, we received a significant capital equipment order associated with reactivating a 7th generation drillship. The project will include installing a new 165 are in the range of 10 active heave compensated crane and an upgraded control system, which includes a drilling automation system and drill pipe handling tools. We expect improving demand for rig capital equipment to continue.

Speaker 3

Rising technical and equipment specifications and tenders for the Middle East are acquiring the revitalization of drilling fleets that we've been expecting for some time. Similarly, tendering activity for offshore markets will require the need to continue reactivating rigs were beginning to get quite deep into the stack. Simply getting some of these rigs back into working condition is becoming a much bigger job, but most of the rigs also require meaningful upgrades to conform with operator requirements. We expect all of this to translate into continued improvements in rig capital equipment orders through the rest of the year. Increasing activity, reactivations and upgrades are driving strong demand for aftermarket products and services.

Speaker 3

During the quarter, our rig aftermarket operations posted a 13% increase in spare part bookings, our 5th consecutive quarter of improved orders and the best based on the recent bookings and quoting activity we've seen from our field engineering group, bookings and quoting levels in Q1 increased 31% 40%, respectively from average levels we saw during the second half of last year, with customers asking our engineers to help them prepare for reactivations, pressure control equipment upgrades and the addition of enhanced automation capabilities. While we were cautious on the offshore wind market coming into 2023 due to the impact of inflation and project delays, developers appear to have recalibrated timelines and are getting over the sticker shock resulting in more optimism around additional FIDs. During the Q1, we received an order for the design and jacking system of a large wind turbine installation vessel, WTV, for a European client. This is the 2nd order from this customer and the 6th order for our NG-twenty thousand vessel design, which has become the industry standard for the offshore wind installation market. Of the 15 WTIVs ordered globally in the last 3 years, excluding China, 12 have been based on NOV's designs and we're optimistic about additional orders later this year as vessel demand for planned projects in the back half of the decade continue to out strip existing and planned WTV capacity.

Speaker 3

Additionally, during the Q1, we delivered the world's 1st telescopic heavy lift crane are capable of lifting 2,500 tons in retracted mode and 12 50 tons in extended mode. The crane was delivered to a Japanese client and is set to install its 1st offshore wind turbines later this month. We've become the wind turbine installation industry leader with a reputation as a dependable supplier with the ability to develop and deliver leading edge technologies to drive efficiencies within the renewables sector. For our Rig Technologies segment, we expect continued improvement in our aftermarket operations and higher levels of capital equipment revenue out of backlog to translate into sequential revenue growth of between 5% to 10% with incremental margins in the mid-twenty percent range. While Rig Technologies is our longest cycle operating segment and is still in the very early stages of its recovery, we believe the Middle East, offshore and wind markets are unfolding in a manner that will allow the segment to drive meaningful growth over the coming years.

Speaker 3

With that, we'll open the call to questions.

Speaker 1

Are on to NOV's Q1 2023 earnings conference call. With me today are Clay Williams, our Chairman, President and CEO and Jose Vallardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward looking statements within the meaning of the federal securities laws. May involve risks and uncertainty and actual results may differ materially. No one should assume these forward looking statements remain valid later in the quarter or later in the year.

Speaker 1

For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10 ks and

Speaker 5

will be available.

Operator

And our first question comes from Jim Rallison with Raymond James. Jim, your line is open. Please go ahead.

Speaker 2

Hey, good morning, guys. How are you today? Good morning, Jim.

Speaker 6

Clay, a lot of talk by yourselves and some of the other large and players just around improvements and kind of the outlook for international and offshore, Which obviously bodes well for you over time, but curious when you break down kind of what you're seeing between You've talked about FPSO demand and your role there, obviously rig reactivations and the fact that You guys have talked about getting deeper in the weeds and the incremental capital dollars that are required there. Just as you kind of frame out how to think about Where are the greatest spots of opportunity as this unfolds over the next several quarters for NOV?

Speaker 2

Thanks, Jim. All three of our segments participate in the offshore, and I think it's fair to say for all three segments as well as our and peers in Oilfield Services, the offshore generally is a higher calorie sort of environment. And so I think why there's so much and the company's leadership position across Oilfield Services with respect to the offshore coming back is the fact that it's been largely absent since 2014. And so, just to run it down, obviously, Rig Technologies as the leading OEM provider of equipment that's seen on almost all the offshore rig fleet as those rigs go back to work, we're kind of the first call drilling contractors make when it comes to reactivating their rigs to upgrading their rigs, which is why we're seeing rising demand for activity in shipyards around the world, I think I mentioned in my prepared remarks that recertifications of rigs, have special purpose surveys, upgrades and reactivations. We now have 55 projects underway in shipyards to support that effort, along with kind of the day to day aftermarket spare parts and what we're particularly excited about is the adoption of technologies we developed in Completion and Production Solutions, it's a little more downstream and so the excitement there is really focused on at SOWs, we have a number of conversations underway with producers around our gas processing technology, our swivel per mooring systems for FPSOs, lots of areas in that world that were market leader.

Speaker 2

And then finally in Wellbore Technology, as these rigs actually do go back to work, they operate at very high day rates and so efficiency matters a lot. There's a tremendous amount of focus on efficient wellbore construction operations, and I'm excited about the technologies that we have in are digitally monitoring and optimizing those operations and the impact we're going to have as the rig count gets back to work. If you look at the offshore rig count, the rigs are actually turning to the right. We're still not back to where we were in the Q1 of 2020. But it's clear to all of us in the space that the puck is going in the right direction.

Speaker 2

There have been a lot of E and P conversations around FIDs on and developments that have been we've all been working on for the past several years that are now finally starting to move forward and excited about the impact are in business.

Speaker 6

Thanks. That's very helpful. And then just first one follow-up. On the Wellbore Tech side obviously had some issues this quarter. It seems like the charges were kind of one off deals hopefully.

Speaker 6

The steel supplier issues you mentioned getting better in Q2 and should be fully resolved by the Q3. When we think about the margin progression, obviously, you mentioned What second quarter looks like, but how quickly does WellboreTech get back to because it sounds like everything else outside of that was actually performing quite well Plus or minus the seasonality. So just trying to understand how I think about margin progression there, getting back to where we were in 4Q and then beyond?

Speaker 2

It is. As we mentioned, we're going to have a little bit of our drill pipe problems stripped over into Q2, but we're pretty confident by Q3 that's behind us. And so when we get past when we get to the end of the year, I think we're going to have margins in that segment that start with a 2 feel pretty good about that outlook, Jim. It's just you can tell from our prepared remarks and our results, it's frustrating continue to have to battle through supply chain challenges. And I will credit that team for the yeoman's work that they did in the first are in the position of the company's prepared remarks.

Speaker 2

And they're are very fully engaged on getting it fixed and behind us, and we're confident we will. Great. Thanks for the answer.

Speaker 1

Thanks, Jim.

Operator

Okay. Stand by while I bring the next caller. And the next question comes from Luc Lamoine with Piper Sandler. Luc, your line is open now. Please go ahead.

Operator

Hey, good morning. Good morning, Lou.

Speaker 2

Clay, your Rytec orders have kicked up nicely from Eargo levels and stabilized at a higher level kind of here in the mid-two hundred million dollars range the last couple of quarters. Do you think there's now a base you can kind of build upon? And Dan, could you talk about the margin profile of the backlog in Graktek relative to your current Graktek margins? Yes, we were pleased to see strong 140 percent book to bill in Q1 for Rig Technology. Jose mentioned, we had a pretty have a sizable wind turbine order in that, but we've had pretty much one of those 1 or 2 quarters we haven't had 1, That's been a pretty nice steady piece of work for us.

Speaker 2

And then in addition to that, I think Jose also mentioned we had a rig reactivation capital equipment order embedded in there as well. And that for that particular rig, it was, call it in very rough numbers, in the $50,000,000 range. Yes, we're hopeful that that we can kind of continue and that this is sort of a new base level and as we also said in our prepared remarks, our expectation is that rigs are going to get more are expensive to reactivate and we're hopeful that they will also carry more upgrade equipment and replacement equipment as we get deeper into the are back and so but I would just point out, as you know, orders are always lumpy and there's ups and downs and and rigs certainly benefited from this higher level of sustained demand in the Q1, but orders are always going to be a little bit volatile for us, in ditto for Completion and Production Solutions. And so, but on the whole, I think the level of enthusiasm across the oil and gas space is underpinning a pretty strong and robust outlook for demand for what we make. Okay, got it.

Speaker 2

And then maybe just kind of the margins in the back half. Oh, sorry. Just directionally or magnitude of that. Yes, thank you. Sorry, the second part of your question was margin improvement.

Speaker 2

And what I'm most optimistic about there, frankly, is the sort of evaporation of all of the supply chain challenges that Rig technology has been dealing with for these past couple of years as well. We've our number one mission is to make sure that we deliver the spare parts and the consumables that our drilling contractor customers need to execute and they keep their rigs working. And so we, in that group too have been doing yeoman's work in moving heaven and earth to make sure our customers have what they need, and that's been a headwind in that business and we were pleased in the Q4 to see, in particular, more castings and forgings available from foundries that support our operation and kept up in shipments and then even more shipments in the Q1. So for instance, record shipments of centrifugal pumps. And so as kind of the supply chain issues abate, I think that can kind of give rise to stronger margins in Rig Technologies.

Speaker 2

But we think that that business, as we kind of look to the end of the year, ought to see its EBITDA margins get up into kind of the low to mid teens range, let's say.

Speaker 3

And so, Luke, I'd add, so specifically related to the backlog, the pricing and the composition of the backlog within rig is quite good. That's probably been more of a volume issue and some of the other external factors. So here as we've now had 4 straight quarters in a row of improving bookings specifically relate to rig equipment. We feel much better about the absorption of our facilities. And as Clay mentioned, the return to normalization of the supply chain should allow much better margins for Rig Technologies overall.

Speaker 2

Okay, great. Thanks, Clay. Thanks, Jose. You bet. Thanks, Luke.

Operator

And our next question comes from Neil Mehta with Goldman Sachs. Neil, your line is open. Please go ahead.

Speaker 7

Good morning, team, and thanks for all the color. The first question is a follow-up to last quarter around free cash flow. And I thought it was interesting that, Jose, you made the comment that you expected $100,000,000 to $300,000,000 of positive free cash flow this year. Is that right? And given the burn in the Q1, which I recognize is seasonally weak, maybe you could talk about the cadence of some of the drivers that give you confidence that could flip to positive?

Speaker 3

Yes, sure, Neil. First of all, to address the guide on that, yes, it was between $103,000,000 of free cash flow that's what I said, I'm sorry,

Speaker 2

dollars 300,000,000

Speaker 3

Free cash flow for the full year, so more than offsetting the $256,000,000 of free cash flow of negative free cash flow in the Q1. So, yes, as you pointed out, Q1 is always seasonally a very difficult free cash flow quarter, and we had expectations that we would have a material consumption of cash in the Q1 of this year related to that seasonality as well as what we had have seen coming from a need to sort of continue building buffers in our inventory and to prepare for what was looking to be have really good year in 2023, particularly as we get back to the back half of the year. So all of that occurred as expected, plus the laundry list, the 4 different items I mentioned in my prepared remarks related to supply chain challenges and accelerated recovery of the supply chain, which led to about $65,000,000 more of inventory than what we were expecting 3 months ago. So looking at the next three quarters of the year, there are always a lot of puts and takes 1 quarter to the next, the timing of a payment from a customer, a single payment could be plus or minus $50,000,000 and depending on where it hits, one 1 quarter to the next can make a pretty material swing, so I'm not going to give precise guidance for every quarter.

Speaker 3

But really, if you sort of look at the math on how we get to that free cash flow guidance, what we're looking at is working capital metrics at the end of this year, and when I say work capital metric, call it, working capital as a percentage of revenue run rate, it is really 200 to 300 basis point higher than where we exited last year gets us within the range of that guidance. So these are not are in a hurry and type assumptions that are built into our expectations for free cash flow. And typically what happens is Q2 is a slightly positive free cash flow quarter and it improves in the final two quarters of the year. So that's kind of what my expectations are.

Speaker 7

And how much visibility do you have into that back half inflection at this point in the year given you are a long cycle business, is it fair to say it's something where you have a high degree of confidence interval? And if to the extent that there would be a downward surprise to that Sharp improvement in free cash flow, what is the biggest risk

Speaker 5

to it?

Speaker 3

We feel pretty good about the outlook in the second for the year and within that outlook is baked in some softness within the North American marketplace. And so really, I see the bigger risk on the free cash flow really relates to a higher exit rate than what we have dialed in, and that's certainly a possibility. And as I've always said, I would gladly take a higher growth rate and less near term cash flow to have that higher growth rate that ultimately translates into higher free cash flow down

Speaker 2

Yes. Neil, as you know, the business model of providing capital equipment to the oilfield can be pretty there's a lot of optionality can be a lot of pretty explosive growth in that model. When you look back to the prior super cycle, Our top line grew almost sevenfold between 2,004 2014. And so to Jose's point, A lot more revenue is a possibility and would require more investments in inventory and working capital to support, But not a bad problem to have.

Speaker 7

That's yes. Those are good problems. Thanks so much, team.

Speaker 1

You bet. Thanks, Neil.

Speaker 2

Eric, are you there?

Speaker 8

Eric, I

Speaker 1

think you're on mute, Eric. We're ready for the next question.

Operator

Yes. I'm so sorry. Yes, I've brought Stephen Gengaro from Stifel. Your line is open. Please go ahead.

Speaker 8

Thanks. Good morning, gentlemen.

Speaker 1

Good morning, Steve.

Speaker 8

2 for me. I think first, we've heard a lot from Some of the U. S. Pressure pumpers about kind of upgrading assets and really seeing a bifurcation in the market for electric fleets. And I'm just curious what you're seeing on that end and how you think about that business potentially picking up over the next several quarters as companies start to see the benefits and probably kind of get in line for new equipment.

Speaker 3

Yes. Stephen, I'll start off on that one. So Yes. I mean, right now, the dialogue with our customers for pressure pumping equipment in the North American marketplace remains very positive, very constructive. As I mentioned in my prepared remarks, there were some conversations that we're having last quarter with customers about potentially adding what would have been net expansion fleets, those specific conversations, which were a very limited number of conversations, have died off, but I'd say the conversation related to the need to replace and upgrade existing fleets is every bit as strong as it was last quarter, if not stronger.

Speaker 3

So I think people are really One, the asset base is tired. It's been run extremely hard, but maybe even more importantly, to your point, we are seeing more customers really acknowledge that bifurcation that you touched on in terms of the reliability, the quality and the total cost of ownership associated with either state of the art dual fuel or e fleets, so we expect demand to remain pretty resilient going forward. Plus, honestly, we're also seeing good demand coming from the wireline equipment and pressure control equipment, both domestically as well as in as well as in international markets, so feel pretty good about the footing of our intervention stimulation equipment operations.

Speaker 2

Yes. We hear anecdotally that the pressure pumpers customers, the producers are pressing the pressure pumpers to have a plan to reduce emissions. In natural gas and electrification is generating a lot of interest around that question. The other data point, I don't know this in our prepared remarks, but I think our quotations in our business unit were up 30% or 35% sequentially are in that area. So a lot of good conversations around the need for stimulation equipment.

Speaker 8

Great. Thanks. That's great detail. One quick one on the RigTech side. When we think about the order flow you've seen and sort of the revenue out of backlog numbers as the next several quarters unfold.

Speaker 8

Is there an inflection point we should be thinking about as far as Revenue out of backlog or is it pretty smooth, likely gradual move high over the next several quarters?

Speaker 3

Yes, Stephen, the expectation is it's more of a smooth progression over the next several quarters.

Speaker 8

Okay, great. Thank you.

Speaker 1

Thank you. Thanks, Stephen.

Operator

And I'm just bringing the next caller forward. Curt Halyard with Benchmark has the next question. Curt, your line is open. Go right ahead.

Speaker 9

Thank you. Hey, good morning, guys.

Speaker 3

Good morning, Kurt.

Speaker 9

As always, good color. I always appreciate it. So, yes, my initial question here is also on RigTech. And as you referenced, right, a number of potential deepwater rig activations potentially coming over the course of the next 12 months or so to satisfy the incremental demand. Based on the data, I think I've seen there's about 14 deepwater rigs that likely to be upgraded that could be upgraded within have a 12 month period with cost range anywhere between $70,000,000 to $100,000,000 You've already given some indication that on a rig activation order you booked in the quarter that had about a $50,000,000 ticket size to it.

Speaker 9

So I guess that answers the question that I had, but is that kind of on average what you as LOB would expect to be able to get from a rig activation?

Speaker 2

Well, I'd be I'm going to caution us all that you're kind of asking how long is a piece of rope. Every rig is different and the and capabilities of a rig required for a particular drilling program are going to vary by operator and frankly nobody is in a mood to spend capital that they don't have to spend. And so, what I would tell you is it's hard to give you a clean average is going to apply to all of those rigs. They all need a different well, first of all, we got to get engineers in there on the deck and look around and see what remains to be done. But the general Trend and this is the picture we were trying to paint in our remarks is that as you get deeper into the stack, the rigs that are cheapest and easiest to activated first get reactivated first.

Speaker 2

We're getting deeper into the stack and it's going to take more increasingly more work. And so I'm hesitant to generalize and it's a pretty wide bracket of cost. But all that notwithstanding, yes, in a market that today has about 80 drillships drilling, there's about 14 that could depending on how much money you have, could be put back into that marketplace. I think there's another 4 being constructed that were suspended and those construction activities could pick up and shipyards could get back to completing those rigs and putting them into the marketplace. And then after that, I think you're going to have to should be looking at building new rigs.

Speaker 2

And so that's kind of the extent of capacity that's out there.

Speaker 9

Yes, got it. All right, great. Thanks, Clay. One follow-up. So you guys referenced that your current EBITDA margins for each of your segments are below what you consider to be normalized.

Speaker 9

So could you give us a refresher on what you consider to be normalized margins for each of those businesses and I probably would then just kind of see if you can give us a perspective as to given the visibility you have Clay on how things are unfolding is normalized margins the prospect for 2024? Is it going to maybe take a

Speaker 3

little bit longer to get there?

Speaker 2

Yes. I would tell you I'm going to give you a consolidated answer rather than go and 9.9% is disappointing. We were knocking on the door in 2018, 2019, and I think we need to see the supply chain issues get behind us. We need to continue to push price. We need to burn off some lower margin backlog and that's the path to get us back to acceptable margins, which is where we ought to be now.

Speaker 2

And And if you kind of extend the story and you go back to the last super cycle, as we get past the mid cycle And things really get a little more heated up. Margins that start with the 2 are a possibility. And so that's really what we're targeting and we're working on improving the margins in all three of our segments and using all the levers we have from improved operational management, along with price increases, and that's what the goal is.

Speaker 9

Are Great. Thanks. Appreciate the color.

Speaker 2

You bet.

Operator

Okay. Stand by for our next caller is Mark Bianchi with TD Cowen. Mark, your line is open. Please go ahead.

Speaker 5

Great. Thank you. I was curious on the outlook for CAPS orders. So I mean, thematically, it sounds like things are very, very strong and there's good levels of inquiry and so forth. But if I just look at 1st quarter fell off from arguably an exceptional Q4, but maybe in the context of those two data points, how do you see orders developing for the remainder of the year here?

Speaker 2

Yes. Actually, Jose referenced the fact that like in one of our CAPS business units, In the Q1, we had 3 different projects we were bidding that exceeded $100,000,000 that the customer came back to us and says, hey, we want to go with NOV. We recognize NOV's superior quality and lower risk and better value, but we've got a competitor of yours that offered a different price. If you'll match their price, we'll go with you, and we said no. And so the pro form a version of our orders for Q1 with those three orders in them would be a very strong book to bill in the 100 and 100 and 30%, I guess.

Speaker 2

And so, we need to improve our margins in cap 7.5 percent EBITDA margins in the Q1 are not acceptable. And one of the paths to get there is to get better pricing on what we sell.

Operator

Hello? I am on the line with you. Is that Mark speaking?

Speaker 3

Yes.

Operator

Yes. I do not know what just happened to these gentlemen, it looks like they've just gone offline. Everyone if you'll just stand by, I'm going to try to get them back on the call. Hello, is this Blake? Are you back online?

Operator

Blake, are you back online? Thank you for your patience, everyone.

Speaker 2

Hello? Yes, you're live.

Speaker 1

Great. Thank you.

Operator

We still have

Speaker 1

Mark, are you still there?

Speaker 5

Yes. I am. Thanks, Blake.

Speaker 2

I apologize, Mark. I'm not sure what happened, but or how much of an answer you got.

Speaker 5

You had mentioned there was the work you were bidding on that customer or Tenere and the customer went with somebody else and it would have been $120,000,000 to $130,000,000 kind of book to bill. So I guess that to me, that's maybe the conclusion is.

Speaker 2

Yes. Let me just cap it off by saying that no one should look at our CAPS order trend for the Q1 and become alarmed to our cap's book to bill. 96% is effective replacement of what we shift. We're being more disciplined around pricing. And as our competitors fill up their capacity, we feel very good about the outlook.

Speaker 2

We also have have a number of feed studies with customers in that business that we think will translate to larger orders on down the road and working closely with customers there.

Speaker 5

Okay, great. Well, thanks. In the interest of time, I'll just leave it to 1.

Speaker 2

Thanks, Mark.

Speaker 9

Thank you.

Speaker 3

Mark, yes, Aaron? We know it's a very busy day, but if people would like to stay on for an extra 5 minutes. After the top of the hour, we can do 1 or 2 more questions.

Operator

Okay. I've got Arun Jayaram with JPMorgan on the line right now.

Speaker 2

Hi, Arun.

Speaker 4

Good morning. Yes, hi guys. Clay, I wanted to get may be some insights on what you're seeing from your OFS customers. I mean, you've mentioned historically that the OFS ecosystem is an important part of your revenue base and I wanted to see if you could talk about what trends you're seeing from some of your international offshore focused OFS customers As well as onshore where some of the land drillers have highlighted reduced CapEx trends as they've gone through The earnings season just give on some of the gas for us. So I'd love to get your thoughts on that.

Speaker 2

I think with respect to your last Most of that's in North America. What we tell you is a very different picture overseas. And so we are very encouraged about interest and demand for land operations, both in South America as well as the Arabian Gulf. And for instance, we've won there was a land tender by NOC, land rig tender, pretty good size. And we are selling the components into the Asian rig packager that is going to be providing those rigs to that NOC.

Speaker 2

With respect to our Arabian Rig Manufacturing joint venture in Saudi Arabia, as you know, we've been delivering rigs to are very pleased with the progress there. In addition, we have another drilling contractor. We think we're very close to landing a couple of rig order from, as well as other drilling contractors in the kingdom that are talking to us about the need to really upgrade the fleets and that's pressure that's coming from the NOCs. I'm not happy with the level of efficiency are coming out of the old fleets that predominate in those regions or in South America. And so I think that's going to be the engine that drives upgrade onshore.

Speaker 2

And then with respect to the offshore, we're hearing this from all over, more offshore rigs going back to work. And we, of course, work closely with the drilling contractors that run those rigs along with providing services directly to those rigs. And so for instance, our Grant business, our waste management, drill cutting processing business, are rigging up on a lot of offshore rigs and anticipate better things in the second half of twenty twenty three as more rig in these programs get underway and we can provide services directly to those. Likewise, our Tuboscope business, it's pipe inspection operation here on the Gulf Coast, Amelia, Sheldon Road, are staying a lot more offshore are coming in, in support of offshore operations. So really all around the world, everyone is kind of looking at the same data set and seeing growth ahead in the offshore.

Speaker 4

And real quickly on the Sanad newbuilds, how many of those are in backlog and is the opportunity set 50 there?

Speaker 2

Yes, I think we've delivered 3, 2 are working. We're in the process of drilling the 3rd. We're building 45. The total order is 50 rigs and so remaining would be, 50 minuteus the rigs I just described to you.

Speaker 4

Sounds good. Really appreciate it.

Speaker 9

Yes.

Speaker 2

Thank you, Arun. Yes, I can hear you. Hello. I can hear you. Yes.

Operator

Tom Curran with Seaport. Your line is open.

Speaker 9

Good morning.

Speaker 1

Can everyone hear me?

Operator

You know what, I believe that we have lost NOV again.

Speaker 9

Okay.

Operator

I am so, so sorry for the technical difficulties today, folks. Let's give them a moment to see if they can dial back in.

Speaker 2

Sure.

Operator

It is I am unable to connect them from my end.

Speaker 2

I understand.

Operator

Are okay. Blake?

Speaker 4

Yes. We're going to go ahead and wrap it up. Let's pass it over

Speaker 2

are going to

Speaker 1

pass it over to Clay Williams, Chairman and

Speaker 2

CEO, for closing remarks. Thank you, Blake, and thank you, operator. Appreciate all of everybody joining in on a very busy earnings

Operator

Thank you, everyone, for participating in today's conference. This does conclude the program. You may now disconnect.

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Earnings Conference Call
NOV Q1 2023
00:00 / 00:00
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