Jose Bayardo
Senior Vice President and Chief Financial Officer at NOV
Thank you, Clay. NOV's EBITDA increased 24% year-over-year to $241 million with margins improving 131 basis points to 11.2% of sales. Cash flow used by operations was $78 million during the first quarter, driven primarily by seasonal builds in working capital and annual payments made in the first quarter.
Working capital increased $395 million sequentially, due primarily to the decrease in accrued liabilities associated with the annual payments made during the first quarter and the two acquisitions we completed, which accounted for $106 million of the $127 million increase in inventory. While operations consumed cash, the use was well below what we consumed in the first quarters of the last two years, which reflects the turn in our business that gives us confidence in our ability to generate a substantial amount of cash flow over the next several years.
We believe NOV is well positioned to deliver strong performance as the cycle matures from a nascent recovery and evolves into an environment where later cycle equipment and technology businesses will outperform. As Clay noted, an improved market environment, differentiated technologies that we've developed over the last several years, and our focus on operational efficiencies will continue to push margins and cash flow throughout 2024 and beyond. Our base forecast contemplates a sustainable multi-year period with modestly improving industry activity, led by the international and offshore markets.
We expect soft activity in the US through 2024, but anticipate a recovery in 2025 aided by increasing gas exports; however, we expect improvements in oil directed activity in the US to be modest with international and offshore activity providing most of the incremental supplies required to fuel the growth of the world's economies.
As a result, we expect a little less volatility in NOC and IOC drilling activity over the next several years versus what we have seen from North American independents over the past decade. Against this backdrop, we anticipate generating high levels of free cash flow on an annual basis for each of the next several years. I want to stress the word annual when I talk about free cash flow because of the seasonality we experience during each year and the fact that we view our capital allocation activities on an annual, multi-year basis.
Our priorities for capital allocation remain consistent, one, defend the balance sheet; two, maintain our asset base; three, invest in organic growth opportunities that drive superior risk adjusted returns; four, pursue M&A that accelerates strategic growth initiatives at attractive returns; and five, return capital to our shareholders.
Our balance sheet is currently in solid shape, with gross debt to EBITDA below our target level of 2 to 1. We intend to continue to use a portion of our free cash flow to return our net debt to EBITDA ratio below 1 times. We have appropriately invested in our assets and expect a base level of investment to maintain and modernize our existing asset base over time of between $200 million and $250 million per year.
Incremental to this base level of spend are attractive organic investment opportunities primarily related to the commercialization of many of the technologies we've deployed over the last several years, which could range from $50 million to $150 million per year. All this is consistent with our expected $330 million capital expenditure plan for 2024.
We will continue to look for compellingly valued strategic acquisitions that can accelerate our growth initiatives. We anticipate we will complete occasional small bolt-on transactions, similar to what we've done over the last several years. While the likelihood of larger acquisitions remains low, we intend to maintain the flexibility to pursue such a transaction.
With a healthy balance sheet; well maintained asset base; the expectation of smaller, rifle shot acquisitions and a high level of confidence in our outlook where NOV's capital-light business model will generate substantial amounts of free cash flow, we are ready to increase the return of capital to our shareholders.
Last night, we announced a plan to return at least 50% of our excess free cash flow, defined as cash flow from operations less capital expenditures and other investments, to our shareholders going forward. To balance the interests of all NOV's stakeholders, our framework utilizes a steady base dividend, opportunistic stock buybacks, and a supplemental dividend to true up returns to our shareholders on an annual basis.
Specifically, we intend to return this capital through a combination of the following one, we expect to increase our quarterly dividend from $0.05 to $0.075 per share, a 50% increase, beginning in the second quarter of 2024, resulting in an annual dividend payment of roughly $118 million going forward. We believe base dividends provide an immediate direct benefit to all shareholders; two, we plan to opportunistically repurchase shares under our new, $1 billion, 36-month share repurchase authorization. With our share price trading below what we consider a fair value, we believe using some of our excess free cash flow to repurchase our shares will drive long-term value; three, at the end of each year, we plan to utilize a supplemental dividend that would be payable in May, starting in 2025, to coincide with our annual shareholders meeting, to true up our total annual return of capital to at least 50% of our excess free cash flow generated during the preceding calendar year.
We believe this approach serves and balances the interests of all of our shareholders. We will not compromise the health of our balance sheet or our ability to invest in the business. Having experienced several routine industry cycles and one recent and very severe pandemic-induced cycle, we understand our business can change in a hurry. However, our capital return framework reflects our confidence in NOV's outlook and our commitment to delivering superior returns to our shareholders.
Finally, acknowledging that none of us can control or accurately predict the future, I want to try to frame what we think is possible over the next four years associated with our base industry outlook. Assuming continued operational and financial execution, what we believe is a reasonable EBITDA growth profile, and sticking to the minimum level of returns at 50% excess free cash flow, we estimate the aggregate capital to return shareholders through 2027 could be in the range of $1.5 billion. Under this scenario, approximately 30%, or $470 million, of shareholder return would be provided through our base dividend and the remaining $1.03 billion would be split between share buybacks and supplemental dividends.
I'll now move on to segment results. Our new Energy Products and Services segment generated revenue of $1.017 billion in the first quarter, an 8% increase compared to the first quarter of 2023. EBITDA increased $20 million to $174 million, or 17.1 percent of sales, representing flow through of 26% compared to the first quarter of 2023. Revenues for the segment are comprised of service and rentals, sales of consumable products, and sales from generally shorter lived, or consumable, capital assets such as drill pipe, composite products, conductor pipe and solids control equipment that tend to see demand rise and fall more or less with activity.
Sales mix for the segment during the first quarter was as follows service and rental, 49%; product sales, 20%; and capital equipment sales, 31%. As noted, the largest share of our Energy Products and Services segment's revenues come from service and rentals, including rentals of our technologically advanced downhole tools and drill bits, coating and inspection services, solids control services, and drilling data acquisition, analytics and optimization services.
With the exception of coating and inspections services, which tend to somewhat move with demand for drill pipe and other tubular goods, the remainder of our service and rental revenues tend to move in line with industry activity, plus or minus, usually plus, changes in market share. First quarter revenue for the segment's service and repair revenues increased in the low-to-mid single digits sequentially and year-over-year, with growing demand from offshore and international markets, particularly the Middle East, more than offsetting lower activity in North America.
Product sales are the segment's second category of revenues and are derived from sales of drill bits, completion tools, composite sleeves and liners, artificial lift products, shaker screens, and downhole tools, among others. Note that several of these products such as drill bits and downhole tools are also rental items, which I will cover in a moment.
Product sales tend to be less volatile, less seasonal, and track activity a little more closely than revenue from capital equipment, although sales of products can also lag activity increases as our customers frequently stock inventories of these products. While individual sales are typically small and frequent, each operation can have occasional, individually large, shipments that may be requested by certain large NOCs who sometimes take bulk shipments one or two times per year. The segment has steadily increased product sales every quarter over the last year, with the first quarter of 2024 up 8% sequentially and 19% year-over-year. And, we expect product sales to increase in the mid-to-upper single digits again in the second quarter.
Looking at specific product lines, drill bits are capitalizing on increasing activity in the Middle East and offshore markets. Our completion tools business is also realizing solid levels of demand in the Middle East, more than offsetting softness in North America. Sales of our Tuboscope Thru-Kote sleeves, Zap-Lock connections and Tector thread protectors have remained solid and we expect to see a significant increase in the second quarter from shipments to customers in the Middle East, Western Africa and Latin America. Sales of our downhole tools decreased 20% sequentially after large shipments to Asia and Europe in the fourth quarter did not repeat.
Finally, sales of the segment's capital equipment offerings, which include drill pipe, conductor pipe, fiberglass products, managed pressure drilling equipment, shale shakers, and other equipment tend to be seasonal and volatile, often lagging activity a bit. In the first quarter of 2024, revenues from capital equipment in our Energy Products and Services segment increased 8% year-over-year, but declined 23% sequentially due to the seasonal effect of customers making a big push to receive their equipment at year-end.
Our drill pipe business unit experienced a greater than average seasonal decline given outsized fourth quarter shipments to international markets, partially offset by increased US land deliveries. New orders, however, had a more favorable international and offshore weighting and included an award for an offshore completion and workover riser destined for offshore Brazil.
Capital equipment sales for our solids control offerings were down in the mid 20% range sequentially due to the ordinary increase in year-end shipments. Revenues increased in the upper teens percent range year-over-year on growing adoption of our Alpha shaker and sales of other innovative drilling solutions such as our Tundra MAX mud chilling systems. Our two most seasonally volatile capital equipment offerings are our conductor pipe and our managed pressure drilling equipment.
After a strong fourth quarter for the two product lines, both realized substantial sequential revenue drops and yet both also have very strong outlooks resulting from the increase in offshore activity. Conductor pipe casing orders achieved a book to bill of over 200%, with solid demand coming from projects in the North Sea, West Africa, the Gulf of Mexico and South America, which will allow for a much improved second quarter.
We are expecting revenues from both conductor pipe and MPD to more than double from the first quarter to the second quarter of 2024. Our composite product offerings tend to be our least volatile capital equipment line in the segment, due in part to the diverse set of end markets served, which include midstream oil and gas, fuel handling, chemical, industrial, and marine. Demand for composite products is still seasonal, and sales declined in the low-single digit range sequentially but are up mid-single digits year-over-year.
Outlook for all end markets remains solid, with particularly robust demand for oil and gas products in the Middle East and a recent pick up for orders for flexible pipe and composite tanks in the Permian. For the second quarter, we expect revenues for our Energy Products and services segment to improve between 1% and 5% from the second quarter of 2023, with EBITDA in the range of $180 million to $190 million.
Our Energy Equipment segment, which is comprised of our longer cycle capital equipment oriented businesses, generated revenue of $1.178 billion in the first quarter, a 12% increase compared to the first quarter of 2023. EBITDA was $119 million, or 10.1% of sales, up 27% compared to the first quarter of 2023. Clay covered our bookings for the quarter, but I want to emphasize that the capital equipment business is inherently more volatile than other businesses. In this case, despite orders that slipped from the first to the second quarter, we foresee a generally bright outlook and now expect an outsized order book in the second quarter.
As a pure capital equipment business, our operations have two revenue streams, capital equipment sales and aftermarket sales and services. During the first quarter, equipment sales, which includes both revenue out of backlog as well as quicker turning equipment sales that do not meet our criteria to qualify as backlog, accounted for 52% of the segment's revenues. Aftermarket sales and service accounted for the remaining 48%.
Similar to what we experience in our Energy Products and Services segment, sales and orders for capital equipment tend to be more volatile and are much more affected by seasonality than aftermarket sales. The segment's capital equipment sales were up 7% year-over-year, but had a seasonal decline from the fourth quarter of 16%, due to the typical year-end push by customers to take deliveries.
Aftermarket revenues tend to have a little less seasonality and are much less volatile. Aftermarket revenue improved 18% since the first quarter of 2023 and was off approximately 1% from the fourth quarter. The vast majority of our aftermarket revenue comes from our drilling equipment and intervention and stimulation businesses.
Our Drilling Equipment business generates three quarters of its revenues from aftermarket sales and services, and in the first quarter its aftermarket revenues improved 27% year-over-year as the business continued to improve throughput and capitalize on a very healthy level of reactivation and recertification projects and spare part orders.
Higher levels of activity around the world are increasing the number of NOV equipped rigs turning to the right, requiring more demand for NOV's parts and services. Additionally, as we dig deeper into the stack for reactivations and the average age of the operating fleet increases, reactivations, recertifications, and upgrades become more complex.
During the first quarter of 2024 we saw the total value of projects in execution having a value of greater than $2 million, continue its steady rise, now up 175% from the first quarter of 2023 and reaching an average size of $20 million per project, up from a $9 million average in the first quarter of 2023. With robust offshore operator drilling plans and current day rates allowing drilling contractors to generate significant cash, but not high enough to justify newbuilds, contractors have incentive to keep their aging assets in good working condition. Being the OEM with the largest installed base, our Rig Technologies aftermarket business will continue to play a larger role for our customers, who rely on NOV to provide reliable service and quality for these critical assets.
Our Intervention and Stimulation Equipment business unit's relatively stable aftermarket revenues reached 63% of the unit's mix in the first quarter of 2024. Despite a soft North American market, we expect our aftermarket operations to remain busy providing consumables and replacement components as well as upgrades and refurbishments of equipment, both domestically and overseas.
Moving to the capital equipment side of the business, our drilling equipment's capital sales improved in the mid-20% range year-over-year. Book-to-bill was well north of 100%, led by a 20K-psi BOP upgrade for a drillship in deepwater Gulf of Mexico. This will be the industry's fourth 20,000-psi BOP, with NOV building all four systems and demonstrating our leadership in cutting-edge pressure control technology that allows our customers to reach previously inaccessible reservoirs.
Utilization for offshore rigs remains high and increased towards the end of the first quarter. The news from the Saudis scaling back their offshore fleet will put some pressure on jackup utilization near-term, but we believe those rigs will eventually be absorbed by other projects around the world and will drive more activity into onshore unconventional gas fields.
This will increase demand for our land rig equipment and aftermarket support, which we are very well positioned to provide in Saudi, as well as for our Intervention and Stimulation Equipment business, which has already seen an increase in orders for completion and intervention equipment as a result of rapidly improving activity in the Jafurah unconventional field.
Sticking with our Intervention and Stimulation Equipment business, capital equipment deliveries were down in the 20% range from the first quarter of 2023, due primarily to strong deliveries of eFrac and conventional pressure pumping equipment in early 2023 that did not repeat. Capital equipment orders declined due to lower demand for new pressure pumping kit, but the unit still posted a book to bill greater than one as a result of solid demand for equipment destined for international markets, including the order for Saudi that I just mentioned.
While we anticipate bookings for new pressure pumping equipment will remain soft in the second quarter, there continues to be a high level of interest for alternative energy equipment, specifically eFrac and CNG units, and the business' backlog remains healthy with meaningful shipments of DGB and eFrac units slated for the second quarter.
In international markets the business is seeing solid demand from Africa and Europe, in addition to strong demand from Middle East. Our offshore wind and construction business achieved year-over-year revenue growth in the mid-20% range from strong execution on the business unit's backlog of offshore wind projects.
Bookings included an inter-array cable lay vessel for a Japanese construction company which will be used to connect wind turbines within an offshore development. Outlook for the unit's core markets is positive with improving sentiment in the offshore wind space and the potential for a couple new wind installation orders later this year.
Wellstream Processing operations achieved solid year-over-year revenue growth from strong execution on the operation's backlog of processing equipment projects, which continues to grow with increasing opportunities to support new FPSOs. The operation also continues to realize more opportunities to leverage its gas and fluids processing expertise into large scale energy transition projects and received an order for a hydrogen dehydration and deoxygenation package in Australia after having completed an engineering study for the customer over the last year.
Our Production and Midstream business saw an upper single digit decline in revenue compared to the first quarter of 2023. Challenging conditions in North American gas markets impacted demand for chokes and other equipment, but was partially offset by strong international activity, particularly in the Middle East. Bookings remained robust driven by choke orders in the Middle East, where demand over the last five months exceeded orders for the preceding 11 months.
With the unit's quickly improving backlog and ramping deliveries, we expect solid growth from this operation in the second quarter. Notwithstanding the low level of bookings in the first quarter, our Subsea flexible pipe business unit posted solid results and its mid-to-longer-term outlook is very strong. The unit posted mid-teens year-over-year revenue growth and, despite the large order slipping out of the quarter, the business secured a contract to deliver its first actively heated flexible pipe system for a deepwater gas field development in the Black Sea.
The pipeline of future tenders for subsea flexible pipe is robust with considerably improved pricing. We expect lower-margin contracts to continue to be replaced by higher margin projects, which will drive a significant improvement in margins during 2025.
For the second quarter, we expect revenues for our Energy Equipment segment to improve between 1% and 5% from the second quarter of 2023, with EBITDA in the range of $135 million to $145 million.
With that, we'll now open the call to questions.
