Clay C. Williams
President, Chairman, and Chief Executive Officer at NOV
Thank you, Amie.
Strong execution in the third quarter of 2024 enabled NOV to deliver higher EBITDA and margins, both sequentially and year-over-year, and cash flow improved significantly compared to the third quarter of 2023 as a result. Rising long cycle capital equipment revenues helped offset declines in drill pipe in certain shorter cycle products and services tied to activity, resulting in consolidated revenues of $2.2 billion. Consolidated revenues improved modestly compared to the third quarter of 2023, but were down about 1% compared to the second quarter of 2024. EBITDA improved to $286 million, up 2% sequentially and up 7% year-over-year and margins moved up to 13.1%, helped by higher margin backlog, lower costs and improved operational efficiency. The Company posted fully diluted GAAP earnings of $0.33 per share, up $0.04 per share year-over-year.
The third quarter saw our customers growing increasingly concerned about the global macro-environment. Sliding Chinese oil demand, excess OPEC capacity and potential non-OPEC oversupply are pressuring commodity prices. As a result, oil and gas operators and service companies are becoming incrementally more cautious in their near-term spending decisions. Despite these emerging headwinds, we remain bullish on the long-term demand for oil and, in particular, natural gas over the next decade, given AI-driven electricity demand is forecast to rise sharply in the United States and stronger global economic growth will inevitably drive demand for more oil and gas. We believe this long-term view is shared by our E&P customers, as evidenced by their continued development of profitable projects in deepwater and in emerging unconventional shale basins around the world.
Final investment decisions, or FIDs, are continuing to move forward. Recent announcements include the greenfield development of a Kaskida's high-pressure reservoir in the Gulf of Mexico, a feat made possible by NOV's development of leading 20,000-psi, or 20K equipment. Other announcements include development projects in offshore Suriname and additional gas facilities in the Middle East. Our customers' commitments for these substantial capital investments give us confidence in the continued recovery of the offshore space and the development of unconventional shale in international basins over the long-term, and both will require NOV's unique equipment and technology.
Next month, we'll mark the 10-year anniversary of OPEC's 2014 decision to take back market share from North American shale producers. At that time, OPEC declined to impose additional quota restrictions, which would have ceded further market share to the rising supply of shale oil from the United States. This prompted a significant sustained decline in global oil prices. North American shale oil supply, built on the application of novel and expensive drilling and stimulation techniques, was regarded as a high marginal cost source, certainly a much higher cost per barrel source than Middle Eastern oil. North American shale was expected to be crippled by low oil price.
It didn't exactly play-out like that. Shale entrepreneurs employing horizontal drilling and hydraulic fracture stimulation and marginal rocks doubled down on efficiency to survive and the relentless pursuit of lower marginal costs led to more than just survival. The U.S. shale oil patch thrived and rocketed U.S. production from 6 million-barrels per day to over 13 million barrels of oil per day. Instead of losing market share, U.S. unconditional shale gained share since OPEC's 2014 meeting. And notably, investments in offshore and many international onshore fields collapsed. These became collateral damage victims of the market share war with shale.
Shale innovation has been astounding. Rates of penetration and footage drilled per day in the complex horizontal wells required to make shale work have doubled in 10 years, while lateral lengths have nearly doubled, increasing from 6,000 feet to 10,000 feet, with many now targeting 15,000 feet and even 20,000 foot laterals. Hydraulic fracture treatment has posted similarly astonishing productivity gains. I note this because it has important implications for NOV and the rest of the industry for the next several years.
Unconventional basins in North America are maturing. We can debate the remaining inventory of Tier 1 drilling locations, but there's no question that there are fewer today than there were this time last year. As pressures decline basin-wide, gas-oil ratios, NGL cuts, and API gravity are rising. Cost of capital to shale producers is far higher than it was a decade ago. Investors are more demanding that capital be returned to them, leading to widespread capital discipline, magnified by recent widespread consolidation amongst shale producers. Many forecasts are calling for decelerating U.S. production growth next year as a result.
While I'm certainly not ready to call the peak of U.S. production growth, I do think it must be close to at least plateauing. And I think many of our international and offshore customers view unrestrained U.S. production growth as much less of a threat than it was in the early days of the shale revolution.
To put in perspective, U.S. shale was responsible for more than 80% of global oil supply growth over the last decade. And it crowded out investments in many or most other sources of oil along the way, places like the deepwater offshore. But that is changing and the resumption of FIDs and the sanctioning of the projects I noted earlier are good examples. Deepwater exploration and development has recovered post-COVID in South America and West Africa and Eastern Mediterranean and in the Gulf of Mexico Wilcox. 2023 global exploration investments were up 40% from the 2015 to 2022 average. Reengineering and standardization have lowered break-evens to $40 a barrel or less and offshore producers have increased their FIDs to around $100 billion a year since COVID.
This is prompting rising orders for FPSOs and production kit. And as shipyards have filled and the supply chain for these has tightened, the quoted delivery dates for FPSOs have pushed out. This has delayed first oil and diminished the urgency of E&Ps to contract offshore drilling rigs, cooling demand and flattening day rate growth through the past several months, a phenomenon our drilling contractor customers refer to as white space or uncontracted time in their calendars. We now believe the white space effect is starting to slow some of the spending plans of our drilling contractor customers into 2025. For example, we were informed a couple of weeks ago of a decision by one of our customers to delay, not cancel, but delay the planned upgrade of two offshore rigs. While we expect some to continue to invest in their offshore rigs through these periods of white space, like another customer that booked two hook-load upgrades to convert sixth-gen drillships to seventh generation. We know others are probably thinking about slowing their near-term expenditures.
I think most foresee higher drilling activity in 2026 and beyond as demand accelerates on the backside of the FPSO supply chain catch-up. So, our early expectation is for demand for offshore drilling equipment as well as aftermarket spares and support for offshore drilling rigs to decline modestly into early 2025 and then see demand grow again in the second-half of 2025.
In contrast to the market for drilling equipment, we see demand for the offshore production equipment that we make continuing to grow. Over the past decade, we have added turret morning systems and swivel stacks, flexible pipe, gas and seawater processing systems, offloading systems, pump and composite piping products and a myriad of other key technologies to enable profitable deepwater production. Preliminarily, we believe rising demand for production kit will be able to fully offset sliding demand for drilling rig equipment offshore in the coming year.
Our third quarter numbers provide good evidence. Solid demand for offshore production-related equipment continued to drive strong orders for the Energy Equipment segment. Total bookings of $627 million led to a book-to-bill of 111% for the third quarter, bringing book-to-bill to 123% year-to-date. Backlog for flexible pipe for deepwater developments eclipsed $1 billion for the first time ever. NOV's Energy Equipment segment posted a 2% increase in offshore revenues compared to the third quarter of last year. The third quarter saw higher revenues from offshore stimulation equipment and deepwater rig upgrades to 20K, partially offset by lower revenues related to wind turbine installation vessels. The segment improved its EBITDA margin 260 basis points year-over-year on improved execution around its flexible pipe, pumps, mixers and production processing capital equipment orders.
However, despite the growth within the Energy Equipment segment, NOV's overall consolidated revenues for the offshore declined 2% year-over-year, as the Energy Products and Services segment's offshore revenue fell due to sharply lower drill pipe shipments and conductor pipe connection sales, both of which tend to be volatile quarter-to-quarter. However, the good news is that we saw a significant increase in orders for offshore drill pipe, up 64% sequentially and our strong backlog for offshore conductor pipe connections are expected to lead to improved offshore results in the fourth quarter for the segment.
So, to summarize, while we foresee modestly weaker demand for drilling equipment for the next few quarters, we believe demand for offshore production systems will continue to grow.
Turning to international land markets, national oil companies in certain areas are embracing technologies pioneered by North American shale producers and applying these to unconventional rocks. Argentina, Saudi Arabia, the United Arab Emirates are all pursuing unconventional development opportunities at-scale. This is an important opportunity for NOV across multiple product lines. First, this will require better rigs. The North American shale revolution was preceded by a build-out of modern drilling technology, as the drilling rig fleet was first converted to fit-for-purpose AC rigs with high set-backs and high-pressure mud systems. Second, specialized tools for hydraulic fracturing and cool tubing for plug drill-outs were required at-scale. Third, innovations in plugs, tow valves, sliding sleeves, burst port subs and other completion tools were required. And now, fourth, better downhole bits, drilling motors, friction reduction tools and torsional vibration mitigation tools, along with higher torque capacity drill pipe, are being required to push laterals out three miles or more.
NOV leads in almost every category I mentioned, and the growing unconventional shale activity in places like the Vaca Muerta formation or the Jafurah field point to greater growth in the future for NOV. For example, this past quarter, our Series 55 drilling motor that has dazzled customers in West Texas completed its first international run in the Middle East. Energy Equipment again saw solid year-over-year mid-single-digit growth into international land markets, led by chokes and gas processing equipment and new AC rig technology for the Middle East. Energy Products and Services posted more modest year-over-year growth, with strong demand for PDC bits, completion tools and composite pipe systems to support unconventional developments, offset by declines in drill pipe sales in the Middle East.
Finally, turning to North America land, activity continues to be subdued as consolidation, efficiency gains, capital discipline, oil price uncertainty and very low gas prices are taking a toll on overall short cycle activity. And frankly, at this time, we don't see much that points to activity improvement through the end of the year. The good news for NOV is that we continue to outperform activity declines, owing to technically better products we've introduced over the past few years. NOV's new technologies have led to material market share gains and everything from PDC bits where we've recaptured the number one position in North America, the drilling motors, friction reduction tools, torsional vibrations mitigation tools, all these technologies continue to set performance records for our customers as they drill ever longer horizontal wells.
Our Energy Products and Services segment posted a modest increase in North American revenues year-over-year during the third quarter, helped by our acquisition of the Extract electrical submersible pump business, along with these market share gains. Composite pipe revenues for this market declined as E&P consolidation pushed projects out, but we are seeing many of these projects restart now. Energy Equipment posted a 6% increase in North American sales during the third quarter, despite its sale of pole products since the third quarter of last year. Strong shipments of Ideal eFrac pumpers and high demand for drilling robotics tools and mud plant upgrades contributed to the strong performance.
The key to NOV's steady improvements in the absence of a major capital equipment build-out cycle is our capacity to innovate to improve results for our customers, including new digital technologies. For example, our drilling instrumentation and digital data acquisition services secured a 20-plus rig fleet of a major Texas-based exploration and production company during the quarter. Chosen for our differentiated service and technology, our edge to cloud digital capabilities enabled by our proprietary Max Platform are driving better efficiency for this operation. We are a trusted supplier to the industry's leading operators.
Our profitability improved in the quarter. We acknowledge that achieving our 2024 exit margin target will be challenging. Nevertheless, we remain focused on the things we can control, driving operational efficiency and optimizing our cost structure. We are confident we can navigate the current market dynamics and grow profitably even if the path to reaching our margin and return goals elongates a bit.
In sum, NOV is well-positioned to capitalize on the evolving multi-year upcycle. I'm grateful to our extraordinary NOV employees who deliver our portfolio of innovative technology and are committed to improving business efficiency. I'm confident they will continue to drive strong financial performance. To all those listening, thank you. Jose?
