NOV Inc.

Good day, ladies and gentlemen, and welcome to the NOV first quarter 2022 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. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy. Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to NOV's first quarter 2022 earnings conference call. With me today are Clay Williams, our Chairman, President, and CEO, and Jose Vallardo, 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 security laws. They 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. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our 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. GAAP basis for the first quarter of 2022, NOV reported revenues of $1.55 billion and a net loss of $50 million. 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.

Thank you, Blake. For the first quarter of 2022, NOV's revenue of $1,548,000,000 grew 2% sequentially, and EBITDA increased $34 million to $103 million, or 6.7% of revenue. Year-over-year revenues were up 24% at 34% leverage, reflecting positive impacts of aggressive cost reductions and some recent pricing recovery, offset by continued inflation and supply chain disruptions. Helped by continued high demand for offshore wind renewables, along with rising oil and gas demand, orders were strong across the board as we put up a consolidated book-to-bill of 115% in the first quarter. The organization's execution against shifting challenges in supply chain freight and labor improved during the first quarter, in part by broadening our base of suppliers as well as recovering escalating costs through higher pricing. Our costs for certain raw materials like resins appear to be easing. Unfortunately, a lot of components got worse during the quarter. Steel forgings, polymers, fiberglass, electronics, stainless steel, and switchgear most notably. Great challenges intensified in the eastern hemisphere owing to the conflict in Ukraine and continued COVID impacts in the quarter. Recent standard cost rules on many of our products moved up materially, reflecting the higher costs we face. Thus, considering all these extraordinary challenges, we were pleased to see improved execution and better financial results for the quarter. While results are still below acceptable levels, our outlook is constructive given the steady tightening of oilfield services capacity that is driving accelerating demand for NOV's core oilfield products. This uplift is giving us improved line of sight towards healthier returns for our shareholders. For reasons I'll go into in just a moment, I believe this upcycle will last a while. First, however, I'd like to take a minute and speak to some oilfield fundamentals. Constructing an oil or gas well takes much more than good reservoir rocks and a drilling rig. Oil and gas companies rely on highly specialized geotechnical talent to identify and delineate drilling locations, and on petroleum and processing engineers who design wells, production systems, and processing and transportation facilities. business requires investments in expensive leaseholds wells and fabrication of platforms processing plants gathering systems and refineries that make oil and gas production one of the most capital intensive industrial undertakings the actual well construction is performed by oil field service companies that in turn operate very expensive highly engineered fit for purpose equipment fleets which probably make it the second most capital intensive industrial undertaking around all this plant equipment and well construction process utilizes a lot of steel as well as exotic metallurgies, polymers, resins, computer chips, electric motors, and electronics. The work is performed by hardscrabble men and women from roughnecks to drillers to truck drivers working long hours in remote locations for usually above average pay in tandem with talented geoscientists and engineers supporting these complex operations. One way to think about our industry is a finely tuned and optimized machine into which goes capital, a lot of capital, highly skilled engineering talent, hard work by experienced oil field hands, fertile acreage identified by geoscientists that holds the promise of profitable production, and a lot of highly spec pipe, plastics, engines, resins, and computer chips. Out of this oil and gas machine comes your high standard of living, the high standard of living that your family and my family and millions of others enjoy, along with the hope of a better standard of living for literally billions of people in lesser developed economies around the world. Out of this machine comes the food that we eat and the fertilizer made from natural gas that the farmer uses to achieve amazing agricultural productivity from fields plowed and harvested using diesel-powered equipment. All air travel, most transportation on demand, plus all ocean-going freight and rail that brings food and products into our lives, the plastics that doctors use to deliver our medical care, and a thousand other things that make our lives better. From construction to transportation to petrochemicals to pharmaceuticals to consumer goods to you name it, the oil and gas industry connects with and supports a hundred industries that form the foundation of our modern lives. This leads me to our current predicament. Two years ago, remarkably, we faced negative oil prices. Today, the world is confronting triple-digit crude prices and all-time high global natural gas prices. While this rapid shift is jarring and damaging to global economies, frankly, it should not have been entirely unexpected. the past few years governments and capital allocators have been playing a dangerous game with respect to energy and the global economy while transition to lower carbon renewable sources of energy for the world is required for the long-term good of the planet it seems we've gotten ahead of ourselves as we've attempted to pivot away from fossil fuels which are inherently reliable and energy dense sources of power to lower density forms of energy with intermittency issues and inferior economic profiles prior pivots to new energy sources were accomplished over decades. Think about the shift from firewood to coal through the 18th and 19th centuries, the shift from coal to oil through the 20th century, the emerging shift to natural gas over the past 25 years. These were driven by economics, superior energy density and value for lower cost to supply rising per capita energy demand. Unfortunately, the lower carbon energy transition today lacks a robust economic engine driving it forward. While LCOEs have fallen for solar, wind, and other forms of renewable energy, I believe LCOEs will continue to fall through technical advancements that NOG and others are making. Renewables are still expensive and suffer from intermittency challenges that require storage solutions that add to their all-in costs frequently not accounted for in LCOE calculations. To accelerate this transition in the absence of a compelling economic driver, governments, regulatory agencies, and media decided it would be a good idea to demonize the oil and gas industry. And let's be honest, you know what I'm talking about. I think the motives behind this are pretty evident to bring about the acceleration of a desired energy transition outcome, namely a more rapid pivot to renewables. Specifically, the oil and gas industry has been under attack by political, bureaucratic, and media leadership that have been very effective in choking off the inputs into the oil and gas machine I described earlier. Now, let's turn back to those, starting with capital. Unrealistic near-term peak oil demand narratives built on the promise of rapid substitution of renewable energy have significantly dampened equity investor interest in oil and gas stocks, both in public markets, where energy weighting of the S&P 500 bottomed recently at less than 2% compared to 14% in 2008 and more than 20% in the 1970s, and in private equity. With little or no terminal value expectation due to a broadly accepted narrative that oil and gas goes away soon, it's easy to understand why equity investors have been reticent to invest here. And with the relentlessly negative PR the industry receives, we understand why it's been fashionable for college endowments and other institutions to trump their divestitures out of the space. Meanwhile, commercial banks are being pressured by both their shareholders and regulators to trim lending to the sector. In short, capital in all forms has become way more expensive to oil and gas. Next, the industry needs... Engineering talent. Again, unrealistic peak demand scenarios and negative PR have frustrated efforts by the oil and gas industry to recruit young, talented engineers who worry about investing their careers in a sunset industry. And this recruiting effort is becoming more urgent as the industry needs to replace its experienced but aging baby boomer workforce soon, referred to by industry insiders as the great crew change. Well-filled work has provided high wages and high standards of living in small towns and remote areas for generations of blue-collar workers. But it's not for the faint of heart. Deep, deep cyclicality requires painful, significant cuts during oilfield downturns, which can be brutal. As the U.S. rig count dropped to record low levels in the summer of 2020 following the global government decisions to shut down economies, the oilfield did the difficult task that we are unfortunately called to do from time to time. We laid off a lot of good employees. This was very, very tough on many good people and families, and they remember it. When we fast forward to today... When the broad economy is growing, unemployment is low, attractive job opportunities are available outside the oil patch, and family balance sheets are in much better shape, only with the pandemic stimulus checks, it is extremely difficult to track direct labor back to the oil patch, and frankly, it requires much higher wages. Oilfield services also cut investments in its hard assets. The downturn saw companies cannibalize underutilized oilfield equipment for spare parts rather than spend precious cash needed to survive on properly maintaining fleets required for more normal levels of activity. As industry activity ramps, oilfield service companies are swimming upstream against the congested supply chains as they scramble to put incremental equipment back in shape to work. The physical inputs required for these equipment overhauls, bearings and hoses, engines and transmissions, polymers and resins, chips and circuit boards are incredibly tight. While the U.S. is back to growing production off of 2020 lows by drawing down duck inventories, we are the only such country that's growing. Global crude inventories are well below average and still trending the wrong direction because we are no longer the just-in-time industry we were in the prior decade. The oil and gas machine needs promising acreage as well. Our EMP customers tell us that the current regulatory environment continues to get more expensive and challenging, orchestrated, in their view, by agencies that are all trying to affect a more rapid energy transition, while in other developed countries, they faced outright bans on oil field activity. By the way, geoscientists need years to find and delineate fertile acreage through exploration. Unfortunately, global exploration was severely cut following the downturn of 2015, meaning the pipeline of prospects to develop is very limited after seven years of underexploring. To summarize, when we survey the inputs required to construct oil and gas wells, from capital to labor to workable regulations to prospect development pipelines to engineering talent to consumables and equipment, all face significant hurdles put in place by politicians, regulators, and media. My question is this. Has this been a good idea? Has it been a good policy to demonize the industry that quite literally powers all other industries? Political leaders across the globe have not been honest with voters and consumers about the cost, feasibility, difficulty, inconvenience, and time required to fully pivot to renewable sources of energy, in my view. I'm not questioning the need to make the pivot, but rather the plan to get there. The de facto policy of choking off inputs of a critical industry, not just years but decades before, we have a good alternative is a very bad policy. Many will suffer as a result. To make matters worse, the enormous economic stimulus that accompanied the forced shutdown of the global economy during the pandemic massively increased money supply across developed economies as governments printed money at a breathtaking rate. The USM2 money supply is up over 40%, for example. Historically, inflation rolls directly into commodity markets like oil and gas. This time, I believe it will be amplified by input constraints that I cataloged earlier. Add to this productivity gains from workforce demographics and globalization that offset money supply growth and prior generation that today are going the other direction, and it's no surprise that dollar inflation is at 40-year highs and rising. In summary, I could not have scripted a more compelling setup for an energy crisis. While this points to rising demand for equipment and services NOV brings to the oil patch over the coming quarters and years, it also points to a pretty dark view of economic challenges we face as we undo the mess created. The world now finds itself in critical need of an industry that it had written off as a sunset industry, and reconstructing this industry will not be easy. Seven years of EMP underinvestment, of oilfield services effectively dismantling much of its capacity and drastically shrinking its workforce in order to survive, together with the additional hurdles created by the vilification of oil and gas, make what is required of us a very heavy lift. According to a recent research report, the industry had its resource life since 2014, and fewer FIDs in recent years will potentially lead to approximately 10 million barrels of lost production by 2024. The prospect pipeline continues to shrink, while ESG measures drive operating and financing costs higher, skilled labor markets are tightening, and inflation and supply chain disruptions are pushing large project cost curves significantly above the levels seen in the prior decade. And accelerating global decline rates adds further risk of global production shortfalls. In order for the world to avoid an energy crisis, the likes of which we haven't seen since the 1970s, we need a synchronized global oil and gas super cycle of some duration, and we need it to start yesterday. We need, and thankfully we are starting to see, both short cycle shale oil and longer cycle offshore development of petroleum resources. The low rates charged by oilfield service participants over the past several years did not reflect the physical consumption of capital equipment used in operations, much less earn a decent return for oilfield service shareholders. However, that overhang is diminishing rapidly and has been replaced with tightening schedules and lean, if not bare shelves. Pricing is beginning to move across the oil field after years of services industry subsidizing its customers by cannibalizing its own capital base. While the moves thus far have been small, mainly to keep pace with inflation, our oil field service customers report net pricing momentum is beginning to grow. Nevertheless, while all the foregoing is worrisome for the global economy, I am confident our company, our industry, and the producers we serve are up to the extraordinary task of growing production to provide energy security and better standards of living for humanity, just as we have done for 163 years. The oil field is nothing if not resourceful and resilient. Since 2014, our organization has shrunk dramatically to make it to the other side of this seven-year down cycle, but we never took our eye off the ball in technology development initiatives. NOV continues to invest in and lead in both oil and gas technologies, along with the emerging renewable technologies that we've spoken of through the downturn. While an energy transition to a lower-carbon future is required, the world is finally waking up to the fact that oil and gas is still absolutely essential to our modern way of life, and the oil and gas industry is quickly becoming aware that it can't continue to meet the world's demand for its products without significant further investment. NOV is the enabler. of what still is the most important industry in the world. And we stand ready to meet the challenges of the coming up cycle. To the employees of NOV who are listening today, thank you for all that you've accomplished through this tough, historic downturn. Your hard work and perseverance got us here. We have a lot more hard work ahead, and now it's showtime. The world will be counting on us. With that, I'll turn it over to Jose.