NOV Inc.

Good day, ladies and gentlemen, and welcome to the NOV third 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 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 third quarter 2023 earnings conference call. With me today are Clay Williams, our chairman, president, and CEO, and Jose Bayardo, 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. 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 form 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 third quarter of 2023, InnoV reported revenues of $2.19 billion and net income of $114 million, or $0.29 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.

Thank you, Blake. NOV's third quarter revenues of $2,185,000,000 were up 4% sequentially and up 16% compared to the third quarter of 2022. The company posted fully diluted earnings of 29 cents per share for the third quarter, up 21 cents year-over-year, and EBITDA was $267 million. Both sequential and year-over-year EBITDA leverage was 24%, driving consolidated margins up 50 basis points sequentially and 190 basis points year-over-year to 12.2% in the third quarter. NOV's extensive offshore business drove results. Consolidated sales destined for offshore markets increased 10% sequentially and roughly 40% year-over-year, lifting our offshore mix to 46%. All three segments posted higher offshore revenues sequentially with completion and production solutions and rig technologies, both posting solid double-digit growth. Our strong franchises in oil and gas, as well as offshore wind, carried the day. Following a decade of underinvestment, which saw North American shale crowd out spending in offshore and international land drilling, we are pleased to see growing momentum in several offshore basins around the world, in addition to international land. Underpinned by LNG and constructive commodity prices, global offshore FIDs look to be in the range of $140 billion in 2023, up 60% from the average of the preceding eight years. And 2024 looks to be even stronger. Offshore service capacity continues to tighten broadly, driving improved economics for us and our customers. Leading-edge day rates for high-spec drill ships are barreling towards $500,000 a day, and jack-up rates are rising as well. Importantly, we are hearing of operators looking to lock up rigs for longer terms, which we hope will give our customers greater confidence to pull the trigger on capital projects that will drive future NOV orders. Although we are a long way from offshore rig new builds, we are intrigued by inquiries we've received related to three Eastern Hemisphere national oil companies considering potential new build jackups and a new build floater. In the meantime, our rig technology segment is benefiting from strong demand for aftermarket spares and reactivations as offshore rigs continue to mobilize. Rig technology's aftermarket increased 10% sequentially and 46% year over year. Completion and Production Solutions saw bookings rise 18% and posted a book-to-bill of 114%, led by our subsea Xcel Systems and Process and Flow Technologies business unit selling kit into offshore developments. RIC Technologies capital equipment bookings for the offshore were up 14% sequentially, but overall bookings fell $44 million following Q2's strong demand for land equipment. Our consolidated revenues into international land drilling programs increased 3%, with wellbore technologies leading the way, posting double-digit sequential gains coming from Africa, Asia Pacific, and the Middle East. Consolidated international and offshore sales gains were partially offset by sequentially lower revenues in North American land markets, down about 2% sequentially. Low gas prices and lower levels of U.S. drilling softened demand for drilling equipment orders, but caps benefited from some large EFRAC equipment orders in the third quarter for the U.S., It's been an interesting time. We've navigated a decade of significant global underinvestment in oil and gas everywhere except North American shale, which was responsible for 80% of global oil supply growth over the past 10 years. And during the last few years of this journey, we've been pummeled by inflationary gales and a supply chain tsunami. In response, we've cut costs everywhere except new technology development. We've pushed prices to try to keep up with inflation, which has been challenging. Nevertheless, I am very, very pleased with the reception our new products are getting. As the oil field goes back to work, our customers are benefiting from NOV's new solutions that are driving better performance, better safety, and lower emissions. They like what they are seeing and demand is building, notwithstanding their pledges of capital austerity and lack of animal spirits. Let me take a few minutes to address revenues, margins, and cash flow. First, with respect to revenue, NOV's performance has been strong. Specifically, NOV's top-line growth rate since our low point in the first quarter of 2021 has been at a rate of about 25% annual growth, 6% higher than the Big Three average through the same period. This has been driven by new bits and new drilling motors, new composite pipe designs, new digital products, including new wired drill pipe high-speed connections to the bottom of the hole, new edge computing products, and new control systems and new automation tools, all of which drive performance for our customers. Thus far, NOB sales outperformance has been accomplished without a meaningful capital equipment recovery. has been achieved through resetting our activity-driven product and service portfolio to offer what we knew all along our customers would eventually need. Oil field down cycles all end in, well, up cycles. And the end of every down cycle and the beginning of the next up cycle, scarred by their near-death experiences, oil field service survivors generally suffer from chronic PTSD. They all swear never to spend a dollar of capital they don't have to ever again and never, ever to stretch or wreck their balance sheets ever again. 1992, 1999, today. In a lot of ways, following periods of underinvestment, solemn pledges of capital discipline kind of mark the opening ceremony for an upcycle. As an upcycle gains momentum and activity rises, the challenge oilfield service companies face is less financial fidelity and more related to the laws of physics. The oil and gas industry consumes highly specialized, fit-for-purpose equipment voraciously. Putting a bit five miles into the earth to hit a precise target devours expensive pipe and rigs. As demand rises and equipment is consumed, prices rise to ration its availability, leading to outsized margins and returns for oilfield service participants who own scarce equipment. When E&P companies face these equipment shortages, they actively sponsor additions to fleets through profitable longer-term contracts to both incumbents and startups. And as the upcycle progresses, well, you know the rest of the story. Now, perhaps this time will be different, but we shall see. The second thing I'd like to talk about are margins. While our margins continue to improve, they still remain below levels we need to generate adequate returns. Thus, we are focused on pulling the levers we can control, namely price and cost structure. We announced that we intend to further streamline our overhead by going from three segments to two segments, energy equipment and energy products and services, starting January 1st. This is part of the $75 million cost reduction program we disclosed last quarter and is designed to make our business more efficient while capitalizing on the new technologies we are bringing to the marketplace. We will be providing historical pro forma financials for your models next quarter. As we continue to reduce costs, we are also intent on putting better quality and higher margin orders into our backlog. We've been very intentional about price, risk, and commercial terms on large tenders, particularly in the offshore and international markets. Predictably, this has led to missing some project awards on price and terms. But having been stung by inflation, we are sticking with our disciplined approach of price leadership. And quarter by quarter, we see our competitive positioning improving as end customers come to appreciate execution, reliability, and technology more and more. We're confident in our strategy because we have good visibility on a growing pipeline of tenders, plus we are carrying solid and stable backlogs. $3 billion for RIG, which has had a book-to-bill of 102% through the last year, and $1.6 billion for Completion and Production Solutions, which has posted a book-to-bill of 106% through the past year. And as I mentioned earlier, we've been able to post significant revenue growth since 2021, up 75% on the strength of the rest of our portfolio, our non-capital equipment products. Our expectation is that as the upcycle emerges, these new businesses, together with a blossoming capital equipment demand at higher margins, will translate to overall higher margins and returns for NOV on a consolidated basis. Said another way, our quick-turn transactional businesses have enabled NOV to post strong revenue growth, while our later cycle equipment businesses represent additional optionality to a future upcycle. Finally, free cash flow during the quarter improved $114 million sequentially, but remains negative at $34 million. As we discussed on last quarter's call, the healing of the global supply chain has led to an acceleration of raw material and component deliveries for our businesses, and net working capital remained at an elevated 33% of annualized revenue during the quarter as a result. This trend is expected to begin reversing during the fourth quarter as our product shipments continue to catch up to the supply chain, which will improve our cash flow sequentially. Looking ahead to next year, the normalization of supply chains and working capital intensity should enable NOV to generate meaningfully positive cash flow and position us to begin returning more capital to our shareholders. So to summarize, one, NOV's new products and technology are amazing and are fueling strong revenue gains for the company without much assistance from our later cycle capital equipment businesses. Two, if history is a guide, these capital equipment businesses will begin to grow and then grow sharply as an upcycle matures, but for now remain mostly optionality. Three, margins have been pressured by extraordinary supply chain disruptions and inflation, but progress in these areas has lifted margins steadily from break-even to 12.2% in two and a half years. And four, after cresting in the third quarter, we expect working capital to decline in the fourth quarter to begin to drive strong, positive free cash flow through 2024 and beyond. Years of underinvestment in the oil field combined with operator demands for better reliability in the field and improving cash flow for our customer base should drive our oil field service customers to more normalized levels of maintenance spending and reinvestment in their asset bases. More efficient manufacturing operations and a fully healed supply chain, together with a higher margin backlog converting into revenue, will drive better incremental margins. All these things will contribute to improving financial results for NOV as we work to provide the global energy industry with the technologies and customer service for which NOV is so well known. Before I turn it over to Jose for more detail, I want to thank the NOV employees listening today for all your hard work and diligence to take such great care of our customers as well as each other. Two of the best examples that I can think of are Kirk Shelton and Isaac Joseph, whom I have enjoyed working with for many, many years. Many thanks to both you guys, and I wish you all the best. Jose?