Q2 2020 National Oilwell Varco Inc Earnings Call
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Good day, ladies and gentlemen, I walked into the National Oilwell Varco second quarter 2020, <unk> earnings Conference call at this time opposite it's not a multi mode later.
We will conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero and you touched on telephone.
As a reminder, it's conference calls being recorded.
I'd 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 National Oilwell Varco second quarter 2020 earnings Conference call with me today are clay Williams, our chairman, President and CEO, and Jose Bayardo or 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 meeting 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 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 the U.S. GAAP basis for the second quarter 2020 interview reported revenues of 1.5 billion and a net loss of 93 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 are we will host a question and answer session. Please limit yourself to one question and one follow up to permit more profit participation now let me turn the call over to clay. Thank you Blake.
The second quarter 2020 brought the full weighted to covert 19 pandemic shut down on a global economy, driving all contracts to negative prices in the us rig count to levels never measured before perhaps lowest dating back to the 19th century.
Consequently, inovios consolidated revenue declined 21% sequentially and EBITDA fell to $84 million were 5.6% of sales as everybody in the oil field hunker down cut costs and pray that this storm would pass.
In the past, we stress that the ability to re size quickly and aggressively is an essential skill in our cyclical business and this is a core competency of interviews line managers.
In a few moments Jose will detail for you our cost reduction progress and expectations for the remainder of the year as bad as this quarter was it certainly would have been far worse without their decisive aggressive actions.
However, our customers were also pretty good at reducing costs and preserving cash. So in addition to the operational headwinds brought about by Kobin 19 facility closures quarantine requirements and travel bans. We also faced a rapid deceleration of business in many areas as customers halted all but the most necessary purchases.
In North American land in particular, the violent reaction fell almost involuntary like a reflex while a couple of our non oilfield business is show growth in the second quarter nobody in the oil field was immune to this unprecedented collapse in the industry as evidenced by all three of our segments reporting sequential EBITDA declines.
Even to those that have been through many downturns the pace at which operators curtailed rig completion and even production activity during the second quarter was breathtaking.
The average us land rig count fell 50% sequentially in the second quarter and the decline in US completion activity was even more severe well completions were down more than 70% quarter on quarter. The oilfield in North America reached a whole new level of pain.
On a consolidated basis, our north American revenues fell 35% sequentially and mix decline for 28% to 28% from 35% during the previous quarter.
Our Wellbore technologies segments revenues declined by 49% sequentially in North America accounting for nearly half of Inovios overall consolidated sequential decline of $387 million.
Well bores products and services tied to drilling.
Downhole tools bit solves control services in tubular inspection were hit hard and hit immediately following 40% to 60% across North America as compared to the 57% decline in the average bakeries rig count from Q1 to Q2.
Pricing pressure ramp quickly as well up to 15% and certain products, but desperate competitors grasping for liquidity or discounting far more trying hang on for one more payroll cycle.
Fortunately pricing is holding up much better in most international markets, even though they too are experiencing steep declines in activity.
Over the last many of Inovios competitors.
Make it to the next payroll cycle and bankruptcies and liquidations are accelerating.
For Innoviva silver lining of this is that our customers are shifting work to in Ob because they know we will make it through this downturn will be there for the long haul, we're seeing meaningful market share gains across many key product lines, albeit in much smaller markets.
Remarkably the flood of oil field assets into the market at distress pricing is leading to startup companies recording equipment and consumables to a handful of fearless entrepreneurs seeking to augment fleets that they purchased at pennies on the dollar and we're rooting for each and every one of them.
It past downturns are to the scope business, we typically see its tubing and sucker rod lines hold up better than drilling activity. As these are more closely tied to workover in production activities and operators get quick paybacks and high reached rates of return on Workovers, However, with millions of barrels shut in across the US we saw workover and production related activity fall just.
As hard as the decline in drilling activity.
The total number of joints and rods inspected in North America fell 51% sequentially and those CTG inventories exceed 12 months as compared to five to six months in normal times. This has led to the shutdown of many domestic pipe mills that for whom we work.
There's essentially no demand for drill pipe rig spares or coiled tubing strings in North America land as contractors are cannibalizing stack assets aggressively, including pulling reals off idled coiled tubing units. Additionally, coiled tubing strings are being run well past establish fatigue life limits before they are being replaced a trend that is further eroding demand.
Eventually this will lead to service failures potentially lost wells in heartbreak, but I guess desperate times call for desperate measures.
We are hearing that leading edge day rates for land drillers have fall into the 15000 $18000 per day range down from the low to mid Twentys. This new materially lower level is likely only marginally above cash costs to run a drilling rig for all but the most efficient drilling contractors and may in fact, the cash flow negative when fully burden for maintenance capex and direct rig supply.
Overhead in areas like safety logistics insurance and sales support the good news is that we are also hearing from many unconventional operators that they plan to add a rigor to in the second half and will likely try to lock in these bargain day rates. Additionally, inovio is being asked to bid one year term pricing in certain Wellsite services historically, a good leading indicator that some custom.
Merger planning on increasing drilling activity.
While we may see a modest uptick in activity later this year, we intend to stay are chartered course, and continuing to re size to the new market, having heard mythical stories of green shoots at the bottom of prior down cycles Hope Springs, eternal and sometimes in the oil field hope gets a little exaggerated.
We think completion and production solution segment, our fiberglass and composite pipe business saw similar sharp decline in North American demand as oil and gas order simply stop while international demand fared better koby 90 shutdowns prevented us from securing vessels to ship pipe overseas from our domestic plants and a couple of our primary international plants, Saudi Arabia.
Asia were shut completely due to government mandates, while our team heroically pivoted supply and Malaysia to China for our growing scrubber business. We found scrubber demand softening as shipyard slowed in ship owners found conversions less economically necessary at least for now due to the tightening spread between diesel and bunker fuel prices offsetting some of the north.
Oracle and gas pressures was a very robust fuel handling market, where we are actually getting price increases.
Not surprisingly demand for chokes valves completion tools and pumps from North America also slowed very sharply.
Although there are virtually no orders being placed domestically for pressure pumping equipment, we're hearing from customers that dual fuel capabilities and other SG friendly offerings will be required by some customers on all future work.
The offshore drilling space is experiencing a similar trend, which is driving more interest in our power blade and other SG friendly solutions from Innoviva.
More broadly customers, specifically majors are mandating certain upgrades and capabilities as a requirement of new contracts, even though the service sector has scant capital to invest in its service fleet their customers. The oil companies are required requiring new and better kit because well they can they havent.
Negotiating leverage and they use it in times like these to get what they really want.
We've seen this in the past all companies demanding and getting better capabilities and features and equipment they hire.
Don't be surprised to see this pressure grow and drive future orders Reno.
I believe that downturn, sometimes forced the service industry to up its game.
The Varco top drive product is a great example, it became.
A required feature if you wanted your rig to be competitive and tenders in the late Eightys and Ninetys at a time when rig margins were under similar pressure as today. This pressure by oil companies transformed the fleet and drilling techniques and consequently safety and efficiency.
And despite the additional investment this can be a good thing for oilfield service companies that can pass this test built by or rent, but somehow secure the necessary capability when the contract in emerge into a world where a few survivors with better kit will make up a more consolidated oligopolies with better long term returns on capital.
Latin America is a mess and widespread Kogan 19, shutdowns and our consolidated revenues there fell 29% sequentially.
In American International markets have held up better than North America declining only about 8% sequentially. Overall. Nevertheless has 750 the international rig count is the lowest since 2003, so markets remain challenging literally everywhere.
In the Middle East mandated facility shutdowns are easing, but closed borders and logistical headaches remain.
A rig technology segments aftermarket business was hit hard by Cobot 19 restrictions falling 26% at high Decrementals in.
In an effort to reduce cobot risks offshore drilling contractors dramatically cut back any personnel going to or from the rigs that weren't drilling related or more bluntly revenue generating.
Inspection certification upgrade and even repair and maintenance activities were deferred and curtailed as a result spare parts orders fell 42% sequentially hitting land more than offshore certain shipyards were also affected by covered 19 further weakening our aftermarket business on the cost side requirements to quarantine two weeks before job as well as to why.
After job certainly didn't help our decrementals.
Needless to say against such a disruptive backdrop.
That also include oil company contract cancellations, not many offshore drillers felt like buying much.
Inquiries for offshore wind installations remained a notable exception for rig technologies, while orders in this area that were low during the second quarter. It is clear that income it participants and new entrants alike are determined to move forward on vessels to support growing demand for offshore wind turbines in Asia and in the United States.
Back to oil and gas, though many oil mini Io sees and indices are delaying projects, but we believe these that most are determined to eventually move forward with these.
There's no doubt that f. ideas will decline materially in 2020.
But many customers are communicating their plans to move forward in 2021 or 2022, perhaps hopeful they can squeeze more cost out of their supply chains in the meantime, the pipeline of projects. We are monitoring for our Wellstream processing business has actually grown year to date underpinned by offshore gas, Brazil development, and LNG projects that need our proprietary mando ethylene glycol.
Paul processing technologies.
With 35 years in oil and gas I can't recall more challenging time.
The near term logistical challenges of co 19 shutdowns of the collapse in oil demand in oil prices. The bankruptcies of so many good companies the loss of jobs by so many wonderful hardworking people and friends. The tragedy of the many who have lost loved ones to this terrible virus.
2020 is a crucible for all of US a year that is testing what were made up it's a year that will remake us and a year. This remaking the.
Despite all these remarkable challenges our Inovio organization continues to improve efficiencies and business processes, because our leaders are focused on what they can control and resisting distraction from issues they cannot.
They continue to support the operations or our customers were facing similar challenges I can honestly say that have never been prouder of this organization and the people that have the owner of working with in every corner of Inovio. The organization remains focused on cost reductions and cash flow, we're adjusting our portfolio of businesses, improving our returns by exiting or divesting certain product lines, we're improving our key.
Capital deployment processes, we're expanding our higher growth areas like Saudi Arabia, and despite operational pressures and disruptions were also continuing to invest in technology and new products.
As we pass through this Crucible. This organization gets better every day and when the phone starch ringing again Adobe will be the best company it has ever been.
One day, the global economy will come out of this downturn to realize just how much it needs oil and gas and when that happy day comes in over you will be there to supply the industry that makes the world go with even better technology delivered by the best professionals in the world to employees that are listening. Thank you for your perseverance. During these difficult times your attention to detail creativity and willingness to.
The extra mile. During this crisis Amazes me everyday Jose Blake and I. Appreciate all that you do stay safe and know that better days lay ahead with that I'll turn it over to Jose.
Thank you clay and obvious consolidated revenue decreased 387 million or 21% sequentially as the global slowdown in oil and gas activity precipitated by the covered 19 pandemic impacted all three of our operating segments. Despite the sequential fall on revenue an intense focus on cost reductions and strong execution on existing back.
Backlog limited decremental margins, 24%, resulting in a $94 million decrease in EBITDA to 84 million in.
In early 2019, we began an extensive effort to better align our cost structure with anticipated market realities and when we saw early indications that the covert 19 pandemic with drive economic shutdowns and an associated collapse in oilfield activity, we materially expanded the scope and accelerate the implementation of our cost out initiatives during the second quarter, we have.
Given an additional 320 million in annualized savings, bringing the total achieved to date to 570 million.
Despite nascent indications that north American drilling and completions activity could increase later this year, we do not anticipate that any near term improvements would be large enough to move the needle associated with a massive current supply demand imbalance for oilfield service tools and equipment.
Therefore, we continue to manage the organization with a lower for longer mentality in doing so we challenged every aspect of our organization to deliver ways in which we can drive further efficiencies and achieve acceptable levels of profitability and returns on capital regardless of how difficult the environment, yes, our actions involve implementing the traditional oil.
Field services downsizing playbook, a requirement to simply survive in this industry, but we're also pushing well above and beyond that game plan to drive every area of the company to execute faster cheaper and better than ever as clay suggested our customers employees and other stakeholders know that inovio is in this business for the long haul.
On to emerge from this downturn stronger and more efficient we're thoughtfully streamlining our operations exiting product lines and geographical markets that don't meet our return thresholds driving more shared services and investing in automation all of which drive toward our ultimate objective, which is to provide better technology tools and equipment.
Summers from a smaller and leaner footprint, a more nimble and responsive supply chain and a business that requires lower levels of working capital.
We are not cutting into the bone of our engineering and R&D capabilities. Instead, we are leveraging those talents to drive improvements in our product designs not just so they operate more efficiently for our customers in the field, but also so they are less costly to manufacture our approach is interest and relentless we're always looking to improve this mentality drove us to identify.
Another $75 million in annualized cost savings opportunities during the second quarter, increasing our year end target to 700 million.
During our last call, we provided a percentage breakouts of savings from direct labor indirect labor facilities and other areas. Since then we've received a few follow up questions from individuals trying to better understand the composition of cost savings and understand future implications.
The simplest way to put it is that our reported cost savings number is the amount of cost we have intentionally and actively removed from our organization. The cost savings number does not include expenses that automatically decrease when volumes fall like raw material costs and normal changes in direct labor hours in other words are stated saved.
Things are 100% structural changes that reduce expense above and beyond what is naturally embedded within normal decremental margins.
If you look at the change in our cost of goods sold and SGN, a excluding depreciation and amortization since we began our cost savings efforts. In early 2019, you can see that these expenses have decreased by more than $2 billion on annualized basis of which 570 million came from structural changes to our operations.
This is the number that we will continue to update through year end.
Now moving on the cash flow.
Cash flow from operations was $378 million for the quarter and capital expenditures totaled 56 million, resulting in $322 million in free cash flow.
Working capital continues to be a source of cash and declined 435 million despite certain metrics. It deteriorated due to customers fighting to preserve liquidity and an increasing proportion of our business coming from international markets, which typically have longer cash conversion cycles in the second quarter of 2020, 72% of our revenue came from.
Outside North America, which compares to 65% in Q1 and 59% in the second quarter of 2019.
We expect to generate positive free cash flow during the second half of the year. Despite the ongoing market challenges.
At June Thirtyth, our net debt totaled 582 million with 1.447 billion in cash and 2 billion in senior notes of which 400 million mature in December 2022.
We expect to pay the $400 million with our cash on hand prior to maturity date, which would then put our next maturity at December of 2029.
Moving to results from operations and outlook.
Our Wellbore technologies segment generated 442 million of revenue during the second quarter, a decrease of 249 million or 36% sequentially revenue from North America declined 49% and international revenue fell 21% segment revenues declined less than overall drilling activity levels in every geographical region, except for the middle.
Just which was disproportionately affected by covered 19 related facility closures.
EBITDA declined 61 million sequentially to 42 million, representing 25% decremental margins, which would have been much higher were not for quick and decisive actions taken by our team within Wellbore technologies.
Our read hike log drill bit business realized at 41% sequential decrease in revenue as a result of the collapse and drilling activity in the western hemisphere, and due to government mandated shutdowns in the middle east, which impacted bit manufacturing throughout most of the quarter and prevented deliveries in Saudi.
Including demand is causing desperation fierce competition, particularly within the us where we are seeing certain competitors aggressively cut pricing are bit technologies have allowed us to steadily capture market share over the past several years and that technology differentiation is now helping us avoid having to match detrimental pricing concessions a testament to the business.
As engineering team and their R&D efforts, while western hemisphere activity will continue to weigh on this business is results the resumption of manufacturing operations in the middle East the startup of recently awarded tenders and eastern Hemisphere and the flow through facility consolidation efforts are expected to result in a small sequential improvement in this business is results in the third quarter.
Our MD Taco business units or 30% sequential decline in revenue due to the dramatic reduction and activity levels revenue from units rig instrumentation offering declined 39%, but was partially offset by continued growth from Andy Mt. Todd 'cause digital drilling automation and optimization solutions, which continued to gain greater adoption.
During the quarter, we began executing on two additional multiyear contracts and let's see for our evolve optimization and automation services utilizing our wire drill pipe technology.
We also commenced several additional jobs using our kaizen surface drilling optimization software that uses artificial hotel intelligence with continuous learning capabilities to optimize drilling performance.
The business also recently commercialized its data wall tripping tool, which enabled the first ever formation pressure test using high speed real time connection tool, while the pipe was dripping.
Empty Taco has a deep pipeline of digital solutions under development that we're excited to tell you more about later this year.
Our grant Prideco Drillpipe business experienced a low double digit revenue decline as the operation continued to execute on existing backlog.
Outside of booking in order for 3 million pound landing string, which will be a largest ever built new order flow fell sharply.
Q2, quoting activity was 73% lower than in Q1.
Demand from the North American land market is near zero, where we expect it to remains as long as there is ample pipe available from stack stacked rigs to cannibalize.
We're still pursuing multiple large international tenders, but we expect many projects to push to the right and are therefore proactively preparing for volumes to drop significantly over the next few quarters.
Our twob scope business experienced a revenue decline of approximately 30% as its pipe coating and inspection operations were negatively impacted by falling drilling activity and sharply reduced demand from steel mills.
Results and our two the scope operation are typically less volatile than other businesses within wellbore technologies due to the slightly heavier weighting to workover and production activities, However, negative oil prices and shut in wells didnt allow any of our operations to find shelter during the second quarter.
Our Wellsite services business units saw revenues declined approximately 50% sequentially driven by the full quarter impact of our exit from the North American fluids business. The sharp decline in North American drilling activity and covered 19 related shutdowns in Latin America and West Africa.
While demand for solids control services will remain challenged near term, we are seeing competitors exiting the business business and customers coming back to end of the because I know, we will be there for them over the long haul.
Revenues in our downhole drilling business unit fell 41% sequentially, resulting from the rapid decline in us drilling activity and covert 19 locked down in Latin America, and the Middle East.
While we do not expect activity levels to improve in the second half customers are focusing on maximizing cash flow through any means possible and we expect our leading edge downhole technologies that improve efficiencies and lower costs to garner additional share.
For the third quarter, we expect the benefit of fewer covert 19 related disruptions to be more than offset by meaningfully lower average drilling activity levels. As a result, we expect revenues for Wellbore technologies segment to fall another 15% to 20% with decremental margins in the mid 20% to 30% range.
Our completion and production solutions segment generated 611 million in revenue in the second quarter, a decrease of $64 million or 9% sequentially.
Effects from the rapid deterioration in market conditions were mostly offset by strong execution on project backlogs built throughout 2019.
Proactive measures to drive efficiencies and contracts the footprint of our operations limited decremental margins to 5% as a result, EBITDA declined only 3 million to 68 million or 11.1% sales.
Economic contraction caused by the covert 19 pandemic pushed many project awards to the right.
Orders for this segment fell 42% to 196 million, resulting in a book to bill of 51%.
Backlog at quarter end was 1 billion down 16% from the first quarter.
Most customers are telling us they are not canceling projects, but rather postponing awards until the massive disruptions and uncertainty from the pandemic abate.
While we take some comfort in this we do not expect a near term resolution of these issues in our planning for continued order weakness through at least the end of 2020.
Our subsea flexible pipe and XL systems businesses, each realized low 20% sequential increases in revenue due to strong execution on what we're viewed as healthy backlogs coming into the year.
Unfortunately bookings were light in the second quarter with sub sea only achieving a 76% book to Bill and XL systems, realizing its lowest order intake on record.
While backlogs are sufficient to support volumes near current activity levels through Q3, and we expect bookings to begin improving as more customers returned to their offices without a sizable improvement in near term orders. We expect our revenues declined slightly in Q3 and see potential for a more pronounced decline in the fourth quarter.
Revenues in our production flow technologies business unit declined 6% sequentially strong execution on backlogs within the units offshore and industrial related businesses was more than offset by 33% revenue decline and its production and midstream operations, which saw sharp decline in demand from North America and co.
At 19 related disruptions, which limited the ability to deliver products and complete final customer acceptance testing for deliveries in the Middle East Latin America and Africa.
Our fiberglass systems business unit realize a 21% decline in revenue due to significant disruptions caused by the coven 19 pandemic.
Multiple international manufacturing locations, including our new plant in Saudi Arabia were shut down for several weeks and product shipping overseas from our us operations and counted extended delays.
Our intervention and stimulation equipment business realized at 21% sequential decline in revenue as demand for coiled tubing and other consumables took a sharp step down in a number of international delivery slipped into the third quarter.
Strong execution of focused cost savings and efficiency improvement initiatives by our IC team helped to mitigate margin erosion.
For the third quarter 2020, we anticipate revenue from our completions and production solutions segment will decline, 2% to 5% with EBITDA margins decreasing between 200 to 400 basis points.
Our rig technology segment generated revenues of 476 million in the second quarter, a decrease of 81 million or 15% sequentially EBITDA fell to 14 million or 2.9% of sales representing 52% decremental leverage.
Second quarter results reflect a small sequential increase in revenue from capital equipment sales with a less favorable mix and a 26% sequential decline in the segments aftermarket business. The sharp drop in global rig counts caused many of our rig contractor customers, which were already under financial duress to immediately cut spending on everything that was.
Not result in a material disruption to active drilling operations. The large sequential decline in aftermarket coupled with operational challenges brought about by covert 19 were the primary reasons for the unusually high decremental margins for this segment.
Last quarter, we mentioned that bookings for spare parts fell sharply in March and Unfortunately, we saw no improvement during the second quarter, which resulted in a 31% sequential decrease in revenue from spare parts sales and a 42% decline in spare part bookings aftermarket services were also inordinately hard hit by the Coven 19 Panda.
Not only do to intentionally deferred surveys maintenance and other non essential spending but also due to the logistical headaches caused by covert 19.
Closed borders mandatory quarantines for crews coming on or off rigs and delayed projects were part of a perfect storm that cost havoc for the operations work schedule during the quarter.
The only good news is that we believe current spending levels on aftermarket parts and services are not sufficient to sustain even the currently depressed levels of activity and must rebound in the future.
Additionally, while lockdowns, a mandatory quarantines remain issue more countries or attempting to reopen their economies.
The segment realized a 49% sequential decline in capital equipment bookings, resulting in 74 million of orders and a book to Bill of 34%. The segment ended the second quarter was approximately 2.8 billion of backlog.
The outlook for our traditional capital equipment business remains challenged near term as drilling activity remains depressed and our drilling contractor customers do all they can to preserve cash while they fight for survival.
However, we continue to see relative strength in the offshore wind market, where we believe that up to 12 heavy wind installation vessels will be ordered by the industry over the next few years, the prominent industry trend of improving offshore wind economics by using larger turbines, which use much longer blades requires installation vessels that are substantially bigger than those built.
For the prior generation of wind turbine technologies.
Each new installation vessel represents revenue opportunity to Lv that is roughly equivalent to a high spec jackup rig. We believe we are well positioned in this market and expect to win our fair share of the coming awards.
For the third quarter, we expect aftermarket sales to remain in line with the second quarter and lower revenues from capital equipment projects, resulting in a 4% to 6% decline in revenue for our rig technology segment. We also anticipate the ongoing cost rationalization efforts, a slightly improved product mix and few recovered 19 related extraordinary costs to reach.
Sold in EBITDA margins that are flat to up 300 basis points relative to the second quarter levels with that we will now open the call up to questions.
Ladies and gentlemen to ask a question we need to press Star then one I just had some telephone so try your question.
Keith please standby with them topic, you may well.
Our first question comes those Bill Herbert holds energy your line is open.
Thanks, Good morning.
Jose.
Your guidance for Cts Q3 looks like the Decrementals.
Our very steep.
If my math is correct what will be the reasons for that is that mix or what.
Yes, it's really relatively small movement.
At the revenue level in mix Thats, causing.
Following that change.
Okay got it.
Clay I'm going to ask macro question, which I know you love, but here's here's the.
Here's the question here.
If you if it's actually not.
So macro but cycle and cycle if you.
I guess the question simply is how do you feel about incremental margins coming out of this morass wants indeed, the world does wake up to the fact that we need oil and gas again and the context is that.
All of your appears to have reported thus far our extolling stronger incrementals due to cost out.
Relative to what was witness in the priors cycle, but the refrain coming out of the morass in mid 2016 was exactly the same theres going to be a vigorous uplift. We've taken so much cost out of the system Decrementals are going to surprise to the upside in fact what happened.
Was just the opposite right margin expansion over.
Over the expansionary phase of the cycle fell well short of expectations and I'm just curious as to what your perspective is a once that date arise and how margins are expected to unfold, yes. Good.
Thanks for the question Bill I'd say, the uplifting kind of a nascent recovery that we saw.
In 2017, and then do that at least the first half of 2018.
In less consolidated portions of oil field services, what what participants Didnt get was pricing leverage and.
So so although a lot of cost were taken out 15 16.
I would submit I think.
You didn't see many sectors getting the sorts of pricing gains that.
We would have gotten coming out of prior down cycle. So if you go back to prior down cycles, we're now you're going into recovery and you're pulling out.
I think you're getting better after a period of significant rationalization.
With that pricing leverage.
Typically the sector has outperformed on incremental results.
And if you kind of stepped through that scenario.
Here are we are in really kind of your six of cost reductions are lot of pressures on our organization to shrink and and as a result, I think culturally in Ob and our peers in oilfield services had gotten really really focus on costs and close management of costs and expenses and so forth.
So in demand starts to come back, which it always does an oilfield services.
Your initial reaction is to try to meet the demand with without adding headcount without adding a lot of resources and capital and you.
All use price frankly to manage that level of demand and so you enter typically enter into it a period where quarter by quarter you outperform on Incrementals.
Where where you're getting really good operating leverage because you have taken a lot of cost out of system plus the extra sort of jet fuel of pricing leverage and that's the that's the kind of recovery that we're looking forward to and for what it's worth.
I think given the current situation with the big supply demand imbalance with with whats underway I think the world maybe setting itself up for an even bigger sort of of shock all of these cost reductions. There. We're all talking about really is a rationalization of capacity of the machine that construe.
Alex Wellbores.
And.
And were shrinking that dramatically in the face of a pretty extraordinary financial pressure and we're doing that at a time when demand is kinda artificially.
Depressed and we can debate, what it's going to bounce back to but I think it is going to bounce back people will start flying again and commuting again, maybe maybe.
Not to the degree that we weren't 2019, but certainly at higher levels and we're doing today. So demand is going to go up certainly supply is going to go down right. You've had this evaporation massive evaporation of capex by MP companies in new wells.
You've got probably a higher level of depletion given the mix a shale oil in the in the global mix of supply than you've had historically.
And then the third Big factor is you got a lot of oil and inventory.
I've heard estimates billion barrels or more.
We'll take some time to flow out it does start to flow out until demand exceeds supply and I think the inventory may mask that imbalance for quite awhile and as at that time progressed as that gets worse right. So so we may wake up one day and find out that weve really dismantle the machine that produces the new oil and gas.
Cells that keep the globe supplied in oil and gas and maybe headed towards a big commodity price shock and when I think that day.
Comps.
This industry will be called upon to ramp back up and you're going to have some very.
Very tough seasoned managers running these oilfield service businesses, they're going to be low to add costs and I think they're going to use price very aggressively to manage incoming demand.
Thank you Sarah.
Thank you Bill.
Our next question comes from the Tommy Mall of Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Ami.
I wanted to start on the cost cut theme and really more on the process.
Whether that's internal with the board or potentially with third parties.
Can you just layout for us.
What inning, we're in there in terms of what you have in front of you to review Im just trying to get a sense of how much work is yet to be done.
When we may hear from you on another target the could potentially be higher than the one that you just raised again today and then on a related point as you've gone through the process. Thus far have you come across in areas, where you are.
Under investing or you realize you had more commercial opportunities than anticipated and you've actually gone the other direction.
Great Great question, Tommy I would say I think we've raised our cost estimate with this program.
Every quarter since we started this process in early 2019, including the second quarter that we just announced.
Last night.
The process really involves our operations teams, making.
Entered it passes through how they accomplish their work.
And looking at how to accomplish that weren't most efficiently and that answers sort of changes as the outlook for demand changes and.
And.
Also as we are willing to undertake.
More structural changes in how we do do business and for instance, I think Jose in his prepared remarks talked about shared services for instance, so.
Which is a little heavier lift.
So as we've kind of move through this process for the past.
Few quarters.
That's what we've done and the cost savings. It's a very very detailed list of actions that they are undertaking.
Ranging from.
New sources of of materials that we use in our business to closing facilities.
To workforce rationalization in those those sorts of things in the most recent quarter, we upped our estimate by $75 million. So we're now targeting $700 million by year end.
A lot of the reason for that is has to do with our low order rates that we saw in both rig and completion and production solutions and so those two groups today given the outlook.
Around orders, let's go back and see what else. We can do that's the kind of thing that we that we do but its monitor very closely.
It's both.
Comes up so it's these individual steps that we track as well as sort of a top down we look for evidence of progress in our in our ledgers and make sure.
This is all hanging together and we're making that we're accomplishing.
The cost savings that we're we're sharing with you you quarter by quarter. We expect that we will continue to move through this current program through year end.
We do have some things that will undertake in 2021, but we'll wait till we get to 2021 to start talking to you about those.
But to.
Set expectations on that certainly not nearly the magnitude of the 700 million that weve expect accomplished by by by year end.
With respect to the second part of your question.
Area I think we are appropriately funding and resourcing the opportunities and initiatives that we see across our businesses and I've been thoughtful about.
Where it's appropriate to cut and and where we should where we should not so so for instance, despite the broad cost cutting thats been underway across innovate.
Certain areas in new product development, we've actually increased our funding for and our resources for so there'll be some some digital products and some.
Areas and automation that we'll be talking to you more balance future quarters that are they are coming out of that but it's sort of a.
A case by case basis that we that we look at these opportunities and try to.
Make sure that were being being good stewards of shareholder resources and funding these appropriately and proportionate to their their potential pay payback.
Thank you Glenn that was very helpful and for a follow up I wanted to shift to a bigger picture theme here the energy transition so called.
It's certainly garnered a lot of attention lately.
And both in and the board rooms, and with investors and so as you've alluded in the past though.
That transition may take longer than is currently assumed by a lot of folks.
So I wonder if you might share what you think.
Some some folks may be missing here and how are you positioning the for the way that you see the world's energy mix evolving.
Well.
Great question. If you if you look at history energy transitions are really all about infrastructure, a capital and and technology and.
History would point to two transitions that take decades, many decades, arguably centuries, and mankind sort of transition from coal to oil.
And from the 19th century to the 20th century into Twentyth century, 21st century, we're going to transition to something else with a lower carbon footprint, we sort of get that but if you. If you look around.
99 point something percent of the world's automobiles are powered by by gasoline or may be diesel, but products that oil and gas industry produces in there's tens if not hundreds of millions of vehicles around the globe, 100% of the aircraft around the world or.
Powered by products from the oil and gas industry, 100% of construction equipment is powered by.
Products from the oil and gas industry, the construction equipment to build our buildings and maintain our rose 100% of tractors and combines are powered by products from the oil and gas.
Industry, 100% of locomotives and tractor trailer rigs that deliver Amazon packages and all the freight.
We rely on.
In addition to our food supplier powered by this industry. So if you step back and look at all those categories of equipment.
An extra so how many tens of trillions of dollars with the key is invested in that infrastructure and it infrastructure doesn't move one inch without products from the oil and gas industry. This is not a transition thats going to go very quickly it's going to go.
But it's not going to happen quickly. So a few years ago, we stepped back and said we could figure out how to help that and accelerate debt in a lot of ways I think that could be the business plan of the 21st century figuring out how to help mankind get to a lower carbon source of energy and we have a lot of skill sets I think that are applicable in this area around.
Capital deployment and project execution, and the built out of infrastructure and so a few years ago, we've began intentionally supplementing our investment in these areas.
In renewables in the energy transition and are pretty excited about.
About the potential of these and we're really actually building on a pretty good base and so we talk at talked in our prepared remarks, you talked a little bit about.
Our participation in offshore wind installation.
Vessels and technology, we're in a visa clear leader.
He is a clear leader in the geothermal space and have been for many years and we've got some.
Products, new products that we're selling into opportunities there and those are established businesses that are making good profits, but in addition to these were investing in new opportunities and products and win.
In solar in a few other areas and so we really do view this as an opportunity and an opportunity that.
They will be uniquely positioned to take advantage of so so pretty excited about what the future culture.
Very helpful. Thank you clay and I'll turn it back thanks Tony.
Our next question comes from Georgia, Leery of TPH and company. Your line is open.
Morning, guys, Hey, George George.
But that the color on the North American fluids market over the last couple of quarters was interesting and you mentioned you have some customers.
When you're looking at plant in deploying new business models in changing the way that kind of game has done that customers are looking to come back to.
Supplier that they can depend on I, just wondered if you could frame how that.
Fluids business looks moving forward in more detail and comparing contrast, maybe what you'll do on the North American side versus the international side to the degree it theres at a major difference.
George.
I'll chime in here. So yes, there's a lot of commentary related or well sites are segment, our prepared remarks, and there has been over the last couple of quarters.
As really a great example of the work that Blake and his team are doing related to helping our businesses.
Make really thoughtful and informed decisions about where it makes sense to for the company to deploy and in keep capital and as part of that review process that process one of the things that.
Jumped out to us is that.
Our us fluids business.
While always a profitable was very working capital intensive and as we sort of looked at or opportunity with our scale in that business is being one.
That we saw few competitive advantages that we can bring the table within the North American marketplace. So like we mentioned last quarter that we were exiting that business and.
And we completed the exit of that business during the second quarter of this year and therefore had outsized impact on on the revenue decline within that business.
The other element that we talked about was the solids control.
Of our well site services business in which we're sort of a clear.
Market leader and that respective area.
If you look at sort of through the cycle returns for that business. It's been very good obviously with a major contraction in the rig count within North America.
You see a quick pretty quick fall off of that business and wall things don't look fantastic spot point in time, what we are saying again is through the cycle.
Good opportunities for us, particularly as we're seeing more and more of the smaller competitors exit the space and create additional opportunities for us just by their exit but also just due to the fact that customers are better recognizing the importance of long term viability commitment add really quality delivery.
Within the market. So those are some of things that we're really trying to highlight in his prepared comments, yes, and in addition to solve control, where we can measure market share and we've clearly gainshare areas like bits.
Coil tubing other areas, we're seeing market.
Sure tick up.
As Jose said on the smaller market, but we're we're clearly gaining share and we're hearing from our customers that are more comfortable with a supplier that as staying power.
Helpful framing. Thank you thank clay.
And then just.
If I missed it but I didn't hear anything with respect to the 2020 Capex budget that may just mean that it's unchanged. It it it seems like looking at the first after the year. There's a shot that you guys under spend that $250 million.
Watermark is that possible or am I, reaching a bit.
The 250 million number is still our budget for 2020 and yes, we.
Spending came down a little bit in the second quarter.
In part due to some of the challenges that we had in terms of advancing construction of our facility in Saudi but we do anticipate the writer spend will pick up a little bit into.
Third quarter.
So we're holding fill them on our.
On our target and that as we've talked about in the past once the that plant is behind US we anticipate getting back to our prior levels of about 3% revenue run rate for Capex spend if not a little bit lower than that depending on the market environment next year.
Very helpful. Thanks for the color.
Sure. Thanks George.
Our next question comes from Chase Mulvehill of Bank of America. Your line is open.
Hey, good morning.
Yes.
Hey, good morning.
I guess I wanted to talk a little bit about fourth quarter. I mean, you touched on it slightly and I just want to make sure that I'm kind of reading the tea at least right.
Commentary seem to suggest that or acute could be down versus Threeq. You said don't look maybe you can confirm that was was that kind of more of a revenue commentary or EBITDA commentary and then maybe just touch so could the free cash flow a little bit you talked about it being positive.
But.
If it's going to be down a little bit how should we think about free cash flow and kind of some of the moving pieces between working capital.
In cash taxes.
Yes, Jason today, so all I'll try to try to take that so yes. The commentary thus providing I think it was really related to our completion and production services segment. A couple specific business units, there where our bookings have been relatively light over the last couple of quarters.
Really what im trying to put out there is that there's still a tremendous amount of uncertainty over the next couple of quarters right you sort of look at the massive amount of disruption that took place at the end of Q1, and then into Q2 or effectively our customers, one where you've been able to sort of come into their offices. So.
We think that had a big impact in terms of the timing of order flow and we mentioned that most of our customers are telling us that orders are not being canceled there they're being pushed some of them are being pushed more significantly than others. We think there are number of orders.
That we expected to obtain in Q2 that are likely Q3 type events and so really just trying to say that if that does not materialize theres further disruption and.
Further issues associated with order intake the backlog starts looking pretty light and some of those businesses and so you can see harder stepped down in Q4, if orders do not materialize.
And I guess the second part of your question as it pertains to cash flow.
Again significant amount of uncertainty.
In terms of how the rest of the year plays out, but what we do anticipate is.
Further harvesting of cash flow from our working capital.
Even given that some of those working capital metrics would likely deteriorate a little further from here and what I mean by that.
Look at the DSO that could tick up a little bit higher as the revenue base continues to shift more towards international markets and customers face a little bit more stress and strain.
Again longer cycle business also has longer terms cycles related inventory, so expect that to get a little bit worse, but as we look at other components working capital for US you look at contract assets and contract liabilities. The anticipated movements in those give us confidence that we should still see some reasonably healthy cash flow in the second half the year.
Okay.
It makes sense one quick follow up.
Maybe kind of back to Bill's question.
Beginning.
Obviously, you've done a lot of rationalization and costs across the organization.
What levels of revenue do you think you actually rightsize your business towards as we think about the recovery and may be hitting the high end those incrementals as.
As you don't have to bring back any kind of fixed costs.
Well.
We're continuing to adjust to market Thats, obviously facing.
Right now pretty historical challenges in and.
Working hard to.
To maintain positive.
EBITDA and cash flow as best we can through that.
What I'd tell you is that.
We're doing that and taking out certain facilities and plants, because we have a great deal of confidence in the ability of our leadership when called upon to rebuild that and to respond to higher levels of demand and I think we've got a great track record with respect to doing that and frankly, that's really kind of an.
Sorry skill set and oilfield services.
The way too.
Survive these downturns and really prosper in the upturns really is to move aggressively on costs at when when called upon and then when demand comes back to move aggressively to expand to rising demand.
In a way that's that's.
Mark and cost effective and so forth and so.
Hard part of put.
A number on on that level of revenue, but as I said earlier.
Our management team continues to iterative.
On a quarter by quarter with respect to outlook for there for their businesses not just 90 days out but over the.
Next few quarters as best as anyone can tell.
And adjust their businesses to to stay healthy.
As best they can't through that.
Okay already okay, well thanks, Jason.
Our next question comes on sign me come of JP Morgan Your line is open.
Thank you Hey, good morning, I want to Sean.
Just a couple points a clarification.
As.
You know to 320 million of annualized benefit and the cost down the second quarter 570 to date, and then or 75 million identified so 700 targeted now by yearend.
Can you maybe just give us an estimate of how much of a cushion that gives you when you lap that full 700 million and 21. So in other words, how much of a year on year benefit you get next year is that maybe.
Under 950 million something like that.
I think we'd have to work through the math, yes, yes, there certainly is a timing element to one that one.
The savings come and I think we've done a reasonable job providing updates in terms of the amounts realized every quarter over the last several quarters. So we can certainly go through that math and.
Fault follow up with you post call it and do that offline Sean.
Okay sure no problem and then I guess my point of clarification. The guidance can you give the third quarter is inclusive of the savings you expect to capture in the third quarter correct that is correct.
Okay, great. Thanks, very much thanks. Thank you.
That's all the time, we have for questions I'd like to turn the call back over to clay for closing remarks. Thank you Michelle.
First and foremost I want to say again, how much appreciate the hard work their employees are doing.
There are some extraordinary challenges and conditions out there and so thank you those of you who are listening I'd ask everybody on the call to do what you can to stay safe keep others around you safe and lastly, we look forward to speaking with you about our third quarter results in October. Thank you very much.
Ladies and gentlemen. This concludes today's conference call. Thank you for Justin will now disconnect everyone have a great. Thanks.
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