Q3 2020 National Oilwell Varco Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the National Oilwell Varco third quarter 2020 earnings Conference call. At this time, all participants are in listen only mode.
Later, we'll conduct a question and answer session and instructions will follow at that time if.
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 National Oilwell, Varco third quarter 2020 earnings conference call with.
With me today are clay Williams, our chairman, President and CEO, and Jose Bayardo Senior Vice President and CFO.
Well, 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 and involve risks and uncertainties actual results may differ materially now what you assume that 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 the latest forms 10-K and 10-Q.
Filed with the Securities and Exchange Commission our.
Our comments include non-GAAP measures.
Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our web site.
On the U.S. GAAP basis for the third quarter of 2020, you know the reported revenues of 1.38 billion and a net loss of 55 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 you.
U.S. drilling activity during the third quarter of 2020 was the lowest measured since records were started in the early 19 forties, making this the worst quarter in the past 300, or so the COVID-19 pandemic response kept a lid on air travel and business activity, which depressed global oil demand and in turn diminished demand for inovios products and services in obese.
Validated revenue declined 7% sequentially and EBITDA fell to $71 million or 5.1% of sales during the quarter ended September Thirtyth 2020.
Although a vaccine and normalizing wheel demand see more likely than not in 2021, our customers like us are cutting costs and exercising extreme austerity in the near term, which led to modest orders during the third quarter. The company realized only 38% book to Bill on a consolidated basis. Fortunately, though we are seeing rising inquiries in our country.
Lesion and production solutions segment that we expect to lead to increased orders and the rig technology segment already surpassed its total Q3 orders level. During the first few weeks of October new products are helping drive demand for both segments.
For the fast past few quarters, we sought to be clear and transparent in our communications with you. What we are doing to navigate this historic downturn, namely one aggressively and proactively downsizing reducing costs to reducing working capital and capex to maximize cash flows three maximizing liquidity.
And for continuing to invest in research and development of new products to position the company for the inevitable upturn.
I'm pleased to report that we continue to exceed our targets on cost reductions, we have reduced our global facility footprint workforce and support services, making our operations leaner and more efficient. We also continue to prune businesses that are not yielding adequate returns.
We've shared a lot of data around these costs and cash flow efforts with you on past calls on the other hand, we've taught far less about our new product investments, which weve been careful to sustain because they will form the foundation of in obese growth going forward.
At our core what it'll be does is build franchises that possess sustainable competitive advantage market leadership frequently lynn's scale advantages status in Ob enjoys however market leadership also carries the responsibility of technical leadership, our customers expect us to push the envelope on technical innovation to improve it.
Fishing season cash flows for their operations knowing this we sustained our investment in new technology through the downturn and I'd like to tell you about a few new technologies, we are bringing to market hydraulic fracture stimulation is a critical part of unconventional shale production. The shale Revolution is built on fracking the industry has been experimenting with the use of lease guy.
Gas to power fleets with electricity to reduce gas flaring carbon emissions fleet maintenance costs and diesel expense, which can run well over a million dollars per month.
Generating power on site to run electric motors that in turn drive pumps instead of conventional direct drive diesel engines and transmissions can reduce mechanical complexity and maintenance costs. We've already seen this work in the drilling space driving the evolution of drilling rigs towards AC electrification between 2005 in 2015.
Throughout that period, the largest best capitalized drilling contractors at the behest of their customers. The p. companies embrace this AC electrification improvement and invested in new rigs.
Then something really interesting happen they looked around when it was done and found their space reasonably well consolidated.
That's because only a handful of smart drillers could afford the price of admission to this new AC rig world, but those that made the leap clearly benefited.
We don't believe me take a close look at tier one land rig day rates between 2015 and 2019 despite.
Despite the downturn day rates remained very healthy strong evidence of an improved industry structure.
I think this example, because much has been said and the need to roll up the pressure pumping sector across North America shale through aggressive M&A to drive consolidation.
In my view there is another capital efficient way to drive consolidation and that is through technology disruption.
We hear from the MPS that they are increasingly that they increasingly prefer electric frac to conventional fracturing for environmental safety and cost reasons two years ago, our completion and production solutions segment began work on our ideal Frac suite to capitalize on this market opportunity and we brought it to market a few weeks ago.
It offers reduced emissions and fuel costs for the operator, and lower total cost of ownership relative to conventional fleets by up to 40% for the pressure pumper.
It does this through two means first it is designed to have the fewest electrical connections in the industry a feature that significantly reduces the need for highly skilled electrical labor at the well site reduces overall wellsite congestion and safety risk and reduces cable expenditures second the ideal system is designed with significantly higher power density and it's more.
Get competition. It is the only offering today with a 5000 horsepower pump designed to fit hand in glove with the best in class turbine offerings, resulting in a smaller footprint and lower engine and transmission expenditures.
Additionally, this transported into 40% fewer truckloads and rigs up faster, particularly with our Fracmax Big bore quick latch system and flex connect Frac Whos evercore.
It requires a smaller footprint and fewer people on site to operate engineered for 13.8 kv. It can accept turban or gas genset power, both utilizing lease gas and minimizing flaring or work offline power is truly power agnostic. Most important note is the reduction in total cost of ownership by up to 40% with for.
Further improvements expected from its integrated condition based monitoring which will work with the predictive analytics, we are actively developing.
We know pressure Pumpers have limited access to capital, but we also know shale producers are anxious to become more SG friendly as shale producer willing to sign a term contract with the pressure pump or perhaps a short is only two years could drive our first purchase order for fleet in the meantime, we executed an agreement with a major us pressure pumping service provider to.
Test one of our new ideal Frac pumpers in the field and we expect to be testing, our blender and support equipment soon as well. Additionally, we are hearing of some clever entrepreneur is exploring opportunities in the power generation side of the emerging refrac opportunity stay tuned.
Within our rig technology segment.
We've discussed our growing installed base of Novos operating systems across both land and offshore rigs was 72 rigs running at this morning's operators love it for the drilling optimization algorithms that provides but we believe they will love it even more soon that's because we expect to commercially introduce a new robotic pipe handling system for land rigs in 2021 when that operate seamlessly.
Within the Novos digital environment, we believe the growing Novos install base is the digital foundation for the industry's leap forward to automate drilling in North America. It used to be that tier one rigs require greater set back higher top drives high pressure mud systems and walking capability now the new definition of tier one rigs also.
Digital rig enhancements like Novos saw speed and kaizen, which are driving further efficiency and safety safety improvements through artificial intelligence and machine learning.
Fully automated slips to slips drilling has been a vision shared by many for decades, the possibility of removing humans from the well center greatly reduces safety risk and frees up rig crews to focus on higher value added activities.
Drilling automation can raise the performance standards of experience drilling crews by permitting them to focus on the big picture rather than on repetitive manual tasks, but here's the kicker our new robotic pipe handling system is very affordable.
It's easily retrofittable into existing land rigs, we understand that capital is limited for drilling contractors. These days, but we also know the MP operators would strongly prefer a rig that can push button trip.
Enabling the retrofit of account of the contractors existing fleet at a very affordable price is a fantastic opportunity that we think will attract a lot of attention among oil companies.
Rick Technologies is also seeing growing interest in its new power blade power management system, which cuts diesel consumption and cotwo emissions on offshore floaters.
Even though weve just introduced this new technology, our first customer in the North Sea is already looking at upgrading additional rigs to improve their competitiveness on MSG metrics in a crowded marketplace.
Let me turn now to our Wellbore technologies segment and speak to some real world challenges our customers face as we all hurdle for the digital Utopia, you've all been hearing so much about.
Wells were drilled and completed and sometimes Recompleted and then Recompleted again, producing data for decades for many vendors and many sources. The data they generate is subject to limited or no data quality checks is produced a multiple protocols with no standards around format Con.
Consequently, oil and gas producers spent a significant amount of time and money cleaning aggregating formatting translating and conceptualizing data before any actual analysis happens. Furthermore solutions reliant on cloud connections introduced lag problems and issues arise when remote communications are broken and guess what the oilfield operate.
Absent the remotest of locations that often lack basic connectivity need.
Needless to say these real world complexities get in the way of easy real time decision, making individual MP operators, who roll up their sleeves and tried to develop their own solutions to these problems frequently lack sufficient expertise and scale because deployment is limited to their own operations and the cost of maintenance and upkeep is hard to justify for all but the largest saw.
Operators plus you have this whole technological obsolescence thing.
Inner wellbores, new Mac suite of edge and cloud technology, which we've been quietly developing for the past three years, we are going to the field next month for testing and expect it to be commercial in 2021.
Our value proposition is simple enable our customers to use their own data and run their own businesses with a uniform version of the truth, both in the office and in the field in the Max Viz, New digital ecosystem enables them to capture aggregate visualize and analyze their data in real time at high speed on the edge in their cloud or in our.
Our cloud in narrow office and at the well site one version of the truth, both at the office and the well site in real time like a Bloomberg screen. Our vision is to collect disparate data streams, and then put them on a single screen sync up and format it and contextualize for easy use by the owner of the data.
We are taking Max to market through Wellbore technologies, 80 year old Indeed, Taco division, the leading provider of rig instrumentation services with global 24, seven support and boots on the ground throughout the oil field MB Tyco make sensors, both service surface and downhole, which helps avoid garbage in garbage out problems and data generation.
You know the Max gathers and translates that data and can run customer owned inovio or third party analytics or applications at the well site or remotely.
While others require a middle man in Ob provides all services and solutions sensor discrete meaning we don't just connect to the data we build the equipment that provides the data with the with the largest installed base of equipment in the industry and Auvi products were most likely already at the well site and in place to gather data as the market leader in control systems, we speak most machine language and can affect.
Automation at the well site it.
A primary means by which customers can drive economic benefit from their data Matt.
Max is built on new technology stack that lives at the edge out in the field where work is done this edge technology has to be robust secure connected and manageable at incredible scale available technologies, just didnt fit the bill. So we developed Max edge to include military grade encryption and Tls secure communication keeping data and analytics.
Dave the solution handles 31, inbound industrial protocols, including support for 12, Kilohertz waveform vibration data on critical channels and 15 industry standard outbound protocols, including eight of US Aiotv as your I O T hub and Google Io T core.
I'm proud of the Inovio engineers programmers and scientists who are introducing new better safer and more efficient ways of developing and producing oil and gas during the worst quarter in the industry for more than 75 years.
I am also proud that Inovio continues to pursue opportunities in renewable energy building, our strong position in the offshore wind to geothermal energy space I've said, many times before that we view the transition to a carbon free future as one of the greatest economic opportunities in human history, and I think capitalism will produce the solutions required.
However, I want to stress two important points that guide our decisions with respect to resource allocation.
The first is that we will remain true to our oil and gas customers. We will continue to bring them, new and better technologies and support their operations. Despite the popular narrative that the world will soon abandoned oil we respectfully disagree and recognize that oil continues to lift people out of poverty and improve all our lives.
There are currently more than 1 billion motor vehicles, 39000 aircraft and billions of dollars of construction mining and agricultural equipment around the world representing tens of trillions in capital investment. It all becomes worthless overnight without hydrocarbons, while renewable sources of energy will certainly grow in the mix of the energy pie at the end.
The day oil and natural gas continues to be the fuels that power the world.
The second point I want to make is that all of our investments in new products and technologies, both traditional oil and gas as well as renewables are constrained by our responsibility to to be good capital stewards. We only aim at markets, where we believe we can carve out a clear sustainable competitive advantage in the long run fundamentals always prevail.
When this crazy year passes and the economic shutdown fades the world is going to need a lot more oil and gas and the world will need this industry to get back to work.
He is going to be there leaner and meaner than we've ever been to make sure. It has what it needs to do so efficiently and safely the dedicated creative service minded employees for whom we are so very grateful will prove once again, while they are the best in the world with that let me turn it over to Jose.
Thank you Clive and of these consolidated revenue decreased a $112 million or 7% sequentially to $1.38 billion as our business has felt the full effect of the sharp reductions in north American drilling activity that occurred during Q2 and the continued activity declines in most international markets EBITDA decreased only $13 million as our.
A relentless focus on reducing structural costs and improving operational efficiencies across the organization limited decremental margins to only 12%.
During the quarter, we exceeded our $700 million annualized cost savings target, while we surpassed our goal we have a number of cost reduction initiatives that will carry into the next few quarters and we will continue to work to identify additional ways in which we can improve profitability and return cap and return on capital for NV.
Our efforts to improve our working capital efficiencies, we are making great strides in a difficult environment are part of our ongoing efforts to improve return on capital our success in reducing working capital along with our capital light business model is allowing us to deliver best in class cash flow generation.
During the quarter, we delivered another 323 million in cash flow from operations and $274 million in free cash flow, bringing our year to date cash flow from operations and free cash flow totals to $740 million and $567 million respectively.
We expect to generate an additional $1 million to $200 million in free cash flow during the fourth quarter.
Our resilient cash flows have enabled us to continue to strengthen our balance sheet, while making meaningful investments in new product development and growth initiatives that will drive future growth for abbvie, including the offerings that clay just described during.
During the third quarter, we successfully completed a tender for $217 million of our senior notes due December 2020 to.
Leaving us with only 183 million remaining outstanding on these notes, which we expect to pay off with our cash on hand prior to the maturity date are.
Our next maturity does not occur until December of 2029.
At September Thirtyth, our net debt totaled 339 million with $1.485 billion in cash and $1.8 billion to $4 billion in debt.
Moving to results from operations and outlook.
Our Wellbore technologies segment generated $361 million of revenue during the third quarter, a decrease of $81 million or 18% sequentially. The decline in revenue was in line with the sequential decrease in global drilling activity and reflected a full quarter impact of the sharp reductions in north American drilling activity and continued declines in international markets.
Revenue declined 28% in North America, and 12% in international markets. Both in line with drilling activity levels continued progress.
Progress on cost savings initiatives, partially offset the impact of lower volumes and pricing pressures limiting decremental margins to 26%.
Our read hike log drill bit business realized a 10% sequential decrease in revenue, but achieved a modest improvement in EBITDA due to cost savings and improved product mix us revenues declined 26% meaningfully outperforming the sequential decline in us drilling activity levels are result of industry, leading technology that is allowing the business to capture market share.
And help customers set drilling records.
David 19 disruptions continue to hamper activity and caused project delays and international markets, particularly in the Middle East and Africa.
More recently, we are seeing countries in Latin America, and Africa merge from Lockdown downs activity levels in the middle East stabilize and North American rig counts increase off off the trough established during Q2, giving us some optimism that we will realize modestly improved results for the business in the fourth quarter right.
Revenues in our downhole business unit fell sharply during Q3 as customers halted orders for drilling tools, while they work down existing inventories to levels better aligned with projected drilling activity as activity begins to stabilize in international markets and improve in North America. We expect the Destocking of these consumable products will be completed in relatively short order.
Resulting in a stabilization of this business unit's results in the fourth quarter.
Our grant Prideco drill pipe business also experienced a sharp decrease in revenues. The result of two straight quarters of limited order intake.
A higher mix of larger diameter pipe deliveries and cost savings initiatives helped to limit decremental EBITDA margins. It will take time to alleviate the overhang of drill pipe recently stack rigs around the globe. However, we believe the tightening supply of drill pipe that we saw as recently as January as January of this year will shorten the timeframe typically required to.
Re established market equilibrium, what we're likely still a few quarters away from a strong inflection in demand. We are beginning to see pandemic delayed international projects resume additional opportunities for drill pipe risers emerge and drill pipe brokers and rental companies in the U.S. reengage, resulting orders booked so far in Q4 already equaling.
Half or Q3 total.
Our tubes scope business experienced a revenue decline of approximately 20% the units us and eastern hemisphere operations experienced particularly sharp declines in revenue as the fall off in oilfield activity and COVID-19 related shutdowns resulted in customers, having more than ample quantities of finished two tubulars in their possession to carry them through the quarter with.
Slowly improving activity levels in North America, and fewer pandemic related restrictions, we expect our twob scope operations will realize slight improvement in the fourth quarter.
Our MD Taco business units off 14% sequential decrease decrease in revenue due to the continued activity declines in North America, and the eastern Hemisphere, which were only partially offset by improvements in Latin America.
Our kaizen intelligent drilling optimizer, which employs artificial intelligence to help mitigate drilling dysfunction and improve performance continues to be adopted by key customers in the North American market and now has two technical trials with large and associates scheduled for this quarter.
As clay mentioned MD tacos technology portfolio is rapidly evolving and we expect to see significant market penetration by several of these products in the near future.
Our well site services business unit experienced a high single digit sequential revenue decline in the third quarter increased activity in the Gulf of Mexico, Trinidad and the North Sea along with increased screen sales in the middle East, partially offset sharp declines in Africa, and the North American land market more recently the business unit has not some sizable wins.
In international markets, including an order for 60, Brant Shakers to upgrade 15, Jackup rigs in Asia, and a contract for our proprietary hot oil thermal desorption equipment to treat drilling waste in Guyana. These.
These awards, along with improving activity levels in North America should result in improved results during the fourth quarter.
As we've said many times in the past our Wellbore technologies segment is the most sensitive to real time changes in global drilling activity and also carries the highest operating leverage of our three segments. His leadership team has moved swiftly to right size the organization and stabilize results in unprecedented market conditions.
For the fourth quarter, we expect revenues for our Wellbore technologies segment to improve 1% to 3% sequentially with incremental margins in the 30% range.
Our completion and production solutions segment generated $601 million of revenue in the third quarter, a decrease of $10 million or 2% sequentially strong.
Strong execution on international and offshore project backlogs, mostly offset limited demand for our shorter cycle products and aftermarket parts and services EPS.
EBITDA declined $5 million to $63 million or 10.5% of sales.
Orders for the segment fell 14% to $169 million as the Lockdowns, an ongoing uncertainty associated with the pandemic caused customers to defer decisions on new projects Encouragingly, we have seen a sharp increase in activity around pre feed studies and our general and general tendering activity in the last few weeks we are.
Cautiously optimistic that order intake bottomed in Q3 and believe the actions we are seeing bode well for more meaningful improvements in 2021.
Our fiberglass systems business unit achieved a small sequential increase in revenue sizable deliveries of large diameter high pressure pipe in the middle East and continued solid performance from our fuel handling business more than offset lower revenue from our marine customers, who are postponing deliveries of scrubber systems.
The global pandemic has caused an unexpected glut of middle distillates, usually processed into jet fuel to be used in the production of inexpensive very low sulfur fuel oil, making marine scrubbing systems, and and economic investment for our customers until the historical price spread between very low sulfur and high sulfur fuel oil returns.
New orders from our fiberglass systems business have not been sufficient to offset large recent shipments leading us to expect a sequential fall off in Q4 revenues.
Our process and flow technologies business unit posted a 10% sequential increase in revenue due to strong project execution on offshore production related backlog and due to the easing of COVID-19 related lockdowns, which allowed our production and midstream operations to deliver delayed shipments of reciprocating pumps, and chokes and Latin America the matter.
At least in Africa, while orders for our process and flow technologies business remained soft in Q3 still solid backlog in the units ABL turret mooring and well stream processing operations should allow for additional growth in Q4.
More importantly, pre feed studies and tendering activity have picked up particularly for our ABL operation. We believe our customers are preparing to get back to work on large projects and 2021 and expect orders to start to pick up modestly to support their plans.
Our subsea flexible pipe and XL systems businesses, each experienced sequential revenue declines as three straight quarters of customers pushing orders to the right began to affect operating results.
We expect both businesses to see additional revenue declines in the fourth quarter, but tendering activity has improved modestly giving us some optimism that bookings could improve in Q4.
Our intervention and stimulation equipment business saw a 9% sequential decline in revenue. Despite the uptick in North America and completion related activity. The market remains sufficiently oversupplied, which has resulted in limited demand for new equipment and customers deferring the purchase of new spare parts by cannibalizing idle assets.
As expected sales of most consumables took another step down in Q3. However, we continue to realize increasing market adoption of our flex connect frac hose and demand for new coiled tubing strings improved more than 50% from the record low we experienced in Q2.
More recently, we have seen a pickup in demand for coiled tubing equipment aftermarket service and repair work and.
And we continue to engage in a growing number of discussions with international customers regarding pressure pumping coil tubing and wireline equipment, driven by increasing demand for multi stage fracture stimulation services in markets outside North America.
For the fourth quarter of 2020, we anticipate revenue from our completion and production solutions segment will decline, 6% to 8% with EBITDA margins decreasing between 204 hundred basis points as a result of less favorable revenue mix and increasing pricing pressures.
Our rig technology segment generated revenues of $449 million in the third quarter, a decrease of $27 million or 6% sequentially.
Third quarter revenues reflect a mid single digit sequential decrease in revenue from capital equipment, and a 3% sequential decline in the segments aftermarket sales the slowing the rate of revenue declines provided better visibility into the into the impact of the segments efforts to reduce costs and improve operational efficiencies are having on results with EBITDA improve.
Moving 14 million to $28 million or 6.2% of sales.
Pandemic related logistical challenges remain as the virus continues to pop up in clusters around the globe and governments react with shutdowns and travel restrictions, but we're learning to mitigate the extra costs and disruptions to our operations and are doing everything we can to support our customers where they need us.
The impact of the economic turmoil caused by COVID-19 is perhaps most apparent in the segments Q3 bookings already burdened by stretched balance sheets several of our larger offshore customers made the difficult decision to enter the restructuring process during the quarter, which put a stop to new orders drilled.
Drilling contractors in general are doing all they can to preserve cash in this difficult market and have reduced spending accordingly segment realized a 23% sequential sequential decline in capital equipment bookings, resulting in $57 million of orders and a book to bill of only 29%.
Despite the tremendous stress our customers are under and amount of idle drilling equipment that exist around the world. Today, we continue to believe that our industry, leading franchise is attractively positioned for the future as operators continue to demand use a better technologies to drive efficiencies in their drilling operations.
Even as we sit here today in an environment with record low drilling activity levels and only six months removed from negative oil prices, we're having dialogue with multiple customers around the world, who still want to upgrade the capabilities of their drilling equipment, we still see demand for new high spec land drilling rigs in the Middle East and Latin America, we've had steady demand.
From new top drives in multiple markets in Asia, and we've recently booked orders from us drilling contractor to upgrade several of its stand transfer vehicles iron Iron Roughnecks and top drives.
This need to continuously upgrade capabilities also exists and offshore markets operators are demanding the latest technologies as they look to reduce their environmental footprint. Thank our powerplay systems and as they seek bigger prize is found in more challenging environments think Endovenous 20000, PXI VLP stack, which recently won the world.
Oils award for best drilling technology.
Even with the unprecedented market challenges on our offshore our offshore customers are facing theres still talking to us about the major upgrades for rigs that will be reactivated in the not too distant future.
Additionally, the segment's renewable business is beginning to see more wind turbine installation vessel projects come to fruition.
As a reminder, we expect approximately a dozen of these vessels will be ordered over the next couple of years and we remain confident in our ability to win our fair share of the project Awards.
Law firm recovery in the market for our traditional capital equipment business remains a ways off we believe Q3 marked the bottom for orders and based on discussions with customers. We currently expect to achieve a book to bill of around 100% for the segment during the fourth quarter. We also expect rig technologies financial results to improve slightly compared to Q3.
With revenue, increasing between 1% to 3% and incremental margins in the mid 20% range with that we'll now open the call up to questions.
Thank you as a reminder to ask a question you will need to press Star then one on your touched on telephone to withdraw your question from the queue. Please press the pound key.
Please make sure to keep your questions to one question and one follow up question the forward during the Q.
And while we compile that given a roster.
Our first question comes from Bill Herbert with them and your line is now open.
Thanks, Good morning.
No.
Jose such as in the category of Dreaming here, a little bit and contemplating.
Life.
Kind of returning to a semblance of normalcy.
OPEC spare capacity normalizes back to kind of the historic range.
Our lives is normalize.
Demand is much closer on a global basis to pre pandemic levels.
And this converging with the austerity narrative of DNP leads to every investment cycle year.
And your clients, taking more steps forward and backwards.
Let's just call. It this for Grands at 2022 outcome.
I'm just curious.
Given how much inventory you have drawn down over the past few quarters.
What would be your working capital intensity responding to that kind of a recovery narrative and the reason I ask the question.
Is because at least on my numbers your free cash flow yields call.
Call it on a semblance of mid cycle or just huge.
Assuming that working capital rate is reasonably.
Contained so I think it kind of.
Understanding the working capital intensity from this point forward is key.
Yes, that's a that's a really good and observant question Phil and.
Yes.
As you know the organization has been just relentlessly focused in terms of improving the capital efficiency overall with a big part of that focus being on reducing our working capital intensity.
Again across across the board and so we've made really good headway over the last year or so in terms of bringing down that working capital intensity.
But we still have quite a ways to go on that front right. So you look at this last quarter roughly.
Between 36% to 38% working capital as a percentage of the revenue run rate.
We have been significantly lower than that in the past and certainly expect to get significantly lower than that level. Obviously, we've had a lot of.
Headwinds in terms of bringing that level lower with edge with as clay described the worse quarter.
From a top line perspective, really oilfield has seen and really maybe maybe ever.
But the other part of whats occurring is.
Big transition in terms of or revenue streams big shift.
From a revenue coming from North America, now, becoming much more predominantly weighted on.
National markets, you know this last quarter only 26% of our revenue came.
Came from North America, and as you know if you look at what we do.
International markets much.
Much longer cycle times in terms of the time during which inventory resides.
In our locations and also the average collection time period, it takes a little bit longer.
But.
We're getting better at all facets of managing inventory and expect all of our metrics to continue.
Moving in the proper direction over the course of the next year or two so long way of saying that even though.
With a recovery intuitively you have a bigger build in working capital to take care of that business.
I don't think it would it's.
Not just a matter of key metrics slot and taking that for the metrics will improve.
Mitigating them out of working capital that we need to build the future yes.
So it's not just.
Kind of better management of working capital that it's also the revenue mix shift to international where the inventory is stickier and thus the head room for growth that you have with regard to your international ops is much more generous is that fair.
I guess, what I'd say is that just we will get better than we have been historically international has been more challenging from a working capital management standpoint got it with more opportunity for us to improve working capital metric I think more around the payment terms that we typically get internationally impacting that.
But going back on this question Bill on it. So it is a great question, what I would really underscore is that this is.
Our folks have just gotten a lot better at it and it's the muscle memory I think that they've learned around working capital management through this downturn and you've seen the results, we just get better and better and.
That's the key thing this is partly map, but it's a lot of its culture too.
Okay. Thank you very much thanks Bill.
Thank you. Our next question comes from Tommy Mall with Stephens, Inc. Your line is now open.
Good morning, and thanks for taking my questions.
Yeah.
I wanted to start on the cost out initiatives. It sounds like Youve now exceeded the 700 million run.
Run rate target advance of year end, but that there could also be some additional opportunities next year.
Understanding that you still need to go through the full planning process I would I would ask nonetheless can you give us any insight on what what buckets of cost you may be able to attack going forward and is there any way to frame up the magnitude of that opportunity.
Yeah Fair very fair question, Tom and so yes, as you pointed out we touched on the prepared comments, we're really pleased not only with the improvement in working capital management, but it kind of goes hand in glove with the efforts that.
We're undertaking across the organization just to get leaner meaner more efficient and just much better in terms of how we manage the business.
And that's how we think about the cost savings initiatives, which as you know we're all structural cost savings that we're pushing to the organization.
Since we started this process really in Q1 of 2019 we've.
We've continued to find more opportunities and.
Reach our targets more quickly than we generally anticipate that also took place.
This quarter really going well beyond our expectations and hitting the full year end target.
So as we sit here today, there are still more of those initiatives that are flowing through the system that will flow in in Q4 and also through the first few quarters of 2021.
As you astutely observed this as time period in which we go into our annual planning process and that process is pretty intensive and we tend to poke and prod a lot of different areas within the organization and.
We inevitably expect to find additional opportunities to continue to refine and.
Get more efficient as an organization so.
Well not dropped fair at this time to to put new numbers out there, but we're we're optimistic that there there is more and more to get.
And.
We will continue to do our part to to get the operation properly size with the market environment that we see over over the coming quarters and years.
Fair enough, we'll stay tuned.
[music].
Shifting to capital allocation and portfolio.
Maybe a question for clay.
We started to see some M&A now that the energy markets have stabilized.
Be it at low level.
And.
A lot of folks participating today.
As well as yourself no doubt noted some peers, who have divested some non core low margin platforms.
Any update on likelihood of whether we might see something similar from you guys and then maybe as a non mutually exclusive alternative.
What's the level of appetite as a potential buyer of assets in this environment well.
Well as we mentioned we continue to prune our own portfolio and we've made a number of adjustments to that around businesses that want earning adequate returns and maybe perhaps lack the path to that we could see clearly to get to adequate returns and so like others. We are doing that on the one hand on the other hand.
We've got a long and rich history of act of being an acquirer in the space.
We continue to look at opportunities.
Sort of influencing our view of those though is number one we clearly need to be a better owner, we clearly need to see a way in which we can carve out a competitive advantage in those opportunities number two.
We recognize that the cost of capital in traditional oil and gas.
Business has been rising and asset value should be falling concur with that and so we've been very disciplined on.
Kind of our approach to valuations and but but.
What our emphasis has been over the last.
Last couple of years as as we sort of move through this more challenging period has been probably a little more around organic technology developments sort of products that I talked about earlier.
Several other things that are underway.
What we find is that that's that's been a lot of ways is the most capital efficient way to carve out competitive advantages to build on our franchise is built on our channels to market our global presence.
Bring bring better technology to both our traditional oil and gas customers as well as the renewable space and so.
I think that's that's sort of if you look back thats been our track record in recent quarters.
Alright, Thank you, both and I'll turn it back.
Thanks, Jeremy.
Thank you. Our next question comes from Kurt Hallead with RBC. Your line is now open.
Hey, good morning occur when Kirk.
Hey, Thanks for the thanks for the summer again very very insightful.
I wanted to.
Maybe follow up a little bit more in the context of your commentary around in developing some of the new Frac technology.
And you've made a great analogy about how the us land rig market transition from mechanical rigs AC rigs look like a 10 year process for that to really gain full traction.
You kind of look forward from where we are now in a difficult market environments and a lot of these companies that participate in frac face challenging cap structures and challenge to generate free cash flow. What's your thought process on how long this transition from traditional frac the Frac may take.
A lot of it depends on the appetite by the MP.
Customers of the Frac companies.
I think given the more challenging economic environment that we are in now versus kind of where we were in 2005 2006 means just that there is going to have to be more pull by the oil companies on this technology and that's going to be sort of the the catalyst I think that makes it that makes it happen I think if the the EPS.
Companies continue to move up the curve on being more demanding around rig.
Reducing their MSG impact of the Frac operations that can accelerate the adoption of the technology.
The the pressure Pumpers, we'll figure out a way to find the capital.
If it's if those.
Purchase orders are backed by some sort term structure, where the pressure pumpers can see either way clear to payback I think investments can be made.
And so that that's probably what's required SEC short of a wildcard in all of this so is how the power provision.
Go system sorts itself out.
There's there's options now in terms of how to power. These frac jobs using turbines on location or using gas power. Gen sets on location are using wind power and so one of the cornerstones of our development and I think I mentioned this earlier is that its really power agnostic at 13.8 kv exceptional.
All of the above and so weve tried to design as much flexibility as we can with respect to the power question.
That's great and quite you kind of keep that a little bit earlier about the prospect of maybe a two year contracts. So I assume when you talk about things on a call like this you have some additional insights from conversations with various parties. So we think thats something that potentially come out here before year end is it more likely sometime in 2021.
True.
Company get a contract for <unk> or for an equally look theres theres a lot of interest in this technology.
We've talked to a number of customers about it we're excited about it on the one hand on the other hand things are pretty tough out there Kurt and very fluid and so so time will tell but what I'm. Most pleased about is the fact that we've we've come to market with a really tightly integrated thoughtful system, that's a big leap forward on reduce.
We're seeing the SG impact of fracking operations in for shale operators, which is really something the market wants and so.
I think in the long run this is going to be a very important development for the S&P companies can't tell you sort of precisely which quarter that starts to.
Really roll out in a big way, but again I want to stress.
The high level of interest from pressure Pumpers in this.
Okay, Great I appreciate that color. Thanks, you bet. Thanks Kurt.
Thank you. Our next question comes from George O'leary with Tudor Pickering Holt. Your line is now open.
Good morning, guys I George George.
The wellbore.
Wellbore technology side, given that can be to the fastest cycle portion of your business. The business. We've taken a lot of cost out of the equation of late and you can see that.
Looking for in that in the margins and the.
The middle decremental margin performance on a quarter on quarter basis.
As a reminder, ladies that 6% overall, our revenue came from North America, or remind us kind of the mix of that business.
In particular the revenue mix.
Converted international and then.
Any any green shoots.
And.
Hi, there are still in my.
Yes product line and whether that is more just in North America situation. At this point are there any green sheets on the international front as well.
The mix is in the third quarter was 38% North America, 62% International for Wellbore technologies, So keeping with Inovio overall it's.
A greater share of the mixes international with respect to Green shoots Yes. We were 40 45 rigs off of bottom in North America from August and so Thats helpful. We're hearing stories of operators that are.
Getting real granular on putting rigs back to work.
Who do get up to a maintenance level in North America, So thats going the right way, but the green shoots aren't limited to North America.
As we mentioned a couple of times earlier, we think the international markets are stabilizing and after of some pretty good size falls in Q3, and then we're hearing about green shoots there as well so for instance.
Major operator in the Vaca Muerta in Argentina is picking up rigs going back to work.
Greater activity outlook in Colombia.
In the middle East coming off bottom Theres a couple of.
Programs that we expect to get kicked off on the land side offshore.
I know of three Io sees it a plan to get a little bit this year in West Africa or Brazil.
Brazil.
Yeah.
We're hearing about more more drilling activity, that's likely coming up there and then in the north sea as well a lot a little greater level of of activity.
Perhaps helped by the temporary tax relief that the Norwegian government put in place and so you know there are green shoots out there I don't want to overstate them. We're still there is still a very challenging market you've got you've got.
Oil prices kind of range bound at the $40 range, an uncertain sort of trajectory from here around pandemic continued pandemic walked down dip.
Demand for oil still remains a big wildcard and so a lot of uncertainty out there, but nevertheless.
What what investors may not fully grasp is that even in a declining production environment is there still some level of work that needs to happen in the oilfield drilling completion recompletion to maintain these assets and to be good stewards of the resource and so I think the industry the whole industry felt like it went into.
A defensive bunker in Q3, and its emerging out of that and working its way back towards.
Little higher level of sort of just good.
Stewardship of their resources, which requires a little more activity and keeping with prior downturns north.
North America is usually the first to go down in the first to start to bounce back and in international markets, which have longer term projects are little more dominated by CS are little slower and so we.
We're hopeful the international has stabilized and that will start to see it turn the corner, but time will tell.
Okay.
That's very helpful. Thank you and then.
When is something we're getting incremental questions about with respect to number of served as the company's base.
Okay particular pop up as we get with clients.
Just wondering if there is any way to frame the kind of market potential there over some medium.
Medium term time right in the next 12 to 24 months.
Potential cyvek hit that Inovio headwind.
Per vessel.
Just any way to think about that market size that market would be incredibly helpful.
Yes, George I think you are you asking about when I think I heard you say about offshore wind.
Yes.
Sure sure. So yes, we're very excited about this.
I think we said a quarter or two ago I think a dozen new installation vessels for the offshore is is a reasonable outlook for the next few years, we can win up to $70 million worth of kit on the larger vessels and the vessels are getting larger just by way of background, what's going on and.
Spaces that taller towers are more capital efficient they access higher elevations, the wind blows steadier and harder at higher elevations and so as the towers get taller.
The owners of these projects get better returns and so in recognition of that GE, which is a major turbine providers coming out with a new 12 megawatt tower I think in 2022, and then Siemens cases coming out with a 14 megawatts hour 2024, and these things are enormous there 500 feet at the hub.
Which is.
The size of a 50 story building and 700 tons and you can.
Page in the kind of equipment, that's required to put up 50 story building out in the middle of the Ocean, it's pretty massive and the world just doesn't have if we to do that and so we're very pleased with the position that we are in as a leading provider of offshore wind turbine installation equipment and look forward to continuing to participate.
In that in that market going forward.
Thanks, Clay you bet.
Thank you. Our next question comes from Sean Meakim with JP Morgan. Your line is now open.
Thanks, Hey, good morning.
John.
So clay you all they really focused on digital initiatives, you're enabling your hardware to work smarter work better.
I think one of the silver linings of the pandemic is this acceleration of customer focus and adoption of digital practices, both MPS and services.
But can you talk a little about your strategy regarding value capture versus transfer. So in other words, how you expect to capture more of the value versus how much he'd be shared with customers to drive more volumes and share I imagine, it's going to vary quite a bit across product lines, but trying to get a sense of how you think about that key piece of creating.
Value for Inovio. So it's a great question look nobody buys anything unless it's a win win solution right and so.
Our customers have to see value in whatever were providing at the price that we're charging thats very clear to us.
And so we work very closely with our customers to to understand that but maybe to make sure that we really are adding value to what theyre doing and so that was a big part of our Novos development.
Thats part of the reason, we've had such great acceptance or the Novos operating system across our rig fleet globally.
Well here more recently with the shutdown and all the travel restrictions, we're seeing a lot of demand for our tracker vision system, which uses augmented.
Reality.
Two two.
And real time communications with our subject matter experts around the world to enable our customers to do installation of equipment repair of equipment commissioning of equipment and so.
The cobot pandemic shutdown has really accelerated demand for that technology.
The on the.
Max suite of digital projects that products that I described earlier likewise that really started with some heart to heart conversations with oil and gas companies around.
But where we could help them.
But with respect to pricing, we as we always do.
Need to need this to be a win win in Ob shareholders need to benefit from the investments that we're making in the end the really really creative ideas that our employees come up with in these areas as well the customers, who who use these products to improve their own operations and so we we always look for a fair split of that.
Economic rent.
Thanks, I appreciate that and I appreciate the feedback.
Offshore wind too I thought that was helpful. There are also other areas have gotten a lot of attention outside of oil and gas and particularly after the U.S transmission announcement the summer.
Hydrogen in particular has gotten a lot of attention you guys are always in the market looking for M&A opportunities are able to maybe just give us a little more view into how you see these other alternative energy channels beyond offshore when and where you see pathways that could make sense, but I know the versus.
As they are more difficult to bridge.
From your current portfolio too.
These new opportunities, yes, great Great question, Sean I'll start with cost of capital earlier, I mentioned cost of capital appears to be rising for oil and gas companies. In contrast on the renewable side cost of capitals plummeting and yes.
There is a lot of capital chasing opportunities in that space, we've looked at M&A.
We've done some small investments here and they're more sort of rifle shot things were continuing to look for.
Opportunities there.
But it's a it's a little more crowded landscape. So once you have that are approaching this kind of fits with what I was saying earlier our approach has been more around home growing organic development and building on the strengths that our organization have in renewable space and so which are considerable I mean, I don't I don't know another company.
On the planet with smarter.
More creative more talented engineers and scientists.
And we try to just get out of the way and let them think through ideas and opportunities and the ones that.
Kerry a a view towards competitive advantage those those are the things that we're funding and so yes, we're looking in all areas with respect to hydrogen.
We're looking at a couple of things.
But other other areas in the renewable frontier.
At the moment, probably have a little better fit to our skill set and I think have a clear path for the creation of competitive advantage, but I'll repeat what I said in the at the beginning in my prepared remarks is that we got to be good capital stewards through all of this.
The funding execution these business plans.
Need to earn a financial return.
And.
And that.
Really only remains for the long haul when when you have competitive advantage so that constraints all that we do.
I appreciate that thanks Clay you bet.
Thank you and Im showing no further questions in the queue at that time I would like to turn the call back to the speakers for any closing remarks, Jamie. Thank you I will let our listeners know that our friend Loren Singletary has elected to retire from national Oilwell, Varco, and I know like like us.
There are many well wishers out there and so we thanks Laurence first 22 years of service to innovate and we wish him. The best in retirement I want to thank all of you for joining us today in particular I know any employees that are out there listening. This has been an unbelievably challenging year, but I got to tell you you're persistent your perseverance to tune out the noise and get that.
Job done for our customers when and where they need us has been awesome I'm, so proud and grateful for each and every one of you and thank you all and ask that you keep it up so we look forward to talking to you.
On our next call in early February.
Thank you.
Ladies and gentlemen, if you're lifting not today.
That concludes the program and you may now disconnect.
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