Q4 2020 National Oilwell Varco Inc Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to the <unk> fourth quarter 2020 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session.
And instructions will follow at that time, if anyone should require systems. During the conference. Please press Star then zero on your Touchtone telephone.
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 <unk> fourth quarter 2020 earnings conference call with me today are clay Williams, our chairman, President and CEO and Jose Bayardo, Our senior Vice President and CFO.
Before we begin I would like to remind you that some of today's comments are forward looking statements within the meaning of the federal security laws.
Involve risks and uncertainty and actual results may differ materially.
No one should assume these forward looking statements remain valid later in the quarter or later in the year for a more detailed discussion of the major risk factors affecting our business. Please refer to the latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website.
On a U S GAAP basis for the fourth quarter of 2020, and it will be reported revenues of $1 33 billion and a net loss of $347 million or use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release later.
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 the fourth quarter of 2020 was extraordinarily difficult quarter for Adobe and Unfortunately, we expect to continue to struggle through the next quarter or two until the world gets past the wreckage of Covid Consol.
Consolidated revenue declined 4% sequentially, and EBITDA fell to $17 million or one 3% of sales in the fourth quarter. This performance was particularly disappointing in view of the massive cost out efforts the company enacted last year indeed throughout the last six years.
A couple of Lockdowns, we faced off and on throughout 2020 continue to hinder our operations and those of our customers against weak demand for services low and falling day rates and significantly reduced cash flows our oilfield service customers have deferred maintenance cannibalized equipment and drawn down stocks of consumables against weak and uncertain commodity prices OPEC plus production cuts and lower.
Cash flow is our E&P customers have cut rigs and slow rolled project approvals.
The offshore rig count was down 37% from the fourth quarter of 2019, and the international rig count was down 40% year over year.
Although north America drilling has been improving since bottoming in August it is still down 58% compared to the prior year, which by the way wasn't exactly robust oil and gas market. Either this continues to be a historically bad downturn in an industry that has a lot of experience weathering very very tough times.
Against this backdrop, our equipment orders have been scarce.
We were pleased to see rig technologies reported book to Bill above one in the fourth quarter that is the only book to bill of <unk> above 100% throughout 2020.
Outside of North America momentum slowed through the fourth quarter with additional Covid Lockdowns continued project approval delays by customers and slowing activity in places like Russia, the middle East and offshore all three of our segments saw the majority of their revenue come from markets outside North America, 59% for Wellbore technologies, 67% per <unk>.
<unk> and production solutions and 90% per rig technologies.
All three rely on capital and consumable sales, which to varying degrees tend to be later cycle businesses.
While wellbore technologies tends to be a little more closely tied to real time rig activity than the other two it also relies on later cycle capital sales of drilling motors fishing tools, and WD equipment solids control equipment and other tools that are subject to destocking and restocking dynamics drill pipe as a capital investment by drilling contractors in drill pipe sales by the Wellbore.
<unk> segment fell sharply in the fourth quarter at very high leverage.
Our team continues to fight passionately and tirelessly to improve performance. We continued to cut costs I am proud that <unk> was able to take out $700 million in fixed cost during 2020, but our poor fourth quarter results tell us that we must do more as we enter 2021, we've identified another $75 million in annual cost reductions that we're executing on.
Right now and we expect the target to grow as we progress through the year.
We continue to focus on cash flow fourth quarter cash flow from operations was $186 million in free cash flow was $133 million for the year, we generated cash flow from operations of $926 million and reduced our net debt by almost $700 million. We completed the year with a very strong balance sheet only $142 million in <unk>.
Net debt with our next major maturity not due until late 2029.
Most importantly, we continued to invest in technology.
Last quarter I spoke to you about our organic R&D efforts, which are increasing operational efficiency, improving safety and reducing the environmental impact of our customers oil and gas operations, we will be testing, our Max digital platform with three E&P customers throughout 2021, all of whom are excited about its potential to drive improvements in their workflows, we will be testing, our new low cost.
Rig for Rob.
Robotics offering at a research rig later this quarter, we hope to have a commercial product available by year end.
Our new ideal <unk> offering will be tested this quarter by a leading north American pressure pumper with one of their customers. They are seeing significant E&P interest in this technology ability to reduce both costs and emissions.
These are just three of dozens of new product and technology initiatives <unk> has underway to support the critical work that our oil and gas customers do we remain committed to developing and delivering solutions that provide the world with abundant reliable safe energy the oil and gas that powers, the world's global food supply chain that power's, 100% of its air travel and that helps.
Lyft humanity out of poverty and it'll be as proud to support this critical industry as we've done for 159 years.
Like you, though we see powerful social political and economic momentum driving the growth of renewable energy, which will one day to enable the world to transition to a net zero carbon future.
Believe that this is perhaps the greatest economic opportunity of this century.
Capitalism will lead to the innovation required to reveal the most efficient solutions.
<unk> intends to play a role.
This morning, I'd like to share with you how nov's competencies align with the emerging energy transition business opportunity and also eliminate a few things that we've been quietly working on for the past few years ideas that I haven't commented on much publicly before.
We want to show you, how we're thinking about nov's future in a world that is growing new sources of low carbon energy.
First we are experts in building large complex machinery with extreme precision that operates in harsh environments and we do this at scale in remote parts of the world.
Employs bright dedicated imagine of scientists and engineers, who are conversant in material Sciences metallurgy power systems robotics, and a host of other fields in short we have a fantastic team with whom to prosecute the business opportunities that are emerging.
So I ask a few to do that in a few years ago. Some of our best and brightest began to explore the renewables landscape to find opportunities where <unk> can make money.
That team has been steadily growing and I'm pleased with the ideas. They are generating in the products that they are developing.
First of all let me offer some perspectives on the opportunities. Most renewables technologies are not new you may be surprised to learn that robust serious technical economic discussions about transitioning to new forms of energy actually began more than 40 years ago. Following the Iranian hostage crisis in the second big oil shock of the 19 seventies.
Economic vulnerability of the west during the Cold war exposed by the tenfold increase in oil price throughout the 19 seventies led to some serious hammering about diversifying away from oil, particularly foreign imports strikingly the list of potential Green energy sources from that era is essentially unchanged from todays list of candidates wind solar geothermal.
Biomass hydrogen infusion and the password decades, all have seen their respective technologies progress incrementally and some has seen significant industrialization.
So why didn't haven't we transitioned to something different yet.
The reason is that all are at best in perfect substitutes for the status quo at least for now in all categories, except greenhouse gas emissions solar and wind face Intermittency challenges land use issues and not in my backyard political opposition hydrogen faces storage and transportation challenges from metallurgical hydrogen embrittlement biomass face basis.
Land use and efficiency challenges fusion continues to face technical challenges in geothermal really only works in geologic hotspots with shallow magna all face infrastructure hurdles.
I bring this up only because if he looks at these challenges and we see opportunities to develop solutions in this competitive advantage. Our approach to renewables is to look at customer pain points like these and solve them. This is the framework that we're using to think about renewables opportunity. Then obi can saw bottlenecks Rus project capital investment improve uptime reduce Owen.
<unk> costs enabled customers to access better resources that we can foster the unrestrained embrace of renewables by free capitalists, thereby positioning itself to profit from this remarkable business opportunity and facilitating the global transition.
Our most advanced business opportunities lie and solutions that improve the economics of wind power generation in a few moments I will take you through our portfolio in this area before I do though I want to note that we are pursuing other areas, where we see potential to add value as well, including solar carbon capture geothermal biomass and hydrogen most of these are very early stage in years.
From contributing meaningfully to our financial results, but nonetheless optimistic about the potential contributions that they may one day make I'll add to that these have been almost entirely organic thus far built through existing business and infrastructure that make up our core oil and gas equipment business today, it's too early to tell which technology.
These will predominate and some will fail. So we are engaging across several in a diversified portfolio approach.
Most importantly, we are doing this to make money returns on capital are derived from our competitive advantage. Therefore, our efforts are focused on creating competitive advantage in this space by cultivating renewable ideas with high growth potential that can be funded from our traditional oil and gas business, where we will also continue to press better products services and technologies. That's the long term plan.
Dan.
So back to <unk> wind business today, our presence in the wind value chain, which stems from our roots in industrial lifting marine vessel design and construction is significant and growing.
At ground level, the windows impeded by top augur fee and vegetation at higher altitudes wind tends to be more stable more powerful and more consistent or better quality resource that improves at higher and higher altitudes taller towers access is better resource as well as provide more space for largest areas swept by the blades swept areas proportional to accessible energy and it grows exponentially.
Italy with blade length, increasing torque applied to the generator and the hub, which also must grow larger to facilitate the additional power production. Therefore taller towers longer blades larger turbines and bigger generators deliver significantly better economics to wind farm owners overall at least to a point so not surprisingly tower hub Heights has.
Steadily increased and contributed to the competitiveness of wind on a <unk> cost of energy basis.
Taller towers are also expanding the geographic regions, where wind power works beyond the so-called wind belt of the great Plains in the United States for instance, more on that in a moment.
The strength that wind farm developers begin to run into is the fact that towers become exponentially more expensive to construct and transport with Hite.
In 2019, and it will be invested in Keystone tower systems, a startup that has developed a patented tapered spiral welding process that enables the automated production of wind tower sections, which can significantly decreased production times and reduce costs by 15% or more. Additionally, the technology has the potential to be deployed for infield manufacturing.
<unk> effectively eliminating many of the severe logistical limitations of transporting larger diameter tower sections over the road Keystone.
Is currently completing construction of its first commercial line within Nov's Pampa, Texas facility and has an order for 100 tower sections from a major wind turbine manufacturer. Upon completion. It will have the capacity to deliver hundreds of towers annually. Another challenge of the taller towers trend is developing cost effective safe methods of tower.
Erection current predominant construction methods using crawler cranes are quickly reaching their limits for safe and efficient use as wind towers increase in height and weight.
These systems concept, which is built upon the intellectual property control systems and experience developed during the design of mobile desert in Arctic drilling rigs utilizes a tower crane in conjunction with a unique mobility system to provide superior lifting characteristics to it at taller heights to significantly improve the safety reliability and efficiency of Paul.
Wind tower installation techniques such methods are expected to also help reduce the ongoing operating and maintenance costs associated with these assets over their 20, plus your lives further improving project economics for wind farm operators.
The U S wind belt runs from North Dakota, South West, Texas, and as defined by the region of the country, where the wind resource blows hardest and steadiest, allowing turbines to achieve the highest levels of utilization and electricity output.
But this picture changes as towers grow taller in the region of economically viable wind resource grows it is conceivable to us that the wind belt area could double or triple as <unk> and Keystone technologies enable towers to grow taller economically and consequently enable power production closer to prime power consumption markets, thereby lowering transmission.
Cash and total capital investment.
Frankly, we are excited about the growth potential here. However, all onshore wind farms require a lot of land and sometimes make their neighbors unhappy by.
By spoiling the view, which leads us to offshore wind.
Generally offshore wind has several advantages over land higher capacity factors due to generally steady or wind regimes, the ability to use larger turbines without facing the limitations of over the road transportation and in an abundance of locations with less not in my backyard political opposition. This has led the global wind energy Council to forecast too.
6% compound annual growth rate for the offshore wind space through this decade.
<unk> nearly 40% of the world's population two 5 billion people living consume power within 60 miles of the coast. This makes sense. However, similar to offshore oil and gas offshore wind developments also carry increased complexity higher execution risk and incremental costs that can challenge project economics again, we view these challenges as opportunities to drop on Nov's unique.
Offshore expertise and provide value to a burgeoning customer base.
He has long been a leader in offshore wind construction vessels on which we can sell as much as $80 million out of equipment. In fact, the majority of the world's 30 Gigawatts installed offshore power generation capacity was put in place with Adobe design vessels and Adobe supplied equipment. We're presently executing on the construction of our upgrade of a half dozen wind turbine installation vessel.
And expect demand to continue due to the growing height of offshore towers for the same reasons that I explained moments ago, Nov's proprietary telescoping cranes jacking systems and deck equipment are all contributing to lower installation costs and better economics for offshore wind farm developers, we landed a contract for the first Jones Act compliant vessel in the fourth quarter with.
Conversations underway with offshore construction firms for additional capacity globally by year end I expect that our business. In this area, we will have doubled to more than $200 million annually and further growth prospects are excellent as the $9 six gigawatts of offshore wind capacity to be installed in 2021 is forecast to more than double by 2025.
Five to more than 21 Gigawatts in order to meet these projections the world will need to build two to three dozen more installation vessels capable of installing the new leading edge 12 megawatts, a 15 megawatt towers with 500 foot hub heights over the next decade or so according to forecast from Clarksons.
And it will be is also pursuing opportunities in the floating offshore wind space, which will require the cranes winches mooring systems cable lay balancing systems chain connections and pensioners that we design and provide Adobe has developed a patent pending pending <unk>.
<unk> floater semisubmersible floating wind foundation designed to require less steel than competing offerings that should allow for four key side construction and turbine installation.
We are engaged in a pay design study now utilizing this proprietary floating wind designed for customer in Asia with revenue potential north of $25 million per vessel and dozens of vessels required to develop a single gigawatt project vs. Total addressable market in this area is potentially in the billions.
So to summarize our wind initiatives, an obvious positioning itself as a value added partner capable of meaningfully reducing project execution risk and overall capital costs.
We have a large and growing base of installed capacity in the fixed offshore wind installation vessel market, which we expect to exceed $200 million annually in revenue for us by year end, along with an ongoing aftermarket opportunity.
Keystone team secured an order for 100 towers based on its proprietary technology that we are constructing at our plant in Texas.
And nov's proprietary floating wind technologies under consideration by multiple perspective customers customers globally.
Potentially opening up a massive new market in countries lacking expansive shallow waters available for wind development suffice to say I am very optimistic about the opportunity set in the wind area.
Returning to our traditional oil and gas business. Despite the near term challenges, we face I am growing more optimistic about 2021, as COVID-19, vaccines proliferate and I expect lockdowns and economic disruptions to subside in a more normalized level of demand for oil and gas to return only then will we realize the true impact of the massive dismantlement debt.
Industry has undergone the lack of major project <unk>. The diminishment of quick turn shale productive capacity increased governmental restrictions on shale development. The lack of offshore exploration the evaporation of capital for highly capital intensive industry the effective of.
The effect of massive amounts of stimulus and explosive growth in money supplies on commodity prices I don't recall a time in my professional career that saw more bullish fundamentals.
It will be interesting despite our most noble aggressive aspirational energy transition scenarios petroleum remains critical to our way of life from air travel the feeding mankind, the oil and gas industry will be called upon again to grow.
So there is a light at the end of the Covid tunnel the positive financial results reported by some of our larger customers. This quarter serve as an early positive signal that condition should improve over the course of the year for our later cycle oil and gas businesses. We expect the back half of 2021 to begin to see improved demand and activity from <unk>, which may well begin to grow just a little more frantic in 2022.
And beyond in the meantime, <unk> remains committed to supporting our customer base around the world wherever and whenever it needs us. Our recent product introductions are evidence of that commitment to <unk> employees that may be listening. Please note that the dual challenges of supporting our oil and gas customers.
While advancing new and creative solutions to provide lower carbon sources of energy will continue to demand your very best I am proud and grateful that you've never given anything less. Thank you for all that you do Jose Blake and I look forward to scaling new heights, and new opportunities with you with that I'll turn it over to Jose. Thank you clay.
Nov's consolidated revenue fell $57 million or 4% sequentially to $1 $33 billion during the fourth quarter of 2020, our shorter cycle businesses capitalized on improving drilling activity levels in the U S to drive 4% revenue growth in North America, Despite very light demand for capital equipment sales International revenue declined.
Nine 7%, reflecting the different trajectories of rig activity between the eastern and western hemisphere during the quarter.
EBITDA for the fourth quarter was $17 million or one 3% of sales elevated decremental margins were the result of a less favorable product mix customer order deferrals, which compounded manufacturing absorption challenges and higher expenses associated with pension accounting environmental accruals and workman's compensation.
While we exceeded our $700 million cost out initiative target in the third quarter of 2020, our efforts to right size and improve the efficiencies of the organization continued during the fourth quarter.
As clay mentioned, we have identified and are executing on $75 million in additional cost savings initiatives that we expect to complete by year end 2021, and we expect our target will grow.
During the fourth quarter, we generated $186 million in cash flow from operations and $133 million in free cash flow. We ended the year with approximately $1 69 billion in cash and $1 eight 3 billion in gross debt, resulting in a net debt balance of only $142 million down $676 million.
Year over year.
For the full year cash flow from operations was $926 million and free cash flow totaled $700 million.
Organizations focus on reducing costs, improving capital efficiency and optimizing cash flow allowed us to reduce net debt by 83%. During 2020 further improving what was already a rock solid balance sheet.
For 2021, we expect to report capital expenditures of approximately $215 million with $82 million of that amount related to completing our rig manufacturing facility in Saudi Arabia.
Factoring in the 30% that will be funded by our JV partner net Capex will total $190 million.
Our Wellbore technologies segment generated revenue of $373 million in the fourth quarter, an increase of $12 million or 3% sequentially. Despite the top line growth EBITDA fell to $12 million or three 2% of sales primarily due to an unfavorable shift in product mix and COVID-19 induced shipping cost overruns and <unk>.
As clay highlighted offerings from this segment are more short cycle than our other more capital equipment oriented segments, but it is still a product business that is affected by the ongoing destocking of customer inventories net.
Nevertheless, we believe Wellbore technologies hit a cyclical low during the third quarter of 2020, and we expect steady improvement from this segment as 2021 progresses.
Our grant <unk> drill pipe business realized a 24% sequential decline in revenue with very high decremental margins lower volumes, a significant decrease in proportion of higher margin large diameter pipe and extra costs associated with shipping delays in Asia more than offset the unit cost reduction efforts, which included reducing its worth.
Force by approximately 25% during the first week of the quarter.
Orders improved 84% off the all time low level realized in the third quarter, but were less than half the level achieved in Q4 of 2019, while orders remain light slightly higher volumes and a more favorable product mix should drive improved results during the first quarter.
Our tubes scope pipe coating and inspection business realized a 7% sequential improvement in revenue led by a 28% increase in our activity from the oce TG market.
The revenue growth was partially offset by declines in higher margin drill pipe coating and through KOTE sleeve sales, resulting in a decrease in EBITDA.
We expect higher volumes from improving backlog and cost controls to drive improved performance from to the scope and the first quarter.
Our downhole tools business saw a 5% sequential increase in revenue driven by the improvement in North American rig count, which was partially offset by lower activity in the eastern hemisphere.
The business realized strong incremental margins from improved absorption and increasing adoption of our proprietary technologies that meaningfully improve operational efficiencies and lower cost for our customers.
During the fourth quarter, we saw a significant increase in the number of runs completed by our select shift downhole adjustable motor, which now incorporates our latest <unk> power section, allowing for up to 1000 horsepower to be delivered to the drill bit further enhancing the motors ability to drill single run horizontal wells.
We're also seeing greater customer adoption of our agitator friction reduction tools and international markets and in operations using rotary <unk> systems.
A major national oil company in the Middle East recently completed a 12 and a one quarter inch directional section using our agitator tool, resulting in a 38% improvement in the rate of penetration relative to nearby offsets.
Also a U S. Operator made our agitator a standard component in their rotary <unk> bottom hole assemblies after recognizing the clear performance improvements and curve and lateral sections within their wells in the Haynesville shale.
Our <unk> drill bit business posted a modest sequential improvement in results with strong growth in North America that was partially offset by declines in international markets.
While the international rig count continue to search for bottom during the fourth quarter and projects continue to push to the right recent customer dialogue has us more optimistic that tenders will advance during the first quarter, creating better prospects for our international operations as we advance through 2021.
Our well site services business generated 17% sequential growth in revenue during the fourth quarter on the meaningful improvement of drilling activity levels across the western hemisphere.
EBITDA flow through was limited by declines in higher margin work in the middle East and offshore markets price competition, and COVID-19 related logistical and supply chain challenges, which impacted personnel movement in deliveries of capital equipment. Despite these.
Headwinds, we are seeing international tenders advance and increasing absorption of excess industry capacity, which we expect will drive improving market conditions in the second half of 2021.
Lastly, our MD <unk> business realized high teens revenue growth during the fourth quarter due to improving demand for the business units rig instrumentation and data acquisition systems, and increasing adoption of M. D. Tacos, Kaiser artificial intelligence drilling optimization application and evolve closed loop automated drilling systems Bay.
On dialogue with our customers, we expect the pace from North American activity growth to moderate in the first quarter, then level off around mid year activity in eastern hemisphere should stabilize but remain sluggish through the first half of the year as operators finalized budgets and work to complete project tenders, which will set the stage for improved international.
Activity in the second half.
For the first quarter of 2021, we expect revenue in our Wellbore technologies segment will increase in the upper single digit percentage range. We also expect an improved mix in product sales and cost controls to result in EBITDA margins expanding approximately two to 400 basis points.
Our completion and production solutions segment generated $546 million in revenue during the fourth quarter, a decrease of $55 million or 9% sequentially on our last call. We mentioned that <unk> current customer conversations in early Q4 bookings gave us confidence that orders would likely improve from the low levels witnessed in the third.
<unk>.
While orders did improved 27% sequentially to $215 million the resurgence of COVID-19 through the quarter reduced customer conviction slowed order intake and led to the segment's fourth straight quarter with a book to bill below one.
Further deterioration of the segment's backlog created additional absorption challenges and a less favorable product mix, resulting in EBITDA declined 35 million to $28 million or five 1% of sales.
While we expect order intake to remain sluggish in the early part of 2021 customer conversations have resumed with improved pace and tone, giving us optimism for a much improved order outlook starting mid 2021.
Our subsea flexible pipe business saw a revenue decline of 11% sequentially.
With high decremental margins.
Low utilization levels across the industries manufacturing capacity have resulted in absorption challenges in pricing pressure.
While we expect orders to remain light in the first quarter. We believe a number of significant projects will move forward in the first half 2021, creating opportunities for sizable bookings in the second half of the year.
Our process and flow technologies business experienced a 4% sequential revenue decline primarily due to deterioration in the backlog of our APL turret loading offerings, which is facing similar challenges to what I just described in our subsea business.
Our more land oriented production and midstream operation saw small improvements in demand off very low levels in North America, Argentina, and the middle East.
While demand for our production and midstream offerings appears to have bottomed in Q3, some customers continue to work through excess stocks of inventory, which should run its course in the first half of 2021 and lead to a more constructive operating environment in the second half of the year.
Our fiber glass systems business saw revenue decline approximately 19% sequentially due to customers that continue to defer deliveries for offshore scrubbers and limited demand from midstream infrastructure, which has depleted our backlog from large diameter high pressure pipe.
The unit realized outsized EBITDA decrementals due in part to ongoing COVID-19 related disruptions in the South East Asia.
And an increase in epoxy in glass prices from suppliers, who are ex extracting better economics before agreeing to reopen plants that were shuttered in the early phase of the pandemic.
We expect oilfield orders in North America to remain limited for much of 2021, let's see projects in the middle East that should advance by mid year, and we continue to see growing demand for our fuel handling offerings.
As a result, we expect our fiberglass business will bottom in the first quarter and realized stronger demand in the second half 2021.
Our intervention and stimulation equipment business realized a 9% sequential decline in the fourth quarter, an increase in deliveries of coiled tubing equipment in international markets was more than offset by limited demand for completion equipment in North America, while we anticipate that demand for Newbuild completions equipment in North America will remain limited over the next several quarters.
Are beginning to see green shoots in our aftermarket related offerings in Q4, we realized our second quarter in a row of improving demand for replacement coiled tubing strength and we are engaging in a steadily increasing number of conversations with customers looking to refurbish or upgrade pressure pumping equipment from tier two to tier four motors with dual fuel capabilities.
We recently received an order from a customer to refurbished 35 pressure pumping units. Additionally, as clay mentioned, we are seeing growing interest in our recently introduced introduced ideal E Frac fleet and for our Frac Max articulating flow line, and quick latch systems, which increase efficiencies and reduce costs of pressure pumping operations.
Lastly, we remain encouraged by the future potential demand for our completion equipment in international markets as the use of multi stage stimulation services continues to grow outside North America.
For the first quarter of 2021, we anticipate revenue from our completion and production solutions segment will decline, 6% to 10% sequentially with decremental margins in the mid 30% range.
Our rig technology segment generated revenues of $437 million in the fourth quarter, a decrease of $12 million or 3% sequentially.
Revenue from capital equipment sales declined 7%, partially offset by an increase in aftermarket services EBITDA.
EBITDA declined to $19 million or four 3% of sales outside of the.
Decremental margins were the result of a less favorable sales mix for both capital equipment and aftermarket operations, where sales of higher margin spare parts declined and revenues from lower margin service work increased. Additionally, this segment incurred extra expenses associated with the logistical challenges of moving 200 service technicians and associated equipment occur.
<unk> numerous international borders during our second round of pandemic related restrictions orders for the segment increased $133 million sequentially off the all time low realized in the third quarter to $190 million, yielding a book to bill of 105% orders from the offshore wind market dominated the order book, which included.
An award for the design and Jacking system for the first U S. Built Jones Act compliant offshore wind turbine installation vessel.
And in order to upgrade existing an existing vessel to enable it to handle the heavier weight of the next generation of offshore wind turbines. Additionally.
Additionally.
Subsequent to quarter end, we received another order for the designed jacking system in cranes for a Europe based wind turbine installation vessel as.
As clay highlighted the opportunity for our wind business is meaningful and the outlook is promising.
While orders for rig equipment remained sluggish capital availability remains constrained among our drilling contractor customers theyre still eager to upgrade the capabilities of their fleets. We continue to have discussions regarding newbuild rigs with customers in the Middle East Latin America, and Asia and in Q4, we received an order from a customer in the middle East for Q1.
Horsepower land rigs fully equipped with automated pipe handling systems, novo's drilling automation and our mice Maestro power management system.
In North America, we do not see near term opportunities for Newbuild rigs outside of niche applications. However, we continue to have active dialogue with customers regarding upgrades to both hardware and digital solutions, we see strong interest in the rig floor robotics that we have underdevelopment and we're seeing holdouts that up until now have resist.
Upgrading to our Novus process automation platform come to us, saying that their customers are demanding the capabilities that <unk> provides.
Similarly in the offshore space, we do not expect many new builds but we continue to see an increasing rate of adoption for our digital subscription solutions, including the novus platform condition monitoring remote support and automation lifecycle management.
More importantly, our offshore drilling contractor customers several of whom are emerging from the restructuring processes with cleaner balance sheets are growing more optimistic that offshore activity is at or near a bottom.
And we are actively working with them to prepare for reactivation and upgrades more customer inquiries have increased since year end and we are optimistic that offshore activity will improve in the second half of the year for the first quarter of 2021, we expect results per rig technologies to be in line with the fourth quarter with that we'll now open the call up to questions.
Thank you to ask a question you will need to press star one on your telephone.
Jay question touched upon key please standby, while we compile the Q&A roster.
Our first question comes from Sean <unk> with Jpmorgan. Your line is now open.
Okay.
Thank you Hey, good morning.
Sean Sean.
Yes.
So thank you for all the commentary around your efforts towards pivoting the business.
Very thoughtful as always.
They can maybe if we just expand.
The discussion a little bit in and share your thoughts around.
New energy market and I'm thinking in terms of matrix. So one access you'd have.
Ability to map as existing expertise from these markets.
And then on the other would be the size of those addressable markets based on those capabilities. So I think you addressed that really well within wind and that seems to be really kind of in the sweet spot in that matrix. Yeah could we just get your initial thoughts, but kind of where your head is today around hydrogen which of course, that's a pretty wide rainbow carbon capture even.
Thermal just love to hear kind of where your head is on those areas under that framework.
Great question Shawn the first part of that I think we can answer very specifically, which is with respect to our skill sets and how that fits sort of the opportunities that are emerging the second in terms of total addressable market. This is all very early days suffice to say, though.
They're all big right. So so.
Tens of trillions of dollars that are required to power the world with whatever we power the world with capital sort of investment.
That's kind of what's at stake as we sort through the options for economies moving towards a lower carbon future. So they are all very big numbers.
It makes it really interesting, but what I really like about our starting point is is that so many of our skill sets fitness and I think I did cover that with respect to win I will tell you that we are looking at other areas.
And buy biogas.
Hydrogen.
Carbon capture and sequestration.
Thermal we're already in the geothermal market like a lot of oilfield service companies are with respect to bids we've actually developed I think a year or two ago develop new.
Fiberglass lined tubular products for that market and have sales into Europe, and a few other places with that and so we're already there as are many but but what's really interesting you look at things like carbon capture.
Our gas processing Wellstream business, which is part of our completion and production solutions group.
Has deep expertise in.
The hydrating gas streams, and Seo to needs to be dehydrated and in fact, we're working with one of the majors on a project now and then.
Net area to bring that particular expertise.
We've also advanced.
Discussions with other participants in that space with respect to solvents membranes, others to sort of continue to kind of build out opportunities there and then in the hydrogen space.
Things like composite pipe systems, we're the largest provider of fiberglass and composite price globally to the oilfield.
And composite piping systems, maybe a key solution with respect to avoiding hydrogen.
Steel when transporting hydrogen we got technologies in.
And ammonia storage.
That may come to play.
Think ammonia make a play a key role in transporting hydrogen globally as that.
Ecosystem, where to build itself out. So we are currently exploring all this stuff and look forward to speaking to you in more detail in the future. All are interesting I think all or additional.
Growth opportunities and avenues for Adobe I do want to stress though.
This is less pivoting then it is cultivating a new source of revenue for four <unk>, we will continue to support oil and gas.
Oil and gas will remain.
Critical even even the most.
Aspirational sort of scenarios laid out by the IEA.
Oil and gas continues to play a major role because theres just no substitute for it and in many areas of the economy and so so.
I'm very very encouraged by the opportunities to both continue to advance our traditional oil and gas business, but as well as I noted in my prepared remarks renewables is.
Yes.
Very exciting with respect to how <unk> can help provide solutions make these sources of energy better more capital efficient cleaner safer and more efficient all of the book.
Thank you. Our next question comes from James West with Evercore ISI. Your line is now open.
Hey, good morning, guys, Hey, James.
Clay I appreciate your commentary around renewables, but love to dig in a little more on the offshore wind side, because thats where.
I see a clear expertise that you provide given all of the technologies you have around offshore rig.
And the management of those rigs.
So I'm curious to understand kind of what.
What youre seeing in that market right now what the competitive environment looks like who the incumbents are at really any and.
I. Appreciate you gave some numbers around what do you think when could be later on this year, but it seems like that market could be.
Call it five years up much much larger.
For you guys in terms of the opportunities that we're really just getting started here, yes, James you've been in oilfield services for enough years to get it when I say that is.
<unk> of the offshore wind installation vessel space, yet a majority of equipment out there as ours, we do have a lot of expertise a lot of proprietary designs.
Im very proud that we're sort of the go to name when it comes to this level of expertise that's not to say, we don't have competitors, we do but the majority of the fleet out there that has installed the world's existing offshore wind capabilities was installed using our technology. So proud of that continuing to invest in that continuing to advance that.
And very excited about debt and.
In the prepared remarks talked about the role that taller towers larger turbines.
Driving better economic efficiencies and so what that space, specifically pointed out our advancements by the turbine manufacturers, specifically a 12 megawatt system.
As you know the size of a 50 story building.
Which is due out in 2022 and then another one of the providers is a 14 megawatt tower that theyre coming out with in 2024 and so.
They're just very few vessels that are big enough to install those things and with a lot of them coming the world needs a bigger fleet and were.
Pleased to play a role.
But in addition to that.
As I mentioned, the floating wind opportunities getting really interesting as well we had a lot of expertise with our with our Houston group around designing holes to fit.
Those sites turbines.
While also minimizing size and cost and steel and so very pleased with how that's developing and thats it thats different than that rather than building the tools to install.
The equipment, we could be in a position to actually building.
The holes in the equipment.
Each unit going into some of these wind development.
Right.
I totally agree I think it's a huge opportunity is there any.
Where it gets how much R&D and capital do you think is associated with this opportunity. If it really isn't you may already have all the capacity in the R&D day, yes, it's really ongoing.
We've got a fantastic we're a leader with respect to offshore construction cranes and lifting technologies and have been for decades and so so this is sort of continuing what we do and as you point out it fits very well the needs of the offshore.
Wind developers, both fixed as well as floating.
Our experience in shipyards are experience.
Constructing large vessels working at height.
Applying technologies.
It's a really good fit with our skill set.
Alright got it thanks Clay you bet. Thank you.
Thank you. Our next question comes from George O'leary with TPN Company. Your line is now open.
Good morning, guys. Good morning, George George.
The sticking along the lines of wind.
I'm curious I think you guys said exiting the year you expect kind of the revenue run rate from all things win for <unk> to be somewhere in the $200 million ballpark.
Thinking about the fact that the kit that you guys said your supply to the weighted believes the wind installation vessels side of the equation $50 million to $100 million per vessel ballpark. So should we think about that is like three to four vessels a year by the end of this year is kind of the run rate and then growth from there or would you frame that any differently.
That's all.
Obviously oversimplifying it a bit but.
Arms a shorthand.
What I would tell you that these vessels take a couple of years to construct right.
And if we sell everything that we can into a fixed wind installation vessels thats $80 million ticket for us that would flow out over a couple of years. So so.
This will we've been building our backlog it's continued to grow in.
This space and our expectation is is that we have sort of line of sight around a healthy level of constructing a fleet that's required to install this capacity over the next few years is what we see.
That makes sense.
Yes, that's super helpful color I'd leave us sales letters to our own devices, we will just simplify things incorrectly so in that way.
And that's what I worry about so.
Yeah.
Understandable.
One of your peers noted that I think day said, they see their offshore activity or revenue is up 15% year over year and we're more in the 5% to 7% ballpark based on what we can see I mentioned second half of the year, maybe some offshore momentum as international activity starts to pick up so just trying to score.
Where the circle there.
Any way you can quantify the increase in offshore activity.
That you guys see on the horizon, no not not precisely and I can't speak to their comments, but what I would tell you the sort of framing our view of the second half of the year and while we are becoming more optimistic is look it's no secret that the.
The biggest challenge.
Challenge in factor that all of us have been dealing with this COVID-19.
And.
And as we sort of look out as to what 2020 has in store.
Yeah.
Our view is really shaped.
Large part by the macro.
The.
The fact that economic activity still remains very low with Covid lockdowns.
Fact that oil inventories have been declining now for several months.
Is I think very telling.
And as we.
Now see vaccines on the horizon as we move into the summer, which which I think typically sees fewer cases.
We foresee sort of Covid, lockdowns diminishing and economic activity returning and.
And then crude demand is going to accelerate and through this COVID-19 locked down a lot of our international offshore customers have had been very very sluggish on placing orders we were continuing to quote a lot and bid a lot and have a lot of feed studies underway.
But.
The orders have been slow in coming and so what we.
Foresee is as we move through the summer the pandemic lockdown gets behind us.
I think OPEC is going to be called upon to throttle back their cuts to sort of meet rising demand, but we're going to pop out of all of that with supply demand imbalance, we're going to need more supply as demand comes roaring back you add to that all the stimulus that's been pumped out by governments the massive growth in money supply and.
And I think we're headed towards a global synchronized economic recovery, that's going to be pretty strong.
And one that we'll likely see a lot of inflation the money supply is going to show up in commodities, including oil in fact, we're already seeing double digit price increases in steel and resin price increases with freight.
And so as we.
We all kind of go back to work.
As our oil company customers go back to work.
I think theyre going to be looking at the need to move forward and maybe move forward quickly with <unk> in the offshore and so that's kind of from a macro level frames out what we see how we see 2021 developing the offshore.
<unk> begin to accelerate debt that we learned kind of all the records that I described earlier, the dismantlement of the oil and gas.
The industry is a lack of investment the last lack of exploration or lack of it it's going to catch up to us as the economy returns back to normal.
Great. Thanks, very much for the color guys.
Okay. Thank you George.
Thank you. Our next question comes from Christopher <unk> with Wells Fargo. Your line is now open.
Thanks, Good morning, good morning.
Regarding the $75 million of additional cost reduction can you give maybe more specific color on which segments and the timing and is there any read through based on the outlook that you laid out on where EBITDA margins could get to by late 2021.
Yes, what I would say this.
Perspective, we've been reducing cost since 2015.
The $700 million plus that we referred to we really kicked off in early 2019, when we begin to face some headwinds and so I want to stress that.
We continue to downsize.
In 2021, we're doing that as well.
Thus far we have line of sight on $75 million, but these are some pretty major.
Frankly difficult challenging steps that we're undertaking now.
To continue to improve our cost position and they tend to be a little lumpy.
They are going to flow out throughout the year.
We've announced for instance, the closure of a major facility in former headquarters of the company.
Painful and difficult but.
So.
It's kind of kind of vary quarter by quarter and I would tell you all three segments remain folks as well as corporate remained focused on reducing costs to try to navigate through this.
Okay. That's helpful. Thanks, and then can you.
Can you touch on.
Well I guess I'll skip over that maybe switching to the <unk> commentary that you had on the call.
I think theres been a lot of interest are orders picking up you have a view on how much that might grow in 'twenty, one or 'twenty two as a percentage of the fleet in North America, Yes.
Yes, it's a really interesting space I mean, it's not lost on us that a lot of pressure pumper share challenge with respect to raising capital, but nevertheless, we see a lot of interest in this we've worked very closely with one of the largest pressure pumper in North America is very excited about it and I think debt interest really stems from what they're hearing from their customers the E&P companies no.
They need to reduce their greenhouse gas emission profile frac jobs are an obvious area to target and so I think that they are leaning on their service providers to think through how to do that and thats, leading both too.
Interest in <unk>.
Dual fuel tier four K.
Abilities as well as kind of the next generation, which is the E frac.
Offering that we're pioneering presently, but I think I mentioned that our pressure pumper customers testing it with one of their E&P customers and also reports a lot of interest from other E&P customers, but the promise here is really.
Very.
<unk> a much lower total cost of ownership, we've built ours around a 5000 horsepower.
Pumping system that has less volume per.
For stroke, and so that lowers O&M costs, a third or more for the owner of the equipment.
It lowers the diesel cost that can run 1 million Bucks, a month or more to support fracking operations. It moves into your truckload cost for smaller footprint. So you can save money on the pad construction you make your neighbors happy because you cut down on traffic.
But most importantly.
60% or more lower cotwo emissions out of it. So this is really really promising and we're very excited and pleased.
It represents.
Another good opportunity for Adobe.
Great. Thanks for the color you bet.
Thank you. Our next question comes from Chase Mulvehill with Bank of America. Your line is now open.
Hey, Thanks for squeezing me in here.
First thing I kind of wanted to ask about was kind of <unk>, Inc.
First quarter.
Obviously.
A little we've got here in <unk>, but could you maybe try to quantify how much is really kind of directly related COVID-19 issues, whether it's logistics certain types of restrictions.
And things like that so we can kind of understand kind of what's impacting the near term numbers.
Yes, it's hard to put a precise number on what I would tell you with 72% of our.
Business on a consolidated basis coming from international markets. The general Sluggishness in international markets has slowed our customers' plans are specific examples of offshore spuds for instance, being delayed because of managing COVID-19 on an offshore rig is very very challenging.
Specific examples of our customers are just sort of slow playing approval of projects.
It's just.
Sluggish is the best word to describe it with respect to orders.
And so and so on the top line I think it really affects us, but as Jose noted to a lot of our businesses require rely on service technicians that cross an international border every other day to take care of our customers out in the field and it continues to be very disruptive it shows up in things like supply chain, where we're freight.
Painters.
Our delayed where ship cost of shipping has gone up.
Covid still continues to impact the operations.
Our own internal operations is where all the operations of our of our customers as it might be it's clearly taking a toll.
Alright.
Follow up.
You guys have been talking about pruning your portfolio divesting some businesses.
I would imagine kind of COVID-19, probably makes it a little bit more difficult to do that so just kind of update us where you are there is it kind of how youre thinking about M&A on a go forward basis, specifically as you think about better positioning the company for energy transition.
Yes.
<unk>.
Chase.
Cost of capital in the renewable space.
<unk> continues to fall, which inflates asset values.
So in terms of M&A in this space.
It just feels very expensive to us.
That doesn't bother me because we've made so much great progress organically and frankly my view is.
It's not to say, we won't find it really interesting acquisition opportunity but.
Lot of really smart people here with clever ideas and so as you've kind of heard earlier.
Looking at this area and making real progress in terms of solving customer pain points and so that's been our approach in the in the renewable space with respect to divestitures.
Again, the whole Covid Spector.
Over the past year.
Has removed a lot of animal spirits with respect to a few things that we might have entertained selling and so that has slowed the process.
In terms of divestitures, but.
We continue to to look at the returns across our portfolio of businesses. Both current snapshot returns, but most importantly kind of growth prospects and what kind of normalized returns are.
And.
I would say R. R.
<unk> continued to try to be disciplined around that but our.
Better management of working capital and being attuned to returns on capital on behalf of shareholders.
Something that we take very seriously and I think we continue to continue to focus on.
Okay, perfect I'll turn it back over thanks clay.
Thank you Jason.
Thank you. This concludes our question and answer session I would now like to turn the call back over to Clay Williams for closing remarks.
Joelle and many thanks to all the employees in particular that are listening.
I really appreciate the great effort that youre doing in extraordinary circumstances to take care of our customers and each other and so.
I appreciate all that you continue to do and I do think that we are all in store.
See better opportunities emerge in 2021.
Getting the COVID-19 behind us and looking forward to continuing to serve our customers in both oil and gas space in the renewables space. I'm also thanks to all of you for joining US today, we look forward to speaking to you all again in April about our first quarter results.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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