Q2 2022 Nov Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the <unk> second quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time as a reminder, this conference call is being recorded I would now like produce your host for today's conference Mr. Blake Mccarthy Vice.
<unk> of corporate development Investor Relations, Sir you may begin.
Welcome everyone to <unk> second quarter 2022 earnings Conference call with me today are clay Williams, our chairman, President and CEO and Jose Bayardo, Our senior Vice President and CFO .
Before we begin I would like to remind you that some of today's comments are forward looking statements within the meaning of the federal securities laws. They involve.
The risks and uncertainty and actual results may differ materially.
No one should assume these forward looking statements remain valid later in the quarter or later in the year for more detailed discussion of the major risk factors affecting our business. Please refer to our latest forms 10-K, and 10-Q filed with the Securities and Exchange Commission.
Our comments also include non-GAAP measures reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website.
On a U S GAAP basis for the second quarter of 2022, <unk> reported revenues of $1 73 billion and net income of $69 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 in the call. We'll host a question and answer session. Please limit yourself to one question and one follow up to permit more.
Now, let me turn the call over to clay.
Thank you Blake for the second quarter of 2022, <unk> revenues grew 12% sequentially at 26% leverage driving EBITDA to $150 million. Despite continuing supply chain disruptions. Our teams were able to improve profitability to an EBITDA margin of eight 7% orders once again exceeded revenue out of backlog, yielding a book to bill of 100.
17% the company posted earnings of <unk> 18 per share for the second quarter.
We were pleased to see further improvement and expect more to come although a potential economic recession has pushed oil and gas prices off recent highs our outlook remains constructive the world is facing a significant energy shortfall in the oil and gas industry needs to increase activity in order to provide greater energy security to the global economy that urgent activity will need to come at a time when the industries.
<unk> its rigs drill pipe and pumps have been idled depleted cannibalized and worn out through a pandemic shutdown that has produced the most withering downturn the industry has ever seen.
He is entering the emerging up cycle in a unique position within the oilfield ecosystem oil.
Oil and gas production companies or operators live at the top of the food chain in this ecosystem and they are benefiting in real time from sharply higher oil and gas prices.
Lack of exploration and development investment in the oilfield through the pandemic and the several years preceding it has reduced the productive capacity of the industry. In fact, some argue that spare capacity may be approaching historic lows.
Despite strategic petroleum reserve releases oil gas and product inventories keep drifting lower and are generating commodity price signals back to operators to step up activity and produce more.
To the extent they can given they are now higher cost to capital their shareholders demands for less drill bit capex and greater return of capital and emerging constraints amongst the oilfield service companies that do the actual work, including constrained access to necessary spares and consumables, finding skilled workers and engineers and moving equipment globally through a bra.
In supply chain and it will be sales to both groups and our results reflect the fact that broadly speaking. These ecosystem participants are currently at different stages of recovery Nov's revenues directly to operators were 35% of its mix in the second quarter and its revenues to oilfield service companies was about 55% of its mix the balance a 10% where sales too.
Other industrial customers.
While the finances of operators have been largely healed by higher oil and gas prices, our oilfield service customers still have a ways to go many still labor under low or no margin contracts signed during the duress of the pandemic lockdown.
They continue to execute against rapidly rising costs due to inflation in materials and labor battling through acute shortages of certain critical items. I mean, you still strained under high debt loads and lack access to external capital. It takes a while for prosperity to trickle down the oilfield food chain, but here's the good news the trickle down is underway month by month.
Older low margin contracts expire and are replaced with better price contracts for example, leading edge day rates for Super spec tier one land rigs are squarely north of $30000 per day now fracking.
Tracking prices per stage are improving and pressure pumper financial statements are starting to reflect it when major deepwater driller announced a drillship day rate well north of $400000 per day. This quarter, the overhang of equipment and capacity is diminishing admittedly at different rates across different categories, but directionally. These are all going the right way utilization is.
<unk> and facilitating pricing leverage for our oilfield service customers idled equipment that has been cannibalized or worn out requires incremental capital to reactivate and with desperation of operating quickly from oilfield service enterprises. They are now demanding contractually guaranteed payback on these incremental investments in order to bring additional capacity to the marketplace.
These are all the first steps that one would expect towards healing the balance sheets and business models of oilfield service companies in the body of evidence of healing continues to grow that's why we are so constructive and our outlook.
It all points to more future demand for <unk> as you know <unk> is in the business of making these two levels of customers above us in the food chain successful ultimately to reduce the cost per barrel that both work in concert to produce Adobe outfits are customers with the equipment technology and tools used in every part of well construction and our unique position yields competitive Dan.
In an up cycle.
As always targeted market leadership, and let me explain why.
Failure costs in the oilfield can be extremely high tens of millions of dollars or even more the very expensive setbacks operators experienced from time to time tend to make them very very risk averse, which means operators value experience and reliability in our oilfield service subcontractors very very highly.
Therefore for oilfield service companies scale and market share matter for an oilfield service company being the top of mind low risk high value choice of operators is a distinct competitive advantage as the market leader that has been in this industry for 160 years <unk> has encountered successfully navigated more real world obstacles that are smaller.
<unk> that experience is valuable to oil and gas operators seeking to avoid the expensive headaches that occasionally a rise in our operations.
Scale also drives additional competitive advantage for <unk> through efficiencies, we gained as market leader, including purchasing efficiencies and global marketing reach that facilitates our new product launches, our oilfield service customers, sometimes enhance their competitive advantage by standardizing their fleet of oilfield equipment.
Which simplifies their management of spare parts and consumables and helps in training their workforce.
These customers will naturally gravitate to a market leader like <unk>, who is well capitalized and will be around to support a fleet of equipment for decades to come and one that operates globally to be there for future geographic expansion our market leadership over time has yielded the industry's largest installed base of oilfield equipment, which provides another important competitive advantage and obese position as the OEM makes us.
The preferred choice for spares and aftermarket support plus our installed base presents additional revenue opportunities upgrades with new digital products and apps like our <unk> operating systems and Max edge computing.
Oil field operations are extraordinarily tough on equipment, when you pump embraces at Super high pressures and rates and GM thousands of horsepower miles into the Earth equipment suffers the physical consumption of equipment by day to day oilfield operations makes oilfield service companies very capital intensive.
However, the rates commanded by most oilfield service subsectors over the past several years haven't even come close to paying for the physical capital consumed instead, the oilfield service industry has consumed excess equipment and there has been plenty of it since 2015 when utilization turn south however.
However, the recent improvements in pricing for many of our customers point to the equipment overhang diminishing rapidly as oilfield activity rises so too should demand for oilfield equipment that we provide.
We expect our manufacturing flexibility that is our ability to redirect manufacturing assets as needed to further enhance our plant utilization as we respond this flexibility along with our valued manufacturing vendors enable us to flex up in times of growing demand, which all serve to reduce nov's fixed asset intensity, our historical financials demonstrate low.
Levels of Capex that go with low fixed asset intensity low capex needs, allowing <unk> to convert more EBITDA to free cash flow for reinvestment in technology and for shareholder returns our results from the past two decades, demonstrating that our unique position the oilfields ecosystem balloons later in the cycle than operators, who enjoy prosperity <unk>.
By service companies, who are just starting to see benefit from rising activity now.
The past decade shows business models throughout the ecosystem can be highly volatile operators are cyclical due to their reliance on oil and gas prices and they cut activity when prices fall oilfield service companies, who rely on operators drilling programs see an outsized downcycle and they in turn cut their expenditures on equipment consumables and aftermarket spare parts.
<unk>, which impacts our revenue as our customers draw down existing inventories and cannibalize idled equipment to support the few units. They have left running following the extraordinary growth in demand <unk> witness from 2004 to 2014, our revenues fell sharply in the downturn that followed.
However, during the first part of that up cycle <unk> demonstrated that our business model can possess extraordinary optionality and growth demand can come rocketing back quickly as history and recent events have shown adobe is manage through the downturn since 2015 through one aggressive relentless cost cutting when necessary.
Two maintaining a strong balance sheet and three diversification diversifying geographically diversifying between operators and oilfield service companies diversifying across drilling and completion activities diversifying across oil and gas and diversifying across land and offshore little goes on in the oilfield where <unk> does.
Not in some way participate all our oil and gas customers are tied more or less to commodity prices, but different parts of the ecosystem respond to changes in different ways, even within oil producers.
Who respond differently than gas producers for example, North American independent operators, usually react quickly both up and down to changes in oil prices, whereas national oil companies moved much more deliberately.
Our three segments respond differently at different times in the cycle as well.
Our year to date financial results for 2022, 50 ecosystem model that I've laid out for you.
For instance, our Wellbore technology segment, mostly provides tools to oilfield service companies tied to drilling but it also provides goods and services like drill bits solids controls and downhole tools that are purchased directly or at least specified by operators. It also provide services directly to operators, such as oilfield tubular inspection and coating and capital equipment to drilling contractors like drill pipe and <unk>.
Acres overall, its revenues are pretty closely tied to real time global drilling activity, but its products and services purchased directly by the operator had been the first to recover while other categories are recovering later.
On the other hand, the completion and production solutions segment is tied to capital expenditures by oilfield service providers, who performed well completion activities like fracking as I noted earlier prosperity is just now trickling through the oilfield ecosystem to these oilfield service customers, many of whom still face challenged balance sheets and low priced legacy contracts, even as balance sheet strengthen theres a natural.
Lag as new projects are bid to operators and orders placed by the winters. This business blooms later in the cycle. Our expectation is that the next few years, we'll see continued growth and margin expansion as our customers recover separately. The cap segment also provides production modules and conductor and flexible pipe directly to operators, mostly for the offshore market.
These capital purchases by offshore operators are also emerging from very low activity level. So this portion of our business should continue to grow significantly for the next few years as the offshore sector recovers, notably the completion and production solutions segment has now posted six quarters in a row of book to bills North of one and its backlog has more than doubled over the past 18 months.
Orders point to future growth and continued margin expansion.
Finally, our rig technology segment as the global leader in engineering manufacturing and supporting drilling rigs of all kinds drilling rigs are large investments drilling contractors must possess strong balance sheets access to capital and high levels of confidence of contracts at high day rates will be available to support. These investments. This all combines to make this segment very late cycle in nature new rigs.
Our never added until the existing fleet is contracted at high day rates and operators seeking drilling rigs are willing to pay up to gain access to additional rigs demand for new rigs evaporated through the downturn and a resumption in demand for newly constructed drilling rigs is probably a long way off in my view, Nevertheless, nov's market, leading status as the OEM on a very <unk>.
Large part of the global drilling rig fleet means that we get the call for engineering and equipment to reactivate recertify and upgrade older frequently cannibalized rigs coming back to the market and aftermarket support of these rigs once they go to work, which is increasingly requiring condition based monitoring technologies that we've developed through the downturn.
<unk> announced plans to put an incremental three dozen or so jackups to work in the Arabian Gulf resumption of drilling programs in West Africa, and new rig tenders for Guyana, and Brazil, all point to higher activity in the offshore and are all driving renewed interest in offshore rig reactivation and rising offshore activity should also again helped the cap segment too.
Importantly through the downturn rig technologies mix has shifted largely to aftermarket support of its installed base for subsistence which accounted for 53% of its second quarter mix. It has also benefited from its position as the leading provider of offshore wind turbine installation vessel packages, which helped to offset its lower oilfield revenues through the past few years.
So to recap these segments are responding at different times to the up cycle as expected broadly Wellbore technologies is the earliest of these while completion and production solutions and rig technologies lag with the world short of secure energy. The oilfield is reassembling itself and getting back to work, which will physically consume the equipment and spare parts Adobe makes it an increasing.
Month by month is becoming increasingly evident that the industry faces an uphill battle, having laid off skilled workers avoided maintenance expenditures during extreme economic duress or customers have been under having cannibalize a lot of idle oilfield assets and having depleted stocks of consumables that would otherwise be available to support growing operations.
I will acknowledge that many are of the view that we face a global recession in the near term recessions can reduce demand or more accurately they usually just flattened growth in demand.
For oil and gas, thereby reducing prices and activity.
Remember coming out of historically low levels of oilfield activity that mark the pandemic shutdown with nearly all excess OPEC supply back in the marketplace with the release of the SPR expected to end soon with a number of viable ducks in North America drawn down significantly in the past few years, and with oil and gas and product inventories low and falling.
It's hard for me to imagine anything other than continued growth of this sector for the next several years.
Our customers still face constraints and workforce and capital that will continue to moderate their orders with <unk> in the near term, but ultimately the energy shortage must be solved and candidly a mild recession would somewhat easy intense supply chain stresses presently on oil and gas industry. However.
However, it plays out the key part of the solution will be more orders for <unk>. This is a compelling set up for multi year up cycle for our company I am pleased to report that we are once again up to the challenges of growth in our world and our customers always care about one thing, but the thing changes.
And down cycles. The thing is price in up cycles. The thing is time.
We are beginning to see a distinct change in our customer conversations with fewer questions around how much will it cost and.
And many more around when can I get it.
This is to me the best evidence yet that we are in the very early innings of the part of the cycle. We're in.
<unk> was designed to flourish to the employees of <unk>, who are listening today. Thank you for all that you do you are the best.
With that let me turn it over to Jose. Thank you clay to recap the quarter Nov's consolidated revenue in the second quarter was 173 billion, a 12% sequential increase compared to the first quarter and a 22% increase compared to the second quarter of 2021, adjusted EBITDA for the second quarter totaled $150 million or eight 7% of <unk>.
All three operating segments reported sequential revenue growth and better profitability as we realized continued improvements in oil and gas equipment market fundamentals and execution against ongoing supply chain related challenges.
The improvement in execution comes from working diligently to better forecast demand plan and build buffers within our inventory of raw materials and third party source components that have less certainty than expected lead times. Despite seeing no improvement in the average for on time deliveries from our vendors in the second quarter with average lead times continuing to extend.
The actions taken by our team increased throughput and deliveries for our customers of course building buffers has a negative impact on our inventories working capital and cash flow inventory.
Inventory increased to $151 million sequentially, which contributed to the $145 million increase in working capital. Despite the increases our focus on working capital management over the past few years allowed us to better mitigate supply chain risks and fund revenue growth, while still delivering an improvement in all primary working capital metrics.
The build in working capital along with a $51 million tax assessment described in our press release resulted in a use of cash flow from operations of $124 million.
Capex for the quarter was $43 million, resulting in negative free cash flow of $167 million and we ended the second quarter with $1 72 billion in debt and $1 2 billion in cash continued topline.
Topline growth supply chain challenges and the timing of payments on certain percent of completion projects will continue to be a drag on working capital for the remainder of the year. However at this point, we expect to generate a modest amount of free cash flow in the second half of 2022.
Moving on to segment results, our Wellbore technologies segment generated $666 million in revenue during the second quarter, an increase of $58 million or 10% compared to the first quarter and 44% compared to the second quarter of 2021.
The segment realized revenue growth in most regions on improving global drilling activity levels pricing gains and better execution against ongoing supply chain challenges.
EBITDA flow through was 36%, resulting in a $21 million sequential increase in EBITDA to $122 million or 18, 3% of revenue.
Our REIT HEICO log drill bit business posted mid single digit revenue growth with a 16% increase in eastern hemisphere revenues, partially offset by the Canadian spring breakup and customer driven project delays in the Gulf of Mexico.
Growth in the Eastern Hemisphere was led by the Middle East and Western Africa, where we are seeing urgency from customers in their request for extensions on contracts nearing exploration and theyre, placing large orders before pricing resets under new agreements.
A REIT HEICO log products literally serve as the tip of the drill string and figuratively serve as the tip of the spear of leading indicators for the broader segment being one of our earliest cycle businesses. The actions. Our NOC customers are taking today are giving us growing confidence in an upcoming inflection in eastern hemisphere activity.
Our downhole business reported a high single digit percentage improvement in revenue during the second quarter, while the unit has seen robust demand for its agitators and motors manufacturing output has been constrained over the last several quarters due to limited availability of special elastomers in certain grades of steel used in the business as high spec products. The team has worked hard to mitigate operational.
<unk> by finding and qualifying alternate sources of materials their efforts began to pay off in the second half of Q2, when they were able to significantly increase throughput.
Higher output and pricing led to a healthy margin improvement, which we expect will carry into the second half of the year.
Our well site services business reported a small sequential decrease in revenue healthy growth in our core solids control operation was offset by a decline in revenues from our managed pressure drilling product line, resulting from large capital equipment packages that shipped in the first quarter.
Outlook for MPD remains solid and we anticipate a strong rebound in revenues from the operation in the second half of the year.
And our solids control operation continued efforts to reduce environmental footprint as well as significantly higher costs for barite and diesel are driving efforts to achieve higher recovery rates from cuttings, which in turn is creating greater demand for various <unk> solutions. These range from adding an additional centrifuge, which can modestly improve recovery rates.
The greater adoption of our <unk> thermal desorption system, which can dramatically improve recoveries and reduce oil on cuttings to as low as 1%.
Outlook for our solids control and MPD operations remained strong with international and offshore focused markets preparing to increase activity improving demand will continue to absorb capacity and allow us to focus on customers that place a premium on our technology differentiation and best in class service.
Similar to well site services, our MD <unk> business posted relatively flat results with solid growth in its legacy surface data acquisition system operations offset by a transitory decrease in revenue from our evolve wired drill pipe optimization services.
Despite the pullback in Q2, resulting from a few rigs in the North sea completing wells and moving onto new locations. We expect to evolve revenue will return to its upward trajectory in the third quarter.
More customers are recognizing the improved drilling efficiencies well productivity and safety benefits that our evolve wired drill pipe services provide.
Which we expect will drive an increase in projects in the North Sea Middle East and U S. During the second half of the year.
Our grant <unk> drill pipe business posted solid sequential revenue growth and achieved its highest order intake since 2014 with a business realized a sharp inflection in demand for its premium pipe in the U S and middle East cut.
Customer owned pipe inventory levels are drawing down to uncomfortable levels, while drilling activity climbs, creating a renewed sense of urgency among our customers, causing them to secure manufacturing.
Our <unk> business delivered a sequential revenue increase in the low teens with solid incremental margins increased demand in the U S and South America fewer operational disruptions and a higher and higher prices drove the improved results.
In addition to solid sequential growth in its inspection operations unit realized its third straight quarter of double digit revenue growth and its coding operations led by increased demand for line pipe and drill pipe coating in the U S.
To meet growing demand and prevent lead times from blowing out we recently reopened to mothball the coating plant in Amelia Louisiana.
That was shut down in July of 2020.
Looking ahead to the second half of 2022, we expect a continuation of solid demand in the western hemisphere with accelerating growth in the eastern hemisphere.
For our Wellbore technologies segment, we expect North American drilling activity growth rates to moderate while momentum builds in the eastern Hemisphere, which we expect will help drive revenue growth of 4% to 7% in the third quarter continued strong execution and pricing improvement should more than offset the impact of ongoing supply chain challenges and.
<unk> pressures, resulting in EBITDA flow through in the mid 30% range.
Our completion and production solutions segment generated revenues of $639 million in the second quarter of 2022, an increase of 21% from the first quarter.
The sequential improvement was broad based with six of the segments eight business units reporting double digit revenue growth.
Adjusted EBITDA improved 22 million to $32 million or 5% of sales.
Despite a strong pickup in the shorter cycle components of the segments operations and improved execution challenges within shipyard projects continued to pressure margins in limit EBITDA flow through to 20%.
Book to Bill was 132% the sixth straight quarter of a book to bill greater than one.
Quarter, ending backlog increased 6% sequentially to $1 4 billion, achieving its highest level since the first quarter of 2015.
While bookings for the quarter were strong we continue to see large projects pushed to the right.
Higher commodity prices have significantly improved project economics, but shipyard suppliers and operators are all struggling with existing logjams and shipyards uncertain lead times higher costs and stress workforces, leading to nervous customers who are delaying <unk>.
However, our confidence in the long term sustainability of improved commodity prices is slowly improving leaving upside to this segment's future order potential.
What we see in our XL systems conductor pipe connection business contributes to our growing confidence that large project will rebound demand for our XL systems products has historically served as an early indicator of offshore drilling activity the <unk>.
Business unit realized a meaningful sequential improvement in revenues and a solid level of orders in Q2, but more importantly, it saw customer inquiries increased 14% sequentially and 24% year over year with the average value per inquiry up roughly 40% both sequentially and year over year.
Our process and flow technologies business unit posted revenue growth in the low teens with EBITDA flow through in the upper teens ongoing disruptions delays and cost overruns and shipyard projects affected our wellstream processing and APL operations and pressured margins for that business unit.
Nevertheless interactions with customers remain upbeat and our engineering teams are fully consumed working on paid feed studies, which will ensure our customers are ready to move projects forward our supply chain has normalized <unk>.
Additionally, the unit's backlog remains strong equal to five five times its revenue out of backlog during the second quarter.
Our production and midstream operations began to see some relief from vendor delays, resulting in the operation generating revenue growth in the low teens with outsized incremental margins improved supplier deliveries with continued healthy demand, particularly for our production chokes and the western hemisphere resulted in a significant pick up in sales.
Our pump and mixture operation revenue was flat with the first quarter. Despite the operations Shanghai manufacturing facilities shutting down for the vast majority of the quarter due to COVID-19 Lockdowns.
While the teams' heroic efforts to meet customer demand allowed revenues to remain solid near zero absorption in Shanghai higher freight costs and overtime incurred at other plants tasked with making up some of the shortfall pressured margins.
Demand for pumps, and mixers remains high and operational realize its seventh straight quarter with a book to bill greater than one.
Our subsea flexible pipe business posted a solid rebound in Q2 after suffering from a three week shutdown in one of our two manufacturing plants in the first quarter caused by the inability to procure sufficient quantities of polyvinyl fluoride. Additionally, the business unit realized its strongest order intake since 2017 with strong demand for projects in Brazil and in the <unk>.
Asia Pacific region.
Our fiber glass systems business unit posted a sharp improvement in revenue during the second quarter capitalizing on six straight quarters with a book to bill over one and overcoming many supply chain challenges that have plagued its operations over the last several quarters.
Headwinds from inflationary pressures on raw materials labor and freight continue proactive actions taken by the business to better insulate operations from material shortages reduced manufacturing disruptions.
Outlook has also improved with all end markets now demonstrating solid recoveries.
Demand from North American oil and gas customers finally, inflected higher in the second quarter, which allowed us to achieve our highest level of bookings from this market in the last four years. We also began to see a recovery in the marine and offshore sector, driven by the increasing spread between low and high sulfur fuels rekindling demand for scrubbers, despite our customers appropriate <unk>.
<unk> to bring vessels support while shipping rates remain elevated the <unk>.
<unk> sector is also benefiting from growing demand in the wind power installations space with our operation receiving in order to provide its bond strand glass reinforced epoxy piping for use in a new wind turbine installation vessel.
Our intervention and stimulation equipment business posted revenue growth in the mid teens with solid improvements in each of the businesses product lines. The unit also achieved its fourth straight quarter of improved bookings in its third straight quarter with a book to bill above 100%.
Demand for pressure pumping equipment parts and service continues to evolve as service market fundamentals improve.
And in the fourth quarter of 2020 customers began reactivating stacked fleets with the average level of difficulty increasing through 2021 as they dug deeper into their stacks of parked equipment. We then saw a shift towards fleet overhauls and rebuilds and are now seeing demand for newbuild equipment and booked orders of 62500 horsepower of pressure pumping equipment.
During the second quarter.
Despite the strong orders, we expect to see a dip in pressure pumping revenues in the third quarter, resulting from the completion of large aftermarket reactivation projects in the second quarter and ongoing supply chain constraints that are extending lead times for newbuild deliveries.
The business units coiled tubing and wireline operations are also realizing growing demand from higher service activity in North America and from a growing number of international markets, where customers are preparing for higher activity in the coming quarters.
We expect our completion and production solutions segments growing backlog to drive revenue growth between 1% to 5%.
While the segment will continue to face supply chain disruptions and inflationary pressures through the remainder of the year. The combination of growing demand and improved execution should drive EBITDA incremental margins into the mid 30% range in the third quarter.
Our rig technology segment generated revenue chain disruptions and inflationary pressures through the remainder of the year. The combination of growing demand and improved execution should drive EBITDA incremental margins into the mid 30% range in the third quarter.
Our rig technology segment generated revenues of $462 million in the second quarter, an increase of $21 million or 5% sequentially.
Topline growth was led by continued strength in the segments aftermarket operations.
Adjusted EBITDA improved 5 million to $41 million or eight 9% of sales.
New orders totaled $141 million, representing a book to bill of <unk>, 80% <unk>.
Total backlog for the segment at quarter end was $2 84 billion.
Orders included the design and jacking system for another next generation wind power installation vessel. The rest of the order book consisted of top drives handling equipment pumps, <unk> controls and components and other miscellaneous equipment for replacements and upgrades.
While this type of order book reflects a market that is still healing. There are many signs that indicate this processes accelerating as clay touched on recent public contracting data points have been very encouraging with key offshore customers securing contracts at day rates more than two times the average rates seen in 2020.
In the U S land market average day rates in the Permian increased 33% in the last three months with a blended average day rates still more than 25% below leading edge rates.
This means we can expect our customers' cash flows to continue improving rapidly which is critical since access to capital remains a challenge for the industry.
Until the broader financial markets once again reward high return investments in oil and gas equipment customers will need to self fund their equipment needs. Fortunately as I just mentioned cash flow from our customer base is improving at a rapid pace.
Near term, we expect the bulk of our rig technology segment capital equipment orders to come from replacement and upgrades for their existing fleets.
While rig capital equipment orders remain modest quickly improving day rates are driving a much improved environment for aftermarket operations.
We're seeing steady.
Steadily increasing demand for reactivation recertification overhaul and upgrade projects in all major regions. We've also seen orders for spare parts improve over the past six quarters with Q2 orders achieving pre pandemic levels.
Supply chain constraints are still limiting our manufacturing output, resulting in backlog growth that continues to outpace our ability to get parts to our customers.
While throughput and revenue from spare parts improved in the second quarter bookings increased 9% and our backlog also increased growing demand and our focus on continuing to improve our ability to secure materials and ramp manufacturing throughput is making us increasingly optimistic about the prospects for this segment to generate improved financial results in the.
Second half of this year and gathering momentum for an improved 2023.
For the third quarter, we expect revenue for our rig technology segment to grow between 5% to 10% sequentially with EBITDA flow through in the mid teens.
While we're pleased with the recovery in profitability in the second quarter, there remains substantial room for improvement with the upturn of our business in the very early innings of what we believe will be a multiyear recovery what we see in each of our operating segments is in line with what we expect short cycle businesses, realizing rapidly improving results initially driven by activity.
In North America, and now shifting to the eastern Hemisphere.
<unk> order cycle capital equipment business is seeing increased demand and aftermarket operations of long cycle capital equipment businesses ramping up.
Every cycle is a little different and this recent down cycle has been more severe than most if not all prior downturns.
We are still facing headwinds from global supply chain challenges and investor pressure on our customers to avoid investments in their operations.
We believe these issues are creating more pent up demand for assets that are needed to address the growing global energy supply and security challenges and we will prove transitory.
While we do not expect these constraints to alleviate in 2022, we do anticipate a significant improvement in our results and expect to see demand for more of our products and technologies inflect, which should allow <unk> to deliver second half of 2022, EBITDA that is 45% to 55% greater than what we achieved in the first half with that.
We will now open the call up to questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone phone.
One moment, while we compile our Q&A roster.
Our first question comes from Stephen <unk> with Stifel. Your line is open.
Thanks, Good morning, gentlemen.
Good morning.
So Jose you mentioned just I was curious if you could dig in a little more I mean, when you think about what pressure pump reserve going through as far as what the e&ps are saying and their willingness or lack of willingness to invest <unk> upgrade equipment.
Can you just talk about sort of the conversations that youre, having with customers and how they are sort of thinking about that given what seemed to be somewhat long lead times for these items.
Yes, I think we're at the point, where we're seeing such a rapid improvement in the pricing that is being received by our customers that they are really sort of struggling with two opposing forces right.
Pressures to be very very conservative from a capital standpoint, and the other sort of beginning to salivate over the type of per unit economics that are coming back into the fray related to assets.
So the longer that people postpone making those types of investment decisions.
The worse the supply demand imbalance becomes right.
So everyone is trying to figure out when the right point is to sort of step into it.
We're still struggling with it and I think they'll continue to struggle at least through the end of this year to be determined how that plays out next year, but I think our primary point here is that.
It's just creating more pent up demand and quite frankly, we may be a little bit biased on this but those who pull the trigger sooner rather than later are the ones that are going to be able to recognize the most benefit from having those assets deployed in the field and it's inevitable that more assets need to come back into the field to meet the global supply and energy security needs.
Great. Thank you and then.
The follow up was really on the Wellbore side.
Maybe talk a little bit about what youre seeing on sort of the price versus cost inflation side and how you think when you talk specifically about incrementals in the third quarter and how you think that impacts the margin progression as you get into 2023.
Yes look I think if you look back over the last.
Several quarters.
We have been very focused on improving our execution and also recapturing pricing that had eroded through the course of the down cycle in order to.
Not only.
Return pricing and normal margins.
To more acceptable levels.
But also to offset the costs associated with those operational disruptions, which were taking place due to all the supply chain related challenges and so with.
With the actions that our teams around the world are taking to better mitigate the supply chain disruptions.
We're starting to see an improvement in those incremental margins and that will continue to be in sort of fits and spurts, but.
Going forward, we hope to be able to deliver at least sort of a normalized incremental margin over an extended period of time and as you recall for Wellbore technology segment that sort of in the mid 30 plus percent range, which is kind of where we were this quarter Steven I would add to we've invested in new technologies and Wellbore.
<unk> around things like the cutters and <unk>.
Downhole tools and drilling motors that I think have enabled <unk> to gain share.
There the performance differences that we highlight in each of our press releases each quarter.
We are translating to more demand for tools that I think we're putting more distance between us and our competitors are differentiating in terms of performance of our customers are paying up for that so thats contributing to the strong financial results for Wellbore technologies too.
Great. Thank you clay and Jose.
Yes.
One moment for our next question.
Our next question comes from David Anderson with Barclays. Your line is open.
Hey, good afternoon.
So your results in your commentary.
Another clear indication about the middle east and offshore and flooding.
Substantial activity, especially next 12 18 months first of all we've seen this obviously in quite some time you guys took a ton of cost out of your operation with some of the internal changes you've made I am wondering if there are certain product lines of businesses and offshore middle East, where do you think you'll see the greatest operating leverage.
As things start to turn up.
Yes, right now in this kind of fits with Jose's prepared remarks as I expected you see the first pick up in consumables.
Things like drill pipe where.
That are required to go back to work for these rigs and I think that's where we've seen the greatest sort of increase in demand.
A big pickup in spares orders and rig for instance, which isn't part of the backlog or the orders that we report.
Separately, but it was a really nice lift sequentially.
To support those rigs going back to work and then our drill pipe business saw orders nearly double from the offshore from Q1 to Q2 again to support.
Those rigs going back to work and so.
Our expectation is with the number of rigs in shipyards.
Going through reactivation recertification processes to go to work in the offshore and in places like Saudi Arabia.
And elsewhere, our engineers are engaged with those customers looking at their needs for equipment and so forth and so I think that'll be a little bit later, so that's sort of the progression of <unk>.
Demand that we foresee in offshore drilling.
And Dave also as you as you just observed.
We spent the last several years really.
Primarily contracting for the organization, but it was really just a right sizing effort, but it was also positioning the organization for the future.
So while we've certainly contracted the footprint to a large degree we've actually enhanced and grown.
Our footprint in certain markets, including the middle East.
Likely really well positioned for the way that the market will evolve.
So.
We are well positioned for that.
Yes, middle East kind of touches all your segments, but I guess the other thing I'm curious about is you talked about reactivation tenders out there.
Lot of the Jakafi the deepwater side.
I would think that the amount of potential aftermarket revenue per rig increases substantially.
Scott a lot of these rigs are in.
I would imagine in a pretty bad shape up the same model for you can you talk about how what that looks like over the next 12 months.
In terms of what Youre seeing what kind of what kind of market really do and how does that change your revenue potential.
Sure it expand quite a bit.
Yes.
It's that two years or so.
Yes, the required after about two years the costs go way up.
And there is sort of almost a step change function in the offshore for rigs that are cold stacked for that period of time.
It's really going to vary a lot by rig and that's why it's so important that our engineering teams engage with these customers and really get on the deck and see what they are working with and that's underway.
But.
The other kind of constraint I guess, what we're facing here in the near term and again something else. So Jose touched on is that the offshore drillers really.
R R.
Many are emerging from restructuring.
This constrained access to capital, they're very very very careful about the expenditures on these rigs and <unk>.
And.
That's sort of gating some of the investments, but at the end of the day more rigs have to go back to work we have a supply demand shortfall that has to be addressed we foresee rising levels of activity that's going to support.
More rigs being reactivated and net process will go from the easy cheap and easy easiest rigs at the beginning of the cycle to the more expensive more challenge rigs as we progress deeper into the stack and that's kind of how we see things playing out.
Okay.
Thank you.
Thanks, Dave.
Our next question.
Okay.
Our next question comes from David Smith, with Pickering Energy partners.
Hey, good luck. Thank you.
Good morning, Thank you for taking my question.
I guess, one quick follow up on that last topic circling back to offshore rig demand growth.
What I was talking about 12 month lead times on the deepwater reactivation.
Suspect youre involved in those conversations before.
Our contract to announce.
So I wanted to ask.
Also on those reactivation candidates, especially on the deepwater side.
Are you seeing interest and equipment upgrades as part of the reactivation and any color you might provide on what that opportunity could look like.
Yes, yes, we are.
Lot of interest around achieving Betsy required DLP re certifications globally, that's sort of becoming a new standard a lot of interest in NPD.
Many markets requiring managed pressure drilling capabilities on deepwater rigs.
As we go forward.
And put those rigs back to work.
But yes, we're definitely involved in those conversations and.
Expect that.
That's going to lead to orders for additional equipment in the future for <unk>.
Okay I appreciate it.
And then just circling back to the push pull and.
And under supplied U S lower 48 market at least under supplied for the.
Future demand growth.
Was hoping you could share any color.
What youre seeing.
On potential for a pickup in private capital maybe evaluating growth opportunities.
You kind of get in front of public companies.
Yes.
Improving balance sheet.
Real term contracts to support growth.
David This is pressure pumping you are asking about or more.
Pressure pumping, but yeah broadly workstation.
Yes, I think look all public companies have a lot of pressure to be very very careful and capital expenditures you've seen that play out in the E&P space, where most of the incremental rigs put back to work or.
Private operators that are picking up rigs, whereas the public companies have been.
Way more measured in their their growth in activity and.
Candidly.
We'll see how it plays out in the oilfield services sector I don't know if this is going to be the case or not but it wouldn't surprise me if there are some smart.
Private capital that looks at opportunities that are emerging we're just now kind of moving through this pricing inflection point and lots of categories of equipment. You've had just the past couple of days strong.
Performance in announcements by.
By some pressure pump offers as well as north American land drillers that point to sharply rising sort of margins per unit per day, and those sorts of things that make those investments more attractive.
And so we'll see how it plays out but ultimately I think what what we're seeing in commodity prices translating through to.
Oilfield service pricing.
Is a strong price signal coming back that that what we have.
Got it we got a couple of million barrel per day shortfall that has to be addressed and capital ultimately will find its way into the space to address that.
And then David I think it's a really interesting question not just as it pertains to the North American market, but if you think about the global market.
Things are emerging quickly, but what does it appears that the investors in the space. This cycle, we're going to be a little bit different than what we saw in the prior cycles. So theres certainly some new and emerging potential investors. They are kicking around within the U S markets and overseas. That's the same case as well but also.
Probably going to be more driven by NOC is helping to support more activity going forward as well as sort of affiliated sovereign wealth funds that are getting much more engaged in the space outside of their home territory. So things are going to look a little bit differently. This time, but at the end of the day one the sector delivers.
Good returns, which we're entering that phase that will draw investors and providers of capital.
Great point and more specifically around that if you go back to the Jackup space and the offshore Theres been a number of Jackup rig transactions in the last quarter or two that you are seeing some players emerge that are backed by sovereign wealth capital that is much more bullish and willing to.
Put new capital into offshore drilling assets.
More specifically.
Yes, that's a great point really appreciate the color and I'd be remiss, if I didn't say congrats on the quarter and a great second half outlook.
Thank you thanks, David.
And one of them before our next question.
Okay.
Our next question comes from Marc Bianchi with Cowen Your line is open.
Hey, Thanks, I guess on the second half outlook. There. Yes. This is the first time I can remember you guys going beyond a quarter.
In terms of giving giving some guidance so what's the what's the thought process there.
If theres anything in particular that caused that this quarter.
I don't think Theres anything in particular markets.
Obviously, we had a.
We significantly outpaced the guidance that we provided this quarter.
Things are shaping up a little bit better in terms of our confidence related to our ability to execute against supply chain challenges that will continue to exist.
Through yearend Blake and I know, we're going to get a tremendous number of questions related to outlook a little bit further out. So we provided a very wide range, but wanted to provide you at least a fairway of alternatives for how we're sort of saying the second half. So that's in a nutshell.
Super.
Maybe back to the.
The customer spending.
<unk> their fleets and so forth.
How much below sustaining capex do you think customers are generally.
At 20%, 30%, 50% below where they need to be spending at current activity levels and is there a big distinction as you look in North America versus rest of world.
Yes, it's really it's a great question, it's really hard to answer what I would say is this is very anecdotal in Italy.
I think it's easier for land drillers with idle.
The rigs to cannibalize then it is for the offshore.
And.
And so in terms of for a given number of rigs working they can understand more dramatically than the offshore because they just send a crew out to take a draw works off of stacked rig.
Replace the capital that's needed to sustain the ongoing land rigs that are working for us in the offshore that's more expensive or more challenging to do putting a rig in a shipyard.
So I don't necessarily I am not sure that answers your question, but its sort of some hopefully some anecdotal insight into what's possible out there what I would tell you though is all of our customers are great and not spending dollars. They don't have to spend in a downturn.
<unk> said that they've honed over prior downturns that they've employed enthusiastically through this downturn.
That gives rise to as that kind of a coiled spring that Jose was talking about earlier, where.
I think we are moving to a period, where we're going to see some catch up expenditures here.
Around these rig reactivation around putting putting more rigs to work globally that are going to benefit.
Yes, thanks for that I will turn it back.
Thank you.
And then one moment for our next question.
Our next question comes from Connor Lynagh with Morgan Stanley . Your line is open.
Yes, Thanks, I wanted to talk about caps a bit.
The order intake there has actually been quite strong, but you highlighted in your comments that youre still seeing deferral of projects and things like that I'm wondering if you can just sort of square the two things basically.
Is there is there a certain portion of the business thats been disproportionately contributing to the orders over the past few quarters and a portion of that you expect to catch up going forward.
Yes, so obviously within our cap segment, we've strung together a number of quarters in a row here of <unk>.
Really solid bookings in this last quarter.
32% book to Bill, but maybe even more importantly, it's up 56%.
On quarter. So everything is heading the right direction I think the distinction that we're trying to make in that commentary that you are referring to is that.
Businesses that are conducting business and Asian shipyards that have had a host of challenges.
And are still sort of working through debottlenecking.
<unk>.
Our resulting and some cautiousness on the customers part in terms of pulling the trigger on so.
So our sense is.
The number and size of opportunities that we've been pursuing over the last several quarters, if not several years certainly.
Getting any smaller.
Just.
The time horizon, when they pull those triggers.
And kicked out a little bit I think pending.
A resolution on those bottlenecks getting arms around the new cost environment that they are in all of those sorts of issues and so really it's just almost more of a sense of optimism that there is more orders to come particularly for those large project intensive businesses.
Yes that makes sense, so just sort of thinking through that you guys are also highlighted.
Ongoing cost to your business from delays in shipyards.
If you would quantify that the amount, but if you have any sort of quantification of that.
I think some of the thinking around margins through the next few quarters that those will be rolling off just any updated expectations on how to think about margins beyond obviously, the third quarter or are those costs. However, you want to frame it.
Yes.
Probably can't give you any more specific guidance, but progressive improvement on the margin front looking at the last two quarters, we called out specific charges that we took on projects and those are POC type project, so that pressures future margins associated with those projects.
This quarter.
We didn't have anything of that magnitude and.
And we saw some improvement obviously you look at the guidance, we're exciting mid 30% incremental margins going into Q3, so things are improving and obviously that's on a segment that normally does not deliver incremental margins thats quite that high.
But hopefully we're soon to get back to a time period, where we're consistently delivering the types of incremental margins that segment normally delivers which is sort of upper <unk> lower 30% type type range, but we've got a little bit of a catch up coming I think.
Okay, and sorry, just just finalizing his thought here so in order to get back to the sort of low to mid teens type margins at this business with doing in phase.
Page 17 and 18.
Is it is it shorter cycle consumable items with higher margin coming back into the mix is it some of these big projects starting to execute faster what do you see as the biggest swing factors to getting back to those profitability profitability levels.
Yes.
Okay.
That's a good question corner.
It's obviously both right we've got to have better execution on those larger projects.
We need more of those short cycle.
Capital equipment businesses to come to life and hopefully you picked up on.
On that aspect in our prepared comments, a little bit that we're starting to see a lot more of those signs of life, particularly with our fiberglass business in our intervention and stimulation equipment business right. So, yes, I think I touched on before that basically the segment consists of about two thirds longer cycle Big project oriented businesses.
About a third.
<unk> cycle.
That longer cycle provide that base load that we sort of been surviving off over the last several quarters.
The shorter cycle components really provide the juice in more of the upside as it relates to better Incrementals and importantly, both types of business had suffered under a lot of supply chain disruption. Both in the short cycles Harbor last week, you've heard us talk about our residents our glass supplier allocations et cetera longer <unk>.
Projects are more exposed to Asian shipyard disruptions in Hawaii, So so I think supply.
Okay.
We will happen.
Over the next few quarters. So I think that will go a long way towards helping us out here.
Makes sense, thanks very much.
Thanks Connor.
One moment for our next question.
Our next question comes from Arun <unk> with Jpmorgan. Your line is open.
Hi, good morning.
I was wondering if you could give us a sense.
On the capital equipment side of the business I was wondering if you could maybe characterize trends youre seeing.
From E&ps.
Versus oil.
Versus your oil service customers and also maybe within oil services.
Give us a bit more color around call it order trends between offshore and onshore because.
As you mentioned earlier, we are starting to see some of the onshore North American service companies start to raise capex.
And fracking.
In terms of adding.
Incremental capacity.
Well, Ryan I know Youre aware of this but for everyone else's benefit oilfield service companies.
Don't necessarily want to.
It features that are directed by.
By operators right. So a lot that happens in our world are dictated by operators.
And so things like lower emission E frac fleets and the like is really a trend that we see in the pressure pumping side.
I think we will continue to be.
Fluids.
The frac fleets that we provide on the drilling side.
A&P on land are dictating more setback capacity they want to move to five five inch drill pipe for better hydraulic salt longer.
Laterals and mud.
<unk> pump.
Capacity at 7500 Psi high pressure systems that sort of thing and in the offshore I mentioned earlier managed pressure drilling is a big push as well, especially sort of DLP requirement. So those are some of the so the directionally some of the trends that we're seeing from the E&P.
The world.
That are that are.
Influencing what they are requiring our customers to oilfield service.
Service cut companies out there.
Great great Okay.
And then just as my follow up Clay you guys, obviously their global manufacturer.
Was wondering if you could give us a sense of how much manufacturing capacity does.
We have in western Europe , and any risk mitigation youre doing given what could be an energy crunch. Unfortunately this this upcoming winter.
Yes, we do have some manufacturing in Europe , but.
Far far less than we have in the United States in North America or in the Middle East or Asia, and so it's small with respect to our own footprint of manufacturing. We do however rely on suppliers out of Western Europe that we're watching closely and in close communication with <unk>.
These are.
Suppliers of castings, and forgings and a few other polymers and things that we buy and so very concerned about kind of their ability to continue to supply us as we move into the winter months. If they are constrained from a natural gas standpoint.
We need to know that and prepare for that and so.
Watching the situation there very closely.
Great. Thanks Kelly.
Thanks Ryan.
And I'm not showing any further questions the private electric the call back over to clay for any closing remarks.
Thank you Kevin I know this has been a busy day, so really newsday and I. Appreciate you joining us this morning, and we look forward to it.
I Hope you have a great day. Thank you.
Ladies and gentlemen, this does conclude today's presentation, you just going to have a wonderful day.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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