Q3 2023 NOV Inc Earnings Call

October 27, 2023

Okay.

Good day, ladies and gentlemen, and welcome to the N V third quarter 2023 earnings Conference call. At this time, all participants are in a listen only mode.

Later, we will can duck the question and answer session and instructions will follow at that time.

A reminder, this conference is being recorded I would now like to introduce your host for today's conference Mr. Blake Mccarthy, Vice President of corporate development and Investor Relations.

Sir you may begin.

Welcome everyone to <unk> third 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 securities laws.

They involve risks and uncertainty and actual results may differ materially.

No one should assume these forward looking statements remain valid later in the quarter or later in the year for.

For a 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 third quarter of 2023.

We reported revenues of $2, one 9 billion and net income of $114 million or 29 per fully diluted share our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release later in the call. We will host a question and answer session. Please limit yourself to one question and one follow up to permit more participation.

Now, let me turn the call over to clay.

Thank you Blake <unk> third quarter revenues of $2 billion $185 million were up 4% sequentially and up 16% compared to the third quarter of 2022.

The company posted fully diluted earnings of 29 per share for the third quarter up 21 cents year over year, and EBITDA was $267 million.

<unk> in year over year, EBITDA leverage was 24% driving consolidated margins up 50 basis points sequentially, and 190 basis points year over year to 12, 2% in the third quarter.

<unk> extensive offshore business drove results consolidated sales destined for offshore markets increased 10% sequentially and roughly 40% year over year lifting our offshore mix to 46% all three segments posted higher offshore revenue sequentially with completion and production solutions and rig technologies, both posting solid double.

Digit growth are strong franchises in oil and gas as well as offshore wind carried today.

Following a decade of Underinvestment, which saw north American shale crowd out spending in offshore and international land drilling we are pleased to see growing momentum in several offshore basins around the world. In addition to international land.

Underpinned by LNG and constructive commodity prices global offshore does.

Look to be in the range of $140 billion in 2023 up 60% from the average of the preceding eight years in 2024 looks to be even stronger.

Sure service capacity continues to tighten broadly driving improved economics for us and our customers leading edge day rates for high spec Drillships are barreling towards $500000, a day and Jackup rates are rising as well importantly, we are hearing of operators looking to lock up rigs for longer terms, which we hope will give our customers greater confidence.

Pull the trigger on capital projects that will drive future <unk> orders.

Although we are a long way from offshore rig new builds we are intrigued by inquiries. We have received related to three eastern hemisphere national oil companies, considering potential newbuild jackups and a newbuild floater.

In the meantime, our rig technology segment is benefiting from strong demand for aftermarket spares and reactivation is offshore rigs continue to mobilize re technologies aftermarket increased 10% sequentially and 46% year over year.

Completion and production solutions saw bookings rose, 18% and posted a book to Bill of 114% led by our subsea XL systems and process and flow technologies business unit selling kicked into offshore developments rig technologies capital equipment bookings for the offshore were up 14% sequentially, but overall bookings fell 44 million.

Unknown Executive: Good day, ladies and gentlemen, and welcome to the NOV Third Quarter 2023 earnings conference call. At this time, participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.

Following Q2 strong demand for land equipment.

Blake Mccarthy: I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investory Relations. Sir, you may begin. Welcome everyone to NOV Third Quarter 2023 earnings conference call. With me today, our 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.

Our consolidated revenues into international land drilling programs increased 3% with Wellbore technologies, leading the way posting double digit sequential gains coming from Africa Asia Pacific and the Middle East consolidated International and offshore sales gains were partially offset by sequentially lower revenues in North American land markets down about 2% sequentially while gas.

Prices and lower levels of U S drilling softened demand for drilling equipment orders, but caps benefited from some large E frac equipment orders in the third quarter for the U S.

Blake Mccarthy: They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10K and 10Q filed with the Security and Exchange Commission. Our comments also include non-gap measures. Reconciliation to the nearest corresponding gap measures are in our earnings release available on our website.

It's been an interesting time, we've navigated a decade of significant global Underinvestment in oil and gas everywhere, except North American shale, which was responsible for 80% of global oil supply growth over the past 10 years.

And during the last few years of this journey, we've been pummeled by inflationary gales and our supply chain tsunami. In response, we've cut costs everywhere, except new technology development, we push prices to try to keep up with inflation, which has been challenging. Nevertheless, I am very very pleased with the reception of our new products are getting as.

Blake Mccarthy: On a US gap basis for the Third Quarter 2023, NOV reported revenues of 2.19 billion and net income of 114 million, or 29 cents, per fully diluted share. Our use of the term Ida Doth throughout this morning's call corresponds with the term adjusted Ida, if defined in our earnings release. Later in the call, we will host a question and answer session.

The oilfield goes back to work our customers are benefiting from <unk>, new solutions that are driving better performance better safety and lower emissions. They like what theyre seeing in demand is building notwithstanding their pledges of capital austerity and lack of animal spirits. Let me take a few minutes to address revenues margins and cash flow first with respect to revenue.

Clay Williams: Now, let me turn the call over to Clay. Thank you, Blake. NOV Third Quarter revenues of 2 billion, $185 million were up 4% sequentially and up 16% compared to the third quarter of 2022. The company posted fully diluted earnings of 29 cents per share for the third quarter, up 21 cents year over year, and EBITDA was $267 million. But sequential in year over year, EBITDA leverage was 24%, driving consolidated margins up 50 basis points sequentially, and 190 basis points year over year, to 12.2% in the third quarter.

<unk> performance has been strong specifically <unk> topline growth rate since our low point in the first quarter of 2021 has been at a rate of about 25% annual growth, 6% higher than the big three average through the same period. This has been driven by new beds, and new drilling motors, new composite pipe designs, new digital products.

Please limit yourself to one question and one follow-up to permit more participation.

<unk>, including new Wired drill pipe high speed connections to the bottom of the whole new edge computing products, a new control systems, and new automation tools, all of which drive performance for our customers.

Clay Williams: NOV's extensive offshore business drove results. Consolidated sales, destined for offshore markets increased 10% sequentially, and roughly 40% year over year, lifting our offshore mix to 46%. All three segments posted higher offshore revenues sequentially with completion and production solutions and rate technologies both posting solid double digit growth. Our strong franchises in oil and gas as well as offshore wind carried today. Following a decade of under-investment, which saw North American shale crowd out spending in offshore and international land drilling, we are pleased to see growing momentum in several offshore basins around the world in addition to international land.

Thus far <unk> sales outperformance has been accomplished without a meaningful capital equipment recovery has been achieved through resetting our activity driven product and service portfolio to offer what we knew all along our customers would eventually need.

Oilfield down cycles, all end in well in up cycles.

In the end of every down cycle in the beginning of the next up cycle scarred by their near death experiences oilfield service survivors generally suffer from chronic PTSD. They also were never to spend a dollar of capital they don't have to ever again and never ever to stretch for a rector balance sheets ever again 1992 1999.

Clay Williams: Underpinned by LNG and constructive commodity prices, global offshore FIDs looked to be in the range of $140 billion in 2023, up 60% from the average of the preceding eight years, and 2024 looks to be even stronger. Offshore service capacity continues to tighten broadly, driving improved economics for us and our customers. Leading edge day rates for high-spec drill ships for barreling towards $500,000 a day, and jack up rates for rising as well.

A day and a lot of ways following periods of Underinvestment solid pledges of capital discipline kind of marked the opening ceremony for an up cycle as an up cycle gains momentum and activity rises the challenge oilfield service companies face is less financial fidelity and more related to the laws of physics, the oil and gas industry consumes highly.

Specialized fit for purpose equipment, voraciously, putting a bit five miles into the earth to hit a precise target devours expensive pipe and rigs as demand rises and equipment is concerned prices rise to ration its availability, leading to outsized margins and returns for oilfield service participants who own scarce equipment when E&P companies phases.

Clay Williams: Importantly, we are hearing of operators looking to lock up rigs for longer terms, which we hope will give our customers greater confidence to pull the trigger on capital projects that will drive future NOV orders. Although we are a long way from offshore rig new builds, we are intrigued by inquiries we've received related to three eastern hemisphere national oil companies considering potential new build jackups and a new build floater. In the meantime, our rate technology segment is benefiting from strong demand for aftermarket spares and reactivations as offshore rigs continue to mobilize.

<unk> shortages, they actively sponsor additions to fleets through profitable longer term contracts to both incumbents and startups and as the up cycle progresses.

The rest of the story.

Now, perhaps this time will be different but we shall see.

The second thing I'd like to talk about our margins, while our margins continue to improve they still remain below levels, we need to generate adequate returns. Thus we are focused on pulling the levers we can control, namely pricing cost structure, we announced that we intend to further streamline our overhead by going from three segments to two segments energy equipment and energy prices.

Clay Williams: Rate technologies aftermarket increase 10% sequentially and 46% year-over-year, completion and production solutions saw bookings rise 18% and posted a book to bill of 114% led by our sub-C, Excel systems and process and flow technologies business unit selling kit into offshore developments. Rick Technologies capital equipment bookings for the offshore were up 14% sequentially, but overall bookings fell $44 million following Q2's strong demand for land equipment. Our consolidated revenues into international land drilling programs increased 3% with well-bored technologies leading the way, posting double-digit sequential gains coming from Africa, Asia Pacific and the Middle East.

Alex and services starting January one.

This is part of the $75 million cost reduction program, we disclosed last quarter and is designed to make our business more efficient while capitalizing on the new technologies, we are bringing to the marketplace, we will be providing historical pro forma financials for your models next quarter as.

As we continue to reduce costs. We are also intent on putting better quality and higher margin orders into our backlog.

Clay Williams: Consolidated international and offshore sales gains were partially offset by sequentially lower revenues in North American land markets down about 2% sequentially. Low gas prices and lower levels of US drilling softened demand for drilling equipment orders, but caps benefited from some large e-fract equipment orders in the third quarter for the US. It's been an interesting time. We've navigated a decade of significant global under-investment in oil and gas everywhere except North American Shale, which was responsible for 80% of global oil supply growth over the past 10 years.

We've been very intentional about price risk in commercial terms on large tenders, particularly in the offshore and international markets. Predictably. This has led to missing some project awards on price and terms, but have you been stung by inflation, we are sticking with our disciplined approach of price leadership and quarter by quarter, we see our competitive positioning improving as <unk>.

And customers come to appreciate execution reliability and technology more and more we're confident in our strategy because we have good visibility.

On a growing pipeline of tenders, plus we're carrying solid and stable backlogs $3 billion for rig, which has had a book to bill of 102% through the last year and $1 6 billion for completion and production solutions, which has posted a book to bill of 106% through the past year.

Clay Williams: And during the last few years of this journey, we've been pommel by inflationary gales and a supply chain tsunami. In response, we've cut costs everywhere except new technology development. We've pushed prices to try to keep up with inflation, which has been challenging. Nevertheless, I'm very, very pleased with the reception our new products are getting. As the oil fuel goes back to work, our customers are benefiting from NOV's new solutions that are driving better performance, better safety and lower emissions. They like what they are seeing in demand is building notwithstanding their pledges of capital austerity and lack of animal spirits.

And as I mentioned earlier, we've been able to post significant revenue growth since 2021 up 75% on the strength of the rest of our portfolio, our non capital equipment products.

Our expectation is that as the up cycle emerge as these new businesses together with a blossoming capital equipment demand at higher margins will translate to overall higher margins and returns for <unk> on a consolidated basis.

Clay Williams: Let me take a few minutes to address revenues, margins and cash flow. First, with respect to revenue, NOV's performance has been strong. Specifically, NOV's top line growth rate since our low point in the first quarter of 2021 has been at a rate of about 25% annual growth, 6% higher than the big three average through the same period. This has been driven by new bits and new drilling motors, new composite pipe designs, new digital products, including new wire drill pipe high-speed connections to the bottom of the hole, new edge computing products and new control systems and new automation tools, all of which drive performance for our customers.

Said another way our quick turn transactional businesses have enabled <unk> to post strong revenue growth, while our later cycle equipment businesses represent additional optionality to future upcycle.

Finally free cash flow during the quarter improved to $114 million sequentially, but remains negative at $34 million.

As we discussed on last quarter's call the healing of the global supply chain has led to an acceleration of raw material and component deliveries for our businesses and net working capital remained at an elevated 33% of annualized revenue during the quarter as a result.

This trend is expected to begin reversing during the fourth quarter as our product shipments continue to catch up to the supply chain, which will improve our cash flow sequentially.

Clay Williams: Thus far, NOV sales outperformance has been accomplished without a meaningful capital equipment recovery. It has been achieved through resetting our activity driven product and service portfolio to offer what we do all along our customers would eventually need. Oilfield down cycles all end in well, up cycles. In the end of every down cycle, in the beginning of the next up cycle, scarred by their near-death experiences, oilfield service survivors generally suffer from chronic PTSD.

Looking ahead to next year, the normalization of supply change in working capital intensity should enable <unk> to generate meaningfully positive cash flow and position us to begin returning more capital to our shareholders. So to summarize one these.

These new products and technology are amazing and our fueling strong revenue gains for the company without much assistance from our later cycle capital equipment businesses.

Clay Williams: They also are never to spend a dollar of capital they don't have to ever again and never, ever to stretch or wreck their balance sheets ever again, 1992, 1999, today. In a lot of ways, following periods of under-investment, solemn pledges of capital discipline kind of mark the opening ceremony for an upcycle. As an upcycle gains momentum and activity rises, the challenge oilfield service companies face is less financial fidelity and more related to the laws of physics.

Two if history is a guide these capital equipment businesses will begin to grow and then grow sharply as an up cycle matures, but for now remains mostly optionality.

<unk> margins have been pressured by extraordinary supply chain disruptions and inflation, but progress in these areas has lifted margins steadily from breakeven to 12, 2% in two and a half years and four after cresting in the third quarter, we expect working capital to decline in the fourth quarter to begin to drive strong positive free cash flow through two.

Clay Williams: The oil and gas industry consumes highly specialized fit for purpose equipment voraciously, putting a bit five miles into the earth to hit a precise target devours expensive pipe and rigs. As demand rises and equipment is consumed, prices rise to ration its availability, leading to outsized margins and returns for oilfield service participants who own scarce equipment. When ENP companies face these equipment shortages, they actively sponsor additions to fleets through profitable longer-term contracts to both incumbents and startups.

<unk> 24 and beyond.

Years of Underinvestment in the oilfield combined with operator demands for better reliability in the field and improving cash flow for our customer base should drive our oilfield service customers to more normalized levels of maintenance spending and reinvestment in their asset bases more efficient manufacturing operations and are fully healed supply chain together with a higher margin backlog converting.

The revenue will drive better incremental margins all of these things will contribute to improving financial results for <unk> as we work to provide the global energy industry with the technologies and customer service for which <unk> is so well known before.

Clay Williams: And as you have cycle progresses, Well, you know the rest of the story. Now, perhaps this time will be different, but we shall see. The second thing I'd like to talk about are margins. While our margins continue to improve, they still remain below levels we need to generate adequate returns. Thus, we are focused on pulling the levers we can control, namely price and cost structure.

Before I turn it over to Jose for more detail I want to thank the <unk> employees listening today for all your hard work and diligence to take such great care of our customers as well as each other.

Clay Williams: We announce that we intend to further streamline our overhead by going from three segments to two segments, energy equipment and energy products and services starting January 1st. This is part of the $75 million cost reduction program we disclosed last quarter and is designed to make our business more efficient while capitalizing on the new technologies we are bringing to the marketplace. We will be providing historical performance for your models next quarter. As we continue to reduce costs, we are also intent on putting better quality and higher margin orders into our backlog.

Two of the best examples that I can think of our Kirk Shelton and ASIC, Joseph who I have enjoyed working with for many many years. Many thanks to both you guys and I wish you all the best.

Hey.

Thank you clay.

<unk> consolidated revenue totaled $2 5 billion in the third quarter, an increase of 4% sequentially and 16% compared to the third quarter of 2022 revenue from international markets grew 11% sequentially offsetting a 6% decline in revenue from North America.

EBITDA for the third quarter totaled $267 million or 12, 2% of sales representing an incremental flow through of 24% sequentially.

Clay Williams: We've been very intentional about price, risk and commercial terms on large tenders, particularly in the offshore and international markets. Predictably, this has led to missing some project awards on price in terms, but having been stung by inflation, we are sticking with our disciplined approach of price leadership and quarter by quarter. We see our competitive positioning improving as end customers come to appreciate execution, reliability and technology more and more. We're confident in our strategy because we have good visibility on a growing pipeline of tenders plus we are carrying solid and stable backlogs, $3 billion for rig, which has had a book to bill of 102 percent through the last year and $1.6 billion for completion and production solutions, which has posted a book to bill of 106 percent through the past year.

We're in the early phases of our $75 million cost savings plan and realized modest savings during the third quarter. As we noted last quarter. We expect the majority will be captured in 2024 helped by the additional restructuring efforts clay discussed.

We generated $40 million in cash flow from operations with working capital continuing to be a use of cash as anticipated receivable days increased slightly with the shift in our business towards international markets inventory also increased as vendors have continued to debottleneck their operations and make deliveries earlier than originally planned.

However, we believe our inventory build crested in August.

Clay Williams: And as I mentioned earlier, we've been able to post significant revenue growth since 2021 up 75 percent on the strength of the rest of our portfolio, our non-capital equipment products. Our expectation is that as the upcycle emerges, these new businesses together with a blossoming capital equipment demand at higher margins will translate to overall higher margins and returns for NOV on a consolidated basis. Said another way, our quick-turn transactional businesses have enabled NOV to post strong revenue growth while our later cycle equipment businesses represent additional optionality to a future upcycle.

The timing of these deliveries also contributed towards the $82 million sequential drop in accounts payables, which further impacted cash flow in the third quarter, we expect working capital metrics to improve from here, leading to healthy free cash flow in the fourth quarter and setting up a very strong free cash flow year in 2024.

Our Wellbore technologies segment generated $799 million of revenue during the third quarter, a decrease of $5 million or less than 1% compared to the second quarter and an increase of 8% compared to the third quarter of 2022.

Clay Williams: Finally, free cash flow during the quarter improved $114 million sequentially but remains negative at $34 million. As we discussed on last quarter's call, the healing of the global supply chain has led to an acceleration of raw material and component deliveries for our businesses and networking capital remained at an elevated 33 percent of annualized revenue during the quarter as a result. This trend is expected to begin reversing during the fourth quarter as our product shipments continue to catch up to the supply chain which will improve our cash flows sequentially. Looking ahead the next year, the normalization of supply chains and working capital intensity should enable NOV to generate meaningfully positive cash flow and position us to begin returning more capital to our shareholders.

Improving international activity and market share gains have offset lower drilling activity in the U S. Despite the slight sequential decline in revenue EBITDA grew slightly to $166 million or 28% of revenue.

Our REIT HEICO log drill bit business posted sequential revenue growth in the mid single digits driven by continued growth in the middle East a strong recovery from the spring breakup in Canada and continued market share gains in the U S. Despite.

Despite U S drilling activity levels that have declined 16% since the fourth quarter of 2020 to read hike log has increased its revenues in the U S for three straight quarters, our new cutter technologies continued to deliver better drilling performance and record that runs driving market share gains while commanding premium pricing.

Clay Williams: So to summarize, one, NOV's new products and technology are amazing and are fueling strong revenue gains for the company without much assistance from our later cycle capital equipment businesses. Two, if history is a guide, these capital equipment businesses will begin to grow and then grow sharply as an upcycle matures but for now remain mostly optionality. Three, margins have been pressured by extraordinary supply chain disruptions and inflation but progress in these areas has lifted margins steadily from break even to 12.2 percent in two and a half years and four after cresting in the third quarter we expect working capital to decline in the fourth quarter to begin to drive strong positive free cash flow through 2024 and beyond.

Our downhole tools business reported revenue growth in the low single digits with strong incremental margins the strong seasonal recovery in Canada and continued gains in the middle East and Latin America more than offset bottoming activity in the U S. Despite the unit posting a slight sequential decline in overall U S results revenue from our drilling motors.

Business in the U S grew 3% sequentially against a 10% decline in drilling activity.

Record runs and strong performance from new products is fueling demand for our drilling motors, which has continued to exceed supply.

With operators increasingly preferring our series 55 motors, along with premium power sections, a combination that deliver stronger drilling performance in some of the most challenging drilling environments.

Clay Williams: Years of under investment in the oil field combined with operator demands for better reliability in the field and improving cash flow for our customer base should drive our oil field service customers to more normalized levels of maintenance spending and reinvestment in their asset bases. More efficient manufacturing operations and a fully healed supply chain together with a higher margin backlog converting into revenue will drive better incremental margins. All these things will contribute to improving financial results for NOV as we work to provide the global energy industry with the technologies and customer service for which NOV is so well known.

Our well site services business reported low single digit revenue growth with strong incremental margins. The improved results were driven by growing demand for solids control and managed pressure drilling services and equipment and the middle east and offshore markets, which more than offset softer demand in the U S and Latin America.

New product offerings like our <unk> solid waste control units and our growing suite of new MPD technology have positioned this business, particularly well in light of climbing international and offshore activity.

Clay Williams: Before I turn it over to Jose for more detail, I want to thank the NOV employees listening today for all your hard work and diligence to take such great care of our customers, as well as each other. Two of the best examples that I can think of are Kirk Shelton and Isaac Joseph, whom I have enjoyed working with for many, many years. Many thanks to both you guys and I wish you all the best.

Our grant <unk> drill pipe business posted a double digit drop in revenue with outsized EBITDA decrementals after a very strong recovery in the second quarter.

Over the course of the year, we have seen our mixed shift from North America to international land and offshore markets. We expect this internationally oriented revenue mix to continue into the fourth quarter. However, based on customer inquiries the outlook for orders in the U S may improve sooner than we'd normally expect likely reflecting expectations for higher levels of drilling.

Jose Bayardo: Jose, thank you, Clay. NOV has consolidated revenue total 2.185 billion in the third quarter. An increase of 4% sequentially and 16% compared to the third quarter of 2022. Revenue from international markets grew 11% sequentially, offsetting a 6% decline in revenue from North America. EBITDA for the third quarter totaled 267 million or 12.2% of sales, representing an incremental flow through 24% sequentially.

<unk> in 2024.

Our <unk> business unit posted a slight sequential increase in revenue achieving its 12th straight quarter with topline growth strong demand in the eastern hemisphere offset softer activity in the U S and Latin America, the unit realized stronger demand for pipe coating services, and our TK liner products across the eastern hemisphere, where activity remains strong.

Jose Bayardo: We're in the early phases of our 75 million dollar cost savings plan and realized modest savings during the third quarter. As we noted last quarter, we expect the majority will be captured in 2024, helped by the additional restructuring efforts, Clay discussed. We generated 40 million in cash flow from operations with working capital continuing to be a use of cash. As anticipated, receivable days increase slightly with the shift in our business towards international markets.

While lower drilling activity in the U S and higher industry inventory levels of OS atg reduced demand for inspection services at steel mills and outside processors.

Our <unk> businesses results in the third quarter.

<unk> with its record results in the second quarter.

Revenues from drilling surface data decreased sequentially due to lower drilling activity in the U S and strong Q2 sales of capital equipment in the far east that did not repeat.

Jose Bayardo: Inventory also increased as vendors have continued to debottle neck their operations and make deliveries earlier than originally planned. However, we believe our inventory billed, crested in August. The timing of these deliveries also contributed toward the 82 million dollar sequential drop in accounts payables, which further impacted cash flow in the third quarter.

Offset by higher activity in the Middle East and Canada.

Lower revenue from drilling surface data were offset by another strong increase in revenue from our evolve wired drill pipe drilling optimization services.

During the quarter, we helped a major operator in the North Sea shave more than 30 days from its drilling plan for a well on the Norwegian continental shelf by utilizing our wired drill pipe optimization and visualization tools, which are starting to see significant interest in the middle East.

Jose Bayardo: We expect working capital metrics to improve from here leading to healthy free cash flow in the fourth quarter and setting up a very strong free cash flow year in 2024. Our well-bore technology segment generated 799 million of revenue during the third quarter, a decrease of 5 million or less than 1% compared to the second quarter and an increase of 8% compared to the third quarter of 2022. Improving international activity and market share gains have offset lower drilling activity in the U.S.

We estimate the significant improvement in drilling efficiencies saved our north sea customer more than $15 million substantially improving its wells economics.

For the fourth quarter, we expect continued strength in international and offshore markets will more than offset bottoming U S land activity, resulting in revenue for our Wellbore technology segment, increasing 46% accompanied by incremental margins in the low to mid 20% range.

Jose Bayardo: Despite the slight sequential decline in revenue, EBITDA grew slightly to 166 million or 20.8% of revenue. Our read-hike log drill bit business posted sequential revenue growth in the mid-single digits driven by continued growth in the Middle East strong recovery from the spring break up in Canada and continued market share gains in the U.S. Despite U.S, drilling activity levels that have declined 16% since the fourth quarter of 2022, read-hike log has increased its revenues in the U.S, with three straight quarters.

Our completion and production solutions segment generated revenues of $760 million in the third quarter of 2023, an increase of 1% compared to the second quarter and an increase of 12% compared to the third quarter of 2022.

EBITDA for the third quarter was $67 million or eight 8% of sales down $2 million from the second quarter and up $11 million from the third quarter of 2022.

While our caps segments results were essentially flat sequentially and drilling and completion activities remained subdued in North America positive momentum in international and offshore markets helped us drive an 18% increase in orders to $530 million, resulting in a book to bill of 114%.

Jose Bayardo: Our new cutter technologies continue to deliver better drilling performance and record bit runs driving market share gains while commanding premium pricing. Our downhold tools business reported revenue growth in the low single digits with strong incremental margins. The strong seasonal recovery in Canada and continued gains in the Middle East and Latin America more than offset bottoming activity in the U.S. Despite the unit posting a slight sequential decline in overall U.S, results, revenue from our drilling motors business in the U.S, grew 3% sequentially against a 10% decline in drilling activity.

Backlog at the end of the third quarter totaled one six to $2 6 billion.

We've remained disciplined on what projects, we take and continue to insist on driving pricing higher resulting in the addition of margin accretive projects into our backlog, which will result in higher margins for the segment as we move into 2024.

Jose Bayardo: Record Runs and that strong performance from new products is fueling demand for our drilling motors, which is continued to exceed supply, with operators increasingly preferring our theories 55 motors along with premium power sections, a combination that deliver stronger drilling performance in some of the most challenging drilling environments. Our well site services business reported low single digit revenue growth with strong incremental margins. The improved results were driven by growing demand for solid control and manage pressure drilling drilling services and equipment in the Middle East and offshore markets, which more than offset software demand in the U.S, and Latin America.

Our process and flow technologies business unit posted a low teens sequential increase in revenue with solid EBITDA flow through led by accelerating progress on new higher margin projects in our Wellstream processing operations, we continue to pursue a large pipeline of potential offshore projects for our Wellstream and APL businesses, while some.

<unk> remained cautious others are moving projects forward.

Being a sufficient number of quality opportunities advance that are allowing us to remain extremely disciplined with our pricing to drive better margins in our backlog, while still posting a book to bill near 100% in the third quarter.

Our subsea flexible pipe business posted results that were effectively in line with the second quarter, but orders more than doubled sequentially achieving the units highest order intakes since 2015, while it has taken some time for customers to recalibrate their expectations and the unit is still working through lower margin backlog, our disciplined approach related to which project.

Jose Bayardo: New product offerings like our ANOVA Thurms, Solid's Waste Control units and our growing suite of new MPD technology have positioned this business particularly well in light of climbing international and offshore activity. Our grant pride code drill pipe business posted a double digit drop in revenue with outsized EBITDA decar metals after a very strong recovery in the second quarter. Over the course of the year, we have seen our mixed shifts from North America to international land and offshore markets.

We are willing to take and at what price is beginning to pay off our efforts along with growing demand from Brazil, West Africa, Australia, and the North Sea are allowing us to book projects that have much healthier margins and more favorable milestone payment terms than those booked over the last several years.

Jose Bayardo: We expect this internationally oriented revenue mix to continue into the fourth quarter, however, based on customer inquiries, the outlook for orders in the U.S, may improve sooner than we'd normally expect, likely reflecting expectations for higher levels of drilling activity in 2024. Our Cubisco business unit posted a slight sequential increase in revenue, achieving its 12 straight quarter with top line growth. Strong demand in the Eastern Hemisphere offsets software activity in the U.S, and Latin America.

Our XL systems conductor pipe connections business posted a low single digit sequential decrease in the third quarter. After a robust increase in revenue during the second quarter orders remained strong and book to Bill was over 100% for the fifth straight quarter led by demand from West Africa, and the North Sea and.

In addition to the unit success in its core offshore market. The business continues to see growing opportunities in geothermal markets and recently completed the first sale of its new caliber gas type threat and connector to a geothermal customer in California.

Jose Bayardo: The unit realized stronger demand for pipe coding services and our TK liner products across the Eastern Hemisphere, where activity remains strong. While lower drilling activity in the U.S, and higher industry inventory levels of OCTG reduced demand for inspection services at steel mills and outside processors. Our MDTOTCO businesses results in the third quarter were flat with its record results in the second quarter. Revenues from drilling surface data decreased sequentially due to lower drilling activity in the U.S, and strong Q2 sales of capital equipment in the forest that did not repeat.

Our fiber glass systems business posted a low single digit increase in revenues during the third quarter solid growth in oil and gas markets led by the middle east more than offset slightly softer demand from industrial and fuel handling markets.

The outlook for this unit remains bright with growing demand for our new corrosion proof composite pipe products from international oil and gas markets.

We also continue to see meaningful opportunities to supply, our new flame and smoke resistant composite dux for semiconductor manufacturing plants and to support the lithium mining and processing space.

Jose Bayardo: Partially offset by higher activity in the Middle East and Canada. Lower revenue from drilling surface data were offset by another strong increase in revenue from our evolved wire drill pipe drilling optimization services. During the quarter, we helped a major operator in the North Sea shave more than 30 days from its drilling plan for a well on the Norwegian continental shelf by utilizing our wire drill pipe optimization and visualization tools, which are starting to see significant interest in the Middle East. We estimate the significant improvement in drilling efficiencies saved our North Sea customer more than $15 million substantially improving its well's economics.

Our intervention and stimulation equipment business realized a double digit sequential decrease in revenue largely due to lower deliveries of pressure pumping equipment, partially offset by higher shipments of process and wireline equipment.

While drilling and completion related activity in the U S continued to soften during the quarter order intake remained solid with the business unit posting a greater than 100% book to bill underpinned by demand for our new <unk> products.

<unk> from international and offshore markets remain solid and customers in North America remained focused on replacing and upgrading their asset base with more operationally and energy efficient equipment.

Jose Bayardo: For the fourth quarter, we expect continued strength and international and offshore markets will more than offset bottoming U.S, land activity, resulting in revenue for a well-bore technology segment increasing 46 percent accompanied by incremental margins in the low to mid 20 percent range. Our completion and production solution segment generated revenues of 760 million in the third quarter of 2023 an increase of 1 percent compared to the second quarter and an increase of 12 percent compared to the third quarter of 2022.

During the quarter, we booked orders for 25000 hydraulic horsepower of E frac equipment and three of our power pod systems that enable hybrid fleets, where E. Frac equipment works alongside conventional assets, making it easy for customers to begin capitalizing on the efficiencies of our E. Frac technology as they replace their conventional pumping units over time.

Despite the perception that theres much excess completion equipment in North America demand remained steady from technology, driven customers as evidenced by the FERC order demand from technology forward customers is not limited to pressure pumping, but also applies to wireline and coiled tubing equipment.

Jose Bayardo: Ebed Doffer in the third quarter was 67 million or 8.8 percent of sales down 2 million from the second quarter and up 11 million from the third quarter of 2022. While recap segments results were essentially flats sequentially, and drilling and completion activities remain subdued in North America, positive momentum and international and offshore markets helped us drive an 18% increase in orders to 530 million, resulting in a book to bill of 114%.

In the third quarter, we sold four of our IMAX wireline units and two high spec coiled tubing spreads that are fully equipped with our latest controls and utilize our new digital Max completions platform to deliver process machine and control data to provide superior service at the wellhead.

Nov's technology leadership is second to none which is also reflected in our team being selected by a major IOC to engineer. The industry's first 20000 psi of pressure control equipment for use in completion and intervention services in the Gulf of Mexico.

Jose Bayardo: A margin of creative projects into our backlog, which will result in higher margins for the segment as we move into 2024. Our process and flow technologies business unit posted a low teen sequential increase in revenue with solid EBITDA flow through led by accelerating progress on new higher margin projects in our well stream processing operations. We continue to pursue a large pipeline of potential offshore projects for our well stream and APL businesses.

For our completion <unk> production solutions segment, we expect continued improvements in offshore markets will more than offset bottoming activity in North America, resulting in sequential revenue growth of between 2% to 4% in the fourth quarter. Additionally.

Additionally, a better mix of higher margin business and cost savings should result in a 100 to 300 basis point improvement in EBITA margin, which should reach into the double digits for the first time in three years.

Jose Bayardo: While some operators remain cautious, others are moving projects forward. We're seeing a sufficient number of quality opportunities advanced that are allowing us to remain extremely disciplined with our pricing to drive better margins in our backlog while still posting a book to bill near 100% in the third quarter. Our subsea flexible pipe business posted results that were effectively in line with the second quarter, but orders more than doubled sequentially, achieving the unit highest order intake since 2015.

Our rig technologies segment generated revenues of $686 million in the third quarter, an increase of $80 million or 13% sequentially. The strong growth was driven primarily by an increase in deliveries of capital equipment packages greater progress on projects and an increase in sales of aftermarket parts and services.

Adjusted EBITDA increased 29 million to $100 million or 14, 6% of revenue.

Jose Bayardo: While it has taken some time for customers to recalibrate their expectations and the unit is still working through lower margin backlog or disciplined approach related to which projects we're willing to take and at what price is beginning to pay off. Our efforts along with growing demand from Brazil, West Africa, Australia and the North Sea are allowing us to book projects that have much healthier margins and more favorable milestone payment terms than those booked over the last several years.

Our strong incremental leverage of 36% was driven by a more favorable sales mix with improved output from our aftermarket operations as well as progress on cost reductions.

New orders totaled $178 million and we also received a $145 million inflationary price adjustment related to the new rigs for Saudi Arabia, resulting in a total $323 million added to our backlog.

Jose Bayardo: Our Excel systems conductor pipe connections business posted a low single digit sequential decrease in the third quarter after robust increase in revenue during the second quarter. Orders remain strong and booked to bill was over 100% for the fifth straight quarter led by demand from West Africa and the North Sea. In addition to the unit success in its core offshore market, the business continues to seek growing opportunities in geothermal markets and recently completed the first sale of its new ex caliber gas tight threaded connector to a geothermal customer in California.

When netted against Q3 shipments of 248 million the segment's backlog increased by $75 million sequentially to 296 8 billion.

The bulk of the segment's capital equipment orders were to upgrade or replace various rig components for offshore and land rigs. We also saw increasing demand for our new automation and robotics technology due to its ability to enhance well site safety and improve drill floor efficiencies while orders for rig capital equipment remained muted we're growing increasingly optimistic.

The dynamics in the offshore drilling markets will continue to improve driving additional demand for capital equipment sales.

Jose Bayardo: Our fiberglass systems business posted a low single digit increase in revenues during the third quarter solid growth in oil and gas market led by the Middle East more than offset slightly softer demand from industrial fuel handling markets. The outlook for this unit remains bright but the growing demand for new corrosion proof composite pipe products from international oil and gas markets. We also continue to see meaningful opportunities to supply our new flame and smoke resistant composite ducks for semiconductor manufacturing plants and to support the lifting and mining and processing space.

Our aftermarket business delivered strong results in the third quarter up 10% sequentially and up 46% year over year. The sequential growth was driven by a 12% increase in spare part sales accelerated deliveries from our vendors allowed us to ramp our throughput and begin chipping away at our backlog of orders while total.

<unk> increased we were able to ship a large amount of spare part packages and assemblies that were awaiting missing components, which was reflected in a 25% sequential reduction in the segments work in process inventory.

Jose Bayardo: Our intervention and stimulation equipment business realized the double digit sequential decrease in revenue largely due to lower deliveries of pressure pumping equipment partially offset by higher shipments of process and wireline equipment. While drilling and completion related activity in the US continued to soften during the quarter order intake remain solid with the business unit posting greater than 100% booked to bill underpinned by demand for our new EFRAC products. Demand from international and offshore markets remain solid and customers in North America remain focused on replacing and upgrading their asset base with more operationally and energy efficient equipment.

We expect our shipments will continue to grow during the fourth quarter and combined with lower deliveries from our vendors should drive both improved profitability and cash flow beyond the fourth quarter the outlook for our aftermarket business, which now comprises 56% of rig technologies mix is strong.

Customers are digging deeper into their stacks for rig reactivation active rig fleet is aging driving larger opportunities for our aftermarket operations.

Where things play out in our backlog of reactivation upgrade and recertification projects.

Jose Bayardo: During the quarter, we booked orders for 25,000 hydraulic horsepower of e-frack equipment and three of our power pod systems that enable hybrid fleets where e-frack equipment works alongside conventional assets, making it easy for customers to begin capitalizing on the efficiencies of our e-frack technology as they replace their conventional pumping units over time. Despite the perception that there is much excess completion equipment in North America, demand remains steady from technology driven customers as evidenced by the e-frack quarter.

Excluding projects with the scope of less than $2 million.

In the first quarter, we had $199 million in active projects with an average cost of $9 million in.

In the second quarter, the total value of projects in execution increased to $316 million with an average price of $11 million and in the third quarter. The total increased to $404 million with an average price of $14 million.

We expect the combination of a growing number of actively working offshore rigs and continued reactivation will continue to support a healthy environment for our aftermarket business.

Jose Bayardo: Demand from technology forward customers is not limited to pressure pumping, but also applies to wireline and coil tubing equipment. In the third quarter, we sold four of our IMAX wireline units and two high spec coil tubing spreads that are fully equipped with our latest controls and utilize our new digital max completions platform to deliver process machine and control data to provide superior service at the well head.

Our next wants to take a moment to highlight the importance of the duration of contracts between our offshore drilling contractor customers and their E&P operating company customers.

Over the recent past, we've seen our offshore drilling contractor customers reset and repair their balance sheets supported by rapidly improving day rates to date and your rig reactivation or upgrade has been supported by operator contracts that provide mobilization fees higher day rate and a duration sufficient to reach a payback on the meaningful investments required to get there.

Jose Bayardo: NOV's technology leadership is second to none, which is also reflected in our team being selected by a major IOC to engineer the industry's first 20,000 psi pressure control equipment for use and completion and intervention services in the Gulf of Mexico. For our completion production solution segment, we expect continued improvements in offshore markets will more than offset bottoming activity in North America, resulting in sequential revenue growth of between two to four percent in the fourth quarter.

<unk> rigs back to work.

However, despite all the contracts that have been announced over the past two years most of the fleet remained on a short well to well contracts and it wasn't until recently that the average duration of contract for the active drillship fleet exceeded one year in length and.

Jose Bayardo: Additionally, a better mix of higher margin business and cost saving should result in a 100 to 300 basis point improvement in EBITDA margin, which should reach into the double digits for the first time in three years. Our rig technology segment generated revenues of 686 million in the third quarter, an increase of 80 million or 13 percent sequentially. The strong growth was driven primarily by an increase in deliveries and capital equipment packages, greater progress in projects and increase in sales of aftermarket parts and services.

In fact average duration of high spec drillship contract signed for 2015 to 2022 was about eight months today, it is pushing well beyond a year.

Similarly, semi and Jackups are also seeing meaningful expansions of average term. This is important because it drives drilling contractors and divestment decisions on capital expenditures.

We believe that with extending visibility of healthy cash flow backed by contracts across the offshore drilling fleet contractors will become more willing to buy upgraded equipment reactivate rigs without contracts in order to improve their competitive positioning for upcoming tenders and which they can secure work over longer time horizons.

Jose Bayardo: Adjusted EBITDA increased 29 million to 100 million or 14.6 percent of revenue. The strong incremental leverage of 36 percent was driven by a more favorable sales mix with improved output for more aftermarket operations, as well as progress on cost reductions. New orders totaled 178 million and we also received a 145 million inflationary price adjustment related to the new rigs for Saudi Arabia, resulting in a total $323 million added to our backlog.

We're already beginning to see signs of this taking place.

In the Jackup market the supply demand dynamic within the high spec asset class continues to tighten with leading edge high spec day rates now eclipsing $170000 a day level above which you that's become possible. While we don't anticipate any of the established drilling contractors to place orders anytime soon as clay referenced.

Jose Bayardo: When netted against two three shipments of 248 million, the segments backlog increased by $75 million sequentially to 2.968 billion. The bulk of the segment's capital equipment orders were to upgrade or replace various rig components for offshore and land rigs. We also saw increasing demand for a new automation and robotics technology due to its ability to enhance well-site safety and improve drill floor efficiencies.

<unk> have made a serious inquiries into current newbuild pricing shipyard availability and construction timing.

In the offshore wind market the impact of higher interest rates and cost inflation, that's challenging the economics of certain high profile projects. Therefore, it's not surprising that wind installation vest contractors deferred tenders during the quarter.

Despite the recent challenges there is still a projected shortfall in vessel capacity needed for projects that have been sanctioned which is driving constructive conversations with multiple contractors. While we did not book a new wind installation vessels during the quarter. We did receive an order for an offshore cable a vessel equipment package from a European contractor, who will use their new vessel.

Jose Bayardo: While orders for rig capital equipment remained muted, we're growing increasingly optimistic that dynamics and offshore drilling markets will continue to improve driving additional demand for capital equipment sales. Our aftermarket business delivered strong results in the third quarter, up 10 percent sequentially and up 46 percent year over year. The sequential growth was driven by a 12 percent increase in spare part sales. Accelerated deliveries from our vendors allowed us to ramp our throughput and begin shipping away at our backlog of orders.

It's installed critical infrastructure for offshore wind development. We leave this award supports the view that the build out of offshore wind will continue to advance once expectations on project economics are reset.

Jose Bayardo: While total inventory increased, we were able to ship a large amount of spare part packages and assemblies that were awaiting missing components, which was reflected in a 25 percent sequential reduction in the segment's work and process inventory. We expect our shipments will continue to grow during the fourth quarter, and combined with lower deliveries from our vendors should drive both improved profitability and cash flow. Beyond the fourth quarter, the outlook for our aftermarket business, which now comprises 56 percent of rig technologies mix is strong.

Looking forward for our rig technologies segment, we believe steadily improving market conditions in manufacturing throughput will drive improved financial results for the segment for.

For the fourth quarter, we expect revenue to increase between 1% to 3% with EBITDA flow through in the low to mid 30% range.

Consolidated company results, we believe building momentum in numerous markets, including rising exploration activity along with continued growth in the middle East will more than offset soft north American land activity, enabling EBITDA to reach the $300 million range with much improved cash flow in the fourth quarter with that we'll open the call to <unk>.

Jose Bayardo: Customers are digging deeper into their stacks for rig reactivations. Active rig fleet is aging, driving larger opportunities for our aftermarket operations. We're seeing this play out in our backlog of reactivation, upgrade, and recertification projects. Exweeting projects with a scope of less than 2 million. In the first quarter, we had $199 million in active projects with an average cost of 9 million. In the second quarter, total value of projects and execution increased to $316 million with an average price of $11 million. In the third quarter, the total increased to $404 million with an average price of $14 million.

Jose Bayardo: We expect the commation of a growing number of actively working offshore rigs and continued reactivations will continue to support a healthy environment for our aftermarket business.

Questions.

Thank you to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.

And our first question is going to come from the line of Jan Rawlinson with Raymond James Your line is open. Please go ahead.

Good morning, gentlemen, thanks for all the detail as usual.

Clay, both you and Jose kind of called out something you've been talking about which is.

On the flexible side one of your competitors yesterday talked about receiving large orders here recently and obviously I think part of your strategy as you've talked about is.

Jose Bayardo: I next want to take a moment to highlight the importance of the duration of contracts between our offshore drilling contractor customers and their ENP operating company customers. Over the recent past, we've seen our offshore drilling contractor customers reset and repair and balance cheese, supported by rapidly improving their rates. To date, any rig reactivation or upgrade has been supported by operator contracts that provide mobilization fees, hired their rates, and a duration sufficient to reach a payback on the meaningful investments required to get tacked rigs back to work.

Tied not just to that business, but in general to watching the industry order uptake watching what's going on with capacity in certain markets, and obviously kind of waiting it out too.

Enhance your margins over time and kind of just curious.

Curious how that also plays out in terms of timing of margin improvement as you think about it.

Jose Bayardo: However, despite all the contracts that have been out over the past two years, most of the fleet remained on short, well-to-well contracts, and it wasn't until recently that the average duration of contract for the active drill ship fleet treated one year in length. In fact, average duration of high-spec drill ship contract signed from 2015 to 2022 was about eight months. Today is pushing well beyond a year. Similarly, some eyes and jackups are also seeing meaningful extensions of average term.

Yes, Jim I'm going to address that sort of more broadly than just flexible, but the pattern that we see within our completion and production solutions backlog about two thirds of that backlog are longer term contracts.

Sort of 18 months on average to turn.

In the past it had levels of inflation protection baked in and so forth and.

Jose Bayardo: This is important because it drives drilling contractors investment decisions on capital expenditures. We believe that with extending visibility of healthy cash flow backed by contracts across the offshore drilling fleet, contractors will become more willing to buy upgraded equipment and reactivate rigs without contracts in order to improve their competitive positioning for upcoming tenders in which they can secure work over longer time horizons.

Contracts and flexible and other project driven Schwartz.

Work that we do are characterized that way, what we experienced through the pandemic downturn and the disruptions that we faced is.

Inflation.

You never can protect everything and so we ran into some a lot of margin pressures frankly, and so what we're trying to do is those contracts signed in 2020 in 2021.

Jose Bayardo: We're already beginning to see finds of this taking place. In the jackup market, the slide demand dynamic within the high-spec asset class continues to type with leading-edge high-spec day rates now clipsing $170,000 a day, level above which new builds become possible. While we don't anticipate any of the established drilling contractors to place orders anytime soon, as Clay referenced, three NOCs have made serious inquiries into current new build pricing, shipyard availability, and construction timing.

Burn off quarter by quarter is replace that with.

With higher margin work and Thats sort of the strategy that I think both Jose and I've laid out in our prepared.

And I think we're moving into a period as the offshore in particular.

Gets back to work are rising.

We're all seeing higher demand across the space.

I think that can be a good tailwind for the next couple of years as high grading our work high grading our work too.

Jose Bayardo: In the offshore wind market, the impact of higher interest rates and cost inflation is challenging the economics of certain high-profile projects. Therefore, it's not surprising that wind installation vest contractors defer tenders during the order. Despite the recent challenges, there is still a projected shortfall on the full capacity needed for projects that have been sanctioned, which is driving constructive conversations with multiple contractors. While we did not book a new wind installation vessel during the order, we did receive an order for an offshore KLA vessel equipment package from a European contractor who will use their new vessel to install critical infrastructure for offshore wind development.

Be higher margin as a result of that strategy.

Makes perfect sense, and then just as a follow up on the North American side.

That's been a bit of a headwind here in the last couple of quarters and it seems like we are in the bottoming process here, yet interestingly, you're still in some areas like the newer technology side on the <unk> Fracs and what have you are picking up orders, but curious how you think that plays out as the market likely starts to recover through.

Through at least next year.

Yeah. Good question I think.

Third quarter and as we move into the fourth quarter.

Jose Bayardo: We'll leave this award-support to view that the amount of offshore wind will continue to advance once expectations on project economics are reset. Looking forward for a rig technology segment, we believe steadily improving market conditions and manufacturing throughput will drive improved financial results for the segment. For the fourth quarter, we expect revenue to increase between 1-3% with EBIT.flow through in the low to mid-30% rig.

He hasn't been quite what we or our customers had hoped for in North America, but when I look into 2024 as e&ps reset their budgets as.

I think as drillers.

Drillers get more visibility into natural gas.

Supply demand dynamics, given that the United States is increasing.

LNG export capacity.

Jose Bayardo: For Consolidated Company Results, we believe building momentum in numerous off-sparkets, including rising expiration activity, along with continued growth in the Middle East, will more than offset soft North American land activity, enabling EBIT dots to reach the $300 million range with much-approved cash flow in the fourth quarter.

In 2025, and another six Bcf per day.

I think that's going to prompt a little more drilling plus.

Continued.

<unk> oil price.

Once the dust settles on these mergers announced for North America I Hope, that's a better backdrop for more drilling in 2024 and now we have a lot of customers that can kind of see it that way.

Unknown Executive: With that, we'll open the call to questions. Thank you. To ask a question, please press star 11 on your telephone and wait for your name to be announced. Could we draw your question? Please press star 11 again. Please stand by, will we compile our Q&A roster?

We're all sort of pulling for that to play out as we get into 2024.

Great. Thanks, and look forward to the improvement in free cash flow.

Good Thank you, Jim we need to.

Thank you and one moment as we move on to our next question.

Jim Rollyson: And our first question is going to come from the line of Jim Rollinson with Raymond James. Your line is open. Please go ahead.

Our next question is going to come from the line of Irone Jairam with Jpmorgan Securities. Your line is open. Please go ahead.

Clay Williams: Good morning, gentlemen. Thanks for all the detail as usual. Clay, both of you and Jose kind of called out something you've been talking about, which is, you know, in the flexible side, one of your competitors yesterday talked about receiving large orders here recently. And obviously, I think part of your strategy, as you've talked about, is, you know, tied not just to that business, but in general to watching the industry order uptake, watching what's going on with capacity in certain markets and obviously kind of waiting it out to enhance your margins over time.

Yes, good morning, Clay, you highlighted a 5% sequential increase in capital equipment orders yet.

Yes.

The rig Tech book book to Bill below one clearly aftermarket is driving that but I was wondering if you could help us just think about the mix of aftermarket as we get into next year I think Jose mentioned, 56% of rig Tech now is aftermarket and.

Maybe the margin implications from that.

Yes, I think I think this is going to be a good tailwind as well, we're kind of seeing the supply chain logjam.

Clay Williams: And kind of just curious, you know, your view on how that's playing out. And you also mentioned lower margin backlog. It gets replaced with some of these higher margin orders and going forward. Just kind of curious how that also plays out in terms of timing of margin improvement as you think about it. Yeah, Jim, I'm going to address that sort of more broadly than just flexible, but the pattern that we see within our completion and production solutions backlog, about two thirds of that backlog are longer term sorts of contracts, you know, sort of 18 months on average to turn.

Clear itself. This year, we are now getting as we talked about on prior calls our room castings and forgings and parts that we need that's moving through our systems now that was it.

Good tailwind lifted rig aftermarket, 10% sequentially and lifted at 46% year over year I think we're going to continue to make progress in that area.

That'll be a really good thing for <unk>.

<unk> margins with respect to capital equipment.

Kind of echoing what I said earlier, we're remaining disciplined on.

On pricing.

Clay Williams: And in the past have had levels of inflation protection baked in and so forth. And contracts and flexibles and other project driven sorts of work that we do are characterized that way. What we experience through the pandemic downturn and the disruptions that we faced is the inflation, you know, you never can protect everything. And so we ran into a lot of margin pressures, frankly. And so what we're trying to do is those contracts signed in 2020 and 2021, you know, burn off quarter by quarter is replace that with with higher margin work.

But as we all know our customers remaining are remaining very disciplined on their capex expenditures as well.

We're hopeful that begins to turn and.

Inevitably we know our customers are going to have to reinvest in their rig fleets and rig will gain a benefit from that.

Plus we're kind of watching the wind turbine installations.

Vessel demand picture here closely softened a bit the last six months I think our last vessel order was in Q1.

Sure.

But the.

The good news is we continue to be engaged in some conversations with our customers here for markets outside the United States and so.

Clay Williams: And that's sort of the strategy that I think both Jose and I laid out in our prepared remarks. And I think we're moving into a period as the offshore in particular gets back to work rising FIDs. We're all seeing higher demand across the space. I think that can be a good tailwind for the next couple of years is hydrating our work, hydrating our work to be higher margin as a result of that strategy. Makes perfect sense.

But.

It all up I do think you hit on the right theme.

Aftermarket growth here in the next few quarters is really going to drive rigs.

No.

Okay.

And just maybe just.

A question.

Listen to neighbors call yesterday, and they mentioned about some teething issues with the Saudi Arabian Newbuild program, maybe pushing some deliveries a little bit can you just give us an update on what's going on.

Clay Williams: And then just as a follow up on the North American side, obviously that's been a bit of a headwind here in the last couple quarters and seems like we're in the bottoming process here yet. Interestingly, you still in some areas like the newer technology side on the E-FRAX and what have you are picking up orders. But here is how you think that plays out as the market likely starts to recover through, through at least next year.

There and just thoughts on.

The impact to you as we think about.

Next year in the 25 I know good I'll be honest with you.

<unk>.

It was actually puzzled by their comments.

And also look back at the second quarter and first quarter comments, where they said that the rigs are performing very very well and last quarter Q2, 90 days earlier. They noted we were delivering milestones on time what I.

Clay Williams: Yeah, a good question. I think third quarter and as we move into the fourth quarter recovery hasn't been quite what we or our customers had hoped for North America, but you know, when I look into 2024 as EMP's reset their budgets as I think as drillers get more visibility into natural gas supply demand dynamics given that the United States is increasing its LNG export capacity in 2025 and you know another six and a half BCF per day.

Would tell you is.

I'm very very pleased and proud of the execution of our joint venture in Saudi Arabia.

As Ben had been doing we've got a joint venture there with a Ram co.

Built a wonderful facility, it's in a remote location and we're waiting for the grid to catch up to us and actually been running off of generated power for the last two years, but in spite of that the first four rigs that we've built we're all delivered on time in accordance with our contract rig number five was manufactured on time in August.

Clay Williams: I think that's going to prompt a little more drilling plus hopefully a continued constructive oil price, you know, once the desk settles on these mergers announced for North America. I hope that's a better backdrop for more drilling in 2024. I know we have a lot of customers that kind of see it that way. And we're all sort of pulling for that to play out. As we get into 2024.

<unk>.

Our customer came out and witnessed our endurance test, which is part of the factory acceptance testing that we do with all of our rigs anywhere in the world.

Signed off on it on August 30, and so the rig has been available to pick up since August 31st. Unfortunately here. We are at 60 days later.

Jim Rollyson: Great. Thanks and look forward to the improvement free cash flow. Thank you, Jim. We need to.

Not yet picked it up so I don't quite know what's going on there, but just want to emphasize that our team. There has done a terrific job delivering on time on budget and I'm very proud of.

Unknown Executive: Thank you and one moment as we move on to our next question.

Arun Jayaram: Our next question is going to come from the line of Arun Jayaram with JP Morgan securities. Your line is open. Please go ahead. Yeah, good morning. Clay, you highlighted a 5% sequential increase in capital equipment orders yet the the rig tech book book to build a bit below one. You know, clearly aftermarket is driving that, but I was wondering if you could help us just think about the mix of aftermarket, you know, as we get into next year.

Right.

They have all done.

Great. Thanks for the clarification I appreciate it.

Yeah.

Thank you one moment as we move on to our next question.

And our next question is going to come from the line of Steven <unk>.

<unk> with Stifel. Your line is open. Please go ahead.

Thanks, and good morning, everybody.

Steven.

Arun Jayaram: I think Jose mentioned 56% of rig tech now is aftermarket and just maybe the margin implications from that. Yeah, I think I think this is going to be a good tailwind as well. We're kind of seeing the supply chain log jam clear itself this year. We're now getting as we talked about on prior calls. That's a room castings and forging and parts that we need that's moving to our systems now. That was a good tailwind lifted rig aftermarket 10% sequentially and lifted at 46% year over year.

Two for me I think I'd start.

You mentioned in your prepared remarks, you kind of alluded to new builds being a long way off.

And I was just curious kind of what your take is on the potential for Newbuild deepwater rigs over time, and maybe as part of that any sense for kind of what's in sort of the idle bucket that still.

Any idea for a number of rigs which could could realistically.

Stickley come back to the market before we'd see something like that.

Arun Jayaram: I think we're going to continue to make progress in that area and that'll be a really good thing for rigs margins with respect to capital equipment. Again, kind of echoing what I said earlier, we're remaining disciplined on pricing, but as, you know, we all know our customers remaining are remaining very disciplined on their capex expenditures as well. We're hopeful that begins to turn and, you know, inevitably we know our customers are going to have to reinvest in their in the red fleets and rig will gain a benefit from that.

Yeah with respect to reactivating rigs and I'm going to stay focused on offshore Steven yes, the context of your question.

We're kind of getting to the bottom of the barrel Frankel on rig reactivation new construction.

Projects that were suspended through the past decade.

Been restarted and so those opportunities are becoming less and less and with respect to those individual opportunities as Jose pointed out kind of rig by rig it's taking a lot more.

Money and capital to get those rigs back into the fleet and serviceable because they've been stacked longer and so the revenue opportunity per rig has been going up for <unk>.

Arun Jayaram: Plus, you know, we're kind of watching the wind turbine installation vent vessel demand picture here closely softened a bit the last six months. I think our last vessel order was in Q1 and but the good news is we're continue to be engaged in in some conversations with our customers here for markets outside the United States.

Let's start reactivating more rigs moving to new builds.

It's getting to be an interesting time.

I do think were ways off from compelling Newbuild economics.

Would require.

Day rates to take another leg up in probably a substantial leg up from where they are today.

And I would add there is additional headwinds in addition to returns which are one agent shipyards kind of got burned out of the last super cycle and ended up with projects that werent completed and customers that went bankrupt.

Clay Williams: But, you know, to sum it all up, I do think you hit on the right thing, team, aftermarket growth here in the next few quarters is really going to drive rigs results. Okay, and just maybe just a question, we listened to neighbors call yesterday and they mentioned about some teething issues with the Saudi Arabian new build program, maybe pushing some deliveries a little bit. Can you just give us an update on what's going on there and just thoughts on any impact to you as we think about, you know, next year into 25, I know, go ahead.

Two.

So they're gonna be a little more hesitant to take these demand higher margins too they're pretty busy with the rising book of business for <unk> LNG vessels wind turbine installation vessels.

And other things I think banks are probably a little hesitant to lend into this.

But I guess, what I would underscore is thats not necessarily unique.

Sure.

For prior up cycles, where the industry faced extensive capital and difficulties with capital.

Clay Williams: I'll be honest with you, Arun, I was, I was actually puzzled by their comments. I also looked back at their second quarter and first quarter comments where they said that the rigs are performing very, very well. And last quarter, Q2 90 days earlier, they noted we were delivering milestones on time. What I would tell you is, I'm very, very pleased and proud of the execution. Our joint venture in Saudi Arabia has been doing.

<unk>.

Eventually what happens is these assets are fully utilized and very expensive. It's the oil companies that really need assets to prosecute their development aspirations and they're the ones that jump into the scene and start prompting.

Either either startups or incumbents to start thinking about adding capacity.

Would love to tell you when that will happen, but it's going to beg off I don't know when it's not next quarter, it's not next year.

Clay Williams: We've got a joint venture there with a Ramco. We built a wonderful facility. It's in a remote location and we're waiting for the grid to catch up to us and actually been running off a generator power for the last two years. But in spite of that, the first four rigs that we've built were all delivered on time in accordance with our contract, rig number five was manufactured on time in August. Our customer came out and witnessed our endurance test, which is part of the factory accepting testing that we do with all of our rigs anywhere in the world and signed off on it on August 30th.

But I.

I think.

If history is a guide it's sort of it's not if but when.

So that's just the way that the cycles kind of play out here in our space.

Great. Thanks for the color and then my follow up I know you don't want to look too far ahead of the fourth quarter, but when we think of next year, we think of.

A modest rebound in U S land in and kind of well.

Well it seems to be this consensus from at least the large service companies around double digit international growth.

Clay Williams: And so the rig's been available to pick up since August 31st. Unfortunately, here we are 60 days later and they have not yet picked it up. So I don't quite know what's going on there, but just want to emphasize that our team there has done a terrific job delivering on time, on budget, and I'm very proud of the great work that they have all done.

In that context, how do you think your your revenue performance you mentioned the outperformance on the top line relative to them over the last couple of years just curious your take on that.

Arun Jayaram: Great. Thanks for the clarification. Appreciate it.

Unknown Executive: Thank you and one moment as we move on to our next question.

Yes.

We feel pretty good again quarter by quarter, we're getting more E&P companies interested in the technologies that we can bring as we all know there at the top of the food chain here in the oilfield and.

Certainly getting busier in offshore and in international markets and I think as an organization, we've gotten a lot closer to national oil companies to IOC.

Stephen Gengaro: And our next question is going to come from the line of Stephen Jingaro with default. Your line is open. Please go ahead. Thanks and good morning, everybody. Two from me. I think I start.

And.

They are liking what they're seeing so I think I.

I think next year will be good we are actually in the middle of our annual planning process now and so I'm going to.

Not rep numbers around that but I think the outlook for 2020 'twenty for topline growth continues to be.

Clay Williams: Clay, you you mentioned in your quarter marks, you kind of alluded to new builds being a long way off. And I was just curious kind of what your take is on the potential for new build deep water rigs over time. And maybe as part of that, any sense for kind of what's in sort of the idle bucket that, you know, still any idea for the number of rigs, which could realistically come back to the market before we see something like that.

Very strong.

Great. Thank you.

Thank you.

One moment for our next question.

And our next question is going to come from the line of Marc Bianchi with TD Cowen. Your line is open. Please go ahead.

Okay. Thank you.

I'm curious about the new segmentation and how you expect that.

Clay Williams: Yeah, with respect to reactivating rigs, and I'm going to stay focused on offshore. Stephen, I think that's the context of your question. You know, we're kind of getting to the bottom of the barrel, frankly, on rig reactivations, new construction projects that were suspended to the past decade that have been restarted, and so those opportunities are becoming less and less, and with respect to those individual opportunities, Jose pointed out kind of rigged by rig, it's taking a lot more money in capital to get those rigs back into the fleet and servicible because they've been stacked longer. And so the revenue opportunity per rig has been going up for NOV as we start reactivating more rigs.

To drive better results.

How are you going to define success there.

Are there any targets that you would be willing to share with us.

Good question Mark.

First for US success is always financial right.

We're a public company and very focused on returns on capital margin efficiency and the like.

The reason for the move is the role of our segments here, we have always been to coordinate.

Sure.

Cooperation between our business units or product lines to enable them to new shared services and our.

Clay Williams: Moving to new builds, it's getting to be an interesting time. I do think we're ways off from compelling new build economics, and that would require day rates to take another leg up, and probably a substantial leg up from where they are today, and I know it would add, there's additional headwinds in addition to returns, which are one, you know, Asian shipyards kind of got burned out of the last super cycle and ended up with projects that weren't completed and customers that went bankrupt, two, so they're going to be a little more hesitant to take these demand higher margins, two, they're pretty busy with a rising book of business for FPSOs, LNG vessels, wind turbine installation vessels, and other things.

Within our organization and.

Lots of examples of that but for instance, Wellbore technologies that segment was able to.

Coalesce a lot of manufacturing up.

Activities across multiple business units several years ago to drive efficiencies. When you go from three segments to two segments, where kind of rearranging some business units.

Within that and I think it's going to give us opportunities for even greater cooperation across product lines and business units.

Avail ourselves of more benefits from shared services and the like so we are.

I believe thats going to contribute to more efficient operations in the future, it's part of our $75 million cost reduction.

Annual cost reduction program that we talked about last quarter and ultimately this is going to make us better but the right measurement is.

Clay Williams: I think banks are probably a little hesitant to lend into this, but I guess what I would underscore is that's not necessarily unique for prior up cycles, where the industry faced expensive capital and difficulties with capital. And eventually what happens is, as these assets are fully utilized and very expensive, it's the oil companies that really need assets to prosecute their development aspirations, and they're the ones that jump into the scene and start prompting either startups or incumbents to start thinking about adding capacity.

We're gonna be financial.

Okay.

Jose you had talked about.

Healthy free cash flow in the fourth quarter and very strong in 2024.

Can you put some maybe put some brackets around that or help us understand what what that translates to $1 maybe on a conversion of EBITDA or however, you want to talk about it.

Yeah sure Mark So yes, we were intentionally vague on on that this time around because obviously.

Been struggling a little bit from a free cash flow perspective, this year for both good.

Clay Williams: And would love to tell you when that will happen, but I'm going to beg off, I don't know when, but you know, it's not next quarter, it's not next year, but I think, you know, a history is a guide, it's sort of, it's not if the win, and so that's just the way the cycles kind of play out here in our space.

And bad reasons, I say good reasons as that one.

The business has had better topline growth that we anticipated coming into the year, particularly.

Particularly from international and offshore markets, which have longer cycle times in our.

The downside of it is consuming more cash.

Clay Williams: Great, thanks for the color, and then my follow up, and I know you don't want to look too far ahead of the fourth quarter, but when we think in next year, we think of, you know, maybe a modest rebound in U.S, land and kind of what seems to be this consensus from at least the large service companies around double digit international growth in that context. How do you think your revenue performs?

Tied up in AR and inventory.

The other piece that's both good news and bad news relates to our challenges with inventory. The good news is that the supply chain has continued to get better and better vendors are accelerating deliveries to us.

Bad News is obviously the impact that it has on our inventory.

Growth in the cash consumed by that.

Clay Williams: You mentioned the alpha formulas on the top line developed into them over the last couple of years, just curious your take on that. Yeah, we, you know, we feel pretty good. Again, quarter by quarter, we're getting more EMP companies interested in the technologies that we can bring, and as we all know there at the top of the food chain here in the oil field, and certainly getting busier and offshore and in international markets.

As I said in our prepared remarks.

Tori We believe peaked in August and has started trending down and that will help support <unk>.

The free cash flow going forward.

So look if you look at our.

Current working capital metrics, and we'll start with the one simple high level, one which is working capital as a percentage of revenue run rate finished the quarter at about 33%.

Clay Williams: In our organization, we've gotten a lot closer to national oil companies, to IOCs, and they're liking what they're seeing. So I, you know, I think I think next year will be good. We're actually in the middle of our annual planning process now, and so I'm going to not wrap numbers around that, but I think the outlook for 2024. Top line growth continues to be very strong.

Can you just sort of look back to where we've been historically in the not too distant past, we were down to 25%, but let's not get overly ambitious we'll call. It if we get back to.

Stephen Gengaro: Great, thank you.

Unknown Executive: Thank you.

27 five.

Per cent that immediately frees up $480 million.

And cash.

So.

Last quarter I think I said, we should see at least a 50% conversion of EBITDA to free cash flow next year I still think that is easily achievable, obviously, the free cash flow breakeven for Q4.

Marc Bianchi: One moment for our next question. And our next question is going to come from the line of Marc Bianchi with TD Cowan. Your line is open, please go ahead. Thank you. I'm curious about the new segmentation and how you expect that to drive better results. How are you going to define success there and are there any targets that you'd be willing to share with us? Yeah, it's a good question, Marc. First for us success is always financial, right?

I think it's a bit.

Ambitious at this point.

Not completely out of the question look if you go back to 2019.

We had in the fourth quarter of 2019, we had $473 million in cash flow from operations. If you assume we did the same thing there we saw about $50 million short on sort of that target.

But realistically.

Marc Bianchi: We're a public company and very focused on returns on capital, margin efficiency and the like. The reason for the move is that the role of our segments here in the V have always been to coordinate the cooperation between our business units, our product lines, to enable them to use shared services within our organization and lots of examples of that. But for instance, well more technologies, that segment was able to coalesce a lot of manufacturing activities across multiple business units several years ago to drive efficiencies.

I think we'll probably have.

Best estimate free cash flow in the fourth quarter somewhere between 100 300.

But as we've seen and frankly as some of the big three service companies have talked about in their conference calls.

Pinning down free cash flow in one quarter is a pretty difficult thing to do highly dependent on the timing of customer payments and other things that come along but at the end of the day.

Long term and long term, we think we're right on the cusp of shifting over to generating extremely healthy free cash flow going forward.

That's great I appreciate its tough to call. So thanks very much for the.

All the commentary on it.

Marc Bianchi: When you go from three segments to two segments, we're kind of rearranging some business units within that. And I think it's going to give us opportunities for even greater cooperation across product lines and business units and avail ourselves of more benefits from shared services and the like. So we're, I believe that's going to contribute to more efficient operations in the future.

Thanks Mark.

Thank you and one moment as they move on to our next question.

Our next question comes from the line of Kurt <unk> with benchmark. Your line is open. Please go ahead.

Hey, good morning.

Good morning, Kurt.

So.

Hey, Craig.

I'm really curious.

Jose Bayardo: It's part of our $75 billion cost reduction, annual cost reduction program that we talked about last quarter and thinks ultimately this is going to make us better, but the right measurement is going to be financial. Okay. Jose, you had talked about healthy free cash flow in the fourth quarter and very strong in 2024. Can you put some, maybe put some brackets around that or help us understand, you know, what that translates to in dollars, maybe on a conversion of EBITDA or however you want to talk about it?

Cycle evolves, you guys kind of outlined.

Yes, the historical dynamics of.

What your customers tend to do how they behave and kind of what drives their decision, making and then how it has a positive impact on your business is right but.

But you guys have like a number of different product lines.

Across a lot of different areas.

And I'm, just kind of curious as this cycle evolves.

What is the what.

What is the thing to get.

Your organization most excited like for example, the prior cycle.

Jose Bayardo: Yeah, sure, Mark. So yeah, we were intentionally vague on that this time around because obviously we've been struggling a little bit from a free cash flow perspective this year for both good and bad reasons. And I say good reasons is that one, the business has had better top-line growth that we anticipate coming into the year, particularly from international and offshore markets which have longer cycle times and are the downside of it is consuming more cash, tied up in AR and inventory.

Like a new top drive in.

Along those lines right. So what are the two or three product lines that you think are really going to be difference makers.

The great question I think edge computing.

<unk> based monitoring.

Our control systems, the whole digital space, we've come out with so many new products, there and we're seeing really good traction.

And specific application of those digital products with our wired drill pipe hardware.

Kurt coupled with managed pressure drilling I really think we're pioneering a whole new way of drilling that 10 years from now 20 years now let's say.

Jose Bayardo: The other piece that's both good news and bad news relates to our challenges with inventory. The good news is that the supply chain has continued to get better and better. Vendors are accelerating deliveries to us. Bad news is obviously the impact that it has on our inventory growth and the cash consumed by us, by that. But as I said in our pair of remarks, inventory, we believe, peaked in August and has started trending down, and that will help support healthy, free cash flow going forward.

Youre going to see most rigs and in the customers a great stable customer base in the North sea, putting this to work with really good results.

Seven or eight customers there we've got four customers in the middle east running getting ready to run.

Trial programs.

Super excited about that.

Our products that reduce emissions, including <unk>.

Jose Bayardo: And so, you know, look, if you look at our, you know, current working capital metrics, and we'll start with the one simple high level one, which is working capital is a percentage of revenue run rate, finish the quarter at about 33%. You know, if you just sort of look back to where we've been historically in the not too distant past, who are down to 25%, but let's not get overly ambitious, we'll call it if we get back to, you know, 27.5%, that immediately frees up $480 million in cash.

Cuttings waste management technologies, a lot of interest in.

Eastern Hemisphere.

As.

Operators tightened their cuttings disposal requirements and reduce the oil on cuttings that they are willing to tolerate.

And so that requires a lot of the technology, we've got new automation products that are a couple of dozen customers are looking at in the first version of that is running for an offshore driller in Brazil.

The first land version of that is going to be operating very soon as well.

Jose Bayardo: So, you know, last quarter, I think I said, we should see at least 50% conversion of EBITDA to free cash flow next year. Still think that is easily achievable. Obviously, the free cash flow break even for Q4, I think is a bit ambitious at this point. It's not completely out of the question. Look, if you go back to 2019, you know, we had in the fourth quarter of 2019, we had $473 million in cash flow from operations.

Just across the board, we put a lot of.

Really creative thought and ingenuity and innovation into our product portfolio.

Any kind of outside the whole capital build.

And that's what's been driving the topline growth for the past two and a half years and I'm Super excited about all of that also excited about the old good old.

Our rig iron that we make.

And the new versions of that like E Frac.

And so thats, but across the board the level of creativity and innovation in this organization just Amazes me every day and we've got real solutions for our customers to make their operations more efficient safer and lower emissions and I think that's what's going to drive nov's fortunes, while the capital.

Jose Bayardo: If you assume we did the same thing there, we'd fall about $50 million short on sort of that target. But realistically, I think we'll probably have best estimate free cash flow in the fourth quarter somewhere between 100 and 300 million. But as we've seen, and frankly, as some of the big three service companies have talked about, and Eric Conference calls, pinning down free cash flow in one quarter is a pretty difficult thing to do, highly dependent on the timing of customer payments and other things that come along.

Equipment dynamic.

<unk> remains as I mentioned in my.

Remarks, more optionality at this point, but on the whole we are looking forward to the.

In the next few years.

That's great that's great.

One other thing.

Alright so.

I guess, the one thing I'm very curious about and you've kind of referenced this concept about.

Jose Bayardo: But at the end of the day, we're on it for the long term, and long term, we think we're right on the cusp of shifting over to generating extremely healthy free cash flow going forward. That's great. I appreciate it. It's tough to call. So thanks very much for all the commentary on it.

Offshore drillers.

Potentially being willing to.

Activate rigs without contracts.

Is that your your sense of how history may repeat or are you getting indications from your discussion is that that's actually going to happen.

Unknown Executive: Thank you, and one moment as we move on to our next question.

I would say not yet we're not seeing that.

Just yet, but our point was longer term contracts and as the market moves towards E&ps are starting to realize hey, rich very short supply here either sign up contracts that run a little bit longer than I previously could which is in contrast to theres a bunch of rigs out there. It's oversupplied I'm just going to go well to well.

Kurt Hallead: Our next question comes from the line of Kurt Haleed with Benchmark. Your line is open. Please go ahead. Hey, good morning. Good morning, Kurt. Hey, Clay, I'm really curious as the cycle of balls and you that kind of outline the historical dynamics of what your customers tend to do, how they behave, and what drives their decision-making, and then how it has a positive impact on your businesses. But you guys have a number of different product lines across a lot of different areas.

Kurt Hallead: And I'm just curious as this cycle of balls, what is the thing to get your organization most excited? For example, the prior cycle was a new top drive and almost lines. What are the two or three product lines that you think are really going to be different? James.

Which was dominated the prior decade, we think could change their thinking but right now everybody is very capital disciplined.

And understandably, so coming out of the last 10 years and all of the financial challenges, we've all been through.

But again if history is a guide overtime.

And shortages of equipment and high margins that are earned by the people that own that equipment can change that.

Yes.

Add that we're not seeing that take place there are conversations where our customers are getting a little bit further ahead in terms of planning and preparing and starting to do small things around the edges to get ready to go sooner rather than later.

Clay Williams: The great question. I think edge computing, condition-based monitoring, control systems, the whole digital space. We've come out with so many new products there, and we're seeing really good traction and specific application of those digital products with our wired drill pipe hardware, Kurt coupled with managed pressure drilling. I really think we're pioneering a whole new way of drilling that, you know, 10 years from now, 20 years from now, let's say, you're going to see on most rigs.

Okay.

Okay. If I may squeeze one more in because you referenced it earlier about.

How do you gauge success on.

This restructuring and so on right. So maybe we can talk about it in this context.

What type of incremental margin.

Would you then equate to success rate in the past.

Some updates on incremental margins for the different business segments on a through cycle basis. So maybe we can kind of throw that out there and say what are the incremental margins.

Clay Williams: And the customers, you know, a great stable customer based in the North Sea, putting this to work with really good results. You know, separate customers there. We've got four customers in the Middle East running, getting ready to run trial programs. Super excited about that. Our products that reduce emissions, including cuttings, waste management technologies. A lot of interest in the eastern hemisphere as operators tighten their cuttings disposal requirements and reduce the oil on cuttings that they're going to tolerate.

That you want to see it.

<unk> in these new segments to say Hey, we're successful.

Yes. So good question tough question, but really.

Outside of.

Kind of what we've really accomplished with Wellbore technologies here to date in the cycle.

We obviously haven't been extremely satisfied with the incremental margins that we've delivered.

So part of this restructuring part of the cost out program part of the sort of doubling down our efforts to make sure that we're extremely disciplined knowing what type of opportunities that we're going to have to drive price higher.

Clay Williams: And so that requires a lot of NOV technology. We've got new automation products that are, you know, a couple of dozen customers are looking at in first version of that's running for an offshore drill in Brazil. The first land version of that's going to be operating very soon as well. You know, just across the board, we put a lot of really creative thought and ingenuity and innovation into a product portfolio really kind of outside the whole capital build thing.

Surround revolves around trying to drive those incremental margins higher and so I think those same through this cycle incremental margins apply same thing that we've always talked about is also always talked about different points in the cycle that can be above other parts of the cycle. They can people.

Low and so as I mentioned to date some of those have been below over the last couple of years and our aim here is to accelerate getting them to be above that.

Clay Williams: And that's what's been driving the top line growth of the past two and a half years. And I'm super excited about all that. Also excited about, you know, the old, the good old rig iron that we make and the new versions of that like EFRAC. And so that, but across the board, the level of creativity and innovation in this organization just amazes me every day. And we've got real solutions for our customers to make their operations more efficient, safer and lower emissions. And I think that's what's going to drive NOV's fortunes while the capital equipment dynamic remains, as I've mentioned in my remarks, more optionality at this point.

Sort of average.

Expected through cycle incremental margin.

Okay very good.

Clearly I appreciate that thanks.

Thanks, Kurt Thanks, Kurt.

Thank you and one moment for our next question.

And our next question comes from the line of adding <unk> with.

Goldman Sachs. Your line is open. Please go ahead.

Hi, good morning, Dave.

To follow up on some of the questions from the floor on free cash flow, maybe any color you can provide on the cadence because it sounds like the conversions improving budget.

Clay Williams: But on the whole, we're looking forward to the next few years. That's great. So one other thing, all right. So I guess one of the one thing I'm very curious about, and you kind of reference this concept about, you know, offshore drillers potentially being willing to activate rigs without contracts, is that your sense of how history may repeat, or are you getting indications from your discussion that that's actually going to happen?

But should we still see impact.

Working capital seasonality to start the year next year and then what metrics are you looking at to inform your capital allocation strategy.

Yes.

Free cash flow standpoint, yes, we will continue to have seasonality with Q1 typically being.

A more challenging cash flow quarter, but then we expect it to improve throughout the course of 2024 and I'm sorry, I didn't catch the second part of your question capital allocation was that your question.

Clay Williams: So now I would say not yet. We're not seeing that just yet. But our point was longer term contracts and as the market moves towards, EMPs are starting to realize, hey, rigs are in short supply here. I better sign up contracts that run a little bit longer, that I previously could, which is in contrast to, there's a bunch of rigs out there, it's oversupplied, I'm just going to go well to well, which has dominated the prior decade.

Yes.

Yes, what I would say is we.

With stronger free cash flow in 2024 I'm, hoping.

That should open up opportunities to return more capital to shareholders.

I think a pretty strong track record here, having returned almost $5 billion since 2014 through both share backs share buybacks and dividends.

Clay Williams: We think could change their thinking, but right now everybody's very capital disciplined and understandably so coming out of the last 10 years and all the financial challenges we've all been through. But again, the history is a guide over time and shortages of equipment and high margins that are earned by the people that own that equipment can change that thinking. Yeah, and Kurt, I'd add that while we're not seeing that take place, there are conversations where customers are getting a little bit further ahead in terms of planning and preparing and starting to do small things around the edges to get ready to go sooner rather than later.

As well as continuing to.

Move forward on our organic growth opportunities.

And as we always do we're going to keep an eye on.

M&A opportunities, but I think looking forward into 2024 really focused on.

On allocating between those those three areas.

That's great and then curious if youre seeing any conversations around new build frac fleets at all particularly given the strength in pricing in pressure pumping has been very strong this year despite activity declines.

Anything that you could share that what could that mean, Florida Adobe.

Yes, yes, we are having inquiries around new frac fleets.

Kurt Hallead: But look, if I may, this squeeze one more in because you referenced it earlier about, you know, what had you had a gauge success on, you know, restructuring and so on, right. So, so maybe we can, we can talk about this context. You know, what type of incremental margin would you then equate to success, right? In the past, you've given some updates on incremental margins, three different business segments on a through cycle basis.

<unk>.

A lot of that as you know the Frac fleet.

Has a lot of churn in it because it's so consumptive of equipment.

And as the industry's move to.

Greater frac intensity that equipment is being run harder and so yes.

<unk> had a number of conversations underway with customers around new Frac fleets, what I would tell you is that the interest in electric Frac fleets continues to grow in particular, we noted this quarter some orders for some bumpers and.

Kurt Hallead: So maybe we can kind of throw that out there and say, you know, what are the incremental margins that you would want to see achieved in these new segments to say, hey, we're successful. Yeah, so Kurt, good question, tough question. But, but really, you know, outside of kind of what we've really accomplished with well more technologies here to date in the cycle, you know, we obviously haven't been extremely satisfied with the incremental margins that we've delivered.

E Frac equipment, and so I think more and more E&P companies are requiring that are preferring E Frac fleet.

Leach because they have lower emissions as well as the.

Pressure pumper in learning they have lower cost of ownership and so that's a good opportunity I think for again these technology to play a key role going forward.

Thank you I appreciate the answers.

You bet. Thank you. Thank you and this does conclude our question and answer session and I would like to hand, the conference back over to Mr. Clay Williams for his closing remarks. Thank.

Kurt Hallead: So part of this restructuring past part of the cast out program, part of these sort of doubling down our efforts to make sure that we're extremely disciplined knowing what type of opportunities that we're going to have to drive price higher. Surround revolves around trying to drive those incremental margins higher. And so, you know, I think those same through the cycle incremental margins applied, the same thing that we've always talked about, but also always talked about different points in the cycle.

Thank you Michelle and thank you all for joining US this morning, and we look forward to discussing our fourth quarter and year end results with you in February I Hope you have a very nice day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Yes.

[music].

Kurt Hallead: They can be above other parts of the cycle, they can be below. And so the mention today, some of those have been below over the last couple of years. And our aim here is to accelerate getting them to be above the sort of average expected through cycle incremental margin. That's good. Really good. Really, really appreciate that. Thanks.

Kurt Hallead: Thanks, Kurt.

Yeah.

[music].

Okay.

[music].

Adi Modak: Thank you in one moment for our next question. And our next question comes from the line of Adi Modak with Goldman Sachs. Your line is open. Please go ahead. Hi, good morning, James. I just want to follow up on some of the questions from before on free cash flow. Maybe any color you can provide on the cadence because it sounds like the conversions improving. But should we still see impact of working capital seasonality to start the year next year?

Yes.

[music].

Yes.

Adi Modak: And then what metrics are you looking at to inform your capital allocation strategy? Yeah, so from a three cash flow standpoint, yes, we'll continue to have seasonality with Q1, typically being a more challenging cash flow quarter, but then we expect it to improve throughout the course of 2024. And I'm sorry, I didn't catch the second part of the question. Capital allocation. Was that your question? Yeah. Yeah, what I would say is we was stronger pre cash in 2024.

Adi Modak: I'm hoping, well, that should open up opportunities to return more capital to shareholders. We have, I think, a pretty strong track record here, having returned almost $5 billion since 2014 through both sharebacks, share buybacks and dividends, as well as continuing to move forward on our organic growth opportunities. And as we always do, we're going to keep an eye on M&A opportunities, but I think looking forward into 2024 really focused on allocating between those three areas.

Jose Bayardo: That's great. And then curious if you're seeing any conversations around you build frack fleets at all, particularly given the strength and pricing and pressure pumping has been very strong, this year despite activity declines. Anything that you could share there, what could that mean for NOV? Yes, we are having inquiries around new frack fleets. A lot of that, I mean, as you know, the frack fleets has a lot of churn in it because it's so consumptive of equipment.

Jose Bayardo: And as the industry has moved to greater frack intensity, that equipment's being run harder. And so, yeah, we've had a number of conversations underway with customers around new frack fleets. What I would tell you is that the interest in electric fleets continues to grow in particular. You know, we noted this quarter, some orders for some pumpers and e-frack equipment. And so, I think more and more ENP companies are requiring that or are preferring e-frack fleets because they have lower emissions, as well as the pressure pumpers and learning they have lower cost of ownership. And so, that's a good opportunity, I think, for, again, NOV's technology to play a key role going forward. Thank you, I appreciate the emphasis. You bet, thank you.

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Unknown Executive: Thank you, and this does conclude our question and answer session.

Clay Williams: And I would like to hand the conference back over to Mr. Clay Williams for his closing remarks. Thank you, Michelle. And thank you all for joining us this morning. We look forward to discussing our fourth quarter, and you're in results with you in February. Hope you have a very nice day.

Unknown Executive: This concludes today's conference call. Thank you for participating.

Unknown Executive: You may now disconnect. Connect. James West, Thomas Curran, Thomas Curran, Blake McCarthy, Amie DAmbrosio, James West, Thomas Curran, Blake McCarthy, James West, Thomas Curran, Blake McCarthy, Amie DAmbrosio, James West, Thomas Curran, Blake McCarthy, James West, Thomas Curran, Blake McCarthy,[inaudible] Thomas, Thomas, Thomas, Thomas, Thomas[inaudible] James West, Thomas Curran, Douglas Becker, Thomas Curran James West, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker James West, Thomas Curran, Douglas Becker, Thomas Curran, Thomas Curran James West, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker, Thomas Curran,[inaudible] Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker, Thomas Curran, Douglas Becker,[inaudible]

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Q3 2023 NOV Inc Earnings Call

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