Good day, ladies and gentlemen, and welcome to the National Oilwell Varco fourth quarter and full-year 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Loren Singletary, Vice President of Investor and Industry Relations. Sir, you may begin.

Thank you, Chanelle, and welcome, everyone, to National Oilwell Varco's fourth quarter and full-year 2016 earnings conference call. With me today is Clay Williams, President, CEO and Chairman of National Oilwell Varco, and Jose Bayardo, Senior Vice President and Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and fiscal year ended on December 31, 2016, please note that some of the statements we make during this call may contain forecasts, projections, and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the federal securities laws based upon limited information as of today, which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco filed with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information may be found within our press release on our website at www.nov.com or in our filings with the SEC. On a U.S. GAAP basis for the fourth quarter of 2016, NOV reported revenues of $1.69 billion and a net loss of $714 million or $1.90 per share. For the full year 2016, NOV reported revenues of $7.25 billion and a net loss of $2.41 billion or $6.41 per share. Please be aware that our use of the term EBITDA throughout the call this morning will correspond with the term adjusted EBITDA as defined in our press release. We also use other non-GAAP measures as described in the press release. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation. Now let me turn the call over to Clay.

Thank you, Loren. For the first time in two years, National Oilwell Varco posted sequential improvement in revenues, which rose 3% in the fourth quarter as compared to the third quarter of 2016. The company did an excellent job driving incremental profitability on this increase, posting 74% incrementals, which lifted our adjusted EBITDA ex-charges for the second quarter in a row. Adjusted EBITDA totaled $102 million or 6% of revenues in the fourth quarter, enabled by many cost reduction initiatives undertaken by our seasoned managers and held by rising rig counts in certain areas. As we noted in the press release, NOV achieved another important milestone in the fourth quarter in that our global sales into land markets exceeded our global sales into offshore markets for the first time since our 2005 merger. Our fourth quarter mix was roughly 52% land related, 42% offshore. Frankly, I'm glad 2016 is behind us. In the fourth quarter, we benefited from rising momentum in North American shale plays in particular, which we expect to accelerate. Our international markets still face headwinds for a quarter or two and offshore markets continue to trend down, so we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief. I attribute my gray hair to the many previous downturns I've been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful. E&P customers cut spending two years in a row and current CapEx is just half the level seen just two years ago. Last year, global exploration discoveries were the lowest they have been since 1947. And in May of last year, the U.S land rig count dropped to the lowest number ever recorded. The industry responded as we always do.…

Thank you, Clay, and good morning, everyone. For the full year 2016, NOV reported a net loss of $2.41 billion or $6.41 per share on a GAAP basis. Excluding $2.08 billion in pre-tax and other items, the net loss was $320 million or $0.84 per share. Consolidated revenues were $7.3 billion for the year, down 51% versus the prior year, and adjusted EBIDTA was $322 million. Full-year decremental EBITDA leverage was limited to 27% on a revenue decline of $7.5 billion. For the fourth quarter of 2016, NOV posted a net loss of $714 million or $1.90 per fully diluted share. Excluding other items, net loss for the quarter was $57 million or $0.15 per share. Other items totaled $706 million pre-tax and consisted of $582 million of inventory charges and $124 million of other charges, primarily associated with severance, facility closures, and write-offs of certain assets. Consolidated revenues were $1.7 billion in the fourth quarter, up 3% versus Q3, with three of our four reporting segments generating higher sequential revenues. Adjusted EBITDA increased $34 million or 50% to $102 million or 6% of sales. Incremental sales and sustained efforts to reduce costs and improve efficiencies contributed to the 74% incremental EBITDA leverage quarter over quarter. Operating loss excluding other items was $72 million, representing a 33% improvement over Q3. Working capital excluding cash and debt decreased $665 million sequentially to $3.9 billion at December 31, 2016. As previously noted, we recorded an inventory charge of $582 million, which was the result of the comprehensive review of our inventories completed during the fourth quarter. Recent activity gains and customer conversations provided us with clear data from which we were able to determine which products across our portfolio were less likely to see demand from our customers in the future, resulting…

Okay, Chanelle, we'll now open it up for questions.

Thank you. Our first question comes from the line of Edward Muztafago of Société Générale. Your line is now open.

Hey, guys. Thanks.

Hi, Ed.

I was wondering if you might be able to help us think a little bit more about the countervailing forces in rig aftermarket. Clearly, that business will shift more towards land as we go forward. And these rigs now that you're on these big multi-well pads with these super-laterals are really starting to tear a lot of equipment up. How do you think about the progression of that segment through the year? Is it something that you think about as structurally downward through the year, or do you think the rig aftermarket makes a turn as we go through 2017 as well?

I'd say based on what we're seeing right now, we're optimistic, 2017, the business is flattening out and is going to pick up. As I think Jose mentioned in his prepared remarks, Ed, we saw about an 8% increase in bookings for spare parts through the fourth quarter. January had a particularly strong – I think January was our strongest month since December 2015 for spares, and so that appears to be going the right direction. We did guide down a little bit in Q1 because when we look at the numbers, we believe there was a little bit of seasonality. In the prior two – or really prior three fourth quarters, we've seen service and repair pick up in Q4 and then fall off a bit in Q1. So that led to a little lower guidance in Q1 due to seasonality. But net-net, we are benefiting from reactivations of land rigs going back to work in West Texas. And I believe – we've been saying for the last two years our customers are great at cannibalizing their existing stocks of spare parts, and that's certainly been going on in earnest. At some point, they're going to run out of opportunities to cannibalize, and so perhaps we're seeing some of that turn around as well. So on the whole, I think the outlook for 2017 is getting brighter.

Okay. I mean it's probably not all that dissimilar to what non-capital equipment saw in 2003 or 2002, albeit it wasn't exactly a comparable segment back then.

Right.

And then maybe you could just help us think about Rig Systems margins a little bit. If that business stabilizes, where can we see margins in that business go to as you do some catch-up with restructuring and whatnot? I'm trying to think about that as we make the turn here at some point in 2017.

We did much better in the fourth quarter that we just reported than we expected. And again, I think Jose highlighted some benefits that we had from the removal of some orders out of our backlog for which we were paid. If you do the math on that, that was about a $17 million – $18 million benefit for the quarter. So that's the reason we exceeded. And backing all that out, we're in the high single-digit, double-digit range and looking for that business to level out across 2017.

Okay, that's helpful. Thanks.

Thank you. And our next question comes from the line of Marshall Adkins of Raymond James. Your line is now open. J. Marshall Adkins - Raymond James & Associates, Inc.: Good morning, guys.

Good morning, Marshall.

Good morning, Marshall. J. Marshall Adkins - Raymond James & Associates, Inc.: Jose, you went through the completions side and mentioned a whole bunch of areas where things are improving. I want to try to understand just scale-wise. What's the most important? Obviously, you had some offshore, the flexible pipe stuff picking up, but I would think the biggest share of the increase there, because to me that's what really stood out in this quarter was how strong completions and production was. What percent was U.S. land and frac equipment and that type stuff versus everything else?

Thanks, Marshall. Really as far as Q4 is concerned, we were tremendously excited about what was coming in throughout the quarter. So the bookings-related activity for U.S. land market was very healthy. We saw really significant increases related to replacement parts and components and the service and repair work in our facilities. But overall, we had a pretty flattish quarter for that business group. What really drove Q4 itself was that we had every other business unit within the segment pick up quite a bit from Q3 to Q4. Now going from Q4 to Q1, there are a couple of those offshore-oriented business units that are still seeing substantial headwinds. We talked about the backlog deteriorating, so some of those businesses we anticipate will actually step down a little bit from Q4 to Q1. But we are really anticipating that the Well Intervention Stimulation Equipment business unit will really more than offset those drop, and that business unit is really starting to gain some momentum here. J. Marshall Adkins - Raymond James & Associates, Inc.: Right, so that then makes sense. And with the strong bookings, you had the 75,000 new horsepower in frac equipment. Where do you start to run into bottlenecks in terms of getting stuff out the door? Can you triple, quadruple the throughput there, or are we going to see bottlenecks in terms of adding capacity in the up cycle?

First of all, we certainly look forward to that opportunity. And here early on, we have – even post our inventory adjustment, we still have a very healthy level of inventory in our businesses, so we're able to turn quite a bit here efficiently on the front part of the recovery. The other thing to point out is you've seen the rate at which the business has contracted. This organization is very adept at scaling the operations, both downward and upward. And so we're certainly looking forward to the opportunity to start taking things the other direction. J. Marshall Adkins - Raymond James & Associates, Inc.: So you don't think there's going to be any kind of issue scaling it back up, since presumably here for the last year and a half, it's essentially gone to zero in a lot of those completion areas?

I will say that we talked about it before on some of our prior conference calls, is that we have been incredibly methodical in terms of how we have consolidated our facilities, consolidated our operations to where we haven't lost maximum manufacturing capacity. There will be some things that need to happen in order to bring things back online. But again, we look forward to making that happen. Another thing I would add is that there certainly is a benefit for customers coming into the queue sooner rather than later.

Right, Get your orders in now. J. Marshall Adkins - Raymond James & Associates, Inc.: Message received. Thanks, guys.

Thanks, Marshall.

Thank you. And our next question comes from the line of Ken Sill of SunTrust. Your line is now open.

Hey, good morning, guys.

Good morning.

Good morning.

Nice to hear the optimism in your voice after the last two years. I had a question, a couple of questions. I wanted to follow up on what Marshall was saying there. Nobody has ordered any pressure pumping equipment in quite some time, and a lot of the customers have worked through their working capital. So you guys seem to be in a place where you could offer terms. Are the people coming to you now people that can finance the orders themselves, or are you able to give these guys terms to help them get through the fact that they don't have any working capital right now?

Hi, Ken, good morning. We certainly are not financing our customers. They're coming to us with healthy deposits and the ability to pay. So there are still a lot of good customers out there with clean balance sheets and ability to fund these orders. And I think they're realizing there's an opportunity to get a little bit ahead of the fray right now with getting in those orders.

We think we're a lot better at making equipment than we are at banking. So there are lots of others out there that I think are providing capital.

Yes, that was just one of the issues. That was the follow-up question. Was the pressure pumping order, was this – obviously it sounds like it's coming from an existing or a repeat customer that's been out there for a while.

Yes.

Okay, I've asked my two questions, I'll let somebody go. Thanks, guys.

Thanks, Ken.

Thank you. And our next question comes from the line of Brad Handler of Jefferies. Your line is now open.

Thanks. Good morning, guys.

Hi, Brad.

My first question is probably, it's just vague enough to be hard to answer I suppose in a way. But I suppose you've gone through your massive restructuring, cost initiatives, bearing down on – concentrating manufacturing across certain plants and all of that, and I have to imagine that just the sheer scale of it made predicting your cost savings very, very challenging. And so I suppose perhaps now that you've been living with many of those changes, I guess I'm curious if there's any kind of revision you can offer with respect to ultimately the cost savings or ultimately the revisions that all – in other words the efficiencies that you might have – you believe you may have achieved?

Brad, I think I understand what you're asking. And what I would tell you is, as you enter a downturn, there's obviously a lot of uncertainty. There's just less visibility in the business than any of us would like. And things change quickly, so there is discounting underway and so lots of things happening. We learned a long time ago, when you enter one of these downturns, we've really got to focus on what you can control. And so what we try to do when it comes to steps to save money in the business to drive more efficiency in the business is to really focus on concrete things that we know have an impact. Sometimes it gets challenging to measure directly in the financial statements. So the way we track our progress is to look at specific ledger balances globally and regionally to see evidence in subsequent periods of steps that were taken. So when we talk about $3 billion in cost savings, that's really what we're referring to. In the second quarter of 2016, which we believe is our low point on EBITDA at $25 million in that quarter, we mapped out a plan to get another $400 million in annualized savings. And last quarter we reported to you that we had achieved, looking at the ledgers, a little over $250 million in annualized savings. This quarter when we look at those same ledgers, we see another $86 million flowing through. So there's tangible evidence of the steps that were undertaken in prior quarters showing up in the fourth quarter. And what I would tell you in terms of an update on that subject is we have other steps underway through the first half of 2017. So we're very confident we'll handily exceed our $400 million cost savings estimate that we gave you in the second quarter of 2016. Does that answer your question?

Yes, I was going to highlight the $400 million and you've drawn it out there, so that is perfect. And I guess – so part of this was a question around your ability to be precise with it and then your ability to set goals against that or achieve that goal, so I do appreciate that. Just to harken back to that for my follow-up I guess, I think the presumption was we would – you said, we'll do more if we have to, right?

Right.

We'll kind of see. How do how you measure having to? Is that purely a function of revenue, or is it just a function of uncovering that much more opportunity for efficiencies?

Well, first of all, we need to act on opportunities to drive efficiency in all markets, good markets and in bad. Secondly, with regards to further downsizing given the current market headwinds, we look to order rates, the level of activity flowing through, that sort of thing to map out more near-term tactical moves to capture cost savings. But again, it was in my prepared remarks but probably worth saying again. We have a terrific group of managers that Jose and Loren and I are pleased to work with. And they're terrific at managing these downturns, and they've all been through a whole bunch of them. So that's the playbook. It's well established. We know what to do. And once again this team rolled up their sleeves as we entered the present downturn and is navigating it I think as well as any management team out there.

Helpful, helpful color. Thank, Clay. I'll turn it back.

You bet. Thanks, Brad.

Thank you. And our next question comes from the line of James West of Evercore ISI. Your line is now open.

Hey, good morning, guys.

Hi, James.

Good morning.

Clay, in the land rig market, the high-spec land rig market, there's a little bit of a bifurcation between these ultra-super-spec rigs, and then you have the high-spec rigs that can be upgraded. Are you having a lot of conversations at this point about upgrading some of those rigs that may not have say a third mud pump or walking capabilities?

Yes, we are. And so a lot of people are very focused on that particular segment in the market. And so third mud pumps, 7,500-PSI mud systems, walking systems for the rigs, but we're also seeing along with that frequently demand for higher torque top drives. And frequently all of that then will require additional generator capacity. And then as Jose mentioned, now we think the land market is moving more towards larger diameter 5.5-inch drill pipe to handle these longer laterals and to put more hydraulics downhole. So there's a lot of upgrading that can happen to achieve the super-spec capability. But a lot of our prepared comments were what we think is the next-generation rig even beyond that, which is you take that rig and then you wire that drill pipe and you let downhole sensors drive a control system at the surface that operates customer apps that they can write to control the rig. That's the rig that learn – the rig of the future as we see it.

Got it, okay. And then so with respect to this rig of the future concept – or really I guess it's not really a concept anymore, it's happening. But how much automation and data analytics are being driven or driving these processes on the rigs versus say this last generation of rigs that we saw get built?

This is a whole new area, James. The industry has not used high-speed data transmission from the bit to operate the rig machinery in the past, and that's really what this offers. So this is a whole new breakthrough in terms of technical capabilities. So we've got, as I mentioned, 57,000 bits per second coming up with vibration torque, weight on bit, stick slip information, all that stuff. And then the software takes that data stream – high-speed data stream and it adjusts the machines in real time. We actually have algorithms, heuristic algorithms that are altitude seeking that adjust the rig, weight on bit, strokes, et cetera to achieve the maximum ROP [Rate of Penetration] formation by formation. And so the machine learns effectively how to drill the stratigraphic section that it's drilling in, and we think that's the next big thing in drilling. So we're very, very excited about this.

Sounds exciting to me, all right. Great, thanks, guys.

You bet. Thanks, James.

All right.

Thank you. And our next question comes from the line of David Anderson of Barclays. Your line is now open.

Hey. Clay, so staying on the same lines of questioning, so the project in the Anadarko Basin, I know you've been putting different parts of this in different areas. Is this really the first time that you're putting it all together for a customer? And also, can you talk to me a little bit about how you're going to measure success? Is it rate of penetration? Is it some sort of performance metric? And then is there follow-on work after that that comes from this?

The success measurement really is time savings and cost savings for our customers. So this is one more way we can reduce their cost per barrel of development. And then I would add to that, higher quality boreholes. So that initiative in conjunction with our downhole tools initiative, we're really seeking to enable our service company customers to deliver straighter boreholes, fewer doglegs and the like. Ultimately, those are the wellbores that have the lowest number of production and drilling challenges. With regards to the first part of your question, David, yeah, we've been doing this before. We've got I think 2.5 million feet drilled with the closed-loop system thus far. But what we did this past quarter, which is new is that we actually are now operating this through our new NOVOS control system. So this is a control system that we can upgrade NOV rigs with. And then our closed-loop automated drilling technology, the machine learning capabilities plug directly into the NOVOS operating system. And so this last quarter – again, we've done it in the past, but this is the first quarter we've done it with all NOV new operating control system and NOV kit throughout the rig.

So this is proof-of-concept right now of everything you've been working on. Now we're at that point, okay, now we're going to prove it. Okay.

Yes, we're actually beyond proof-of-concept. This is a commercial offering.

Okay.

We did the first one a few years ago. But in our view, it's the next big thing in drilling. And then while we're on that subject too, the NOVOS operating control system is unique in that it's an open architecture workspace. It's an operating system for the rig, but we will enable third parties to take a software developer kit. So we've got a number of oil companies and service companies now that are actually writing apps to control the rig through the NOVOS operating control system. So that's the basic architecture, and I think that's unique in the space. So the way to think about it, you can have a service company show up to perform a specific operation on the rig. They can load in their proprietary app that they write and then take control of that rig and execute their work in a more efficient way, so really enabling their business model. Likewise, we've got oil companies that are writing apps for things like safety parameters, operating parameters that they want to make sure their rigs operate within, specific operations on the rig. So we're pretty jazzed about this.

And then so on a different new business for you, at least a new opportunity for you, I was curious about directional drilling and measurement tools. In the release today, you talked about how you're now planning to offer a full suite of equipment to customers. Now this has traditionally been the area for the big diversified companies, but it sounds like you're starting to see more of these packages to the land drillers. Can you help me understand how this market is evolving, or is there evolution happening here in the market in which do the big guys take the higher-end work, and then you guys can supply the land drillers to do maybe some of the lower-end directional drilling? How do you see that market evolving here?

Our business model is unique in that we view ourselves as the enabler for other oilfield service companies. So unlike the big four, we're not out actually pitching directional drilling jobs. We're providing the hardware, the equipment, the technology, the training to enable all directional drillers, frankly, including the big four, to supplement their offering to the marketplace. And so it's a little different business model. We think that's the best potential for the technology we have and the best application of our capital. But clearly, the entire industry has moved more towards a lot more directional drilling. Horizontal drilling is one of the two key things that made the shale revolution happen. You've got probably close to 90% of rigs drilling in North America drilling horizontally. So there's a lot more directional drilling going on and a lot more rigs onshore than offshore, but both are drilling directionally. So there's an opportunity for directional drillers in both spaces. So we see that as a great growth market as more and more operators employ horizontal drilling. And then going back to what I referenced earlier, this high-quality borehole, a borehole with fewer doglegs, you're going to have fewer drilling problems, less torque and drag, better production recovery factors. We're focused on helping our directional drilling customers deliver that high-quality borehole. And again, pretty excited about that with new additions to our MWD offering and the rotary steerable initiative that we've referenced in the past and other things that we can provide into that market.

Great. Thanks, Clay.

You bet. Thanks, David.

Thank you. And our last question comes from the line of Sean Meakim of JPMorgan. Your line is now open.

Thanks, good morning.

Hi, Sean.

Good morning.

Clay, I'd like to stay on the NOVOS topic, the automated drilling opportunity. As you think about the long-term potential, how would you rank your opportunity set across shale, maybe international onshore, places like the Middle East, versus offshore rigs? How would you rank those different opportunities?

I think we've been very explicit, Sean, over the last couple years. The company sees a great opportunity in that enabler role onshore. And right now you're seeing rig count going up in West Texas and the Mid-Continent and the Marcellus, where economics are working for the onshore. Offshore longer term we're optimistic, but it's been little more challenged near-term, so the most immediate opportunity we see is this focus on onshore technology specifically around horizontal drilling and then hydraulic fracture stimulation and completion tools. So that's been the guide post we've used to get to deploy capital through the past couple years. To bring a little more granularity to that, I think obviously these shale technologies were well established across North America, a great opportunity for us to bring things like MWD tools for greater geosteering in the shales. Overseas, in my travels internationally here recently, what I'm finding is there's a tremendous amount of interest in this technology and in employing shale technologies, horizontal drilling internationally. And you couple that with the move towards local content that we see in a lot of our international markets. There are a lot of regions where national oil companies would really prefer to have some local service providers. And you see how well I think our strategy articulates with what those NOCs desire because we sell all of the kit that local service providers need to provide directional drilling, that they need to provide hydraulic fracture stimulation and the like. So I think that's just a tremendous opportunity out there for NOV going forward is that enabling local service companies, enhancing our more traditional customers offering internationally, but I think that's the direction technology is going to go.

Okay, fair enough. And then just a little bit on 2017 thinking about Rig Systems and the schedule or the cadence of throughput through the year, could you give us a sense of how you expect that to play out? And is there a mix between onshore and offshore, how the backlog shifts that we should think about as we try to model the coming year?

Hey, David – Sean, I'm sorry. The visibility in the back half of the year is still a little bit murky. We are optimistic that a number of the conversations that we're having related to land opportunities both here in the U.S. and in international markets will turn into bookings. And so our backlog and our revenue generation will increasingly become more land-oriented. But maybe just to talk about order flow out of backlog here for the next couple of quarters, we think it will remain relatively stable at the $270 million-ish type level that we cited earlier, and ultimately it's just going to depend on what additional bookings really come through. So the back half is still a little bit unclear, but we're feeling more and more optimistic about the opportunity set in front of us.

The $270 million is offshore, to be clear.

Got it. Okay, great. Thank you.

Thank you.

Thank you. and I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Clay Williams for closing remarks.

Terrific, Chanelle. Thank you. I want to thank everybody for joining us this morning, and we look forward to updating you on our next call in April. Thanks very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.