Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to National Oilwell Varco's 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 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. For a more detailed discussion of the major risk factors affecting our business, please refer to the latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the third quarter of 2020, NOV reported revenues of $1.38 billion and a net loss of $55 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. [Operator Instructions]. Now let me turn the call over to Clay.

Thank you, Blake. U.S. drilling activity during the third quarter of 2020 was the lowest measured since records were started in the early 1940s, making this the worst quarter in the past 300 or so. The COVID-19 pandemic response kept a lid on air travel and business activity, which depressed global oil demand, and in turn, diminished demand for NOV's products and services. NOV's consolidated revenue declined 7% sequentially, and EBITDA fell to $71 million or 5.1% of sales during the quarter ended September 30, 2020. Although a vaccine and normalizing oil demand seem more likely than not in 2021, our customers, like us, are cutting costs and exercising extreme austerity in the near term, which led to modest orders during the third quarter. The company realized only 38% book-to-bill on a consolidated basis. Fortunately, though, we are seeing rising inquiries in our Completion & Production Solutions segment that we expect to lead to increased orders. And the Rig Technology segment already surpassed its total Q3 orders level during the first few weeks of October. New products are helping drive demand for both segments. For the past few quarters, we sought to be clear and transparent in our communications with you on what we are doing to navigate this historic downturn, namely: one, aggressively and proactively downsizing and reducing costs; two, reducing working capital and CapEx to maximize cash flows; three, maximizing liquidity; and four, continuing to invest in research and development and new products to position the company for the inevitable upturn. I'm pleased to report that we continue to exceed our targets on cost reductions. We have reduced our global facility footprint, workforce and support services, making our operations leaner and more efficient. We also continue to prune businesses that are not yielding adequate returns. We've shared a…

Thank you, Clay. NOV's consolidated revenue decreased $112 million or 7% sequentially to $1.38 billion as our businesses felt the full effect of the sharp reductions in North American drilling activity that occurred during Q2 and the continued activity declines in most international markets. EBITDA decreased only $13 million as our relentless focus on reducing structural costs and improving operational efficiencies across the organization limited decremental margins to only 12%. During the quarter, we exceeded our $700 million annualized cost savings target. While we've surpassed our goal, we have a number of cost reduction initiatives that will carry into the next few quarters, and we will continue to work to identify additional ways in which we can improve profitability and return on capital for NOV. Our efforts to improve our working capital efficiencies, well we're making great strides in a difficult environment, are part of our ongoing efforts to improve return on capital. Our success in reducing working capital, along with our capital-light business model, is allowing us to deliver best-in-class cash flow generation. During the quarter, we delivered another $323 million in cash flow from operations and $274 million in free cash flow, bringing our year-to-date cash flow from operations and free cash flow totals to $740 million and $567 million, respectively. We expect to generate an additional $100 million to $200 million in free cash flow during the fourth quarter. Our resilient cash flows have enabled us to continue to strengthen our balance sheet while making meaningful investments in new product development and growth initiatives that will drive future growth for NOV, including the offerings that Clay just described. During the third quarter, we successfully completed a tender for $217 million of our senior notes due December 2022, leaving us with only $183 million remaining outstanding on these…

[Operator Instructions]. Our first question comes from Bill Herbert with Simmons.

Jose, so just in the category of dreaming here a little bit and contemplating life kind of returning to a semblance of normalcy. So OPEC spare capacity normalizes back to kind of the historic range, our lives normalize, demand is much closer on a global basis to pre-pandemic levels and this converging with the austerity narrative of E&P leads to a reinvestment cycle and your clients taking more steps forwards and backwards. Let's just call this for grants at 2022 outcome. And I'm just curious, given how much inventory you've drawn down over the past few quarters, what would be your working capital intensity responding to that kind of recovery narrative? And the reason I ask the question is because, at least on my numbers, your free cash flow yields, call it, on a semblance of mid-cycle are just huge, assuming that working capital is reasonably contained. So I think kind of understanding the working capital intensity from this point forward is key.

Yes. That's a really good and observant question, Bill. And yes. As you know, the organization has been just relentlessly focused in terms of improving the capital efficiency overall with a big part of that focus being on reducing our working capital intensity, again, across the board. And so we've made really good headway over the last year or so in terms of bringing down that working capital intensity. But we still have quite a ways to go on that front, right? So you look at this last quarter, roughly somewhere between 36% and 38% working capital as a percentage of the revenue run rate. We've been significantly lower than that in the past and certainly expect to get significantly lower than that level. Obviously, we've had a lot of headwinds in terms of bringing that level lower with its -- with as Clay described, the worst quarter from a top line perspective, really the oilfield has seen in really maybe ever. But the other part of what's occurring is big transition in terms of our revenue streams, big shift occurring from revenue coming from North America to now becoming much more predominantly weighted on the international markets. This last quarter, only 26% of our revenue came from North America. And as you know, if you look at what we do in international markets, much longer cycle times in terms of the time period in which inventory resides in our locations and also the average collection time period takes a little bit longer. But we're getting better at all facets of managing inventory and expect all of our metrics to continue moving in the proper direction over the course of the next year or two. So long way of saying that even though with the recovery, intuitively, you have a bigger build in working capital to take care of that business. I don't think it would -- it's not just a matter of keeping the metrics flat and taking that forward. The metrics will improve, mitigating the amount of working capital that we need to build in the future.

So it's not just kind of better management of working capital, but it's also the revenue mix shift to international, where the inventory is stickier and thus the headroom for growth that you have with regard to your international ops is much more generous? Is that fair?

I guess what I'd say is that just we will get better than we have been. Historically, international has been more challenging from a working capital management standpoint. And there's more opportunity for us to improve those working capital metrics.

I think more around the payment terms that we typically get internationally. Impacting that. But going back on this question, Bill, and it is a great question. What I would really underscore is that this is -- our folks have just gotten a lot better at it. And it's the muscle memory, I think, that they've learned around working capital management through this downturn. And you've seen the results, we just get better and better. And that's the key thing. This is -- it's partly math, but it's -- a lot of it is culture, too.

Our next question comes from Tommy Moll with Stephens Inc.

I wanted to start on the cost out initiatives. It sounds like you've now exceeded the $700 million run rate target in advance of year-end, but that there could also be some additional opportunities next year. Understanding that you still need to go through the full planning process, I would ask, nonetheless, can you give us any insight on what buckets of cost you may be able to attack going forward? And is there any way to frame up the magnitude of that opportunity?

Yes. Fair question, Tommy. And so yes, as you pointed out and we touched on in the prepared comments, we're really pleased, not only with improvement in working capital management, but kind of goes hand in glove with the efforts that we're undertaking across the organization just to get leaner, meaner, more efficient and just much better in terms of how we manage the business. And that's how we think about the cost savings initiatives, which, as you know, were all structural cost savings that we're pushing through the organization. Since we started this process really in Q1 of 2019, we've continued to find more opportunities and reach our targets more quickly than we generally anticipate, and that also took place this quarter really going well beyond our expectations and hitting the full year-end target. So as we sit here today, there are still more of those initiatives that are flowing through the system that will flow in, in Q4 and also through the first few quarters of 2021. And as you've astutely observed, this is a time period in which we go into our annual planning process, and that process is pretty intensive. And we tend to poke and prod a lot of different areas within the organization. And we inevitably expect to find additional opportunities to continue to refine and get more efficient as an organization. So we're not prepared at this time to put new numbers out there, but we're optimistic that there is more to get. And we will continue to do our part to get the operation properly sized with the market environment that we see over the coming quarters and years.

Fair enough. Will stay tuned. Shifting to capital allocation and portfolio. Maybe a question for Clay. We've started to see some M&A now that the energy markets have stabilized, albeit at low levels. And a lot of folks participating today as well as yourselves, have no doubt, noted some peers who had divested some noncore low-margin platforms. So any update on likelihood of whether we might see something similar from you guys? And then maybe as a nonmutually exclusive alternative, what's the level of appetite as a potential buyer of assets in this environment?

Well, as we mentioned, we continue to prune our own portfolio, and we've made a number of adjustments to that around businesses that weren't earning adequate returns and didn't and maybe perhaps lack the path to that we could see clearly to get to adequate returns. And so like others, we're doing that on the one hand. On the other hand, we've got a long and rich history of being an acquirer in this space. We've continued to look at opportunities sort of influencing our view of those, though, is, number one, we clearly need to be a better owner. We clearly need to see a way in which we can carve out competitive advantage in those opportunities. Number two, we recognize that the cost of capital in traditional oil and gas business has been rising and asset value should be falling concurrent with that. And so we've been very disciplined on kind of our approach to valuations. And -- but what our emphasis has been over the last couple of years as we sort of move through this more challenging period has been probably a little more around organic technology development. So the products that I talked about earlier, several of the things that are underway. What we find is that that's in a lot of ways, is the most capital-efficient way to carve out competitive advantages to build on our franchises, build on our channels to market, our global presence, bring better technology to both our traditional oil and gas customers as well as the renewable space. And so I think that's sort of -- if you look back, that's been our track record in recent quarters.

Our next question comes from Kurt Hallead with RBC.

Clay, I wanted to maybe follow-up a little bit more in the context of your commentary around developing some of the new e-frac technology. And you've made a great analogy about how the U.S. land rig market transition from mechanical rigs to AC rigs, took like a 10-year process for that to really gain full traction. As you kind of look forward from where we are now in the difficult market environment that a lot of these companies that participate in frac face, challenging cap structures and challenge to generate free cash flow. What's your thought process on how long this transition from traditional frac to e-frac may take?

Well, a lot of it depends on the appetite by the E&P customers of the frac companies. I think given the more challenging economic environment that we are in now versus kind of where we were in 2005, 2006 means that there's going to have to be more pull by the oil companies on this technology. And that's going to be sort of the catalyst, I think, that makes it happen. I think if the E&P companies continue to move up the curve on being more demanding around reducing their ESG impact to their frac operations that can accelerate the adoption of the technology. The pressure pumpers will figure out a way to find the capital and if those purchase orders are backed by some sort of term structure where the pressure pumpers can see their way clear to pay back, I think the investments can be made. And so that's probably what's required. The second sort of wildcard in all of this, so is how the power provision ecosystem sorts itself out. There's options now in terms of how to power these frac jobs using turbines on location or using gas-powered gensets on location or using line power. And so one of the cornerstones of our development, and I think I mentioned this earlier, is that it's really power agnostic, at 13.8 kV, it accepts all of the above. And so we've tried to design as much flexibility as we can with respect to the power question.

That's great. And Clay, you kind of teased that a little bit earlier about the prospect of maybe a two year contract. So I assume when you talk about things on a call like this, you have some additional insights from conversations with varying parties. So do you think that's something that could potentially come out here before year-end? Is it more likely sometime in 2021 before you can see a frac company get a contract for any fleet?

Look, there's a lot of interest in this technology. We've talked to a number of customers about it. We're excited about it on the one hand. On the other hand, things are pretty tough out there, Kurt, and very fluid. And so time will tell. But what I'm most pleased about is the fact that we've come to market with a really tightly integrated, thoughtful system that's a big leap forward on reducing the ESG impact of fracking operations for shale operators, which is really something the market wants. And so I think in the long run, this is going to be a very important development for the E&P companies. Can't tell you sort of precisely which quarter that starts to really roll out in a big way. But again, I want to stress a high level of interest from pressure pumpers in this.

Our next question comes from George O'Leary with Tudor, Pickering, Holt.

The global technology side, just given that can be the fastest cycle portion of your business, it's a business where you've taken a lot of costs out of the equation of late, and you can see that bearing fruit in the margins and the incremental, decremental margin performance on a quarter-on-quarter basis. Can you just remind us -- I know you said 26% overall revenue came from North America. Remind us kind of the mix of that business, in particular, the revenue mix in North America versus international? And then any green shoots you guys are seeing by product line? And whether that is more just the North America situation at this point? Or if there are any green shoots on the international front as well?

No, the mix is -- in the third quarter, was 38% North America, 62% international for Wellbore Technologies. So in keeping with NOV overall, it's a greater share of the mix is international. With respect to green shoots, yes, we -- we're 40, 45 rigs off of bottom in North America from August. And so that's helpful. We're hearing stories of operators that are getting real granular on putting rigs back to work to get up to a maintenance level in North America. So that's going the right way. But the green shoots aren't limited to North America. As we mentioned a couple of times earlier, we think the international markets are stabilizing. And after some pretty good-sized falls in Q3 and then we're hearing about green shoots there as well. So for instance, a major operator in the Vaca Muerta in Argentina is picking up rigs going back to work. Greater activity outlook in Colombia. In the Middle East coming off bottom. There's a couple of programs that we expect to get kicked off on the land side. Offshore, I know of 3 IOCs that plan to get a little bit busier in West Africa, Brazil, Guyana. We're hearing about more drilling activity that's likely coming up there. And then in the North Sea as well, a lot -- a little greater level of activity perhaps helped by the temporary tax relief that the Norwegian government put in place. And so there are green shoots out there. I don't want to overstate them. They're still a very challenging market. You've got oil prices kind of range bound at the $40 range. An uncertain sort of trajectory from here around continued pandemic lockdown, demand for oil still remains a big wild card and so a lot of uncertainty out there. But nevertheless, what investors may not fully grasp is that even in a declining production environment, there's still some level of work that needs to happen in the oil field, drilling, completion, recompletion, to maintain these assets and to be good stewards of the resource. And so I think the industry -- the whole industry felt like it went into a defensive bunker in Q3, and it's emerging out of that and working its way back towards a little higher level of sort of just good stewardship of their resources, which requires a little more activity. And keeping with prior downturns, North America is usually the first to go down and the first to start to bounce back. And then international markets, which have longer-term projects, that are a little more dominated by NOCs, are a little bit slower. And so we we're hopeful that international has stabilized, and now we'll start to see it turn the corner, but look, time will tell.

That's very helpful. And then wind is something we're getting incremental questions about with respect to a number of services companies, but you all, in particular, pop up as we chat with clients. And just wondering if there's any way to frame the kind of market potential there over some medium-term time rise in the next 12 to 24 months and the potential size of kit that NOV could win per vessel? Just any way to think about that market, size of that market would be incredibly helpful.

Yes. George, I think you asked about wind. I think I heard you say about offshore wind?

Yes, yes, on the marine investment side. Yes.

Yes. Sure. Sure. So yes, we're very excited about this. And I think we said a quarter or 2 ago, I think a dozen new installation vessels for the offshore is a reasonable outlook for the next few years. We can win up to $70 million worth of kit on the larger vessels. And the vessels are getting larger. Just by way of background, what's going on in that space is that taller towers are more capital efficient. They access higher elevations, the wind blows steadier and harder at higher elevations. And so as the towers get taller, the owners of these projects get better returns. And so in recognition of that, GE, which is a major turbine provider, is coming out with a new 12-megawatt tower, I think, in 2022 and then Siemens Gamesa is coming out with a 14-megawatt tower in 2024. And these things are enormous. There are 500 feet at the hub, which is the size of a 50-story building and 700 tons. And you can imagine the kind of equipment that's required to put a 50-story building out in the middle of the ocean. It's pretty massive. And the world just doesn't have a fleet to do that. And so we're very pleased with the position that we are in as a leading provider of offshore wind turbine installation equipment and look forward to continuing to participate in that market going forward.

Our next question comes from Sean Meakim with JPMorgan.

So Clay, you all have been really focused on digital initiatives. You're enabling your hardware to work smarter, work better. One of the silver linings of the pandemic is this acceleration of customer focus and adoption of digital practices, both E&Ps and services. Could you talk a little bit about your strategy regarding value capture versus transfer? So in other words, how you expect to capture more of the value versus how much needs to be shared with customers to drive more volumes and share? I imagine this could vary quite a bit across product lines, but trying to get a sense of how you think about that key piece of creating value for NOV?

It's a great question. Look, nobody buys anything unless it's a win-win solution, right? And so our customers have to see value in whatever we're providing at the price that we're charging. That's very clear to us. And so we work very closely with our customers to understand that, but to make sure that we really are adding value to what they're doing. And so that was a big part of our NOVOS development as part of the reason we've had such great acceptance of the NOVOS operating system across the rig fleet globally. We'll hear more recently with the shutdown and all the travel restrictions, we're seeing a lot of demand for our tracker vision system, which uses augmented reality to -- and real-time communications with our subject matter experts around the world to enable our customers to do installation of equipment, repair of equipment, a commissioning of equipment. And so the COVID-pandemic shutdown has really accelerated demand for that technology on the Max suite of digital projects -- products that I described earlier. Likewise, that really started with some heart-to-heart conversations with oil and gas companies around what -- where NOV could help them. But with respect to pricing, we -- as we always do, need this to be a win-win. NOV shareholders need to benefit from the investments that we're making and the really, really creative ideas that our employees come up within these areas and as well, the customers who use these products to prove their own operations. And so we always look for a fair split of that economic rent.

I appreciate that. And I appreciate the feedback on offshore wind, too. I thought that was helpful. There are also other areas that have gotten a lot of attention outside of oil and gas or, particularly after the EUs transition announcement this summer, hydrogen, in particular, has gotten a lot of attention. You guys are always in the market looking for M&A opportunities. Are you able to maybe just give us a little more view into how you see these other alternative energy channels beyond offshore wind? And where you see pathways that could make sense for NOV versus those that are more difficult to bridge from your current portfolio to these new opportunities?

Yes, great question, Sean. I'll start with cost of capital. Earlier, I mentioned cost of capital appears to be rising for oil and gas companies. In contrast, on the renewable side, cost of capital is plummeting. And there's a lot of capital chasing opportunities in that space. We've looked at M&A. We've done some small investments here and there. More sort of rifle shot things. We're continuing to look for opportunities there. But it's a little more crowded landscape. So in view of that, our approach, and this kind of fits with what I was saying earlier, our approach has been more around home growing organic development and building on the strengths that our organization have in the renewable space. And so -- which are considerable. I mean, I don't know another company on the planet with smarter, more creative, more talented engineers and scientists, and we try to just get out of their way and let them think through ideas and opportunities. And the ones that carry a view towards competitive advantage, those are the things that we're funding. And so yes, we're looking in all areas. With respect to hydrogen, we're looking at a couple of things. But other areas in the renewable frontier at the moment, probably had a little better fit to our skill set. And I think have a clearer path for the creation of competitive advantage. But I'll repeat what I said in the -- at the beginning in my prepared remarks is that we've got to be good capital stewards through all of this. The funding, the execution of these business plans need to earn a financial return. And that really only remains for the long haul when you have competitive advantage. And so that constrains all that we do.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Jimmy, thank you. I want to let our listeners know that our friend, Loren Singletary, has elected to retire from National Oilwell Varco. And I know like us that there are many well-wishers out there. And so we thank Loren for his 22 years of service to NOV, and we wish him the best in retirement. I want to thank all of you for joining us today, and in particular, any NOV employees that are out there listening. This has been an unbelievably challenging year. But I got to tell you, your persistence, your perseverance to tune out the noise and get the job done for our customers when and where they need us, has been awesome. I'm so proud and grateful for each and every one of you, and thank you all and ask that you keep it up. So we look forward to talking to you on our next call in early February. Thank you.

Ladies and gentlemen, thank you for your participation of today's conference. This concludes your program, and you may now disconnect.