Good day, ladies and gentlemen and welcome to NOV Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to NOV's Fourth Quarter 2021 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 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 fourth quarter of 2021, NOV reported revenues of $1.52 billion and a net loss of $40 million. For the full year 2021, revenues were $5.52 billion and a net loss of $250 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. Please limit yourself to 1 question and 1 follow-up to permit more participation. Now let me turn the call over to Clay.

Thank you, Blake. For the fourth quarter of 2021, NOV's revenue grew 13% sequentially and 14% year-over-year. These results marked the first quarter in which our revenue has increased year-over-year since our revenues bottomed in early 2021 and our backlog bottomed in late 2020. The company continued to build its backlog, which increased for the fourth quarter in a row. Book-to-bill was 137%. For the full year 2021, NOV generated $229 million in EBITDA or 4.1% on $5.5 billion in revenue. Revenues declined 9% from the prior year at 21% decremental EBITDA leverage year-over-year. While we are pleased with the slow but steady recovery of demand and activity in the oilfield and our continued revenue and backlog growth, we are disappointed in our low sequential operating leverage and margins in the fourth quarter. Consolidated EBITDA leverage was only 7% sequentially, nearly 20% lower than we expected at the time of our call. All 3 segments struggled this quarter with supply chain challenges that we did not foresee along with mix issues and COVID disruptions related to the emergence of the Omicron variant during the fourth quarter. And while we expect these to subside longer term, we now expect supply chain headwinds to continue to persist through the first half of 2022 as our vendors continue to push out their delivery commitments to us. In addition to COVID-related charges of $11 million on projects that the Completion & Production Solutions segment is executing in Asia, our productivity and efficiency was broadly encumbered by 2 significant factors. First, the tightening labor market we faced in the United States was exacerbated by COVID outbreaks in certain plants during the fourth quarter. As skilled workers recuperated safely at home, their work was performed by less experience, less efficient crews or by other skilled workers…

Thank you, Clay. NOV's consolidated revenue in the fourth quarter of 2021 was $1.52 billion, a 13% sequential increase compared to the third quarter with both North American and international revenues achieving double-digit growth. Adjusted EBITDA for the fourth quarter was $69 million or 4.5% of sales. As Clay mentioned, our fourth quarter results included $11 million in charges related to ongoing operational challenges on projects in Asian shipyards. Reported SG&A decreased $11 million sequentially due primarily to lower third-party expenses, a reduction in bad debt expense and a small reclass between SG&A and cost of goods sold, partially offset by increasing wage rates. Looking forward, we expect the reinstatement of certain employee benefit programs and continued labor pressures will result in reported SG&A increasing modestly in 2022. Despite Q4 revenue increasing 14% over the prior year, working capital decreased $244 million during 2021 as we achieved good success turning working capital into cash and reducing working capital intensity across the organization. Through 2021, we generated $291 million in cash flow from operations, with capital expenditures totaling $201 million, resulting in $90 million cash flow. In 2022, we expect capital expenditures to total $255 million with $20 million of the capital budget dedicated to the completion of our new rig manufacturing facility in Saudi Arabia. During the fourth quarter, we reinstated our quarterly dividend at $0.05 per share, representing approximately $20 million per quarter, and we also used $41 million in cash to acquire a leading provider of managed pressure drilling equipment that is highly complementary to our existing operations. We ended the fourth quarter with net debt of $122 million comprised of $1.71 billion in debt netted against $1.59 billion in cash. Moving on to segment results. Our Wellbore Technologies segment capitalized on broad-based activity improvement and market share…

[Operator Instructions]. Our first question comes from the line of Arun Jayaram of JPMorgan Chase.

Yes. A quick question here. Clay, you mentioned that the cannibalization of equipment in the field is running its course, but maybe not at the end yet. So I was just wondering maybe if you can elaborate a little bit on that it feels like we should soon see an inflection point both on and offshore, which would provide a decent setup for you guys as you "[indiscernible] more razor blades." But I was wondering if you could give us a little bit more thoughts on that and maybe thoughts on potential rig reactivations from cold-stacked equipment this year.

You bet, good question, Arun. First of all, with respect to cannibalization of equipment, it's very difficult for us to know precisely how much remains out there to be done. We just know that after several years of curtailing expenditures wherever they can. Drilling contractors are very good at pulling consumables, spares and capital equipment off of idled rigs and avoiding purchases from us and from our competitors wherever possible. It just feels like we're so deep into this, and we've heard anecdotally and the fact that equipment is being purchased at auction for this purpose is we thought a pretty interesting data point that we shared in our prepared remarks and that's on the land side. On the offshore side, yes, we're -- although it's not really showing up in our orders yet for rig equipment, we're really excited about what we hear from our customers who are engaged in conversations. We understand there's 3 or 4 E&Ps that are calling around, checking on rig availability. These are floaters. The leading-edge discussions now have moved up in the $300,000 a day plus category. We've been contacted by a number of offshore drilling contractors to come out and do engineering work and surveys on rigs to see what's required. We know that IOCs are requiring class recertification and OEM recertification on rigs that have been cold stacked for more than a year. And so that's leading to some incremental business. So it's not really show up in orders yet, but the level of activity and inquiries are pointing towards an improving market in the offshore. And frankly, that's what's been missing since 2014. And so we're pretty excited about that. Plus comes on the back of the emergence of offshore drilling contractors out of bankruptcy and reorganization in 2020 and 2021. And so hopefully, the worst is now behind us, and so we're looking forward to a much brighter futures as rigs get reactivated in the offshore.

Great. And just my follow-up, I don't want to dwell on this too much, but I was wondering if you could give us a little bit more thoughts on this situation in the Southeast Asian shipyards. You took $11 million charge this quarter. You're 80% done. Can you just give us a sense of what are some of the risks of additional charges? And if we wanted to take a more conservative tax over the next couple of quarters, this thing is almost done, but give us a sense of what the risk is from here.

Yes. And that's another really good question. And so Arun, as you know, we execute these projects on a percentage of completion basis every quarter for all projects every year we go through, we reevaluate the costs that we're facing. We reevaluate the plan as these projects get executed. We adjust our costs along the way to reflect sort of our view going forward. And so the charges that we've taken for the last few quarters have been very frustrating for all of us, but they point to the fact that we've had to modify significantly our plan quarter by quarter as new COVID challenges have emerged. So let me go back to the beginning. This is a project that just a little bit more complex than we normally undertake and a little more scope on installation and commissioning. A big project and not -- and we signed it right before the world went into lockdown in early 2020 and begin executing on it right before that happened. Since then, due to COVID, the original country, for instance, where we were constructing the largest, most complex piece of it got shut down in COVID. So we literally had to move to a different yard in a different country, face different importation duties and tariffs and complexity. 1 of our suppliers who is going to supply the bolts for this job, which are very, very tightly specced, declared force majeure. We had to pivot to a new supplier, a higher cost. Prior quarters, the charges reflected all that. This most recent quarter reflects the fact that as we have undertaken the completion of this module fabrication with a new contractor in a yard, 40 of their 70 employees came down with COVID, brought in new labor, ran into some issues, had to go back and do some rework. And so the most recent charges reflect that. So what's embedded in our financials, and this charge is a realistic view of how do we get this done. It's 80% done now. The plan is to get it into the shipyard late Q1 and get it finished installation commissioning finished through the summer. And the current costs reflect all that. I'll stop short telling you we're not going to continue to run into new challenges. I mean if I learned anything in 2021, it's very difficult to forecast what the heck is going to happen with COVID and all the impacts on the supply chain and workforce, et cetera. So there is a possibility of future charges. What I can tell you though is this is receiving a lot of attention by everybody. We have our best folks working on it with a great team over there trying to navigate through what is an extraordinarily difficult set of challenges that are presented by COVID and its impact on the supply chain.

Our next question comes from Stephen Gengaro of Stifel.

Two things. The first is, could you talk a little bit about -- you provided some sort of year-end margin guidance. But when you're -- I'm sure this is baked in, but when you think about the pricing of work that you've been winning and the strong order flow, particularly in the CAP segment in the last quarter, how are you managing sort of price -- the pricing dynamic there relative to supply chain issues and cost inflation, et cetera?

Yes, well, not as well as we need to be. That's the message on the call. We need to get out in front of this with pricing, recognizing some of this is transitory and should pass as COVID. I'm going to stop short of predicting which quarter this happens in. But others of it is broad wage inflation, and I think it's here to stay. And so I think it's incumbent on us to get back to margin expansion and do a better job of pricing into it. But look, we're very focused on this on managing through it, on pushing pricing, the steadily increasing level of demand in orders along with higher commodity prices, WTI above $90 a barrel, our oilfield service customers now starting to get pricing leverage in their business models. I think that's a better backdrop for us to push pricing in. And so our expectation is we're going to get better at that as the year progresses, and that's part of our plan.

But there's -- but you've clearly balanced the pricing with the supply chain issues where you've provided the color on sort of year-end margin targets.

Yes. Yes. We're -- and Stephen, here in the near-term, that's reflects the fact that the first 5 weeks of 2022, Omicron has remained an issue. Supply chain challenges have remained an issue, and some of our suppliers are saying, "Hey, we're pushing out deliveries, it's going to take a while to get the supply chain fully healed." And so those sort of pricing gains offset by sort of continued inflation is what's embedded in our plan for 2022.

Great. And then when we think about just cash flow and sort of -- you've provided some CapEx numbers. But when we think about working capital as we go through 2022 with the impact on cash, any guidance there, Jose.

Yes, Stephen. So yes, clearly here, we provided the CapEx guidance for the year at $255 million. And obviously, we're only providing guidance for 1 quarter out as it pertains to revenue, but we assume some pretty healthy growth at the top line during the course of the year, which naturally starts to consume a little bit more capital through a little bit of a working capital build. However, that gets partially offset by continued progress related to our working capital metrics, made a tremendous amount of headway through the course of 2021 with our working capital optimization efforts going from a run rate of about 31% on an annualized revenue run rate down to 23%. It gets harder and harder as you go forward in time, but there's still a little bit more we can do to improve turns and as well as DSOs. So do think that working capital will be a good consumer of cash, which is a healthy thing and something that we're looking forward to. But I do think that working capital efficiency continues to improve.

Our next question comes from Ian MacPherson of Piper Sandler.

I was interested to see the managed pressure drilling business acquisition. That seems very timely right now as you're inbounding all of these drillship reactivations. So I was wondering, if you could speak a little bit about that acquisition and also what the penetration rate of MPD is on these Seventh Gen deepwater assets and what you think the growth opportunity is for more penetration as well as the earnings opportunity on the installed base there?

Yes. Thank you, Ian. It's a really good question, and thank you for pointing out how strategic it is for us. At a time when floating rig drilling contractors are seeing more interest in their vessels and their fleets, MPD, managed pressure drilling capabilities is one way they can differentiate their rigs in a crowded marketplace and sort of earn premium day rates. And so there's a lot of interest as a way to upgrade. I would add as well. We're also seeing and having discussions around crown-mounted compensators around BOP, second BOP in some instances, and/or improving the sharing capability of BOPs. And so a lot of -- I would say those are kind of some of the areas that the drilling contractors are looking at improving. As they're putting these rigs into shipyards to be made ready to drill, it's also an opportune time to upgrade their capabilities and further differentiate those capabilities. And so this is 1 kind of key area. And that's within sort of a market move towards more and more managed pressure drilling capabilities in the offshore. Some of the oil companies that drill offshore has sort of made it a standard requirement. Some basins are -- it's very pervasive. Others have a long way to go. But we're just seeing this general interest in managed pressure drilling that sort of helped us decide this is a good strategic application of capital to pull this into our fold and to offered as part of what we do. I would add as well, the combination of managed pressure drilling in conjunction with our IntelliServ wired drill pipe, which has the capability of measuring pressure in real time kind of up and down the mud column also combined with our NOVOS operating system and our dynamic well pressure modeling capabilities is really sort of a unique and very impactful offering I think that can really step up safety and efficiency in deepwater drilling. And so kind of all the way around this, I think is a pretty exciting new opportunity for us.

Yes. Good. And is it correct to say that it's still a minority of the deepwater rigs that have MPD now and then the opportunity is to take that to a majority of the rigs that we'll have it in next years?

Yes. Yes. And our goal is to put it on all of them.

My other question was you spoke to the need for more time for the service companies and contractors to get their pricing to flow downhill to you. And I wanted to ask, if that's exactly the same when you're dealing with some of your Eastern Hemisphere, more NOC-sponsored entities that buy from you where maybe the capital paradigm is a little bit different and maybe there's more urgency with respect to getting programs mobilizing at this point since they're already a year plus behind. Do you see any nuance between how your Western hemisphere and Eastern Hemisphere end markets are sort of responding to a higher oil price deck, et cetera?

Yes. Fair to say all oilfield service providers, the people that construct wellbores that work them over that complete them, discounted heavily in 2020 in face of the downturn of both Eastern Hemisphere and Western Hemisphere and have been trying to claw that back. And with the emergence of higher commodity prices, I think all participants globally are trying to get -- to push their day rates and their pricing up. The levels of inflation that we see in North America are a little more acute, and North America typically reprices a little more quickly. And so I think we've probably seen better traction here in the U.S. and in Canada with respect to our customers being able to push day rates and pricing up. Overseas, the contracts tend to be a little longer. And I would say we and others are seeing a little less wage inflation. But nevertheless, I think globally, we're going to have to see all parties push pricing up. And I think that's a reasonable expectation that they will go up. They'll be able to enjoy some of the prosperity of $90 plus oil and higher gas prices. And so I think both areas we're going to have to see pricing move.

Yes, and I'd add that obviously, within the North American marketplace, the amount of excess capacity is much greater than what you had in international market.

That's true.

There's still excess capacity in the international market. So it impacts both markets effectively equally towards the bottom of the cycle. However, I think as we kind of alluded to in our discussion related to our Intervention & Stimulation Equipment business, the demand for new capital equipment that we're starting to see here in the early phases of the recovery is really coming from those international markets because they have that need sooner and therefore also probably have the opportunity to raise the pricing there a little bit sooner as well. North America is still undergoing the process of absorbing existing capacity, their rebuilds, their refurbishments, their reactivations, very little at this point in the way of really serious conversations about great quantities of incremental capacity additions. So it's -- North America is coming along. It's just going to lag the international markets a little bit.

Our next question comes from Scott Gruber of Citigroup.

So thinking about Grant Prideco here. Should the deliveries of premium pipe at Grant Prideco start to step up in 2Q and 3Q as your access the premium pipe improves? And if that's accurate, do you think it's sufficient to drive Wellbore incrementals above normal in 2Q, 3Q? I think I heard normal incrementals beyond 1Q. But when Grant Prideco sales really kick in, in the past, we've seen those incrementals go above normal. So any color on kind of catching up on some premium pipe deliveries and potential impact on incrementals.

Yes, the mix at Grant Prideco, our expectation from Q4 going into Q1, Q2, should improve materially. As Jose said, a lot of the deliveries in Q4 were not premium threads. Our deliveries of Delta premium threads did go up, but also API commodity threads and C50 threads, smaller diameters sort of dominated. And so as we move into 2022, we are now getting better access to larger green tubes for premium pipe plus these rig reactivations in the offshore that we talked about are leading to larger streams in premium pipe. I think the mix -- the outlook is a lot better for Grant Prideco. But it's 1 piece of a number of business units from the Wellbore Technology as well. But it's -- our expectation is that it should start to go in a better direction from a mix standpoint.

Got it. And then just thinking about your year-end margin targets across the businesses, how much incremental pricing is reflected in those margin targets? Or is it really just reflecting what you've already secured in the backlog? And then in addition, we started to see steel prices actually roll here. Do the exit margins reflect any further deflation in steel price?

Scott, it's Jose. I'll start off on this one. But I mean, really, if you sort of go through and do the math and take in the Q1 guidance that we gave and sort of map out to that year-end guidance, which I know you'll do once the call is over, you'll see that you don't have to make any sort of heroic type of assumptions related to the incrementals that are baked into that type of outlook. So certainly, anticipate pricing to improve. But the biggest obstacle that we're looking forward to getting resolved is just all the disruptions and the one-off costs that have been burdening the organization over the past few quarters.

Got you. I guess the heart of the question was do you -- are you starting to see or line of sight to seeing some of the issues abate such that you don't need the pricing to get to those margins? Or is there just kind of longevity to those issues that you kind of need the pricing to get there and just kind of normalizing the incrementals?

Yes. I would say, we're not counting a lot of deflation in anything that we're buying. We have heard of certain grades of steel that are going down a little bit. We've heard of easing on freight here and there. But the message to the organization is, let's assume, it's all permanent and structural and let's go out there and get prices that get ahead of it and get margins to go the right way. So really, in a lot of ways, 2022 is going to [indiscernible] between inflation that we see, some of which may abate and go the other way, and the structural -- or these COVID-driven sort of disruptions that we face that lead to one-off charges versus pricing going in the positive direction, driving margins higher. And so we're very focused on maximizing the ladder to the best that we can. But in our plans, as Jose mentioned, our forecast, it's -- we're making pricing gains, but they're at least partly offset by inflation. If that makes sense.

Got it. Yes, it does.

Our next question comes from Neil Mehta of Goldman Sachs.

Clay, first question is around capital returns. Is it fair to say that as you kind of work through the supply chain issues this year, we shouldn't be looking for incremental capital returns in the form of dividend or share repurchases. But as you go into 2023, have you started to frame out what the framework is for returning what could be a decent amount of free cash flow generation, ultimately as margins normalize?

Yes. This is something we're very focused on. Neil, as you know, we reinstated our dividend in December -- we actually made the decision in November, I think, and then Omicron showed up. And so it got a little more challenging operationally. And so that's very frustrating, obviously, disappointing to us. We're very focused on it. But on the other hand, my outlook for a multiyear up cycle and rising sort of conviction that, that is going to unfold is improving. And so we're going to be looking at this closely as we continue to get deeper into 2022, discussing it with our Board. Over the past 7, 8 years, we have a track record, a very strong track record of returning a lot of capital to our shareholders through both dividends as well as share repurchases. And we understand that that's what need to do. And so it's something we're going to be very focused on. So that's sort of our plan. But on the whole, it's frustrating as [indiscernible] of near-term COVID impacts are, we are seeing a lot of things going well in terms of demand, orders coming back, outlook for the oil field and our belief that we are in for a much better market in an up cycle, our conviction and that continues to grow.

All right. Very good. And Clay, we didn't talk about the wind business. But how are you feeling about that $400 million opportunity that you've laid out? And any update in terms of how the wind opportunity is progressing?

Very good. We are above our $200 million annualized run rate presently in revenues in the wind space. And as we have said on prior calls, that's going to $400 million by year-end. And what I'd tell you is we're probably running ahead on our bookings in that space. And so that's going really, really well. We think there'll be probably a second, maybe a third Jones Act vessel sold for the U.S. market in addition to a handful of other vessels that will be ordered in 2022. That's in the fixed wind space. We also, as you know, have some offerings for the floating wind space, which is more nascent, but a big Scott wind tender was led here a few weeks ago, excited about the opportunity to participate in that. And we're talking to a number of the winners of that -- of those lease auctions about supporting their operations, along with opportunities in Asia. And in onshore, continuing to progress our what we think will be a very disruptive land win offering, which is the combination of a lower cost steel tower that's also materially taller than existing towers. Combined with a proprietary way to erect those towers in the field. And we think that, that can greatly improve the economics of land win farm developments, taking the sort of the average size turbine from 3 megawatts up to like 13, 14, 15 megawatts. And so that's very disruptive, materially better economics for the wind developers and the possibility of NOV emerging with some proprietary technology that makes that happen is super exciting. So that's win. And then as you know, we've got things going on in solar, in geothermal and carbon capture. So a lot of opportunities that we see on the horizon for the energy transition.

At this time, I'd like to turn the call back over to Clay Williams for closing remarks. Sir?

Thank you, Latif. As you know, we've been very aggressive on reducing costs through the past few years, focused on cash flow, liquidity and maintaining strong financial resources, that's enabled us to invest in those energy transition technologies that I mentioned along with other digital technologies and new products for the oil field. So as we enter into this multiyear up cycle that we foresee, NOV has a great position and a great portfolio to bring a lot of value to our customers' operations. So looking forward to getting through the near-term challenges and looking forward to a brighter future ahead. Thank you all for joining us today. Thanks to the employees that are listening in today, and we look forward to updating you on our first quarter results in April.

And this concludes today's conference call. Thank you for participating. You may now disconnect.