Good day, ladies and gentlemen, and welcome to the NOV Second Quarter 202 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 Second Quarter 2022 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve 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 second quarter of 2022, NOV reported revenues of $1.73 billion, and net income of $69 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. For the second quarter of 2022, NOV's revenues grew 12% sequentially at 26% leverage, driving EBITDA up to $150 million. Despite continuing supply chain disruptions, our teams were able to improve profitability to an EBITDA margin of 8.7%. Orders once again exceeded revenue out of backlog, yielding a book-to-bill of 117%. The company posted earnings of $0.18 per share for the second quarter. We were pleased to see further improvement and expect more to come. Although a potential economic recession has pushed oil and gas prices off recent highs, our outlook remains constructive. The world is facing a significant energy shortfall and the oil and gas industry needs to increase activity in order to provide greater energy security to the global economy. That urgent activity will need to come at a time when the industry's tools, its rigs, drill pipe and pumps have been idled, depleted, cannibalized and worn out through a pandemic shutdown that has produced the most withering downturn the industry has ever seen. NOV is entering the emerging upcycle in a unique position within the oilfield ecosystem. Oil and gas production companies or operators live at the top of the food chain in this ecosystem, and they are benefiting in real time from sharply higher oil and gas prices. Lack of exploration and development investment in the oilfield through the pandemic and the several years preceding it has reduced the productive capacity of the industry. In fact, some argue that spare capacity may be approaching historic lows. Despite strategic petroleum reserve releases, oil, gas and product inventories keep drifting lower, are generating commodity price signals back to operators to step up activity and produce more, and they are to the extent they can, given their now higher cost of capital, their shareholders demands for…

Thank you, Clay. To recap the quarter, NOV's consolidated revenue in the second quarter was $1.73 billion, a 12% sequential increase compared to the first quarter and a 22% increase compared to the second quarter of 2021. Adjusted EBITDA for the second quarter totaled $150 million or 8.7% of sales. All 3 operating segments reported sequential revenue growth and better profitability as we realize continued improvements in oil and gas equipment market fundamentals and execution against ongoing supply chain-related challenges. The improvement in execution comes from working diligently to better forecast demand, plan and build buffers within our inventory of raw materials and third-party source components that have less certainty in expected lead times. Despite seeing no improvement in the average for on-time deliveries from our vendors in the second quarter, with average lead times continuing to extend the actions taken by our team increased throughput and deliveries for our customers. Of course, building buffers has a negative impact on our inventories, working capital and cash flow. Inventory increased $151 million sequentially, which contributed to the $145 million increase in working capital. Despite the increases, our focus on working capital management over the past few years allowed us to better mitigate supply chain risk and fund revenue growth while still delivering an improvement in all primary working capital metrics. The build in working capital, along with a $51 million tax assessment described in our press release, resulted in the use of cash flow from operations of $124 million. CapEx for the quarter was $43 million, resulting in negative free cash flow of $167 million, and we ended the second quarter with $1.72 billion in debt and $1.22 billion in cash. Continued top line growth, supply chain challenges and the timing of payments on certain percent of completion projects will continue…

[Operator Instructions]. Our first question comes from Stephen Gengaro with Stifel.

So Jose, you mentioned this at the end, I was curious if you could dig in a little more. I mean when you think about what pressure pumpers are going through as far as what the E&Ps are saying and their willingness or lack of willingness to invest and/or upgrade equipment? Can you just talk about sort of the conversations that you're having with customers and how they're sort of thinking about that given what seemed to be somewhat long lead times for these items?

Yes. I think we're at the point where we're seeing such a rapid improvement in the pricing that is being received by our customers that they're really sort of struggling with the 2 opposing forces, right? Those being pressures to be very, very conservative from a capital standpoint and the other sort of beginning to salivate over the type of per unit economics that are coming back into the fray related to assets. So the longer that people postpone making those types of investment decisions, the worse the supply/demand imbalance becomes, right? And so everyone is trying to figure out when the right point is to sort of step into it. They're still struggling with it. And I think they'll continue to struggle, at least through the end of this year to be determined how that plays out next year. But I think our primary point here is that it's just creating more pent-up demand and quite frankly, we may be a little bit biased on this, but those who pull the trigger sooner rather than later are the ones that are going to be able to recognize the most benefit from having those assets deployed in the field, and it's inevitable that more assets need to come back into the field to meet the global supply and energy security needs.

Great. And then the follow-up was really on the Wellbore side. And maybe talk a little bit about what you're seeing on sort of the price versus cost inflation side? And how do you think -- I mean, you talked specifically about incrementals in the third quarter and how you think that impacts the margin progression as you get into 2023?

Look, I think if you look back over the last several quarters, we have been very focused on improving our execution and also recapturing pricing that had eroded through the course of the down cycle in order to not only return pricing and normal margins to more acceptable levels but also to offset the costs associated with those operational disruptions, which were taking place due to all the supply chain-related challenges. And so with the actions that our teams around the world are taking to better mitigate those supply chain disruptions, we're starting to see an improvement in those incremental margins, and that will continue to be in sort of fits and spurts. But going forward, we hope to be able to deliver at least sort of a normalized incremental margin over an extended period of time. And as you recall, for our Wellbore Technologies segment, that's sort of in the mid-30-plus percent range, which is kind of where we were this quarter.

Stephen, I would add, too, we've invested in new technologies in Wellbore Technologies around things like bit cutters and downhole tools and drilling motors that I think have enabled NOV to gain share out there, the performance differences that we highlight in each of our press releases each quarter really are translating to more demand for tools that I think were putting more distance between us and our competitors on. We're differentiating in terms of performance, and our customers are paying up for that. And so that's contributing to the strong financial results from Wellbore Technologies, too.

Our next question comes from David Anderson with Barclays.

So your results on your commentary or another clear indication of both Middle East and offshore and selecting, and we'll see substantial activity expansion in the next 12, 18 months. First of all, we've seen this, obviously, in quite some time. You guys took a ton of cost out of your operations and some of the internal changes you've made. I'm wondering if there are certain product lines or businesses in offshore Middle East where you think you'll see the greatest operating leverage as things start to really turn up.

Yes. Right now, and this kind of fits with Jose's prepared remarks. As expected, you see the first pickup in consumables and the things like drill pipe where that are required to go back to work for these rigs. And I think that's where we've seen the greatest sort of increase in demand and a big pickup in spares orders in rig, for instance, which isn't part of the backlog or the orders that we report, separately, but it was a really nice lift sequentially to support those rigs going back to work. And then our drill pipe business saw orders nearly double from the offshore from Q1 to Q2, again, to support those rigs going back to work. And so our expectation is with a number of rigs in shipyards going through reactivation, recertification processes to go to work in the offshore in places like Saudi Arabia and elsewhere our engineers are engaged with those customers, looking at their needs for equipment and so forth. And so I think that will be a little bit later. So that's sort of the progression of demand that we foresee in offshore drilling.

And Dave, also, as you just observed, we've spent the last several years really primarily contracting the organization, but it's really not just a rightsizing effort but it was also positioning the organization for the future. And so while we've certainly contracted the footprint to a large degree, we have actually enhanced and grown our footprint in certain markets, including the Middle East. So I feel like we're really well positioned for the way that the market will evolve. So we're well positioned for that, yes.

Yes. I feel like Middle East kind of touches all your segments. But I guess the other thing I'm kind of curious about is you talked about reactivations and tenders out there where a lot of the jack-up in the deepwater side. I would think that the amount of potential aftermarket revenue per rig increases substantially the further we go down the stock, a lot of these rigs have been -- I would imagine they're in pretty bad shape after sitting idle for a few years. Can you talk about how -- what that looks like over the next 12 months? I mean like in terms of what you're seeing, what can the market really do? And how does that change your revenue potential? I'm sure it expands quite a bit [indiscernible] these rigs have its back 2 years or so?

Yes, the requirement after about 2 years, the costs go way up, and there's sort of almost a step change function in the offshore for rigs that are cold stacked for that period of time. It's really going to vary a lot by rig. And that's why it's so important that our engineering teams engage with these customers and really get on the deck and see what they're working with, and that's underway. But the other kind of constraint, I guess, that we're facing here in the near term, and again, something else that Jose touched on is that the offshore drillers really are -- many are emerging from restructuring. They face constrained access to capital. They're very, very, very careful about their expenditures on these rigs. And I think that's sort of gating some of the investments. But at the end of the day, more rigs have to go back to work. We have a supply demand shortfall that has to be addressed. We foresee rising levels of activity that's going to support more rigs being reactivated and that process will go from the easy -- cheap and easiest rigs at the beginning of the cycle to the more expensive, more challenged rigs as we progress deeper into the stack. And that's kind of how we see things playing out.

Our next question comes from David Smith with Pickering Energy Partners.

I guess one quick follow-up on that last topic, circling back to offshore demand growth, with fillers talking about 12-month lead times on the deepwater reactivation. I suspect you're involved in those conversations before we'll ever see a contract announced. So I wanted to ask also on those reactivation candidates, especially on the deepwater side, are you seeing interest in equipment upgrades as part of the reactivation? And any color you might provide on what that opportunity can look like?

Yes, we are. A lot of interest around achieving BSEE required BOP recertifications globally. That's sort of becoming a new standard, a lot of interest in NPD. Many markets are requiring managed pressure drilling capabilities on deepwater rigs as we go forward and put those rigs back to work. But yes, we're definitely involved in those conversations and expect that, that's going to lead to orders for additional equipment in the future for NOV.

Great. I appreciate it. And then just circling back to the push-pull and undersupplied U.S. Lower 48 market at least undersupplied for future demand growth. I was hoping you could share any color on what you're seeing on your potential for a pickup and private capital, maybe evaluating some growth opportunities to kind of get in front of public companies that need improving balance sheets and real term contracts to support growth.

David, this is pressure pumping you're asking about or more broadly?

Pressure pumping, but yes, broadly works, too.

Yes. I think -- look, all public companies have a lot of pressure to be very, very careful in capital expenditures. You've seen that play out in the E&P space, where most of the incremental rigs put back to work are private operators that are picking up rigs whereas the public companies have been way more measured in their growth in activity. And candidly, we'll see how it plays out in the oilfield services sector. I don't know this -- if this is going to be the case or not, but it wouldn't surprise me if there's some smart private capital that looks at opportunities that are emerging. We're just now kind of moving through this pricing inflection point in lots of categories of equipment. You've had just the past couple of days, strong performance and announcements by some pressure pumpers as well as North American land drillers that point to sharply rising sort of margins per unit per day and those sorts of things that make those investments more attractive. And so we'll see how it plays out. But ultimately, I think, what we're seeing in commodity prices translating through to oilfield service pricing is a strong price signal coming back that, look, we've got a couple of million barrel per day shortfall that has to be addressed. And capital ultimately will find its way into the space to address that in our view.

And David, I think, it's a really interesting question, not just as it pertains to the North American market. But if you think about the global market, things are emerging quickly, but what does appear is that the investors in the space this cycle are going to be a little bit different than what we saw in the prior cycle. So there's certainly some new and emerging potential investors that are kicking around within the U.S. markets. And overseas that's the same case as well, but also probably going to be more driven by NOCs helping to support more activity going forward as well as sort of affiliated sovereign wealth funds that are getting much more engaged in the space outside of their home territories. So things are going to look a little bit differently this time. But at the end of the day, when the sector delivers good returns, which we are entering that phase that will draw investors and providers of capital.

That's a great point. And more specifically around that, you go back to the jack-up space in the offshore. There's been a number of jack-up rig transactions in the last quarter or 2 that you're seeing some players emerge that are backed by sovereign wealth capital that is much more bullish and willing to put new capital into offshore drilling assets more specifically.

Yes. That's a great point. Really appreciate the color, and I'd be remiss if I didn't say congrats on the quarter and the great second half outlook.

Thank you.

Thanks, David.

Our next question comes from Marc Bianchi with Cowen.

I guess on the second half outlook there, this is the first time I can remember you guys going beyond a quarter out in terms of giving some guidance. What's the thought process there, if there's anything in particular that caused that this quarter?

I don't think there's anything in particular, Marc is, look, we -- obviously, we had a -- we significantly outpaced the guidance that we provided this quarter. Things are shaping up a little bit better in terms of our confidence related to our ability to execute against supply chain challenges that will continue to exist through year-end. Blake and I know we're going to get a tremendous number of questions related to outlook a little bit further out. So we provided a very wide range but wanted to provide you at least a fair way of alternatives for how we're sort of seeing the second half. So that's it in a nutshell.

Okay. Super. And maybe back to the customer spending and refurbishing their fleets and so forth. How much below sustaining CapEx do you think customers are generally? Is it 20%, 30%, 50% below where they need to be spending at current activity levels? And is there a big distinction as you look in North America versus rest of world?

Yes. It's really -- it's a great question. It's really hard to answer. What I would say is this is very anecdotal, admittedly. I think it's easier for land drillers with idle rigs to cannibalize than it is for the offshore. And so in terms of -- for a given number of rigs working, they can underspend more dramatically than the offshore because they just send a crew out to take a draw works off of a stacked rig and replace the capital as it's needed to sustain the ongoing land rigs that are working. Whereas in the offshore, that's more expensive, far more challenging to do, putting a rig in a shipyard. So I don't -- I'm not sure that answers your question, but it's sort of some -- hopefully, some anecdotal insight into what's possible out there. What I would tell you though is all of our customers are great at not spending dollars. They don't have to spend in a downturn. That's a skill set that they've owned over prior downturns and that they've employed enthusiastically through this downturn. And what that gives rise to is that kind of coiled spring that Jose was talking about earlier, where I think we are moving to a period where we're going to see some catch-up expenditures here around these rig reactivations, around putting more rigs to work globally that are going to benefit NOV.

Our next question comes from Connor Lynagh with Morgan Stanley.

I wanted to just talk about caps a bit. The order intake there has actually been quite strong, but you highlighted in your comments that you're still seeing deferral of projects and things like that. I'm wondering if you can just sort of square the 2 things and basically -- is there a certain portion of the business that's been disproportionately contributing to the orders over the past few quarters and a portion you expect to catch up going forward?

Yes. So obviously, within our CAPS segment, we've strung together a number of quarters in a row here of really solid bookings in this last quarter. It's 132% book-to-bill, but maybe even more importantly, it's up 56% quarter-on-quarter. So everything is heading the right direction. I think the distinction that we're trying to make in that commentary that you're referring to is that the businesses that are conducting business and Asian shipyards that have had a host of challenges and are still sort of working through debottlenecking processes are resulting in some cautiousness on the customer's part in terms of pulling the trigger on FID. So our sense is the number and size of opportunities that we've been pursuing over the last several quarters, if not several years, certainly getting any smaller just the time horizon when they pull those triggers is getting kicked out a little bit. I think pending resolution on those bottlenecks, getting arms around the new cost environment that they're in, all those sorts of issues. And so really, it's just almost more of a sense of optimism that there's more orders to come, particularly for those large project-intensive businesses.

Yes, that makes sense. So just sort of thinking through that, you guys have also highlighted ongoing cost to your business from delays in shipyards. I missed if you had quantified the amount, but if you have any sort of quantification of that and I think some of the thinking around margins through the next few quarters was that those would be rolling off? Just any updated expectations on how to think about margins beyond, obviously, the third quarter or those costs, however you want to frame it?

Yes. I think I probably can't give you any more specific guidance but progressive improvement on the margin front. Look, the last 2 quarters, we called out specific charges that we took on projects, and those were POC type project. So that pressures future margins associated with those projects. This quarter, we didn't have anything of that magnitude, and we saw some improvement. Obviously, look at the guidance, where we're citing mid-30% incremental margins going into Q3. So things are improving. And obviously, that's on a segment that normally does not deliver incremental margins, that's quite that high. But hopefully, we're soon to get back to a time period where we're consistently delivering the types of incremental margins that segment normally delivers, which is sort of upper 20s, lower 30% type range, but we got a little bit of a catch-up coming, I think.

Okay. And sorry, just finalizing this thought here. So in order to get back to the sort of low to mid-teens type margins that this business was doing in, say, '17 and '18, is it shorter cycle consumable items with higher margin coming back into the mix? Is it some of these big projects starting to execute faster? What do you see as the biggest swing factors to getting back to those profitability levels?

Yes...

Go ahead.

That's a good question, Connor. It's obviously both, right? We've got to have better execution on those larger projects. And then we need more of those short-cycle capital equipment businesses to come to life. And hopefully, you picked up on that aspect in our prepared comments a little bit that we're starting to see a lot more of those signs of life, particularly within our fiberglass business and our Intervention and Stimulation Equipment business, right? So I think we touched on before that basically the segment consists of about 2/3 longer cycle, big project-oriented businesses and about 1/3 shorter cycle. And that longer cycle provides that baseload that we've sort of been surviving off of over the last several quarters. the shorter-cycle components really provide the juice and more of the upside as it relates to better incrementals.

Yes. And importantly, both types of business has suffered under a lot of supply chain disruption, both -- in the short cycle, fiberglass we, -- you've heard us talk about our resins, our glass supply, allocations, et cetera, longer cycle projects are more exposed to Asian shipyard disruptions and the like. So I think supply chain hopefully will happen over the next few quarters. I think that will go a long way towards helping us out here.

The next question comes from Arun Jayaram with JPMorgan.

Jose, I was wondering if you could give us a sense on the capital equipment side of the business. I was wondering if you can maybe characterize trends you're seeing from E&Ps versus your oil service customers. And also maybe within oil services, give us a bit more color around call it, order trends between offshore and onshore because, Clay, as you mentioned earlier, we are starting to see some of the onshore North American service companies start to raise CapEx in frac in terms of adding incremental capacity.

Yes. Well, Arun, I know you're aware of this, but for everyone else's benefit, oilfield service companies don't necessarily want to add features that aren't directed by operators, right? So a lot that happens in our world are dictated by operators. And so things like lower emission, e-frac fleets and the like, it's really a trend that we see in the pressure pumping side that's -- I think, will continue to be -- influence the frac fleets that we provide on the drilling side, the NPEs on land or dictating more setback capacity. They want to move to 5.5-inch drill pipe for better hydraulics on longer laterals and -- or mud pump capacity at 7,500 psi high-pressure systems, that sort of thing. And in the offshore, I mentioned earlier, managed pressure drilling is a big push as well as BSEE sort of BOP requirement. So those are some of the -- directionally, some of the trends that we're seeing from the E&P world that are influencing what they're requiring of our customers, the oilfield service companies out there.

Great. Great. Okay. And then just my follow-up, Clay. You guys, obviously, are a global manufacturer. I was wondering if you could give us a sense of how much manufacturing capacity does NOV have in Western Europe. And any risk mitigation you're doing given what could be an energy crunch, unfortunately, this upcoming winter?

Yes. We do have some manufacturing in Europe, but far, far less than we have in the United States and North America or in the Middle East or Asia. And so it's small with respect to our own footprint of manufacturing. We do, however, rely on suppliers out of Western Europe that we're watching closely and in close communication with. And these are suppliers of castings and forgings and a few other polymers and things that we buy. And so very concerned about kind of their ability to continue to supply us as we move into the winter months, if they're constrained from a natural gas standpoint, we need to know that and prepare for that. And so watching the situation there very, very closely.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Clay for any closing remarks.

Good. Thank you, Kevin. I know this has been a busy day, so really a news day, and I appreciate you joining us this morning. We look forward to [indiscernible] I hope you have a great day. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.