Good day, ladies and gentlemen, and welcome to the NOV Third Quarter 2022 Earnings Conference Call [Operator Instructions] As a remainder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Please go ahead, sir.

Welcome, everyone, to NOV's third 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 third quarter of 2022, NOV reported revenues of $1.89 billion and a net income of $32 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 one question and one follow-up to permit more participation. Now let me turn the call over to Clay.

Thank you, Blake. For the third quarter of 2022, NOV's consolidated revenues grew 9% sequentially and 41% year-over-year, with all three segments posting solid double-digit year-over-year growth. Despite continuing supply chain friction and increased turmoil in the global economy, our teams were once again able to drive higher sequential EBITDA at 28% leverage on top line gains. The results demonstrate international offshore markets that are starting to gather momentum. Our early cycle rig count activity-driven businesses continued to trend positively on rising volumes and pricing recovery in North America and increasingly in international and offshore markets. So far, despite fears of recessionary demand destruction, commodity prices have remained strong, which I think is appropriate. The world faces a significant and scary energy shortfall after years of underinvestment, and our outlook is very constructive as a result. However, this constructive dynamic has not yet translated into the big uplift in capital equipment orders we expect. Our overall book-to-bill for the third quarter slipped slightly below 1, 98% to be exact. While we saw strong orders and 116% book-to-bill in Completion & Production Solutions, Rig Technologies book-to-bill came in below 1, and our combined reported backlog for capital equipment declined, slightly less than 1%. We believe this is transitory and we expect orders to grow in coming quarters. Let me explain why, starting with the observation that the third quarter book-to-bill is off trend for us. Helped by solid orders in renewables technologies through the past year, NOV's consolidated book-to-bill for the trailing 12 months through the third quarter has been 116%. Our customers share our optimistic outlook, but they face some near-term constraints that are delaying capital equipment orders, especially for U.S. and European oilfield participants. First, the availability and cost of capital to the oilfield has emerged as a limitation.…

Thank you, Clay. NOV has consolidated revenue in the third quarter of 2022 was $1.89 billion, up 9% sequentially and up 41% year-over-year. All three segments posted another quarter of strong growth and improved profitability and achieved or exceeded the 2022 exit margin targets we provided at the beginning of the year. During the third quarter, we completed the sale of our operations in Belarus and classified our Russian operations as assets held for sale, which collectively resulted in $76 million in impairment charges, most of which was related to foreign currency translation adjustment losses and which increased SG&A. These charges were partially offset by credits related to gains on sales of previously reserved inventory, resulting in total adjustments or Other Items of $63 million. We do not expect additional charges in the fourth quarter. Cash flow used by operations during the third quarter was $106 million, primarily due to working capital builds needed to support our rapid top line growth and to mitigate continued supply chain risks. Capital expenditures in the quarter totaled [$59 million] and we ended the third quarter with $1.73 billion in debt and $1 billion in cash. For the fourth quarter, we expect to generate between $100 million to $200 million in free cash flow, and we expect free cash flow conversion to improve significantly in 2023. Moving on to segment results. Our Wellbore Technologies segment generated $741 million in revenue during the third quarter, an increase of $75 million or 11% compared to the second quarter and 46% compared to the third quarter of 2021. The segment realized its eighth straight quarter of revenue growth by capitalizing on improving global drilling activity levels and better execution against ongoing supply chain challenges. While activity in North America may be reaching a temporary plateau, the segment…

[Operator Instructions] Our first question comes from the line of Scott Gruber with Citi.

So your margins are basically now where you thought they'd be in 4Q, and I understand there's some puts and takes on 4Q. I'm trying to get a sense for where we stand on multiple fronts. So some additional color on where you stand on resetting the price book, where you stand on seeing improvement in delivery costs and delivery timing and what you're seeing in terms of stability on input cost inflation. So just some color -- and I know these are kind of key areas you guys have been focused on over the past year. So some additional color on these margin influencers would be great.

Yes, Scott. It's a good question and it's a lot of things intentioned here. So over the past couple of years, we've been taking costs out of our organization, and we've been focused on pushing prices up. We had the most success in our quick turn businesses that are associated with rising drilling activity in North America. And so that's gone in the right direction. But on the other hand, as we've talked about on prior calls and in our prepared remarks, we still face a lot of supply chain issues. So kind of a quick update on where we are on that. Broadly, things are getting better. However, I do want to say we're a long way from being normalized. And in certain categories, we're seeing things get a little bit worse. And so things like electric motors, actuators, PLCs, a lot of electrical components. Some of those got more expensive and more difficult through the quarter; certain castings, in particular, coming out of Europe. I think there's something like 15 steel mills in Europe that have [Audio Gap] energy situation there, putting a little pressure on some of our businesses there are the counter examples. But items like freight, freight is probably down 60% off the double where it was in 2020 and triple where it was in 2019. And as well, we're seeing deliveries of certain items push out. And so it was sort of broad normalization underway, and ports are slowly clearing. We're still way off the mark in terms of delivery reliabilities. Costs are still elevated. We face workforce challenges as do our vendors, particularly across North America. One of the developing items that we saw through the third quarter, some of our third-party machine shops now are running into labor shortages and machinist shortages. And so on-time delivery slipped quite a bit in Q3. So it's -- those are the factors that are offsetting some of the price increases that we've been able to get and some of the costs that we've taken out. So I think, puts and takes in both directions around the margins.

Got you. I appreciate all the color there. And just shifting to capital return. It's a hot topic in oil services at this juncture. And we've heard several peers who've actually put guys still have a long way here to see kind of full margin recovery. But assuming that plays out, how do you think about a capital return commitment and whether that makes sense for NOV?

Scott, it's Jose. I'll tackle this one. Yes, it's a good question. And certainly, sort of getting back to more normalized margins is something that we're very focused on and also just managing the tremendous amount of growth that we're currently experiencing in our business, which is a good news, bad news story, with a good news more outweighing the bad news, right? When you're drawing 10% -- roughly 10% a quarter and 40-plus percent year-over-year, provided that you weren't mismanaging your working capital prior to that, it's going to consume some working capital and use some cash flow, right? And that's sort of where we are as a later cycle business. But we'd much rather sacrifice a little free cash flow today to have a lot more down the road. So I think we've been pretty clear about the historical cash flow generation capability of this business, which we expect to be even stronger going forward. We've never shied away from returning capital to our shareholders, having returned almost $5 billion of capital since 2014. And we've also been pretty clear about where we need to see our leverage metrics get, which is back to the 2x or better gross debt-to-EBITDA metric. So we're looking forward to arriving at the right place and time to where we can step up or return the capital again and things are certainly all heading in the right direction. So things look promising from that standpoint.

I appreciate that. We have to remind people that working capital is a high-class problem when it builds quickly. So we'll continue to stay updated.

[Operator Instructions] Our next question comes from the line of Marc Bianchi with Cowen.

You guys talked about an expectation for improving orders. I'm just curious, it seems like it's likely that you're going to stay above the 1x book-to-bill here in caps as we move forward. When do you think Rig Tech could get back above 1x?

Yes, Marc, I think I actually think Q3 is just a temporary blip and I appreciate the question because if you focus in on our rig order book for the third quarter, what really changed from the second quarter was the absence of a wind turbine installation vessel. If you go back to the past several quarters, we pretty much had a wind turbine insulation vessel large order every quarter. And so we're engaged on building out, I think, 11 wind turbine installation vessels as a result of that growing backlog in that space. And what happened in the third quarter is we just didn't get any. So it just -- it fell off. If you look at our sort of more traditional oilfield order book in the third quarter. It actually -- for capital equipment, which is really the only piece of it that we report, it was up for both offshore and land customers. I think Jose mentioned in his prepared remarks, we got an order for a high-spec rig from a North American operator. And so that helped double land rig orders sequentially and triple land rig orders year-over-year. And then offshore continued to move up as well. We went up about 15% sequentially. The point I was trying to make in my prepared remarks, though, is that even at rising levels moving up sequentially up into the right, still far less than the industry needs in order to sort of launch the major industrial effort that's required to get back to growing oil and gas production around the globe. And so we think this is growing the right way as we, as I explained at length in my prepared remarks, the dynamics around demand for what we sell, I think, are very strong, very constructive over the next several quarters and really the next several years. And so we're excited about that. And then to kind of round out the picture, Rig Technology capital equipment is only one of really three big ways that drilling contractors spend money with NOV. And the other two are spare parts to support their rigs as [Audio Gap]. And what we've seen, as Jose said in his prepared remarks, is sort of steadily rising demand for spare parts to support rig reactivations, rig operations. They're kind of flattish sequentially, but year-over-year, up 27% and up for both offshore and land. And then drill pipe is the third way that drilling contractors spend money with us. And that's actually in our Wellbore Technologies segment. And again, both of those just a monster order in Q2, down a bit in Q3 [Audio Gap] still very, very strong. And in fact, Q3 was up 67% year-over-year. So you add all that together, we are seeing rising [Audio Gap] expectation is that continues as the offshore gets back to work as drilling picks up in international markets.

Yes. Okay. Jose, I don't think I heard anything unallocated. You usually don't guide to it, but it was up quite a bit from second quarter. How should we be thinking about that for fourth quarter?

Yes. So from basically the elims line, moving as it normally does, a similar percentage from pre-elimination revenue and then probably looking at a couple of million dollar increase from -- at the EBITDA level with the growth.

Got it. So something like $60 million.

Maybe just shy of that. Yes.

[Operator Instructions] Our next question comes from the line of Tom Curran with Seaport.

What lead time is the CAPS division's wise unit quoting at this point for new build frac spreads? And when it comes to capital equipment sales for shale completions, what level of competition are you confronting from the secondary markets, such as auctions? How does the amount and pricing of used equipment out there compare to what you've seen at this point in prior U.S. upcycles?

I'll answer the second part of that question first. There's very little used equipment that's really can be refurbished economically. And what we've seen over the past year is more and more pressure pumpers in North America are pivoting towards buying new and the longevity and sort of the overall value offered by going to new versus used, I think, is a lot stronger. . And then the first part of your question, I think, was lead times and more -- I'd say, plus/minus one year, tier 4 engines are eight months plus in terms of deliveries is what we're looking. And I will say, we made some true purchases of some of the key items, and so can probably deliver maybe, depending on what our customers are buying, maybe a little more quickly than our competitors out there. But on the whole, that's probably what you're looking at.

Yes. That's all consistent with the checks I've done, but I wanted to be sure I had you guys weigh in as well. And could you give us an update on your annual revenue expectations or even just potential for CCS and geothermal, respectively. By division, it seems as if Wellbore Technologies has a product suite that spans both of those new energy segments, while CAPS has some specific offerings for CCS. And then Rig Tech has done some custom designs and systems for geothermal. Maybe just an update on each of those renewables markets.

Yes, Tom, I think we'll hold back from providing the granularity that you're looking for. But our efforts related to energy transition opportunities are going are going very well. And particularly as Clay touched on the backlog and the ongoing work that we have related offshore wind construction vessels, momentum continues to build there as it does related to really a number of the other initiatives that we have going on related to energy transition, including geothermal that you're asking about. And really, we're seeing -- we saw a really rapid sequential growth going from Q2 to Q3. And I think the total company combined from a renewable standpoint was roughly $90 million or so in revenue in the third quarter at a really nice trajectory. So we're really pleased with the way that those initiatives are shaping up for the company.

Yes. And just to touch more color. The wind installation vessel space where NOV is leader, and we've come out with new technology that we referenced in our press release is the majority of that $90 million, but we're seeing really good growth in particular around geothermal offerings and I think we mentioned in our prepared remarks, ReedHycalog has emerged as a market leader in terms of hard rock drilling that's required for geothermal, but also generating a little bit of revenue in our solar initiative and a lot of interest in CCUS technologies. We're the leading provider of gas processing, dehydration technologies that are directly applicable to CCUS. And so we've got some FEED studies underway there. And so really across the board, very excited about all that. And then finally, to put a bar around it, in addition to fixed wind installation vessels, there's movement on the floating wind side as well. And there, as you move into deeper waters, it's kind of a different way that NOV can participate in those projects, with respect to helping build out the actual vessels, providing mooring systems and it's a larger kind of revenue opportunity for us. And so we're very pleased to be participating with partners and customers in Asia and the North Sea and looking at specific floating wind opportunities that could be real needle movers in the future. So we continue to prosecute these opportunities and excited about the future and believe we have a lot of value to bring to the energy transition.

[Operator Instructions] Our next question comes from the line of David Smith with PEP Advisors.

Calling in from Pickering Energy Partners. So I didn't think I would ask a question like this for a really long time, but here it goes. Given how much capacity Saudi is taken out of the jackup market, when I start to count the jack-ups that are going to be left, there just aren't that many that were delivered in the last 20 years that aren't already contracted. So assuming demand continues to grow for the next year or two, I think we can get to a point where the options to satisfy incremental demand becomes either a new jackup or the reactivation of a 40-some-year-old cold stacked rig that hasn't worked in several years. So my question is, in your view, do you think we'll see any new jackup orders in the next five years, but also -- how should we think about the opportunity for NOV on reactivations of the much older assets? I expect those might include some pretty significant capital equipment upgrades.

It's an interesting comment for sure. And listen, you're probably aware, but in Saudi Arabia, there is -- there are plans to construct new jackups. And so -- we just recently opened our joint venture with Aramco, built a rig equipment manufacturing facility there in the Kingdom. And that's to satisfy a very large land rig order. But in addition to that, the Saudis are moving forward with a program to build out 20 jackups over a period of time. . So we're well positioned to participate in that. And so that's one of the ways I think that the gap will be filled and that's sort of in addition to the, I think, 37 jackups that Aramco is adding in the offshore to grow their production. And so yes, we are, I think, starting to face constraints around rig availability, and that's the reason, frankly, that dayrates have moved up so sharply. They've moved up materially for jackups, but in the floating space have roughly doubled in like a 12- to 18-month period. And so all good. Industry is going back to work and very pleased that NOV is well positioned, I think, to help our offshore customers get there.

Yes, absolutely. I should have put an asterisk on that outside of ARO Drilling, if you think there's potential for new jackup orders in the next five years?

Well, we're not forecasting at this point, to be clear, but the dynamics are certainly getting a lot closer to that supply-demand tipping point.

And switching to land. I have been wondering when we might see a new land rig ordered for the U.S., just given the remarkable increase in pricing. Would love to hear your outlook for additional new land rig orders in U.S., but international, if you have a few there. And maybe anything you can give on what kind of conversations you're having?

Yes. We follow that very closely. Just to put this in perspective, though, the day rate recoveries I just talked about in the offshore are really pretty recent. And in the land rig space, in North America, for super-spec rigs those probably front ran the offshore by a quarter or two going in the right direction. We believe that we start to -- we're right at the edge kind of replacement economics. There's a lot of incremental day rate disclosure being made this week in earnings calls. But as we kind of move from the high $30,000 a day range up into the $40,000 a day range for super-spec rigs, I think it starts to become the investment opportunities there for new capacity start to look pretty compelling. And so that's kind of where we are with respect to that category. In international markets, as I mentioned, we are in the process of building out a grand total of 50 rigs in our order for Saudi Arabia. We've delivered the first two, and the third is being commissioned right now. And so we're just at the leading edge of that addition. And those are very capable high-spec rigs. But I think that's sort of an indicator of things to come. I think international markets, in particular, have a long ways to go in stepping up their technology that they apply in drilling -- in their drilling operations. And again, NOV is well positioned to help them accomplish that. So still ways away from kind of the new building of rigs that we saw in the prior super cycle, but certainly all signs are encouraging that we're heading in the right direction.

[Operator Instructions] Our next question comes from the line of Stephen Gengaro with Stifel.

Just curious, in the third quarter the Rig Tech margins were better than we thought. And based on the commentary you gave, they look to be increasing from here. How should we think about Rig Tech margins as we go into 2023?

Stephen, I think obviously it's dependent on kind of what [Audio Gap] and what the overall growth is. But I think we've repositioned the company appropriately. We've gotten the restructuring and cost savings initiatives behind us at this point. So really, as we look at not just Rig Tech, but really all of the businesses, I think the best way to think about it is that we should start to see more of what those historical normalized incrementals have been. And so for the rig business, historically, that's been kind of a mid-20% type incrementals; CAPS, upper 20s, lower 30s; and Wellbore, call it, somewhere between 30% and 40% incrementals. And so I think we're approaching a place that, at least over a period of time, there's always ebbs and flows within a quarter, but over a reasonable period of time that we should be back to those normalized incrementals and hopefully all the charges and restructuring is completely behind us.

Yes. Yes. I mean normalized volumes and then in addition, rig really has been facing some headwinds related to supply chain issues as well. And so kind of continued normalization of supply chain will help a lot. So those are good tailwinds for rig margins going forward.

Okay. Great. That's helpful color. And then the other quick one and I know it's a similar question looking out past the fourth quarter. But when you think of the CAPS business, I mean, it feels like momentum is building. It feels like you're on the cusp of sort of a pretty nice acceleration in the top line. Is that consistent with what you're seeing? And I mean do you think you could see a year or two of sort of outsized growth?

Yes. It's going the right way. But if you look back in the last couple of years, it's been pretty challenging. For the last few quarters, we've been battling projects that we undertook in the downturn of 2020 combined with supply chain headwinds and challenges in Asian shipyards, et cetera, et cetera, et cetera. That's all kind of -- that's clearing, but we kind of have to work those projects through our system. Likewise, I think we need to get to a place where we're seeing more pricing leverage in some of our quicker term businesses, our stimulation equipment business, for instance, in international markets is -- still has a ways to go in terms of recovery but it's all going the right way. And so I think that's going to be helpful for margin expansion going forward, but still a ways to go. And so, we'll see.

Thank you. There are no further questions at this time. And I would like to turn the conference back over to Mr. Clay Williams for any further remarks.

Thank you, Michelle, and thank you all for joining us this morning. We look forward to discussing our fourth quarter and year-end results with you in February. Have a terrific day. Thank you.

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