Good day, ladies and gentlemen. Welcome to the NOV Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference call, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome, everyone, to NOV’s fourth quarter and full year 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 fourth quarter of 2022, NOV reported revenues of $2.07 billion and net income of $104 million. For the full year 2022, revenues were $7.24 billion and net income was $155 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.

Thanks, Blake. For the fourth quarter of 2022, NOV’s revenues grew a solid 10% sequentially and fully diluted earnings were $0.26 per share. EBITDA increased to $231 million or 11.1% of revenue with sequential flow-through somewhat impacted by continuing supply chain challenges, incremental cost to expedite key orders and less desirable mix. Consolidated book-to-bill was 111% on 16% higher sequential shipments out of backlog. Compared to the fourth quarter of 2021, incremental EBITDA flow-through was 29% on a very strong 37% year-over-year revenue growth. For the full year 2022, NOV generated $679 million in EBITDA on $7.2 billion in revenue, which included $332 million in renewable energy-related revenue. Incremental flow-through was 26% on 31% year-over-year growth. 2022 was a good year for NOV, our team executed well in the face of continuing extraordinary challenges. We introduced new products that we developed through the downturn that improve the efficiency, safety and environmental impact of our customers’ operations, including several greenhouse gas emissions reducing technologies and an edge computing platform is the foundation for several new digital products. EBITDA marched up steadily quarter-by-quarter as revenue grew, and we benefited from the cost reductions of prior years. We push prices higher, more successfully in some product lines than in others. While EBITDA margins improved, frankly, we are disappointed in the magnitude of our price driven margin expansion so far. Our marketplace remains competitive, as our competitors seek to load plants after the pandemic lockdown decimated volumes. But nevertheless, we have been successful in clawing back discounts and achieving significant pricing increases. However, the ramp in inflation we saw throughout the year has driven our costs up materially. While we still have ways to go, we are much, much closer to earning acceptable returns on capital, and it is early days in what we…

Thank you, Clay. To quickly recap the quarter, NOV’s consolidated revenue grew 10% sequentially and 37% year- over-year with all three segments posting their highest revenue since the fourth quarter of 2019. While North America drove most of the growth during 2022, as Clay noted, momentum in international markets has been building throughout the year and outpaced North America in the fourth quarter, resulting in 14% sequential revenue growth in international markets and 4% in North America, which included strong growth in offshore Gulf of Mexico. Adjusted EBITDA for the fourth quarter totaled $231 million, or 11.1% of sales, representing an incremental flow-through of 20% sequentially and 29% compared to the fourth quarter of 2021. We’ve recorded a credit of $8 million in other items during the fourth quarter, primarily related to positive margins realized on previously reserved inventory, which we deducted from Q4 EBITDA. With the improving market environment, we may continue to recognize such credits and EBITDA adjustments in 2023. Additionally, we expect to complete the termination of our U.S. defined benefit pension plans in the first quarter, for which we expect to recognize a pretax noncash charge for the recognition of all actuarial losses and accumulated other comprehensive loss which was $8 million as of December 31, 2022. During the fourth quarter, eliminations and corporate costs at the EBITDA level increased $11 million due to higher levels of intercompany transactions, expenses associated with the buyout of a JV partner and year-end true-ups to employee benefits and other accounts. We expect eliminations and corporate cost to return to the $60 million range in the first quarter. Despite the increase in working capital arising from strong revenue growth, cash flow from operations was $154 million in the fourth quarter. Capital expenditures totaled $66 million, resulting in free cash flow…

[Operator Instructions] Our first question comes from the line of Jim Rollyson of Raymond James.

Hey. Clay, going back to your comments about the offshore side and kind of the need for incremental investments and obviously the lack of capital or willingness to spend capital by some of the current owners, how do you see that playing out in terms of you mentioned who the ultimate providers of capital may be. But when you think about that just playing out and time frame of this playing out, how do you unpack that?

It’s a great question. In our view, it’s already starting to play out as the major integrated oil companies, as the big national oil companies who need the offshore rig industry to go back to work and perform drilling services are sitting down with those providers. I think they’re being told, hey, you’re going to have to pay much higher day rates, you’re going to have to be much higher mobilization fees. You’ve seen day rates for 7th gen drillships, for instance, double year-over-year and now starting with the 4 handles pretty common. And so, I think there’s just this recognition of reality here that this industry, offshore drillers have been beat up pretty bad through the downturn and have limited access to capital, and someone is going to have to pay for that. So the oil companies, I think, are the first ask on this. There’s other participants here as well. I mentioned, I think, in my prepared remarks that some of the shipyards that are sitting on rig construction projects that were stranded through the downturn are offering bareboat charters on those to drilling contractors, such that the shipyard can go out and find the capital to complete those projects, get those things out of their yards, transfer -- make those assets available to drilling contractors to operate them. And then, another potential source of capital that we think is going to play an increasingly bigger role, are these sovereign wealth funds, which have very deep pockets. And they’re in these countries that rely on the petroleum industry to fund public services to balance their government budgets and so forth. And so, they don’t appear to have the sort of constraints on lending to the industry that other provider -- more traditional providers of capital have.

Great. That’s helpful. And then just as a follow-up, when we think about kind of how things have unfolded over the last two or three years, obviously, NOV has made a lot of overhauling of the cost structure through the downturn, which is, I’m sure, enhancing margins as revenues start coming back. And as we think about this going forward, you mentioned supply chain issues and constraints there and just cost inflation around at plus pricing, which you’ve been working on clawing back pricing from where we were before. But maybe just a little bit of color on kind of where pricing sits on average because I know it varies by product line. But kind of where we sit now versus kind of pre-COVID levels? And as I think about margins going forward, how much room do you have in pricing versus just your volume?

Yes. First, I appreciate the question. We’re very focused on -- the short answer to your question is, prices aren’t high enough. We -- in 2019, we started taking a lot of costs out of our organization north of $900 million a year. Then, we hit the pandemic shutdown with demand really falling away to almost nothing and discounting happened, right? So, we track pricing, among other ways through like looking at baskets of products that we sell on an apples-and-apples basis. And -- so for many of those, we found that they felt kind of mid-teens by late 2020 or early 2021. Since that bottom, we’ve been pushing on pricing very intentionally. We’ve talked on prior calls about that and have successfully clawed back most of those discounts. There’s lots of products that are priced now higher than they were in 2019. But the problem is that inflation has eroded a lot of that potential margin increase. And so, when we kind of step back and reflect on our financial results, given the heavy, heavy lift that’s happened here on taking $900 million out of our cost structure, the erosion of that through inflation, the recovery of pricing, margins aren’t really where they need to be yet. And so, one of the big focuses we’re going to have in the coming years continue to push on pricing, to continue to work towards an acceptable level of margins. But, as you correctly point out, we’re not out of the woods yet on supply chain disruptions. We’re still seeing inflation in a lot of areas that we work, there’s a lot of pressure on costs. And so, we’re going to have to really continue to maintain a very high level of focus on pricing and trying to get to an acceptable margin.

Our next question comes from the line of Chase Mulvehill of Bank of America.

Just I want to follow up on orders. You talked a lot about kind of growing momentum in subsegments and maybe some conservatives -- outlook and some others. So I don’t know if you can maybe just kind of take a moment and walk through both kind of Rig Tech and CAPS, just real quickly, and maybe point to things that the investment community should be paying attention to and focus on when we think about potential for growth in those segments in ‘23. And I guess, I don’t know if you’d want to comment, if you think that orders could actually be up for both segments in ‘23 as well.

Yes. I’ll ask Jose to chime in on that as well. But broadly speaking, we -- as I said in my prepared remarks, we’re a little cautious on outlook for North America. Heretofore, through 2022, most of our intervention stimulation equipment order book has really been driven by North America. We kind of see that pivoting over in 2023 and more interest coming out of international markets, specifically the Middle East, which previously was more focused on used equipment and pricing there hasn’t been as good. We’re hearing opportunities to improve pricing and also a desire to put higher technology equipment into certain regions in the Middle East and elsewhere around the world. So, we’re pretty excited about that. The other side of the Completion & Production Solutions order book really are producers, mostly focused on offshore projects. And last year, projects felt like they were moving to the right a lot because of the high levels of inflation. I mentioned 30% sort of overall headline project cost increases weren’t uncommon. It’s a big sticker shock to a group of engineers at an oil company who have been working on a project for several years. I think as we move into 2023, the sort of lesson we’ve learned about energy security, I think there’s growing confidence around the highly constructive supply-demand outlook. And so, our gut feel is that operators are getting more confident about doing FIDs. I think, you’re hearing that from others in our space, too, that their expectation around FIDs, particularly focused on international gas and are moving forward. And so, our expectation is that has a pretty bright outlook as well. On the rig side, yes, I mean obviously, offshore is looking up, but still a lot of hesitancy here really of all drilling contractors about putting a lot more capital into their rig fleets. But if supply demand gets tighter and tighter and tighter, day rates tend to get pressured up. And so, our expectation is that the demand may grow. One real interesting area though is in the area of workover. We’ve had a surprising level of interest and demand for those, and that’s within Rig Technologies. I think we sold something like 7 or 8, much higher spec workover rigs focused on longer laterals and a few other areas. But -- anyway, it’s across the board, both segments, given the challenges that the oil and gas industry face in the coming year to restore energy security, it’s a pretty good backdrop, I think, to start from.

Clay covered it extremely well, maybe just one or two other things to sort of weave in. I mean, obviously, the market environment continues to improve. We’re looking forward to maintaining really good bookings in ‘23 to what extent it really depends. And I think some of the commentary that Clay provided gives you an indication that there will be a little bit of a change in mix, particularly related to some of the offshore projects within CAPS. We can see some of our business units where we have had some of those projects kind of pushed to the right, pick up a little bit in ‘23. So, we’re looking forward to that. And then lastly, related to rig, just to tack on to Clay’s commentary, you mentioned or requested insights in the things that people should be looking for. And I think our commentary sort of gives you a flavor that we’re seeing very steady improvement in our rig business, obviously started with the aftermarket businesses. They’re both well off of their bottoms. But also from a capital equipment perspective, we’ll -- we’ve been seeing a lot of volatility in our bookings quarter-to-quarter, primarily related to the very large chunky bookings that we’ve had in the offshore wind space. We’ve had three really nice quarters in a row of improved bookings at the conventional rig capital equipment business. And one of the things that kind of distorts the booking -- how you look at book-to-bill there is this massive backlog that we have associated with our Saudi rig manufacturing contract, which was that $1.8 billion of backlog, if you sort of strip that out in terms of the revenue produced by it and just sort of look at the quarter, excluding contributions from that facility, book-to-bill was a little bit over 100% from a conventional rig capital equipment standpoint. And so, we’re hopeful that continues to trend upward as we move through 2023.

Okay. I appreciate the color. Maybe one quick follow-up. Investors seem to also be focused on kind of the Rig Tech aftermarket opportunities as the offshore activity was picking up. So, maybe if you could just speak to -- I guess, I’m assuming that they had some nice growth last year. And given what you talked about, I think it was 23 -- you launched new -- 23 new reactivations in the fourth quarter. When you look at the opportunities for ‘23, what’s out there? Do you think it’s going to be more heavy shallow water or deepwater reactivations and some new builds? And how should we think about the aftermarket business in ‘23 versus ‘22?

Yes. I mean broadly, as the offshore drilling industry goes back to work, they’re going to need more aftermarket spares. There’s certainly kind of a flush level of demand going into reactivations a little bit. The industry got really good at cannibalizing spare parts off of idled rigs and we’re rebuilding that to some degree. But 37 jack-ups contracted by Aramco, for instance, for Saudi Arabia, going to work higher levels of activity in Brazil. That all takes a lot of aftermarket to support. One of the big headwinds we faced in 2022 throughout the year was supply chain disruption of our aftermarket business. And what you saw in Q4 was the dam broke a little bit, better availability of casting since our manufacturing group really got after a 26% increase in their shipments into our aftermarket organization helped sort of underpin a 20% -- roughly 20% sort of spare parts sequential improvement in revenue there. That won’t necessarily repeat in Q1, but we’re making good progress and feel pretty good about the balance of the year.

Our next question comes from the line of Luke Lemoine of Piper Stanley.

You touched on some of the underpinnings of this offshore cycle within Rig Tech with some of the bigger ticket items like floater reactivations, the stranded drillships between guys like Samsung and Hyundai [ph] and NVO jack-ups. I guess with these type of individual orders and the incremental floater demand that could be over 30 rigs over the next few years, what do you think the annual order potential is for Rig Tech a couple of years out?

That’s a really hard question to answer, Luke. As Jose just said, it tends to be really, really lumpy. I would tell you the upward trajectory is good. And our expectation is we should continue to build momentum, supporting global drilling operations of all pipe and in offshore. But there’s been so much downsizing that’s happened since 2015 here. Our expectation is that we can really step up and generate good financial returns by supporting the industry globally without the rig newbuilds that we saw in kind of the prior super cycle. They come terrific. We’re prepared to grow and provide whatever the industry requires and hopefully, that will come to pass. But the basic sort of blocking and tackling of drilling does work through a lot of spare parts. It’s a high margin, high incremental business for us. As well, we continue to innovate around a lot of technologies and products for the oilfield. Jose mentioned our ATOM RTX robotics system that we’re introducing this year, super excited about that. We sold that into both land and offshore operations. We’ve got a couple of different emissions reduction technologies, our Eco Booster hydraulic system, our PowerBlade regenerative energy capture system, our Maestro system, all help both land and offshore drillers reduce their greenhouse gas emissions. And so, I think there’s great opportunities for that. And then lastly, we talked a bit about digital solutions that we have available that I think will help shape order. So, we’re -- as opposed to just providing iron, which we did a lot of in this last super cycle, I think the next up-cycle, it’s going to be smarter iron and higher value-added iron, which I think will pave the way for higher margins and higher returns.

Got it. And then maybe on the stranded drillships, you talked about what the content value could be to you kind of $20 million to $125 million a rig, on the -- floater reactivations we’ve seen the offshore drillers quotes. But what could the content value be to you guys kind of per rig from what you see right now?

Yes. Every rig is different. They’ve been sort of stacked in different ways. They’re at different levels of completion. So, this is sort of the notional revenue range that Jose provided for kind of the rig reactivations. But as I mentioned, one of the bigger ticket items in that is potentially a second subsea BOP stack, which is like a $50 million way to make the rig compliant with the latest BSEE regulations.

Our next question comes from the line of Neil Mehta of Goldman Sachs.

Good morning, team. And congrats on the good orders here. I had a couple of cash flow questions. And the first is, just as you think about 2023, can you walk us through some of the moving pieces? Recognizing free cash flow is super challenging to forecast in a growth environment like we’re in right now, but maybe you can walk through the different components ranging from working capital to other considerations that you want us to have dialed in for ‘23.

Sure thing, Neil. It’s a good question because there certainly are a lot of moving parts and pieces as we sort of think about 2023. And first and foremost, related to the near term, as we talked about in our prepared remarks, Q1 typically is a good seasonal use of cash with a number of payments that need to get made within the quarter. And then, the free cash flow tends to pick up, particularly in the second half of the year. But as we think about 2023, particularly, one of the tailwinds to us is hopefully continuing improvement from a supply chain perspective. However, with where we’re sitting right now, we’re still making sure that we’re doing everything that we possibly can to live up to our commitments to our customers. And at times, that means maintaining buffers within our inventory base, overstocking in certain key critical areas that obviously is a drag from a working capital perspective. Also, we’ve had really, really strong growth during -- to this point in the recovery, and we expect to continue to have strong growth through ‘23 and hopefully well beyond. So to be determined precisely how much normal working capital that will consume, combined with the ongoing supply chain issues. And then probably lastly, as we sort of look at the transition from ‘22 to ‘23, our revenue mix is going to become much more internationally weighted. And so international operations tend to have longer cash conversion cycles, combination of larger projects, things take a little bit longer to work through the system, meaning slightly higher levels of inventory to meet those project orders as well as longer DSOs associated with the international client base. So, that’s kind of the headwind. And then otherwise, as you know, a lot of the things that we do are very large-scale projects that have large progress payments along the way and/or completion payments. And those are sorts of things that can make material differences from one quarter to the next. And so, that’s why we generally try not to get too terribly excited about free cash flow from one quarter to the next, but are really confident that we’ll have a build in working capital during the course of the year to coincide with the growth in top line, but ultimately, all that working capital translates into free cash flow in the future.

I would like to add, too, our historical working capital intensity at 25% this quarter in the high 20% range is much better than it was before the prior super cycle. So, I think the organization has made a lot of progress in becoming more efficient around our working capital requirements, required to support top line growth.

Yes. That’s very clear. I think Clay, that’s - a follow-up. You guys have a terrific balance sheet here, and you made some comments around M&A. So, I just want your perspective on whether you would leverage that balance sheet to opportunistically add to the portfolio? And to the extent that is something you’d consider, do you see any logical areas for addition?

Well, we’ve been very clear, Neil, over the years about the need for a strong balance sheet. And I would say, again, we’re not forecasting new builds anytime soon, but you go back to the last super cycle from 2004 to 2014, our top line grew 6.5-fold pro forma for our DNOW spin. And so the sort of the top line growth potential here is very, very high and it does take working capital to support that. So we need to be very careful to make sure that coming off bottom that we don’t pile on leverage. We’ve done a great job delevering through this downturn. And while it’s -- the M&A space is getting really interesting and there are a number of stranded assets out there the PEs and other sponsors have had for a long time and are kind of looking to exit creating opportunities, we’re going to be -- we’re going to continue to be very cautious, very careful, very focused on risk management through this process and make transactions that we do will be smart.

Our next question comes from the line of Stephen Gengaro of Stifel.

Good morning, everybody. Two things for me. One is -- I don’t know if you have comments around this or not, but we’ve heard of a couple of manufacturers, one manufacturer who’s effectively financing new builds on the frac fleet side, on the [indiscernible] side. How does this -- how do you think about that and how do you think about that sort of impacting your order flow, if at all?

I think we’re really good at developing technologies. We’re really good at manufacturing. We do that efficiently. We manage costs. I don’t think we’re very good at banking and financing. And I really, really -- given my balance sheet comments around Neil’s question, I think we -- I think everyone should be very, very careful about financing in this space, deeply cyclical and potentially fraught with peril. So yes, we’re well aware of in a couple of product categories where we face competitors that, for whatever reason, have put deals on the table. And I think coming out of really low volumes during the pandemic, that sort of prompted a lot of desperation. And so, we’ll see how that turns out for them. But we don’t need to practice. And we actually do this for financial returns, and we think the highest and best use of our capital is not investing in our customers’ fleets.

That makes sense. I just wanted to get your views. And the second, just on the wellbore side, can you just remind us when we think about the international versus North American mix? Just sort of how we should be thinking about growth in light of your comments on both the international and the domestic side as we think about ‘23?

That’s about 50-50, Stephen. And you heard my comments around sort of our outlook for both areas. I did -- I want to be clear, although we’re not necessarily expecting an activity increase in North America and I think the pressure on gas, you could even as modest decrease, we do expect that overall North American investment by E&Ps and overall revenue for NOV probably should be up in 2023, and that’s because pricing marched upwards across North America for most all participants in oilfield services throughout 2022. So, that kind of year-on-year comparison, that all kind of hangs together. I think the most -- some of the most recent surveys point to kind of mid-teens year-on-year E&P, CapEx on drilling and completion work in North America. But I think it’s going to take that level of spending increase just to keep activity flat, if that makes sense.

That’s great. Thanks for the color.

You bet. Thank you, Stephen.

Thank you. That does conclude the Q&A. I’d like to turn the call back over to Clay Williams for any closing remarks.

Thank you, Valerie. I appreciate everyone joining us this morning and look forward to speaking with you again on our next earnings call in April. Have a great day.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.