National Oilwell Varco, Inc. Third Quarter 2017 Earnings ...
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7909 Parkwood Circle Drive Houston, Texas 77036, USA nov.com ©National Oilwell Varco – All rights reserved National Oilwell Varco, Inc. Third Quarter 2017 Earnings Conference Call Remarks LOREN SINGLETARY Vice President, Investor and Industry Relations Welcome everyone to National Oilwell Varco’s third quarter 2017 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 US GAAP basis, in the third quarter of 2017, NOV reported revenues of $1.84B and a net loss of $26MM or ($0.07) per share. 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. CLAY WILLIAMS Chairman, President, and Chief Executive Officer Thank you, Loren. In the third quarter of 2017, NOV generated $1.84B in revenue, an increase of 4% sequentially and 11% year-over-year. Adjusted EBITDA of $167MM improved $25MM sequentially, representing 33% operating leverage, and Adjusted EBITDA improved $99MM year-over-year, representing 52% operating leverage from the prior year. This was our fifth quarter in a row of rising EBITDA. Improving market conditions in North America and the Middle East since last year, together with the cost reductions we’ve executed, have driven our profitability improvements. However, the industry hit yet another headwind this summer, as oil prices began to decline in April and remained persistently weak in the third quarter. As a result, since peaking at 958 rigs in late July, the US rig count began a shallow decline to 913, which is where we were in the US back in May of this year. Rig reactivations have slowed and many of our drilling contractor customers are, once again, curtailing spending with our Rig group.
Transcript of National Oilwell Varco, Inc. Third Quarter 2017 Earnings ...
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NationalOilwellVarco,Inc.ThirdQuarter2017EarningsConferenceCallRemarksLORENSINGLETARYVicePresident,InvestorandIndustryRelationsWelcomeeveryonetoNationalOilwellVarco’sthirdquarter2017earningsconferencecall.WithmetodayareClayWilliams,ourChairman,President,andCEO,andJoseBayardo,ourSeniorVicePresidentandCFO.Beforewebegin,Iwouldliketoremindyouthatsomeoftoday’scommentsareforward-lookingstatements,withinthemeaningofthefederalsecuritieslaws.Theyinvolverisksanduncertainty,andactualresultsmaydiffermaterially.Nooneshouldassumetheseforward-lookingstatementsremainvalidlaterinthequarter,orlaterintheyear.Foramoredetaileddiscussionofthemajorriskfactorsaffectingourbusiness,pleaserefertoourlatestForms10-Kand10-QfiledwiththeSecuritiesandExchangeCommission.Ourcommentsalsoincludenon-GAAPmeasures.ReconciliationstothenearestcorrespondingGAAPmeasuresareinourearningsreleaseavailableonourwebsite.OnaUSGAAPbasis,inthethirdquarterof2017,NOVreportedrevenuesof$1.84Bandanetlossof$26MMor($0.07)pershare.OuruseofthetermEBITDAthroughoutthismorning’scallcorrespondswiththeterm“AdjustedEBITDA”asdefinedinourearningsrelease.Laterinthecall,wewillhostaquestionandanswersession.Pleaselimityourselftoonequestionandonefollow-uptopermitmoreparticipation.Now,letmeturnthecallovertoClay.CLAYWILLIAMSChairman,President,andChiefExecutiveOfficerThankyou,Loren.Inthethirdquarterof2017,NOVgenerated$1.84Binrevenue,anincreaseof4%sequentiallyand11%year-over-year.AdjustedEBITDAof$167MMimproved$25MMsequentially,representing33%operatingleverage,andAdjustedEBITDAimproved$99MMyear-over-year,representing52%operatingleveragefromtheprioryear.ThiswasourfifthquarterinarowofrisingEBITDA.ImprovingmarketconditionsinNorthAmericaandtheMiddleEastsincelastyear,togetherwiththecostreductionswe’veexecuted,havedrivenourprofitabilityimprovements.However,theindustryhityetanotherheadwindthissummer,asoilpricesbegantodeclineinAprilandremainedpersistentlyweakinthethirdquarter.Asaresult,sincepeakingat958rigsinlateJuly,theUSrigcountbeganashallowdeclineto913,whichiswherewewereintheUSbackinMayofthisyear.Rigreactivationshaveslowedandmanyofourdrillingcontractorcustomersare,onceagain,curtailingspendingwithourRiggroup.
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NOVovercamethisbyputtingupstrongtop-linegrowthinWellboreTechnologies,whichrose13%sequentially,owingtosoliddemandfordownholedrillingtechnologiesglobally.Completion&ProductionSolutionsalsopostedstronggrowth,up5%sequentially,ledbydemandacrossNorthAmericaandtheMiddleEastforfracstimulationequipment,completiontools,andfiberglasspipe.ThesetwosegmentsledNOVhigheroverall,up$76MMinrevenue,andresultedinourlandmixincreasingonceagainto65%ofconsolidatedsalesinthethirdquarter.Oilpriceshavemovedbackupabove$50lately,whichistimelyasourcustomersarelaunchingtheirbudgetingprocessesfor2018.Nevertheless,therecoverynarrativerightnowseemstepidandvisibilityinto2018islimited.Customersseemtobewaitingforsustainedoilpriceimprovementbeforerampinguplandspendingorpullingthetriggeronlong-awaitedoffshoreFIDs.Inthemeantime,wecontinuetoseepocketsofdemandemerging,withthreeyearsofunderinvestmentandcannibalizationand,lately,risingscarcityfuelingdemandincertainareaslikefracequipment.Otherpocketsofdemandarisefromtechnologieschangingthelandscapeandprovidingopportunity.Thinkclosedloopdrilling,downholetools,andcompletiontools.Strategically,NOVcontinuestopivotintotheseareaswithsmartorganicinvestmentsandrifle-shotM&A.CapitaldeploymentatNOVisguidedbyourconvictionthatunconventionalshaletechnologiesarethemostimportantdevelopmentinenergyinageneration;thatgun-barrel-straightboreholes,geo-steeredtothesweetspotswithinformations,withlowtortuosity,aremateriallymorevaluabletoE&Pcompaniesthanlesserqualityattempts;andthatNOVcanbringproprietarytoolstooilfieldservicecompaniestodeliverthesewellbores.Webelievethatcompositetechnologieswilldefeatcorrosionintheoilfield,themostexpensiveproductionproblemthatmanyofyouprobablyneverthinkabout.Webelievethatbigdataandpredictiveanalyticswilldriveefficiency;andthat,asthelargestOEMofdrillingequipment,NOVisuniquelypositionedtobringautomationandbigdatasolutionstotheoilfield.WebelievethatasproductionshiftstounconventionalbasinstheindustrywillneedmorefluidsprocessingtechnologiesthatNOViswell-positionedtodeliver.Andwebelievetheindustrywilladoptamoreefficientindustrialmodeltoconstructthefloatingproductionfacilitiesneededtodeveloptheplanet’simmensedeepwaterresources.Wecontinuetoexecuteourbusinessplanaroundtheseperspectives,whilereducingcostsandmonitoringfundamentalsthatareslowlybutsteadilyimproving—UScrudeinventorieshavedeclined23ofthepast29weeks,pointingtosteadilytighteningsupply.NOV’soptionalityintoamorevigorousrecoverycontinuestobeenhancedbyouractionsthroughthedownturn.AsI’vedoneonpastcallsI’dliketotakeafewminutestotellyouaboutoneofthecompellingbusinessesthatresidewithinNOV’sportfolio.NOVTuboscopeistheworld’slargestprovideroftubularinspectionandinternaltubularcoatingservices,comprisingonequarterofWellboreTechnologiessegmentrevenues.Theoilbusinessusesalotofpipe.Alotofpipe.Forexample,in2017theindustrywillconsumeabout14MMtonsorabout1.3BfeetofOilCountryTubularGoods,or“OCTG”pipe–casing,tubing,anddrillpipe.Theoilandgasindustrywilldrillandcaseandcompleteanestimated650MMfeetofboreholegloballyin2017.OnaveragetheindustryconsumesabouttwofeetofOCTGpipeforeveryfootofboreholeitdrills.AsIsaid,that’salotofpipe—infact,enoughtocompletelyencircletheglobeninetimes.Thismakestheoilandgasindustryanenormousconsumerofsteel.ThereareliterallyhundredsofsteelmillsaroundtheworldthatmanufactureOCTGpipeofallsizes,weightsandgrades,tomeetthedemandsofanindustrywithavoraciousappetite.Theindustry’sproductivitygainsindrillingarewelldocumented:eachrigisdrillingmorewellboreseachyear,andeachwellborecontainslongerandlongerlaterals.Allthesegainsareconspiringtodriveever-higherconsumptionofOCTGpipeforeachoperatingrig.Consequently,steelmillsthatmanufactureOCTGpipehavebeenaddingcapacity,mostlyinNorthAmerica,tomeetthisravenousincrementaldemand.Pipemillsgenerallypreferlongrunsofthesamepipesize,sincelargerrunsallowthemtospreadtheirhighsetupcostsacrossmorepipe.Theyfrequentlysellrawpipeor“greentubes”topipeprocessors,which
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quenchandtemperthemtoadjustthemetallurgytodesiredstrengthandhardness.Thepipeisthensoldtodistributors,whoperformtheimportanteconomictaskofbreakingthelargeheatsdownintosmallerquantitiestobetterfittheneedsoftheirE&Pcustomers.OCTGdistributorsaremostlyprivatebusinessesthattakespeculativepositionsinvarioussize,weightsandgradesofpipewheretheyforeseethehighestfuturedemand.SomelargerE&Pcustomersperformtheirownbuyingfunctions,buteventhesewillsupplementtheirpipeneedswithoccasionaldistributorpurchases.So,thefirstpointI’dliketomakeabouttheOCTGworldisthatitisusuallycharacterizedbylotsoftransfersofownership,jointsofpipeflowfrommillstoprocessorstodistributorstooilcompanies.Iwouldaddthatthereexistsarobustmarketforusedpipeaswell,distributorsthatpurchaseusedpipefromoneoilcompanytoselltoanother.ThesecondpointI’dliketomakeisthatpipedefectsarenotuncommon.Themanufacturingprocesscanresultincracks,voids,inclusionsandmillscale.Pipecanbedamagedinhandlingandaccidentallybedeformedtobeoval.Usedpipemaysufferfromcorrosionandpitting.Allofthesecanaffectthepressureratingandfutureperformanceofthepipe.ThethirdpointI’dliketomakeisthatpipefailureintheoilfieldisaseriousmatter.It’salwaysexpensiveandfrequentlydangerous.Fishingjobsarecostly,andifunsuccessful,theoperatormaylosethewellcompletely.Around80yearsago,NOV’sTuboscopebusinessrecognizedtheneedtobringbetterqualityassurancetotheoilfieldpipeworld,adaptingmilitarytechnologyusedtoinspectcannonbarrels.Todayweusesophisticatedphysics,includingmagneticfluxleakage,eddycurrent,andultrasonictechnology,toprovidecriticalqualityassuranceforoilcountrytubulars.Andeverytimeanewjointofpipeisborn,orprocessed,orsoldtoadistributor,orsoldtoanoilcompany,orpulledoutofanexistingwellandre-runorresold,thereisanopportunityforTuboscopetoinspectthepipetoassureitsnewownerthatitisfit-for-purpose.Andwithenoughjointstogoaroundtheworldninetimesin2017,thatisaterrificbusiness.Itisessentiallyatollingbusiness,whereinNOVTuboscopeistheGoodHousekeepingSealofApprovalforpipetransactions.AsinglejointofOCTGpipemaybeinspectedseveraltimesthroughoutitslife.Weprovidethiscriticalserviceinthesteelmills,inthepipeprocessor’soperations,inthepipeyardsofouroilcompanyanddistributorcustomers,ontherigsthatrunthepipeandpullthepipe,andinourownnetworkofpipeinspectionyards.Ournetworkofpipeyardsis,webelieve,thelargestintheworld.NOVoperates75pipeyardswhichofferpipestorageasaservice,whichcover2½squaremiles,over1,600acres.Letmesaythatagain:weoperate75yardstotalingmorethan1,600acres,andtodaywe’reinpossessionof88MMfeetofOCTGpipe—over2½MMjoints,or3½weeksofglobalforwardsupply.Imentionedearlierthatpipecanbedamagedintransport.It’sheavyandexpensivetoloadonatruckandmove.ThatmeansthatthepossessionofOCTGpipewithinouryardsiseffectivelyacompetitiveadvantage,becauseadditionalservicescanbeperformedonthepipebyNOVwithouthavingtoshipitbytruck,reducingriskandcost.Consequently,we’vesteadilyexpandedourservicesbeyondwarehousingandinventorytrackingtoincludeserviceslikethreadrepair,buckingoncouplings,applicationofexternalcoatings,straightening,bellingforourproprietaryZap-LokTMflowlineinstallationmethod,installationoffiberglassTKTMliners,andinstallationofourThru-KoteTMsleeves,tocombatcorrosion,justtonameafew.Wealsohardbanddrillpipe,repairtooljoints,andinstallRFIDchipstoprovidefulllifecyclemanagement-ourTracIDTMsystemcapturescompletedrillpipehistory,includingownership,usage,andservice.OneparticularpipeservicehasgrownthroughthepastseveraldecadestobecomeatremendousNOVfranchise.Yearsago,NOVTuboscopepioneeredaproprietarymethodofapplyingthermosetplasticcoatingstotheinnersurfaceofOCTG,somethingwedoat15facilitiesglobally,tocombatcorrosionandtoimprovethehydraulicperformanceofpipe.Onemajoroilcompanyreporteditachieved25%higherflowratesfromitsGulfofMexicowellsbyrunninginternallycoatedtubulars.Iwouldaddthatthecostoffailureofinternalcoatingsishigh.Thousandsoffeetofpeelingthermosetplasticscaneasilyclogupawellandnecessitateanexpensiveworkover.AstheoldestandlargestapplicatorofinternalOCTGcoatings,NOVTuboscope,again,isthemosttrustednameinthisbusiness.ThereareveryfewjointsofpipeintheoilfieldthatNOV’sTuboscopeunitdoesnottouchatsomepoint,andasdrillingefficienciescontinuetorisetheamountofpipeconsumedbyeachdrillingrigalsoriseseveryyear;infact,it’supabout
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50%overthepastfiveyears.This80-year-oldbusinessunit,whichderives84%ofitsrevenuefromlandmarkets,providesyetanotherexampleofhowWellboreTechnologiesbenefitsfromfootagedrilledmuchmorethanrigcount.TurningtoNOV’sCompletion&ProductionSolutionsSegment,wearebenefittingfromrisingdemandforfracstimulationequipmentinNorthAmericaandtheMiddleEast,ascompletionintensityinunconventionalreservoirshascontinuedtorise.NOV’sIntervention&StimulationEquipmentbusinessunithaswitnessedrisingdemandforthecapitalequipment,consumables,andaftermarketserviceandrepairthatitprovidestooilfieldpressurepumpers,coiledtubingoperators,andwirelineoperators.ItisthelargestbusinessunitwithinCompletion&ProductionSolutions,accountingforabout30%ofthesegment’srevenue.Completionintensityofunconventionalwellscontinuestomoveupandtotheright.Lateralsaregettinglonger,stagecountsareincreasing,pressuresandproppantloadingsperstagecontinuetorise,andcompletionsnowrepresent65%ormoreofaverageNorthAmericanwellcosts.Thepressurepumperswhoexecutethesefracjobs,ourcustomers,areputtingmoreabrasivesandmorehorsepowerintothegroundthaneverbefore,andexecutingmorestagesperday,whichmakesthisendeavorhighlycapital-intensiveandhighlyconsumptiveoffraciron.Morestagesrequiremorecoiledtubingequipmenttomilloutplugsusedtoseparatethestages.And,morestagesrequiremorewirelineequipmenttodeployplugsandperforatinggunsdownhole.NOVisaleadingproviderofalloftheequipmentusedtoexecutethesecompletions,particularlythehighervalue-addedtechnologiesandcomplexprocessequipment,likehydrationunits,chemicaladditivesystems,blendersandcontrolsystems.Weprovidedatavancontrolcentersequippedwithindustry-leadingsoftwaresystemsthatcoordinateoperatingresultsandreducemaintenance,enablingoperatorstocontrolhigh-pressure,high-volumepumpingofabrasiveproppantsdownholethrough24fracunitssimultaneouslyfromasinglecontrolpanel.Complex,demandingoperationslikethisrequirehigh-reliability,whichiswhywedevelopedbondedBlueThunderTMvalvesforfracunitsthatlast50%longerthancompetitorproductsinthemostdemandingfracjobs.Ournewstainless-steelPatriotTMfluidendstriplethelifeofconventionalfluidends,withdesignimprovementsthatmakethemeasiertoservice.Coiledtubingisacontinuouslengthofsteeltubing,typicallyaroundtwoinchesindiameter,andupto30,000feetinlength,whichiswoundonareelaswemanufactureit.Itisusedtoperformarthroscopicsurgeryintheoilfield,withthecapabilitytoenterexisting,evenflowingwells,andtraverselonglaterals,toperformcompletionandwellremediationoperations,likesettingplugs,perforating,pumpingacid,orevenpumpingfracjobs.NOVistheleadingproviderofcoiledtubinghardwareandconsumables,datingbacktothe1970s.Weprovidecoiledtubingunits,controlsystems,pressurecontroldevices,andthecoiledtubingitself,whichisaconsumablethatmustbereplacedregularly.We’vedeliveredover1,500NOVHydraRig-manufacturedunitsinservicetoday,andmanymoreinjectorheadsaswell.Coiledtubingistheonlyindustrialapplicationofsteelthatpushessteelpastitsplasticdeformationlimitswhiledemandingitcontinuetoholdpressureandweight.Butthereisalimittothecapabilitiesofsteel.Everyroundtripdownholetakescoiledtubingthroughsixplasticdeformationcycles.Operatorsmusttrackthenumberofcycleseachcoiledtubingstringhasbeensubjectedtosothatitdoesnotexceeditslimits,andthusfail.NOV’sCerberussoftwaresystemhasbeentheindustrystandardincoiledtubingmonitoringforthispurposeforover20years.Theseoperatingconstraintsdictatethatcoiledtubingstringsberetiredandreplacedeverytwotothreemonths,undernormalpressureandutilization.Asaleadingproviderofthesecoiledtubingstrings,NOVrecentlyintroducedQT-1400,thehigheststrengthcoiledtubingintheworld–withathreefoldincreaseinoverpullcapability,lighterweight,andthinnerwall–enablingpeopletoreachfartherinplug-and-perfandinterventionoperations.WearealsothelargestmanufacturerofcoiledtubingBOPstacksthroughourTexasOilToolsname,offeringourcustomersthecapabilitytomonitor,remotelyandinreal-time,thestatusofthecoiledtubingblowoutpreventerrams.Weprovidereal-timeconditionmonitoringofcoiledtubingoperationsdesignedtoidentifyequipmentfailuresbeforetheyoccur,includingpumps,filters,engines,hydraulicsystems,lubricationsystemsandspecificbearingswithinrotatingmachinery.Thesystem’salarmscanbeconfiguredwithremotealertssentviatextmessage.Additionally,E&Poperatorsandservicecompanyexpertscanmonitorcontrolpanelsremotely,tofollowinrealtimetheprogressofhigh-riskjobs.Onelarge
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independentreportsthattheyhaveavoidedincidencesofstuckpipebyutilizingthissystem,whichtheynowuseroutinely.Inadditiontofracspreadsandcoiledtubingunits,theIntervention&StimulationEquipmentbusinessunitisaleadingproviderofnitrogenequipment,withover1,000nitrogenunitsinthefield.Itisaleadingproviderofsnubbingunits,withover150snubbingunitsinthefield.Wearegloballeaderindesignandmanufactureofwirelineproductsforslicklineandelectriclineapplications,includingcriticalpressurecontrolequipmentlikewirelinelubricators.Infact,ourElmarbrandhasdeliveredover60,000feetoflightweightwirelinelubricatorusedtocontrolpressure.WithourenormousinstalledbaseofoperatingequipmentNOVisuniquelypositionedtoprovideaftermarketserviceandrepairastheOEM,andwehaveinvestedsteadilyinthisopportunity.Everythingwemakeinthisareaisexperiencinghighwearandtear.Forinstance,coiledtubinginjectorheadstypicallyundergoamajoroverhaulat10MMrunningfeet.Fiveyearsago,thiswouldbetwotothreeyearsofservice;todayourcustomersarehitting10MMrunningfeetinayear,triplingthefrequencyofcoiledtubingunitoverhauls.Withtrainedtechniciansinmorethan40locationsacross14countries,wehavewhatourcustomersneed,whentheyneedit,wheretheyneedit—preciselywhatourcustomersexpectfromNOV.Today,aftermarketservicesandsparesaccountforover40%oftheIntervention&StimulationEquipmentbusinessunitsales.Here,asineveryotherbusinessunitinNOV,wedeliverfield-provensolutionsthatmaximizeefficiency,improveservicevalue,andincreaseourcustomers’bottomline.TuboscopeandInterventionandStimulationEquipmentaretwomoreterrificbusinesseswithintheNOVportfoliothatareglobalmarketleadersthattheoilfieldrelieson.Bothprovidemission-criticalequipmentandservicestoourcustomers’globaloperations.Bothbenefitfromsustainablecompetitiveadvantage,throughscaleandscopeandtechnologyandinstalledbase.BeforeIturnitovertoJoseI’dliketothankNOV’sincredibleemployees.YoumayhavenoticedthatwedidnotcalloutanyimpactfromHurricaneHarveyinourthirdquarterresults,despitebeingbasedinHoustonwithnearlyonehundredfacilitiesintheGulfCoastareaaffectedbythisstorm.Companyfacilitiesendured,forthemostpart,prettyminimaldamage.Unfortunately,manyofouremployeeswerenotsolucky.Fully20%ofourworkforceliveintheareasaffectedbythestorm,and600NOVemployeesweredisplacedfromtheirhomesbyfloodwaters.Ourthoughtsandprayersremainwiththemandtheirfamiliesastheyworktoputtheirlivesbacktogether.IamparticularlyproudofthehundredsoffellowNOVemployeeswhopitchedintohelptheircoworkers,families,friendsandneighbors,byrescuingthosetrappedbyhighwater,byservingmeals,byvolunteeringinshelters,andbypullingwetcarpetandsheetrockoutofnearly140employeehomes.Youworkedveryhardtotakecareofbothourco-workersaswellasourcustomersthroughthisperiod.IhavealwayssaidNOVisaspecialplaceandithasneverbeenmoreapparentthanithasbeeninrecentweeks.Youfolksareawesome.Allofyouhavemyheartfeltgratitude.Jose?JOSEBAYARDOSeniorVicePresidentandChiefFinancialOfficerThanks,Clay.Torecapourthirdquarterresults,NOVconsolidatedrevenuesincreasedby$76MMfromthesecondquarterof2017to$1.84B.Strongdemandforourtechnologies,productsandservicesfromourshort-cyclelandbusinessesinNorthAmerica,alongwithgrowingdemandintheMiddleEast,droveourtoplinegrowth,morethanoffsettingcontinuedchallengesintheoffshoremarketandotherinternationallandmarketsthatremainstagnant.Duringthethirdquarter,land-relatedrevenueswere65%oftotalcompanyandNorthAmericasupplied43%ofsales.EBITDAimproved$25MMto$167MM.
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Forthefirsttimeintwoyearsweachievedatleastbreakevenoperatingprofitforeachofourreportingsegmentsbutreportedaconsolidatedoperatinglossof$7MMafteraccountingforcorporatecosts.Weanticipatewewillhavepositiveoperatingincomeinthefourthquarter.AfewitemsworthnotingrelatedtotheconsolidatedP&L:
- SG&Atickeddownanother$1MMsequentially;- InterestIncomeincreased$7MMduetoaninterestpaymentreceivedfromafavorablerulingrelatedtoalong-
disputedtaxassessment;- Otherexpenseincreased$4MMduetoFX;and- Ourtaxratecameinat10%asexpected.
Alsoofnote,forthefirsttimeinquiteawhile,wereportednoone-off"otheritems"asrestructuringinitiativesreachedatleastatemporarypause.Inthethirdquarter,cashflowfromoperationswas$232MM,andafterdeducting$42MMincapitalexpenditureswenetted$190MMinfreecashflow,givingusafreecashflowmarginof10.4%.WhilewebelieveourfreecashflowmarginwillremaininthetopquartilefortheOFS&Espace,weknowwecandobetter.Wearerefocusingoureffortsandtakingactiontoimproveourmanagementofworkingcapital.Weexpectimprovementsinourcashconversioncycle,combinedwithourcapital-lightbusinessmodel,willhelpensureweremainatornearthetopofthepackinfreecashflow,andwillultimatelyhelpusimproveourreturnoncapitalemployed.Ourcashbalanceincreased$192MMto$1.72BatSeptember30,2017andtotaldebtremainedat$3.2Bwithnothingoutstandingonourcreditfacility.Asaresult,ournetdebtdecreasedto$1.49B.Duringthefourthquarter,weplantopayoffa$500MMSeniorNotethatwillreachitsmaturityonDecember1,2017usingcashonhand.Rig-relatedbusinessesTheoverarchingmacrocommentaryforourRigbusinessesisthatthecommoditypricepullbackthatbeganlateinthesecondquarter,whichsawoilpricesfallintothelow-to-mid40s,andensuingactivitydeclinescausedourdrillingcontractorcustomerstoretrenchandstopspendingonallbutthemostessentialofitems.Theresultforuswasdeferreddeliveriesandasharper-than-anticipatedfall-offinordersfornewequipment,re-activationservices,andspareparts.RigSystemsDuringthethirdquarter,ourRigSystemsSegmentgenerated$330MMinrevenue,down$16MM,or5%,sequentially.EBITDAincreasedby$2MMto$28MM.Asdisclosedinourpressrelease,weagreedwithacustomertocanceltwojackupdrillingequipmentpackageordersinexchangeforfirmcommitmentstocontinueforwardwithseveralotherjackuppackagesthecustomerhasundercontract,retentionofdownpayments,andotherconsideration.Theagreementresultedinthedeletionofapproximately$100MMfromthesegment’sbacklogandasmallgainthat,alongwithoutstandingeffortsbyourteamtocontinueremovingcostsandimproveefficiencies,contributedtothesegment’ssequentialEBITDAimprovement.Bookingswerelimitedto$84MMinthethirdquarterascustomersdeferredseveralanticipatedorders,includingalargesubseaBOPstack,intothefourthquarterandbeyond.Amongtheordersreceivedwereseveralrigupgradepackages,fivetopdrives,severalhigh-specwellservicerigs,andpressurecontrolequipment.
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Weareencouragedbythecontinuationofrobustdialoguewithourcustomersregardingrigupgradestoimprovethepositioningoftheirmarketedfleetsandheavyquotingactivity;however,weexpectconversionofquotestoP.O.storemainveryslowastenderspushtotherightandascustomerspostponedecisionstoupgradeuntiltheyhavebettervisibilityintocontractopportunitiesthatareslowtoemergeinanear$50oilpriceenvironment.Despiteourlowbookingsinthethirdquarter,weremainsteadfastinourbeliefthat$1BinannualrevenuerepresentsadraconianscenariofloorforthisbusinessandthatthecurrentleveloforderintakeisincapableofsupportingthelargeinstalledbaseofNOVrigequipmentactivelydeployedaroundtheworld.Weareoptimisticthatbookingswillreturntothe$100MM+rangeinthefourthquarter.Wealsoexpectrevenueoutofbacklogtopick-up$40-50MMasitemsthatpushedoutinthethirdquarterwillbeshippedinQ4.Marginsshoulddecreasebyapproximately150bpsduetoalower-marginmixofbacklogdeliveriesandthenon-recurringnatureofthebenefitreceivedfromthecontractterminations.RigAftermarketDuringthethirdquarter,ourRigAftermarketSegmentgenerated$311millioninrevenue,adecreaseof$30MM,or9%fromthesecondquarterof2017.AsImentionedearlier,activityassociatedwithrigreactivationsandupgradesfellmoresharplythanweanticipatedbecauseofdeterioratingmacroconditions.Theresultingdeclineinsparepartsalesandfall-offinourservicerelatedrevenuedrove47%EBITDAdecrementalsfora$14MMdecreaseinEBITDAto$69MMor22.2%ofsales.Notwithstandingtheoverallsequentialdecline,demandforcertainexpendablesfortheUSlandmarketcontinuedtogrowthroughoutthequarter,particularlydemandforourpumpexpendableswhichreacheditshighestlevelsince2014.Additionally,wedidseea40%increaseinthenumberofspecialpurposesurveys;however,customerscontinuetoreducethescopeandresultingspendofmostprojectsastheyseektolimitspendingonlytowhatisabsolutelynecessary.RecentimprovementsinsparepartbookingsgiveussomeconfidencethatfourthquarterRigAftermarketresultsshouldbein-linewiththethirdquarter,andweexpectthesegmentwillreturntoaslow,steadypaceofimprovementin2018ascustomerinventoriesofsparepartsaredepleted,opportunitiestocannibalizepartsdiminish,andvisibilityintolonger-termactivitylevelsimproves.WellboreTechnologiesDuringthethirdquarter,ourWellboreTechnologiesSegmentgenerated$693MMinrevenue,anincreaseof$79MMor13%.AdjustedEBITDAincreased$28MMto$94MM,or13.6%ofsales.NorthAmericaandtheMiddleEastledsegmentgrowth,andwealsorealizedmeaningfultop-lineimprovementsineverymajorregionoftheworldoutsideofAsia.Webelieveourgrowthinthissegmentcontinuestooutpaceglobalactivitylevelsforthreeprimaryreasons:
- First,afternearlythreeyearsspentdepletingequipmentinventoriespurchasedinaperiodofmuchhigheractivitylevels,customersneedtoreplenishtheirsupplyofthecriticaltechnologiesNOVprovidestohelpthemdrillfartherandfaster.
- Second,fasterdrilltimesresultinmuchmoreaggressiveconsumptionoftheequipmentweprovide,andproductdemandincreaseswitheachadditionalfootdrilledperday.
- Third,therapidadoptionofourlatestdrillingtechnologiesisdrivingmarketsharegainsaroundtheworld.WeseecompellingevidenceinvirtuallyallourbusinessunitswithinourWellboreTechnologiessegmentthatsupportsourbelief,andIwanttogiveafewexamplesthismorning.
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InourDownholeToolsbusinessunit,whichdesigns,manufacturesandsellsdownholemotorsandothercriticaldrillingtools,weexperienced24%sequentialrevenuegrowthintheUSasthereappearstobeaninsatiabledemandforadditionalmotorsandtoolsasscarcitybuildsdespiteaplateauingrigcount.AlsosupportingouroutsizedgrowthinourDownholebusinessarenewproductsandtechnologiesthatdirectlycontributetoourcustomers’abilitytoincreasetheirrateofpenetrationandlaterallengths.ToolslikeournewAgitatorHETM,whichprovidesgreaterfrictionreductionthanourstandardAgitatorTMtooltohelpdrilllonglateralsmoreeasily,aredrivingsignificantimprovementsindrillingresultsforourcustomers.InWestTexas,forexample,acustomerdrilledtheirfastestandlongest8¾-inchsectioninReaganCountyrealizingrateofpenetrationimprovementsof74%whileslidingand38%whilerotatingallowingthemtodrillatanaveragerate79ft/hrfasterthanadirectoffset,whichusedastandardAgitator.InColorado,theAgitatorHEallowedanothercustomertodrillwith22%lessweightonbit,andan18%decreaseinpressuredropversusthestandardAgitatorsignificantlyincreasingrateofpenetration,andreducingwearonthebottomholeassemblyandotherdrillingequipment.Asaresultoftherapidgrowthindemandformotorsanddrillingtools,we’veaddedthirdshiftstomanyofourNorthAmericanmanufacturingandservicefacilities,andweareevenstartingtoaddafourthshiftincertainfacilitiesuntilweareabletocatchupwiththerecentup-tickindemand.WithinourReedHycalogbusiness,we’realsorealizingrapidmarketadoptionfromourrecentlyintroducedproductsandtechnologies.Ourrecently-establisheddirectionaldrillingtoolsplatformalsorealizedoutsizedgrowthinQ3,aswesecuredmultipleordersinkeyinternationalmarketsforourTolteqTMmud-pulsemeasurement-while-drillingtools(MWD)andourVectorTMseriesrotarysteerablesystems.Ourcustomizeddrillbitsoutfittedwithindustry-leadingshapedcuttertechnologycontinuetosetfieldrecordsaroundtheworld,resultinginsharegainsinkeymarkets.OurnewChainsawbitdesignfeatures3Dcuttersonthebit’sprimarybladesthatpre-fracturetheformationmakingiteasierforthecylindricalcuttersonthesecondarybladestoshearofftheremainingrock,boostingthebit’srateofpenetration.AftersuccessfullytrialingtheChainsawdesignintheUSlastquarter,wetookthetechnologyinternational,wherewearealreadysettingfieldrecordsintheMiddleEast. And,oureVolveTMdrillingautomationproductsandservicesaredeliveringsignificantimprovementsindrillingefficienciesandgainingmoretractionwithcustomersaroundtheworld.We’vehelpedcustomersrealizedrilltimeimprovementsofupto50%andaredeliveringanunsurpassedlevelofinsightintodownholeconditionsthatleadtosignificantimprovementsinthepredictabilityandconsistencyofdrillingoperations.Lastly,withinourdrillpipebusinesswesawrevenuegrow17%sequentially.Growththatiscertainlydrivenbydepletedinventoriesinourcustomers’possessionafterseveralyearsofunderinvestmentinthiscriticalproduct,andgrowththatiscompoundedbysignificantincreasesindrillingintensityasdrillstringsrequirehigher-torqueconnectionswhenpushedharderaround90-degreebendsandthrougheverincreasinglateralwellborelengths.Yet,ourindustry-leadingtechnologyhasdrivenmuchoftherecentgrowthwe’veseeninthisbusiness.WedesignedourDeltaTMpremiumdrill-pipeconnectionstoimprovedrillingtimesandreducetotalcostofownership.Thethreaddesignrequiressignificantlyfewerturnsfromstabtomakeupthancomparableconnectionsandrequiresnostabbingguides,makingitsignificantlyeasiertohandleonarig.Thefastermakeupoftheconnectionispartiallyaccomplishedbydeeperstabbing,meaningtherearemorethreadsengagedatthetimetwojointscometogether,whichminimizesdamagebymoreevenlydistributingstressesontheconnection.AfterafewquartersofuseinthefieldsofNorthAmerica,theMiddleEast,anddeepwaterGulfofMexico,wearepleasedtoconfirmourclaimsoflowercostofownershipaswe’veseenrecutratesoflessthan1%afterourinitialrunsonthisconnectionversusanaverageofrateof10to20%forourpriorgeneration,market-leadingconnections.
7909ParkwoodCircleDriveHouston,Texas77036,USA
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Evenwiththerecentgrowthinourdrillpipebusiness,wesuspectthereispent-updemandinthesystemthatcontinuestobuildwitheachpassingday.InourTuboscopepipeyardsthatClaydescribedearlier,we’veseencustomer-owneddrillpipeinventorydecreasebyapproximately17%yeartodatesupportingourviewthatexistinginventorieswilleventuallyneedtobereplenishedinamaterialway.Thoughwebelievecustomershavemostlyexhaustedtheir2017budgetsandexpectlighterbookingsandflatrevenuesthroughyear-end,marketdynamicsappeartobesettingthestageforaninflectionindemandduring2018.AcrossourWellboreTechnologiesSegment,weexpecttocontinuerealizinggrowththatoutpacesthebroadermarketinthefourthquarterforthesamethreereasonsImentionedearlier:thedepletionofNOVproductsandtechnologiesincustomerinventories,seculartrendsdrivingincreaseddrillingintensityandacceleratingadoptionofourlatesttechnologies.Specifically,weexpecttorealize300to500basispointsoftop-linegrowthwithstrongerincrementalmarginsthanwesawinthethirdquarter.CompletionandProductionSolutionsOurCompletion&ProductionSolutionsSegmentgenerated$682MMinrevenueduringthethirdquarter,anincreaseof5%or$30MMsequentially.RobustcompletionsactivityinNorthAmericaandtheMiddleEastdrovestrongdemandforourInterventionandStimulationEquipment,FiberGlassSystems,CompletionTools,andProcessandFlowTechnologiesbusinessunits,partiallyoffsetbydeclinesinouroffshore-orientedoperations.Inlinewithexpectations,EBITDAmargindecreased80bpsto14.2%duetolessfavorablemixandFXbenefitsrealizedinthesecondquarter,whichasanticipateddidnotrepeat.Specifically,oursubseaflexiblepipe,floatingproductionandconductorpipeconnectionbusinessespostedlowermarginssequentiallyinthefaceofcontinuedoffshorechallenges.Thesegmentbooked$463MMinnewordersduringthethirdquarterfora119%book-to-bill.Almostallbusinessunitsachievedbook-to-billsatornear100%andweendedthequarterwithatotalbacklogof$974MM.Favorableseculartrendssupportincreasinggrowthinourland-orientedbusinesseswithinthesegmentand,weexpect,willcontinuetodosointhefuture.Risingwellcounts,longerlaterals,growingnumberoffracstages,andenhancedcompletiontechnologiesmeaningfullyincreaseserviceintensityandthestrainplacedoncompletionequipment.TheprimarybeneficiaryoftheseculartrendsinthissegmentisourInterventionandStimulationEquipmentBusinessUnit.Thebusinessunitachievedabook-to-billofapproximately154%,which,asClaymentioned,marksthefourthconsecutivequarterwhereorderintakeexceeded100%book-to-bill.Increasingserviceintensitycombinedwithourcustomers’year-endrushtoprocurenewpressurepumpingequipmentbeforeTierIVemissionsstandardscomeintoeffectmorethanoffsetcautiousnesssurroundingcapitalequipmentcommitmentsinasub-$50oilpriceenvironment.Thisquarterwebookedtwocomplete50,000-HPfracspreads,plusanadditional37,500-HPofindividualpumpunits,bringingouryear-to-datetotalofpressurepumpingequipmentordersabove400,000HP.Wealsobookedtwocoiledtubingunitsandanumberofdiscretepiecesofpressurepumpingsupportequipment,includingblenders,hydrationunitsandliquidadditivesystems.Additionally,wereceivedcustomercommitmentsforextensivepressurepumpingrefurbishmentprograms,bringingourcommittedrefurbishmentstoover100pumpingunits.OurFiberGlassSystemsBusinessUnitcontinuestoseeconsiderabledemandfromMiddleEasternmarkets.WebookedourlargestordereverofFibersparTMspoolablecompositepipeintheMiddleEast.Customersthereincreasinglyseekcorrosion-free,lightweight,easytoinstallproductsforgatheringandinjectioninfrastructuresystems.Weanticipateregionaldemandforcompositesolutionstocontinue,whichiswhywe’rebuildingafiberglassplantinSaudiArabiawhereweexpecttobeupandrunningbymid-2018.
7909ParkwoodCircleDriveHouston,Texas77036,USA
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OurCompletionToolsBusinessUnitalsoexperiencedsignificantwinsintheMiddleEastduringthethirdquarter.Wesuccessfullyqualifiedandusedouri-FracCEM™ball-drop-activatedmultistagefracsleevesandBurstPortSystemTMtohelpourcustomersuccessfullycompletethetoesectioninarecord-settinglong-stringcompletion.OurCompletionToolsbusinessunitalsonotchedafewkeywinsintheMiddleEastforitsrecentlyintroducedlinerhangersystems.TheMiddleEastisalsoastrongsourceofgrowthforourProcessandFlowTechnologiesbusiness,specificallyforproductionchokes,watermanagement,separation,andearlyproductionequipment.IntheUS,thebusinessunitalsocontinuestoseegrowingdemandforproductionchokesandprocessingequipment,whichincludeswatertreatmentsystems.Inthethirdquarter,wesecuredourlargestvalueordereverforasaltwaterdisposalfacility,andwesoldtwoofourWaterWolfTMDynamicOilRecoverysystems.OurWaterWolfsystemrecoversoilandremovessuspendedsolidsfromproducedwaterinasinglestageoftreatmentusinghydro-cyclonetechnologythatreplacesusingchemicals,filtersortanks.Thesystemsignificantlyimprovesoilrecoveryandreduceswaste,improvingeconomicsforourcustomers–yetanotherexampleofhowwehelpourcustomerslowertheirmarginalcostperbarrel.OutsideofbrightspotsinUSandtheMiddleEast,demandremainsmuted.Becauseoflowcommodityprice,largecapitalequipmentpurchaseshaveyettomanifestinmostinternationalmarketsandoffshore.Forthefourthquarter,weexpectbookingswilltaperoffasmostofourcustomers’2017budgetsareexhausted,theopportunitytosecureTierIIpressurepumpingequipmenthaspassed,andcommoditypriceoutlookremainsuncertain.Afterseveralquartersinarowofstrongbookings,thesegmentiswellpositionedtorealizemid-singledigitpercentrevenuegrowthinthefourthquarter;however,weexpectbusinessmixshiftsandlowermarginsfromouroffshorerelatedbusinessestopushEBITDAmarginsdownaround50basispoints.Weareincrediblyproudoftheorganization’stenacity—havingdeliveredfivequartersinarowofimprovingresultsamidstchallengingmarketconditions.Whileheadwindswillpersistina$50world,webelievetheeventualcollisionbetweenshrinkingglobaloilinventories,steadilyimprovingdemand,underinvestmentbytheindustry,andfavorableseculartrendswilldrivestep-changeimprovementsinourbusinesses.Untilthathappens,thetalentedanddedicatedteamsatNOVwillremainlaser-focusedonmakingthemostofeachmarketopportunity,squeezingouteverypossibleefficiencyimprovement,investingincompellingsolutionsforourcustomer,andenhancingthepositionofouroperationsinthemarketsthatwillmattermostinthefuture.Withthat,we'llopenthecalltoquestions.
