Earnings Call: Q1 2021

Apr 28, 2021

Good day, ladies and gentlemen, and welcome to the NOV First Quarter 2021 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 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 Q1 2021 earnings conference call. With me today are Clay Williams, our Chairman, President and CEO and Jose Bayardo, 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 uncertainties 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 ks 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 Q1 of 2021, NOV reported revenues of $1,250,000,000 and a net loss of $115,000,000 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. Now let me turn the call over to Clay. Thank you, Blake. 2020's 1 2 punch of an oil supply price war followed closely by an oil demand crushing global pandemic led to a sharp decline in demand for oilfield equipment and consumables through the year. NOV's results for its Q1 of 2021 Reflect the full impact of the shockwave emanating from the combination of these events that led to this historically painful downturn As we reported in our operational update on March 16, the quarter was further impacted by other factors. Severe winter weather and power outages in Texas and Oklahoma led to 63 NOV facilities being shuttered for a week or more. Additionally, new pandemic control measures flared up overseas, which shut down another couple of large plants and disrupted our supply chains for certain raw materials, notably fiberglass and resin. And as if that weren't enough, the quarter also ended up being impacted by higher costs On 2 projects related to poor execution on our part. In one case, a new pipe design has proven more expensive to manufacture than expected. And another, an offshore platform component was delayed because our engineering took longer than expected. Both have been corrected. Despite these, the final quarterly result Slightly exceeded our March forecast due to better progress on cost reductions overall, as well as, and this is important, More and more green shoots emerging in the oilfield, particularly in Wellbore Technologies and particularly in North America. Although we still face headwinds in many markets, our confidence continues to mount that the worst is behind us. North American oilfield activity continued Its recovery during the quarter, with March revenues up sharply from January for certain of our earlier cycle domestic businesses, while international results began to point to early signs of a recovery as well. Nevertheless, the Q1 sequential decline in capital equipment revenues reflect the pummeling Our backlog took in 2020, which led to consolidated revenue declines of 6%. EBITDA fell to breakeven, Which is unacceptable and is prompting further cost reductions. As a provider of capital equipment and spares to the oilfield, Our results lag those of our customers, generally speaking. The Q1 of 2021 reflects the preceding 9 months of crashing oil demand And a virtual cessation of capital spending, offset by substantial downsizing and cost reductions. We believe this down cycle It's the worst our industry has ever seen. Oil prices went negative in April. In August, the U. S. Rig count Its lowest level since records began in World War II. North American frac fleet utilization hit single digits. By year end, more than 100 North American oil and gas Companies had filed for Chapter 11 bankruptcy protection with a combined debt of over $100,000,000,000 Were it not for a couple of large projects that were awarded before the lockdown, FIDs for offshore projects in 2020 would have marked the lowest since 1960. Although the recovery has begun taking hold in many markets, Average first quarter rig counts were down 46% for North America land, 36% for international land And down 31% for offshore year over year. When I say that it has been historically bad downturn, what I mean is that it has been a measurably, In this environment, our oilfield service customers are sticking to the tried and true survivor playbook of cannibalizing equipment, spares and consumables, deferring maintenance, reducing spending to bear substance levels and hoarding precious cash. NOV's largest competitor in this environment is idled equipment. By fall, every stacked rig had become an incremental source of drill pipe, shaker screens, handling tools, etcetera. That same dynamic applies across all categories of oilfield equipment when utilization collapses And service companies fight to keep the lights on. A year ago, day rates began racing to fine bottom at daily cash costs, which were insufficient to cover long term maintenance cash costs, much less the capital consumption costs represented by depreciation. For many sectors, year end 2020 day rates reflected desperation. Company is discounting to keep some assets and crews working and spending cash only as a last resort. Consequently, NOV's oilfield backlogs fell throughout the year and Q1 annualized revenue run rate is down 45% from just 5 quarters ago. Here's the good news. 160 years of oilfield history demonstrates that this dynamic is always temporary. The amount of idled equipment available to be parted out falls as activity resumes and dwindling spares and consumables must be restocked As utilization improves, we are beginning to see the early signs of this in certain areas as rigs and frac fleets go back to work. Idled stripped drilling rigs must have cannibalized pumps and handling tools replaced to go back into service. And this rebuilding, restocking and reactivation phenomenon occurs at a time when service company desperation is evaporating And optimism is growing with rising oilfield activity. We know this because NOV has lived through recovery cycles like this in the past. As the oilfield goes back to work, customers will soon start to worry about non trivial cash investment required to reactivate rigs and equipment. Think about the courage required to put your precious cash into the business that almost killed you last year. That's what these customers face when it comes to reactivations. We believe our customers will require higher pricing on their incremental assets going back to work in order to mitigate risk by achieving quicker paybacks on the reactivation investments. Plus, they'll need to cover rising wage pressures and other inflationary forces and more on that in just a moment. And if oil prices remain constructive, pricing momentum will lift margins and return significantly, such as the nature of the cyclical business we serve. NOV will be a key recipient of this unit reactivation investment. As various basins and categories of equipment Pass through the inflection to emerge into higher day rate regimes, their orders for capital equipment will accelerate. This is the sweet spot of our business model. The historical oilfield events of 2020 have led predictably to an enormous disassembly of well construction capability by the oilfield services industry, The tried and true playbook I referred to earlier. Every surviving oilfield service company on the planet has made it this far by downsizing extraordinarily well. Collectively, our surviving customers are the dream team of cost cutters, and they have been hard at it for several years before Tripling their cost cutting ferocity in 2020. It stands to reason that the aggregate capacity to construct wells has been materially diminished In our view, if the global economies continue to recover out of COVID and demand more oil, the oilfield services industry will be tested to get back to normalized levels of wellbore construction sufficient to meet rising oil demand. We think that's more likely than not. First, governments around the world responded to the economic turmoil of the pandemic with unprecedented stimulus packages. For instance, the G10 plus China passed more than 20 $1,000,000,000 of stimulus in the aggregate. This has led to stunning money supply growth. The U. S. M2 is up 27% year over year as an example. Generally, money supply growth and low interest rates inflate asset prices, including commodity prices like oil. Next drug companies invented a vaccine, Several, actually. While there are fits and starts, global vaccination efforts are progressing, positioning the world to emerge from the pandemic lockdown. Huge economic stimulus and a powerful catalyst, vaccines, to more or less simultaneously open economies, Coupled with sharply improved household balance sheets and a widespread desire to get our lives back to normal, well, I cannot conceptualize a more compelling recipe For a synchronized global economic recovery of a size that we have not seen since the 1950s post war boom. We believe this synchronized recovery will lead to rising oil consumption. In Global inventory levels appear to be normalizing ahead of schedule. On the whole, this is a highly constructive backdrop for oil prices for the next few years in our view. Key risks to this thesis include excess Saudi and OPEC capacity, which is scheduled to trickle in over the next several months and the possibility of the return of Iranian crude production. We acknowledge that these both remain prominent unknowns. However, record levels of crude inventories achieved through the first half of twenty twenty have, to the extent we have visibility into them, largely dissipated. That only happens because withdrawals have exceeded additions. So supply held artificially low by OPEC has been less than demand held artificially low by the pandemic lockdown. And the key question is, what will the picture look like as artificial constraints on both ease? Another risk is the productivity of U. S. Shales, which achieved extraordinary levels of growth off and on throughout the past decade. Simulfracs and other advancements point to the relentless march of the domestic E and P industry toward greater efficiencies. But to be fair, The domestic E and P industry was helped in the prior era by 1, gobs of cheap capital that fueled drilling programs seeking production growth And 2, duress in oilfield services that held pricing below that required to replace, let alone earn a return on The capital consumed in the construction of these wellbores. Things have changed. Capital, when they can get it, is far, far more expensive now and it feels like it is becoming even more so as ESG factors play a more prominent role in investment decisions. In incremental investments that will be required to restore oilfield service well construction capabilities will also demand higher returns. Layer in on top of that, the consolidation among domestic E and P operators, the higher costs of attracting labor back to the oilfield while A major economic expansion is underway, giving workers a lot of other high paying options and well, you get the picture. A return to material production growth from U. S. Shales will be more challenging this time around from where we sit. Behind the artificial production constraints imposed by OPEC, Russia and Saudi Arabia, The artificial consumption restraints imposed by COVID economic lockdowns lies oppressive depletion math. All oil wells declined. To what level has the aggregate natural decline of oil wells been obscured by these artificial constraints? We can debate about what the true supply demand picture looks like, but one thing we can all agree on is that both are far more opaque in 2021 than any prior year. After all, we've never had an economic shutdown like this before. My point is this, when the industry materially cuts its expiration, Its development, its steady construction of the platforms, projects and wells that produce the oil that our global economy relies on and further Eviscerates the tools of the oilfield services industry that actually do the work, there will be a day of reckoning. Throughout this historic period, NOV has been steadfast in 1, reducing our costs, which are down $12,600,000,000 Since 2014, including approximately $2,000,000,000 in annual fixed cost reductions 2, improving our cash flow, which has delevered our balance sheet and 3, investing in the next generation of technologies, both for the oilfield as well as emerging renewables opportunities. Whether it's the next Generation of rig 4 technology like our robotic pipe handling system controlled in our Novos digital environment, our Ideal eFrac fleet outfitted with our Quick Latch System and Flex Connect frac hose system to remove both emissions and manpower from the completion process Or NOV Max, our digital platform that brings out brings all the disparate data sources together for the operator to utilize as he or she sees fit. NOV remains at the forefront of the next generation of oilfield technology. Our push into supporting the energy transition focuses on areas Finally, before I turn it over to Jose to go through our segments in detail, let me share some specific examples of the recovery that we believe is just getting started in the oilfield, Beginning with Wellbore Technologies. 7 out of 8 Wellbore Technologies business units posted sequential growth in the Q1, reflecting surging demand for certain products. Consequently, we began to add shifts to manufacturing and we achieved the highest level of absorption we've seen since the Q1 of 2020. NOV witnessed share gains for our Reed Hikalog Bits in West Texas and Saudi Arabia, despite increasing prices due to strong performance and rising activity. Drilling motor demand is also increasing and downhole friction reduction tools are completely sold out in certain North American markets as revenues were up more than 30% sequentially. We pushed drilling motor pricing up double digits in some areas. North American rig instrumentation and solids control services pricing is up double digits on new work Back to pre COVID levels and poised to rise further. In international markets, we expect our wire drill pipe jobs to increase over 25% in the 2nd quarter, As operators become increasingly convinced of the value of real time high bandwidth data from the bottom of their drill strings, something that's only available Our proprietary IntelliServe wire drill pipe technology. Global OCTG demand appears to be picking up, which led to double digit sequential growth in NOV Tuboscope's And despite continuing day rate pressure on drilling contractors, Grant Prideco posted a book to bill greater than 100% As operators are requiring larger 5.5 inches drill pipe to accommodate better hydraulic performance, leading drilling contractors to purchase this pipe with our proprietary Delta Premium On the whole, higher oil prices and higher rig counts, particularly in North America, place Wellbore Technologies at the forefront of the oilfield recovery. On the other hand, Completion and Production Solutions and Rig Technologies segments continue to battle through low capital equipment backlogs and stingy customer spending. However, the CAPS segment saw its book to bill for new capital equipment orders above 100% for the first time since the Q4 of 2019, An indication of better results to come. The group's North American quick turn businesses began to see improvement. North American production Backlog popped 30% and our reciprocating pump backlog grew 69% sequentially. We won another Tier 4 dual fuel fleet upgrade For domestic pressure pumping service provider and demand for coiled tubing strings tripled from its low point in the Q2 of last year. While we lost a large project in Alaska, We did win another large project for Brazil and both projects are evidence that perhaps operators are moving forward with some decisions after protracted COVID related delays. Rig Technologies sees challenging conditions for rig CapEx in the near term, But it did see double digit growth in spare parts orders, followed by 2 record low spare parts order quarters in a row. It has also seen rising inquiries for rig engineering around offshore drilling rig reactivations. So while our first quarter results were terrible, I'm growing increasingly confident that results will improve significantly as the year progresses. Our spare parts, consumables and services businesses tied to activity Are seeing it already and our sales force is wasting no time repairing pricing to acceptable levels. And healing for our capital equipment businesses always begins with rising which we started to see in many businesses for the first time in a year and a half. To NOV employees listening, I again want to thank you for your perseverance and professionalism. You skillfully positioned the company to support our customers and to capitalize on opportunities to serve them better. Most importantly, through a year that has thrown a lot at our team, you've taken care of each other. I'm incredibly proud to serve with you and appreciate all that you do. Jose, Blake and I look forward to better days with you as things improve through 2021. Now, let me turn it over to Jose. Thank you, Clay. NOV's consolidated revenue fell $78,000,000 or 6% sequentially to $1,250,000,000 during the Q1 of 2021. The sequential decline was the result of ongoing austerity from our customer base, operational disruptions from severe weather and COVID-nineteen challenges, which continue to play global supply chains. A simple way to summarize the quarter is that January was extremely slow, February was a frozen disaster, And in March, orders began to pour in and we made up a lot of lost ground, giving us confidence that our results will improve through the rest of the year. Ongoing cost out initiatives, higher margin revenue mix and better pricing limited sequential decremental margins to 22%. However, we take no comfort in this performance given that we are breakeven EBITDA, which is unacceptable in any market environment. We continue to challenge our organization to look for new ways to drive incremental efficiencies. During Q1, we realized $52,000,000 in annualized cost savings and identified an additional $31,000,000 in opportunities, bringing the total we expect to achieve in 2021 to $106,000,000 During the Q1, our operations used $27,000,000 in cash and capital expenditures totaled $49,000,000 It's typical for the organization to consume cash in the Q1 and we expect to be free cash flow positive for the year. We ended the Q1 with $1,610,000,000 in cash and $1,850,000,000 in gross debt or net debt of $244,000,000 Following the end of the quarter, we fully redeemed the remaining 183,000,000 of our senior notes due in December 2022 with cash on hand. As a result, our next bond maturity does not occur until December 2029 And interest expense should decline roughly $1,000,000 per quarter. Moving on to our segment results. Our Wellbore Technologies segment generated 4 $15,000,000 in revenue during the Q1, an increase of $40,000,000 or 11% sequentially. Cost cutting, improved absorption in our manufacturing plants, A more favorable sales mix and better pricing drove 55 percent incremental margins and a $22,000,000 increase in EBITDA to $34,000,000 or 8.2 percent of sales. Our ReedHycalog drill bit business achieved 20% revenue growth with strong improvements across the Western Hemisphere. ReedHycalog's technology leadership is driving market share gains in most markets and the gains helped drive modest revenue growth in the Eastern Hemisphere during a quarter in which we typically see a seasonal slowdown. Share gains improved absorption, better pricing and cost cutting drove incremental margins of We expect our ReadHycalog business to post another solid sequential improvement in Q2 led by growing activity in the Middle East and Asia Pacific markets. Our downhole tool business realized a 13% sequential improvement in revenue, led by sales growth that meaningfully outpaced increase in drilling activity in the Western Hemisphere, partially offset by seasonal declines in the Eastern Hemisphere. Operators working to reduce trips, Maximized hydraulic flow and reduced friction are driving improved demand for our select shift drilling motor, fluid hammer, impulse axial pulse technology and agitator tools. A more favorable sales mix, higher volumes, improved operational efficiencies and better pricing allowed the business to deliver 50% incremental margins during the quarter. Our well site services business realized a 16% sequential increase in revenue, primarily from improving results in its solid control operations. The business unit has steadily recaptured market share in North America from desperate competitors fallen out of the market over the last several quarters and is now starting to claw back pricing. Our MD Totco business Realized low single digit revenue growth in the Q1. Revenue from surface sensor and data acquisition offerings in the Western Hemisphere improved in line with drilling activity, but was partially offset by the seasonal falloff in capital equipment sales to the Eastern Hemisphere. The business units EVOLVE wired drill pipe optimization services achieved record rental service revenue and as Clay mentioned picked up additional jobs for Q2. Our track record of improving drilling efficiencies for operators is driving an increasing rate of adoption. However, the relatively high cost of wire drill pipe The capital constrained market has mostly restricted this service offering to operators that have complex wells with tight drilling parameters. We believe our new low cost next generation wire drill pipe technology could significantly expand the market and accelerate the adoption of our wire drill pipe enabled services. Our Tuboscope Pipe Coating and Inspection business posted a 10% sequential increase in revenue. Demand for inspection services improved globally and was particularly strong in the U. S. Where piece counts from steel mills and outside processors improved 43%. Revenue from coating operations fell due to seasonal declines in the Eastern Hemisphere, which more than offset improving demand in North America. Our Grant Prideco drill pipe business achieved a high single digit sequential increase in revenue. A higher proportion of large diameter premium pipe in our sales mix drove outsized incremental margins despite meaningful costs associated with the winter storm, which included facility repairs, overtime pay and scrapping costs from power outages that occurred during sensitive heat treating operations. The business unit achieved a 104% book to bill, which should allow for another sequential improvement in Q2. 31 percent of our orders came from North America, the highest percentage in quite a while. As Clay mentioned, we saw strong demand for 5.5 inches pipe driven by operators seeking greater hydraulic efficiencies, Consistent with the driver we're seeing for our high flow rate drilling tools at a time when there continues to be ample supplies of 4.5 and 5 inches customer owned drill pipe in the U. S. For our Wellbore Technologies segment, we expect activity gains in the U. S. And Latin America to moderate and activity in the Eastern Recover resulting in sequential revenue growth of 8% to 10% during the Q2. We also expect continued improvement in the segment's cost structure and better pricing, which should allow incremental EBITDA margins near 50%. Our Completion and Production Solutions segment generated $439,000,000 in revenue during the Q1, a decrease of $107,000,000 or 20 percent sequentially. The sharp decline was primarily due to depleted backlogs, Severe weather related disruptions and supply chain challenges. Efforts to reduce costs and improve operational efficiencies Limited decremental margins to 30% and EBITDA declined $32,000,000 to a loss of $4,000,000 Orders for the segment improved $57,000,000 sequentially to $338,000,000 resulting in a book to bill of 127%, The segment's 1st book to bill greater than 100% since the Q4 of 2019. During the quarter, we began to include Orders for subsurface fiberglass fuel storage tanks in our capital equipment backlog. Excluding this addition, our book to bill would have been 115%. Our Fiberglass Systems business realized a 25% sequential decline in revenue. Difficulties faced by the unit were emblematic of what we saw in most of our capital equipment businesses during the Q1. We anticipated absorption challenges resulting from 5 straight quarters with a book to bill below 1, But severe COVID-nineteen and weather related disruptions also impacted operations. COVID outbreaks shut down our 2 large manufacturing facilities in Malaysia for 3 weeks And the pandemic's impact on global supply chains resulted in shortages of epoxy resin and glass fiber, which limited manufacturing output at our facilities. Severe winter weather further hampered operations and caused customers to defer deliveries due to transportation constraints and difficulties installing large subsurface Storage Tanks in Frozen Soil. Despite demonstrating the near perfect case study for Murphy's Law, our team did everything within reason to protect the bottom And was able to maintain positive EBITDA margins. While ongoing supply challenges may not be fully resolved until August, The outlook for this business seems to be improving with each passing day. A significant pickup in orders in March for our fuel handling products allowed the unit to post a book to bill north of 100%. We're also seeing demand return for marine scrubbers in Asia and fiberglass pipe in the Middle East, providing us with confidence that the business should realize steady improvement in its results throughout the remainder of 2021. Our Intervention and Stimulation Equipment business realized a mid single digit sequential decline in the Q1, its 5th straight quarter of declining revenue. Despite continued weakness in the North American market, the segment achieved its 2nd straight quarter with a book to bill greater than 1. Demand for wireline equipment, particularly in the Middle East, Europe and Africa Has been a bright spot and while our global coiled tubing business experienced a sharp fall off in Q1, quoting activity from international markets remains healthy and improving completions activity in the U. S. Is driving greater demand for consumables. In the pressure pumping space, activity levels have increased significantly, but pricing for our customer services remain well below pre COVID levels, Forcing cannibalization and low cost purchases of distressed equipment to sustain operations. Opportunities to cannibalize are limited And while equipment auctions continue, the quality of iron on the auction block is quickly deteriorating. As a result, we're seeing a significant increase in quotes, albeit off extremely low levels for new equipment. Our Q1 cementing equipment orders were double the amount we received the entire second half of twenty twenty And we're also seeing increasing demand for stimulation equipment with enhanced capabilities and reduced emissions. During Q1, we booked an order to convert 16 Tier 2 Frac pumps to new Tier 4 DGB dual fuel units that can run on a combination of diesel fuel and natural gas, Lowering operating costs and emissions. Additionally, we are seeing growing interest in our IDEAL E Frac stimulation equipment, which recently finished its first field trial where our pump completed more than 200 stages at rates up to 22 barrels per minute, Nearly 3 times that of a traditional 2,500 horsepower unit. With improved bookings and growing demand for aftermarket Services, we expect our Intervention and Stimulation Equipment business will realize a meaningful pickup in revenue during the Q2. Our XL Systems conductor pipe business experienced a sharp sequential decline in revenue during the quarter, resulting from a backlog that It was depleted after 8 straight quarters with a book to bill of less than 1. Our team limited decremental margins to only 17% and we achieved a 143% book to bill indicative of improving market conditions. Interestingly, we've seen certain customers award work then delay deliveries, while other customers are scrambling hard with urgent orders for newly established near term spud dates. So sentiment remains mixed, It's not a little unusual, but we take the current dynamics as a net positive. Meanwhile, competition remains fierce with desperate Competitors offering pricing and payment terms that we will not match. Fortunately, our technological and quality differentiation allows us to win a sufficient number of projects Our Subsea Flexible Pipe business realized a low double digit sequential revenue decline with outsized decremental margins resulting from lower volumes, A less favorable product mix and the manufacturing challenges associated with the new pipe design that Clay mentioned. While bookings remained light, Customer dialogue and order outlook has improved, particularly in Brazil, where we expect large projects to advance later this year. However, exact timing remains somewhat uncertain as extreme COVID-nineteen related challenges in the country make it difficult to coordinate efforts and complete essential engineering work required to advance projects. We believe the offshore production oriented components for our CAP segment are at or near a bottom. On our last several calls, we've mentioned how we've been pursuing a large number of offshore production related projects that continued to push out quarter after quarter. We finally started to see some of these projects shake loose and remain hopeful that stronger oil prices could support more FIDs through the year. For the Q2 of 2021, we anticipate revenue from our Completion and Production Solutions segment will improve between 15% to 25% sequentially with incremental margins in the mid-twenty percent range. Our Rig Technologies segment generated revenues of $431,000,000 in the 1st quarter, a decrease of $6,000,000 or 1% sequentially. A small increase in capital equipment sales related to offshore wind was more than offset by the seasonal fall off in aftermarket services. A less favorable revenue mix and weather related disruptions resulted in $6,000,000 decline in EBITDA to $13,000,000 or 3 percent of sales. Orders for the segment declined $78,000,000 sequentially to $112,000,000 Yielding a book to bill of 59%, the segment's 6th quarter out of the last 7 with a book to bill of less than 1. Orders for rig capital equipment remained weak as drilling contractors continue to cannibalize idle equipment and minimize spend. Despite improving activity and dialogue, there remains a distinct lack of urgency from our customers. Quotation levels increased 25% sequentially And the conversion of quotes to orders also improved. However, only quotes for small orders converted to bookings. We aren't losing larger orders to competitors and customers are not canceling projects. There's simply just a lack of urgency and potential orders keep sliding to the right. Ongoing waves of COVID-nineteen outbreaks in international markets do not inspire confidence and neither does uncertainty around the timing of when several of our We expect the lack of urgency will keep the book to bill for our traditional rig equipment business below one time. However, we are optimistic that a few additional quarters of stability in commodity prices and improving activity levels will do quite a bit to move projects forward. On a more positive note, we began manufacturing the first two rigs from our new manufacturing plant in Saudi Arabia. Near term revenue from these projects will help offset the expected weakness in our rig equipment order book. As a reminder, the has a commitment for 50 drilling rigs over the next 10 years and accounted for $1,800,000,000 in backlog. We expect to deliver the 1st rig at the end of this year, A rig in each quarter during 2022 and 5 rigs per year beginning in 2023. In our aftermarket business, Spareport bookings increased 22%, led by demand from the Middle East and U. S. Land markets, as the ability to cannibalize stacked rigs has nearly run its course. While the improvement is extremely welcome, spare part bookings are down 36% year over year And demand for our offshore customers was 43% lower than it was in Q1 2020. As previously mentioned, several Our larger offshore customers are in the late stages of restructuring processes and we currently have a large amount of their equipment sitting in our shops. We're optimistic that once capital structures are reset and more FIDs advance, we will realize a meaningful pickup in service repair and recertification related work. Our renewables business has a completely different feel than our traditional rig business. During the quarter, we booked an order for the design, jacking systems and crane for a European Wind Turbine Insulation Vessel. Our Q1 offshore wind order intake was modest relative to the opportunities we are pursuing, which include over $400,000,000 in potential projects that could be awarded before the end of the year. Looking ahead to Q2, We expect growth in our renewables business, improving aftermarket activity and progress on the rigs in Saudi Arabia Offset the impact of weak orders from our Rig Capital Equipment business, which should lead to results for our Rig Technologies segment that are in line with the Q1. With that, we'll now open the call up to questions. Thank you. Our first question comes from the line of David Anderson with Barclays. Your line is now open. Hey, good morning Clay. So I have kind of a near term question and then a bigger picture question. I guess just starting on the wellbore side, this is clear standout this I was hoping you could talk a little bit more specific about the international side, international land side of this business and how you're seeing this trending? Would you be capable of, call it, a I'm just wondering if you're starting to build out some capacity for your Middle East customers and advance of a ramp up. We're hearing a lot of talk about this in the second half. Can you just kind of expand on that business a little bit, please? You bet. Happy to, Dave and appreciate the question. Yes, we are optimistic that international is now starting to go back to work in certain markets, Probably most excited about Latin America and the Middle East and as well expect Russia to pick up a bit. Typically, It's low seasonally through the winter period. But specifically, we're starting to see tenders For bulk sales of things like bits, fishing tools, downhole drilling motors, those sorts of things And an indication that we think a lot of national oil companies are getting ready to go back to work. Recently saw A compilation of NOC budgets for 2021 and some pretty solid double digit Year over year growth rates expected and generally, the group that was included are getting back closer to kind of where they were in 2019. And so we think that's indicative Of the oilfield, in international, starting to recover in the way, hopefully, that North America has. I think higher crude prices are supportive of that. And so we're optimistic that that should continue to unfold As we progress through the summer. That's great to hear. So my other question is kind of a bigger picture topic here. I think one of the things that investors tend to under appreciate is how the skill sets in the OFS sector are really transferable to other markets. And I think as energy markets adapt, service companies, at least the best ones adapt right with them. You probably know that better than just about anybody. So I guess with this coming energy transition, I'd be really curious to know how certain product lines that you have could be repurposed or reengineered For this new type of customer in emerging end markets, offshore wind installation is a very clear example of this transferable skill set, but Where else could you see this happening at NOV? Yes. It's a great question. I do think that the skill sets and The technology that we employ in this space, the prosecution of large projects at scale in remote locations It's very transferable to renewables in many instances. And so, actually very pleased as we started moving and exploring the renewables A few years ago here at NOV was very pleased to see the overlap in skill sets and the possibilities for to put those skills to work in the renewables challenges that the world faces. And so, yes, you correctly point out the wind offshore space is almost a one for 1 Application of things like jacking systems, lifting, handling systems, more specifically, We have a lot of experience as you know well in pipe handling and drilling operations, pipe rackers, those sorts of things that are tightly choreographed Industrial, mechanized and roboticized processes in many instances. And so our scientists are working on Applying those sorts of things to the process of handling blades offshore and attaching these very long blades to the nacelle on these turbines, instance, so that's sort of a specific example of where we think we can bring a lot of value. Geothermal business, as you know well, Is a direct application of oilfield drilling capabilities to hotspots around the globe that are That lend themselves to economically efficient electricity generation. And so We have developed more specialized products for the hot temperatures that those drilling operations encounter as well as the hard rock that they encounter. And so very pleased to put things like Our Fluid Hammer downhole device into geothermal operations in Europe this quarter. We have developed composite piping systems that can handle the temperature and scale Challenges of geothermal. More sort of fledgling opportunities. We are the largest provider of gas dehydration, Gas processing systems to traditional natural gas producing operations and so our monoethylene glycol Solvent based dehydration technology is very analogous to the solvent based CO2 stripping Technologies that will be required, we think, for carbon capture and sequestration. And so we've got a team looking at opportunities there. Just all the way around from metallurgy to composites, to mechanical systems, to permanent magnets, You name it. I think there's a lot of expertise that not just NOV, but frankly, the whole oilfield services industry Can bring to bear on the renewables challenges. Great. Thank you, Clay. You bet. Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Your line is now open. Thanks. Good morning, gentlemen. Hi, Stephen. Jose, do you mind maybe talking about the Free cash flow expectations for this year and how we should think about movements in working capital as we think about free cash generation? Sure thing, David. Yes, as I mentioned in our prepared remarks, Q1 is typically a quarter in which we consume a little bit of cash Due to things that happened early in the year, but we remain very confident that we will be free cash flow positive through the full year. And so obviously that has implications for the next three quarters that we will generate meaningful amounts of Free cash flow. So we feel good about that, even despite the fact that we are factoring in Improvement in the top line revenue through the back half of the year. We think we've made a tremendous amount of headway related to improving The processes within our organization tied to better management of working capital. And so we see Opportunities to continue reducing the capital intensity of our business even with an improving top line. We finished last year with working capital as a percentage of revenue run rate in the low 30% range, popped up a little bit further fall off in revenue that we had this quarter. But as we progress through the year, we see certainly getting at least back down to that range, if not into the upper 20s to 30 ish percent range, which should free up additional cash from our working capital. Thanks. And just as a follow-up and a follow-up to a prior question as well. When you think about Alternative opportunities and I'm specifically thinking about in the near term, the offshore wind side, any material Incremental CapEx we should be thinking about as it pertains to those opportunities? That's the good news. Not It's the same plants that make jacking systems for offshore jackup drilling rigs, for instance, that make The jacking systems that go into these vessels, Stephen and the same plants that make our cranes, lifting systems and so Same terrific engineering team with all their creative innovations. And so it's a really nice fit for what we do. And so I am really as challenging as it is in the drilling space and I think Jose explained this well in his prepared remarks around what's going on in the drilling space. The wind space is really getting Last quarter, we talked a lot about the impact of taller towers accessing a better wind resource that blows steadier and harder and then These larger turbines with larger swept area and the higher loading factors and efficiencies and that translates to better economics for the wind developers. And so since we did our last call, what I'd say is incrementally, we're getting more enthusiastic about the prospects in this And I think it has a lot to do with that phenomenon. The OEMs are now offering larger 12, 13, 14 Megawatt towers. I think as the offshore project developers run those higher load factors and sort of new economics based on that, They are coming up with better results. And so I think there is more projects moving towards FID for offshore wind development and translating to a lot of enthusiasm in our customer base. And so we've got customers that are looking at exercising options in this space and we've got new customers I'm going to stop asking about it. So on the whole, very excited about the opportunity to apply our oilfield skill set directly Our next question comes from the line of Chase Mulvehill with Bank of America. Your line is now open. I guess, the first thing I wanted to touch on was just the margin progression here. Obviously, your guidance implies about 3% EBITDA margin, so a nice little uptick without any help from RigTech, mind you. But as we kind of move forward, I don't know if you could kind of talk about how you see margins progressing in the back half of this year. And maybe just speaking to when you think we can actually get back to kind of double digit EBITDA margins and maybe there's A revenue number that you need to reach to be able to kind of get to double digit EBITDA margins again, But just kind of want to understand the path of margins going forward and when we can get back to double digits. Yes, Chase, Jose, I'll take that one. Thanks for the question and it's a good one, but obviously there continues to be Less than perfect certainty is in terms of how the market environment plays out. You're obviously hearing from us that we're optimistic that things are headed in the right direction And we see opportunities for a good pickup beginning in the back half of this year with obviously some improvement in Q2. So as we look ahead towards the exit of 2021 going into 2022, We could easily see our Wellbore Technologies business getting back to the mid teens type EBITDA percentage rate And the other two segments being in the mid to upper single digit percentage range. So hopefully that helps a little bit. And really It's going to take a little bit more time for backlogs to rebuild related in both CAPS and Rig Technologies businesses To get them back into the double digit and mid teens type range that we're very confident are not too terribly far away. And the other thing I guess I'd mentioned related to the question about longer term or revenue targets, but I won't get specifically into that. You also have to recall the tremendous amount of cost that we've taken out of the organization really throughout the course of the downturn, but From the beginning of 2019 through the end of 'twenty, dollars 700,000,000 of structural costs. We've got another $106,000,000 coming out In 2021, so all that means that we should be able to achieve comparable margins to what we did in the past At a much lower revenue run rate and most importantly that will translate into better returns on are capital employed. So feel good about the way the company is positioned for the future and we're looking forward to Some market improvements to help with all the internal efforts that we've been working really hard on over the last several years here at NOV. I appreciate the color. If I can kind of switch gears a little bit and just talk about rig aftermarket. During the prepared remarks, you obviously talked about The offshore drillers coming out of bankruptcy and a lot of equipment sitting in your service centers. If my math was right, in 20 You did about $1,100,000,000 of rig aftermarket revenues. And at the peak in 2019, you did kind of 1 point $4,000,000,000 So as these offshore drillers start coming out of bankruptcy and activity starts picking back up, How should we think about how aftermarket revenues progress over the next 2, 3 years? Do you think the 1,400,000,000 You did in 2019, and that you would be able to kind of get back there in the next 2, 3 years? Or do you think it's structurally a lower revenue run rate as we go forward? No. Actually, I think, Chase, that's probably representative of something that's closer to steady state in terms of the consumption of aftermarket spare parts, of repair services, those sorts of things. And so, looking forward to getting back to that level. We do think, as Jose said in his comments, we do think that many of the offshore drillers moving into bankruptcy restructuring has impacted, Significantly impacted their aftermarket purchases. Because when you look at our decline, like our Q1 2021 Bookings for spare parts just for the aftermarket compared to the prior year quarter was down 43%, much more than the 31% year over year Decline in the offshore rig count, do not think that's structural. I think it is tied to their advisor expenditures and those sorts of things Going through as well as just trying to navigate the restructuring. And so as the offshore hopefully gets back to work, The account picks up, they emerge from bankruptcy with cleaner balance sheets. They are going to get back to buying spare parts the way they had in the past. The other Phenomenon that we are hopeful about in that area too is that many of these rigs have been stacked. In fact, many Some have been cold stacked and reactivating those rigs is not for the faint of heart. It costs Potentially significant investments to get those rigs back and working in our aftermarket business will be a major part of the reactivation process for many rigs that have been both cold stacked and warm stacked and hot stacked. And so we are looking forward to participating in that. And then one other thing that we mentioned in our prepared remarks, it's probably worth reiterating, is the fact that we have received Increasing inquiries around for our engineering group around potentially reactivating rigs. So that's kind of a very, very early leading indicator That hopefully some more rigs will be going back to work in the offshore. All right. Perfect Clay. Thanks, Jose. I'll turn it back over. Thanks, Chase. Thank you. Our next question comes from the line of Marc Bianchi with Cowen. Your line is now open. Maybe building on Chase's question there about aftermarket. If I just sort of look at orders Broadly, in RigTech and in CAPS, it sounds like you're maybe more optimistic about recovery in CAPS. But how would you characterize the kind of recurring level of orders that would be required for where the current Level of oilfield activity is. So if we kind of get past this cannibalization period that might be occurring in both businesses, just not building any earlier rig count increase, but just To get back to normal where we are today, what would you say those types of order levels are? One of the things that makes making capital equipment for the oilfield So exciting is that it's almost hypercyclical. It's a great question mark, but one that's really hard to answer Because of that cannibalization phenomenon and it's something that we study, what I would tell you is it varies by category of equipment across the oilfield. But our customers have sort of refined that cannibalization process skill very, very well and it's The playbook that they go to and it's hard to say. What we do know from prior upturns though is that the increase can be dramatic. And it usually goes with some pricing improvement on behalf of our customers. So as we start to see perhaps day rates increase In various categories of equipment, then that's sort of a helpful dynamic for them to Go ahead and place orders with us with a much higher level of urgency. But yes, I would just tell you, it's very difficult To quantify kind of what the I think you are really asking what's sort of the normalized level of orders in certain categories. On the other hand, what has sort of tied us through this downturn really is the aftermarket business. It tends to be steadier. The consumption of spare parts and Consumables and services that are part of our aftermarket business is more directly tied to activity and a little less volatile visavis Capital equipment demand. And so that's really been sort of the base load for us. And so that's what's made Doubly challenging as we navigated at the end of 2020 and the 1st part of 2021 is that as spare parts orders fell off for the aftermarket and aftermarket ticked That's made it doubly challenging to get through this. Yes. Makes sense. Thanks, Clay. Next question is for Jose. The caps guidance for 2nd quarter, The incremental margin in the mid-20s looks perhaps conservative considering how the last couple of quarters have evolved. There was some supply chain issues that impacted Q1. I assume those have been resolved, but maybe that's not the case and what Might be driving the lower margin, but I'm just curious if you could provide some more color around that. Yes, Maury, it's a fair question, but really what it has do with is a shift in the mix of the business. And at this point, the Orders that we've taken in in some of those businesses have been at more challenged pricing. So near term here, a little bit of challenge related to Margins within the CAP segment, but we anticipate that improving as we move through the course of the year. Yes. Got it. Thanks, Jose. To be fair, though, we are continuing to battle through some supply chain issues that are going to linger through the summer. We got our teams focused on navigating through those, but I think that will be continue to be somewhat of a headwind here for the next couple Great. Thanks, Clive. Thank you. Our next question comes from the line of Scott Gruber with Citigroup, your line is now open. Good morning. Good morning, Scott. So looking at the Wellbore Tech guide, it does look like the 2nd quarter guide is broadly on par with Our expectation for spending growth by the global E and P industry, is it fair to assume that when you guys think about Stronger second half that when we look at wellbore, we should be thinking about growth rates that are in excess Of the underlying E and P spending growth rate, it just seems that we're on the cusp of the normal cycle beta for that segment kicking in. I wanted to get your thoughts. Yes. Look go ahead. Go ahead. This is Scott. It's another good question. And Typically, with our wellbore business, it tends to be it often tends to be a rig activity plus Type performance and an environment that we're expecting over the next several quarters and really over the next couple of years, We see some additional opportunities to outpace the normal growth coming from a couple of different areas. Clay spent some time talking about The new products that we're delivering into the market, the share gains that we've been making over the last several quarters, those things will continue to contribute to hopefully outsized growth as well coming off of the absolute bottom of the cycle to where we're just now starting to see some select opportunities to regain pricing. And so that will further boost Growth over the coming quarters. Got you. And then just thinking about the recovery here, Wellbore picking up, accelerating off the bottom, aftermarket business coming back. But obviously, you had some Supply chain issues that were largely out of your control in fiberglass, but just given what we're hearing across The general economy with issues cropping up as the global economy starts to snap back, are there risks Outside of fiberglass, the supply chain issues is it confined to price inflation Are there real kind of delivery delay issues that you could face due to the supply chain? Just some more color kind of around Those issues as things ramp back up and any commentary on your ability to secure net pricing Above and beyond input cost inflation? Yes. It's a great question, Scott. Something we have been very focused on. It's been Suffice to say, it's been a very unusual year and sort of latest manifestation of that is what we are seeing in our supply chain. We have talked a lot about resins and fiberglass. We do think residents kind of sort themselves out in the 2nd quarter and hopeful in the 3rd quarter we will sort out our supply chain challenges for fiberglass for that business. But as you can appreciate, many if not most of our business units utilize steel. And given the wide diversity of our product offering, we utilize a lot of different kinds of steel, Lots of different metallurgies that are sourced from various mills around the globe and that's probably where we're seeing Pricing increases and sort of supply chain challenges most acutely. Put in perspective, Some business units are seeing no change in steel prices. Others are seeing very high double digit changes sort of sequentially. So it's kind of all over the map And it's a function of which mills are up and running post COVID and which are still not. Broadly speaking, I think the mills in Asia We are getting back to work a little more quickly than the mills in Europe, but that's an area that we are devoting a lot of attention to make sure that we stay ahead of it on pricing. I think we've had good success in our business units, putting in surcharges and those sorts of things to cover higher raw material costs that we're But I think as the economies get back to work and these mills and other raw material producers Kind of get back up and running, I think the supply chain will sort itself out. So I don't think this is a long term problem, but rather just the next Quarter 2 that we'll have to put a lot of energy into making sure that we navigate it successfully. Great. Thank you. Thank you, Scott. Thank you. Our next question comes from the line of George O'Leary with Tudor, Pickering. Your line is now open. Good morning, Clay. Good morning, Jose. Hi, George. Lots of focus from the investor and the sell side community on kind of the energy transition side of the equation. Just curious from an inorganic growth standpoint, if you guys aren't looking a little bit counter to that popular view and maybe Some opportunities on the oil and gas side of the business given the very impressive balance sheet you guys have and if there aren't some more attractive from a valuation Yes. It's a really good question, George. The short answer is yes, we are looking. But what we found is a pretty wide difference between the bid and the ask. And so we Have had a couple of conversations with some folks for interesting franchises, opportunities, technologies, those sorts of things. But As we've discussed in prior quarterly calls, I think there's frankly a higher level of capital efficiency And more value for money in inorganic technology and product developments. And so most of our focus has been there. But we're transactional, we're opportunistic, and we continue to look for opportunities to enhance and grow our franchises, both in oilfield as well as renewables, And continue to look at opportunities to thoughtfully and profitably But to sum it all up, we haven't had we haven't made an acquisition in the oil field in quite some time now, and it's largely Just because of the difference in valuations. Okay, great. That's very helpful. And then the commentary in the press release and during the call IntelliServe was interesting to me. I remember that seemed to be gaining some momentum just a few short years ago. We spent some time with some land drillers in the U. S. In particular that we're looking at deploying it more frequently and purchasing incremental strings, the cost reduction in 20 hours to 20 minutes seems like Yes, that could maybe reemerge as a theme. I'm curious how dialogue is going with customers post this change and Whether you think that has a better shot at making a splash in onshore markets, the U. S. Or offshore markets, just kind of how you see that playing out and what the customer feedback has been? Yes, good question. Another good question, George. Yes, it's an area that We are excited about it. It's an area that has been steadily growing and becoming a more meaningful part of our business and We're gaining more and more traction with it. We've worked on several different projects in several different continents, as you pointed out, U. S. Land, Offshore and have recently started working for a major NOC in the Middle East on some High profile land projects and things are going very well. Also particularly excited about the latest generation of the Teleserv wire, Jill pipe that you referenced, technology that allows us to significantly reduce the total time And repair that technology out in the field. So the incremental cost To add the wiring technology to the drill pipe has been significantly reduced, which should lower Capital cost requirements in a market where capital is very, very precious and also lower day to day operating costs. So think that that certainly has potential to help open the doors to market opportunities where customers have been a little bit more challenged in In terms of thinking the economics may or may not work for them. So more to come in that product. It's still early days, But it's ramping up pretty nicely. Appreciate the color. Thanks guys. You bet. Thanks, George. Thank you. This concludes today's question and answer session. I will now turn the call back to Mr. Clay Williams for closing remarks. Thank you, Sarah. And thanks to everybody for joining us today. It was obviously a very challenging quarter, but we are optimistic things should get brighter as the year progresses. Reflecting on what's been accomplished by our team, just can't thank them enough. Extraordinary reduction in our fixed cost out of our business, Reduction in our working capital intensity, the strengthening of our balance sheet, all while continuing to develop new products and technologies, I think we are very well positioned. Thanks to That NOV team, and so I am very grateful to how our employees are listening and their colleagues have positioned the company for So thanks to everybody for joining us today. We look forward to discussing our 2nd quarter results with you in July. And in the meantime, Please be safe. Thank you. Ladies and gentlemen, this concludes today's conference call.