NOV Inc. Q2 FY2020 Earnings Call

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Second Quarter 2020 Earnings Conference Call. 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 National Oilwell Varco's second quarter 2020 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 security 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 more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q, filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the second quarter of 2020, NOV reported revenues of $1.5 billion and a net loss of $93 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Thank you, Blake. The second quarter of 2020 brought the full weight of the COVID-19 pandemic shutdown on the global economy, driving oil contracts to negative prices and the U.S. rig count to levels never measured before, perhaps the lowest dating back to the 19th century. Consequently, NOV's consolidated revenue declined 21% sequentially, and EBITDA fell to $84 million or 5.6% of sales, as everybody in the oilfield hunkered down, cut costs, and prayed that this storm would pass. In the past, we stressed that the ability to resize quickly and aggressively is an essential skill in our cyclical business, and this is a core competency of NOV's line managers. In a few moments, Jose will detail for you our cost reduction progress and expectations for the remainder of the year. As bad as this quarter was, it certainly would have been far worse without their decisive aggressive actions. However, our customers were also pretty good at reducing costs and preserving cash. So in addition to the operational headwinds brought about by COVID-19 facility closures, quarantine requirements, and travel bans, we also faced the rapid deceleration of business in many areas, as customers halted all but the most necessary purchases. In North American land, in particular, the violent reaction fell almost involuntarily, like a reflex, while a couple of our non-oilfield businesses showed growth in the second quarter. Nobody in the oilfield was immune to this unprecedented collapse in the industry, as evidenced by all three of our segments reporting sequential EBITDA declines. Even to those that have been through many downturns, the pace at which operators curtailed rig, completion, and even production activity during the second quarter was breathtaking. The average U.S. land rig count fell 50% sequentially in the second quarter, and the decline in U.S. completion activity was even more severe. Well completions were down more than 70% quarter-on-quarter. The oilfield in North America reached a whole new level of pain. On a consolidated basis, our North American revenues fell 35% sequentially, and mix declined from 35% to 28% during the previous quarter. Our Wellbore Technologies segment's revenues declined by 49% sequentially in North America, accounting for nearly half of NOV's overall consolidated sequential decline of $387 million. Wellbore's products and services tied to drilling, downhole tools, bits, solids control services, and tubular inspection were hit hard and hit immediately, falling 40% to 60% across North America, as compared to the 57% decline in the average Baker Hughes rig count from Q1 to Q2. Pricing pressure ramped quickly as well, up to 15% in certain products, but desperate competitors grasping for liquidity are discounting far more, trying to hang on for one more payroll cycle. Fortunately, pricing is holding up much better in most international markets, even though they too are experiencing steep declines in activity. Nevertheless, many of NOV's competitors won't quite make it to the next payroll cycle, and bankruptcies and liquidations are accelerating. For NOV, the silver lining of this is that our customers are shifting work to NOV because they know we will make it through this downturn and will be there for the long haul. We are seeing meaningful market share gains across many key product lines, albeit in much smaller markets. Remarkably, the flood of oilfield assets into the market at distressed pricing is leading to startup companies recording equipment and consumables to a handful of fearless entrepreneurs seeking to augment fleets that they purchased at pennies on the dollar, and we're rooting for each and every one of them. In past downturns, our Tuboscope business would typically see its tubing and sucker rod lines hold up better than drilling activity as these are more closely tied to workover and production activities, and operators get quick paybacks and high rates of return on workovers. However, with millions of barrels shut in across the U.S., we saw workover and production-related activity fall just as hard as the decline in drilling activity. The total number of joints and rods inspected in North America fell 51% sequentially, and OCTG inventories exceed 12 months as compared to five to six months in normal times. This has led to the shutdown of many domestic pipe mills for whom we work. There is essentially no demand for drill pipe, rig spares, or coiled tubing strings in North American land, as contractors are cannibalizing stacked assets aggressively, including pulling reels off idle coiled tubing units. Additionally, coiled tubing strings are being run well past the established fatigue life limits before they are being replaced, a trend that is further eroding demand. Eventually, this will lead to service failures, potentially lost wells, and heartbreak, but I guess desperate times call for desperate measures. We are hearing that leading edge day rates for land drillers have fallen to the 15,000 - 18,000 per day range, down from the low-to-mid 20s. This new materially lower level is likely only marginally above cash cost to run a drilling rig for all but the most efficient drilling contractors and may in fact be cash flow negative when fully burdened for maintenance CapEx and direct rig support overhead in areas like safety, logistics, insurance, and sales support. The good news is that we are also hearing from many unconventional operators that they plan to add a rig or two in the second half and will likely try to lock in these bargain day rates. Additionally, NOV is being asked to bid one-year term pricing in certain WellSite Services, historically a good leading indicator that some customers are planning on increasing drilling activity. While we may see a modest uptick in activity later this year, we intend to stay our chartered course of continuing to resize to the new market. Having heard mythical stories of green shoots at the bottom of prior downcycles, hope springs eternal, and sometimes in the oilfield hope gets a little exaggerated. We think the Completion & Production Solutions segment, our fiberglass and composite pipe business, saw a similar sharp decline in North American demand, as oil and gas orders simply stopped, while international demand fared better. COVID-19 shutdowns prevented us from securing vessels to ship pipe overseas from our domestic plants, and a couple of our primary international plants, Saudi Arabia and Malaysia, were shut completely due to government mandates. While our team heroically pivoted supply out of Malaysia to China for our growing scrubber business, we found scrubber demand softening as shipyards slowed and ship owners found conversions less economically necessary, at least for now, due to the tightening spread between diesel and bunker fuel prices. Offsetting some of the North American oil and gas pressures was a very robust fuel handling market, where we are actually getting price increases. Not surprisingly, demand for chokes, valves, completion tools, and pumps for North America also slowed very sharply. Although there were virtually no orders being placed domestically for pressure pumping equipment, we are hearing from customers that dual fuel capabilities and other ESG-friendly offerings will be required by some customers on all future work. The offshore drilling space is experiencing a similar trend, which is driving more interest in our PowerBlade and other ESG-friendly solutions from NOV. More broadly, customers, specifically majors, are mandating certain upgrades and capabilities as a requirement of new contracts. Even though the service sector has scant capital to invest in its service fleet, their customers, the oil companies, are requiring new and better kit because, well, they can. They have the negotiating leverage, and they use it in times like these to get what they really want. We've seen this in the past, oil companies demanding and getting better capabilities and features in equipment they hire. Don't be surprised to see this pressure grow and drive future orders for NOV. I believe that downturn sometimes forces the service industry to up its game. The Varco Top Drive product is a great example. It became a required feature if you wanted your rig to be competitive in tenders in the late '80s and '90s, at a time when rig margins were under similar pressure as today. This pressure by oil companies transforms the fleet and drilling techniques and consequently safety and efficiency. And despite the additional investment, this can be a good thing for oilfield service companies that can pass this test. Build, buy, or rent, but somehow secure the necessary capability, win the contract, and emerge into a world where a few survivors with better kit will make up a more consolidated oligopoly with better long-term returns on capital. Latin America is a mess. In widespread COVID-19 shutdowns, our consolidated revenues there fell 29% sequentially. Excluding Latin America, the international markets have held up better than North America, declining only about 8% sequentially overall. Nevertheless, at 750, the international rig count is the lowest since 2003, so markets remain challenging literally everywhere. In the Middle East, mandated facility shutdowns are easing, but closed borders and logistical headaches remain. Our Rig Technologies segment's aftermarket business was hit hard by COVID-19 restrictions, falling 26% at high decrementals. In an effort to reduce COVID risks, offshore drilling contractors dramatically cut back any personnel going to or from their rigs that weren't drilling related or more bluntly revenue-generating. Inspection, certification, upgrade, and even repair and maintenance activities were deferred and curtailed as a result. Spare parts orders fell 42% sequentially, hitting land more than offshore. Certain shipyards were also affected by COVID-19, further weakening our aftermarket business. On the cost side, requirements to quarantine two weeks before and after a job certainly didn't help our decrementals. Needless to say, against such a disrupted backdrop, that also included oil company contract cancellations, not many offshore drillers felt like buying much. Inquiries for offshore wind installations remained a notable exception for rig technologies. While orders in this area were low during the second quarter, it is clear that incumbent participants and new entrants alike are determined to move forward on vessels to support growing demand for offshore wind turbines in Asia and in the United States. Back to oil and gas though, many IOCs and NOCs are delaying projects, but we believe that most are determined to eventually move forward with these. There is no doubt that FIDs will decline materially in 2020, but many customers are communicating their plans to move forward in 2021 or 2022, perhaps hopeful they can squeeze more cost out of their supply chains in the meantime. The pipeline of projects we are monitoring for our Wellstream Processing business has actually grown year-to-date, underpinned by offshore gas, Brazil development, and LNG projects that need our proprietary monoethylene glycol processing technologies. With 35 years in oil and gas, I can't recall a more challenging time. The near-term logistical challenges of COVID-19 shutdowns, the collapse in oil demand and oil prices, the bankruptcies of so many good companies, the loss of jobs by so many wonderful hard-working people and friends, the tragedy of the many who have lost loved ones to this terrible virus. 2020 is a crucible for all of us, a year that is testing what we are made of, a year that will remake us and a year that is remaking NOV. Despite all these remarkable challenges, our NOV organization continues to improve efficiencies and business processes because our leaders are focused on what they can control and resisting distractions from issues they cannot. They continue to support the operations of our customers who are facing similar challenges. I can honestly say that I have never been prouder of this organization and the people that I have the honor of working with. In every corner of NOV, the organization remains focused on cost reductions and cash flow. We're adjusting our portfolio of businesses, improving our returns by exiting or divesting certain product lines. We're improving our capital deployment processes. We're expanding our higher growth areas like Saudi Arabia, and despite operational pressures and disruptions, we're also continuing to invest in technology and new products. As we pass through this crucible, this organization gets better every day, and when the phone starts ringing again, NOV will be the best company it has ever been. One day, the global economy will come out of this downturn and realize just how much it needs oil and gas, and when that happy day comes, NOV will be there to supply the industry that makes the world go with even better technology delivered by the best professionals in the world. To employees that are listening, thank you for your perseverance during these difficult times. Your attention to detail, creativity, and willingness to go the extra mile during this crisis amazes me every day. Jose, Blake, and I appreciate all that you do. Stay safe and know that better days lay ahead. With that, I'll turn it over to Jose.

Thank you, Clay. NOV's consolidated revenue decreased $387 million or 21% sequentially, as the global slowdown in oil and gas activity precipitated by the COVID-19 pandemic impacted all three of our operating segments. Despite the sequential fall in revenue, an intense focus on cost reductions and strong execution on existing backlog limited decremental margins to 24%, resulting in a $94 million decrease in EBITDA to $84 million. In early 2019, we began an extensive effort to better align our cost structure with anticipated market realities, and when we saw early indications of the COVID-19 pandemic driving economic shutdowns and an associated collapse in oilfield activity, we materially expanded the scope and accelerated the implementation of our cost-out initiatives. During the second quarter, we achieved an additional $320 million in annualized savings, bringing the total achieved to date to $570 million. Despite nascent indications that North American drilling and completions activity could increase later this year, we do not anticipate that any near-term improvements would be large enough to move the needle associated with a massive current supply-demand imbalance for oilfield service tools and equipment. Therefore, we continue to manage the organization with a lower-for-longer mentality. In doing so, we challenge every aspect of our organization to deliver ways in which we can drive further efficiencies and achieve acceptable levels of profitability and returns on capital, regardless of how difficult the environment. Yes, our actions involve implementing the traditional oilfield services downsizing playbook, a requirement to simply survive in this industry. But we're also pushing well above and beyond that game plan to drive every area of the company to execute faster, cheaper, and better than ever. As Clay suggested, our customers, employees, and other stakeholders know that NOV is in this business for the long haul, and we intend to emerge from this downturn stronger and more efficient. We are thoughtfully streamlining our operations, exiting product lines and geographical markets that don't meet our return thresholds, driving more shared services, and investing in automation. All of which drives toward our ultimate objective, which is to provide better technology, tools, and equipment for our customers from a smaller and leaner footprint, a more nimble and responsive supply chain, and a business that requires lower levels of working capital. We are not cutting into the bone of our engineering and R&D capabilities. Instead, we are leveraging those talents to drive improvements in our product designs, not just so they operate more efficiently for our customers in the field, but also so they are less costly to manufacture. Our approach is iterative and relentless. We are always looking to improve. This mentality drove us to identify another $75 million in annualized cost savings opportunities during the second quarter, increasing our year-end target to $700 million. During our last call, we provided a percentage breakout of savings from direct labor, indirect labor, facilities, and other areas. Since then, we've received a few follow-up questions from individuals trying to better understand the composition of cost savings and understand future implications. The simplest way to put it is that our reported cost savings number is the amount of cost we have intentionally and actively removed from our organization. The cost savings number does not include expenses that automatically decrease when volumes fall, like raw material costs and the normal changes in direct labor hours. In other words, our stated savings are 100% structural changes that reduce expenses above and beyond what is naturally embedded within normal decremental margins. If you look at the change in our cost of goods sold and SG&A, excluding depreciation and amortization, since we began our cost savings efforts in early 2019, you can see that these expenses have decreased by more than $2 billion on an annualized basis, of which $570 million came from structural changes to our operations. This is the number that we will continue to update through year-end. Now moving on to cash flow, cash flow from operations was $378 million for the quarter and capital expenditures totaled $56 million, resulting in a negative $322 million in free cash flow. Working capital continues to be a source of cash and declined $435 million, despite certain metrics that deteriorated due to customers fighting to preserve liquidity and an increasing proportion of our business coming from international markets, which typically have longer cash conversion cycles. In the second quarter of 2020, 72% of our revenue came from outside North America, which compares to 65% in Q1 and 59% in the second quarter of 2019. We expect to generate positive free cash flow during the second half of the year despite the ongoing market challenges. At June 30th, our net debt totaled $582 million with $1.447 billion in cash and $2 billion in senior notes, of which $400 million mature in December 2022. We expect to pay the $400 million with our cash on hand prior to the maturity date, which would then put our next maturity at December of 2029. Moving to results from operations and outlook. Our Wellbore Technologies segment generated $442 million of revenue during the second quarter, a decrease of $249 million or 36% sequentially. Revenue from North America declined 49% and international revenue fell 21%. Segment revenues declined less than overall drilling activity levels in every geographical region except for the Middle East, which was disproportionately affected by COVID-19 related facility closures. EBITDA declined $61 million sequentially to $42 million, representing 25% decremental margins, which would have been much higher were it not for quick and decisive actions taken by our team within Wellbore Technologies. Our ReedHycalog drill bit business realized a 41% sequential decrease in revenue as a result of the collapse in drilling activity in the Western Hemisphere and due to government-mandated shutdowns in the Middle East, which impacted bit manufacturing throughout most of the quarter and prevented deliveries in Saudi. Imploding demand is causing desperation and fierce competition, particularly within the U.S., where we are seeing certain competitors aggressively cut pricing. Our bit technologies have allowed us to steadily capture market share over the past several years, and that technology differentiation is now helping us avoid having to match detrimental pricing concessions, a testament to the business's engineering team and their R&D efforts. While Western Hemisphere activity will continue to weigh on this business's results, the resumption of manufacturing operations in the Middle East, the startup of recently awarded tenders in the Eastern Hemisphere, and the flow through of facility consolidation efforts are expected to result in a small sequential improvement in this business's results in the third quarter. Our M/D Totco business units saw a 30% sequential decline in revenue due to the dramatic reduction in activity levels. Revenue from the unit's rig instrumentation offering declined 39%, but was partially offset by continued growth from M/D Totco's digital drilling automation and optimization solutions, which continue to gain greater adoption. During the quarter, we began executing on two additional multi-year contracts in the North Sea for our eVolve optimization and automation services, utilizing our wired drill pipe technology. We also commenced several additional jobs using our KAIZEN surface drilling optimization software, which uses artificial intelligence with continuous learning capabilities to optimize drilling performance. The business also recently commercialized its data wall-tripping tool, which enabled the first ever formation pressure test using a high-speed real-time connection tool while the pipe was tripping. M/D Totco has a deep pipeline of digital solutions under development that we're excited to tell you more about later this year. Our Grant Prideco drill pipe business experienced a low double-digit revenue decline, as the operation continued to execute on existing backlog. Outside of booking an order for a 3 million pound landing string, which will be the largest ever built, new order flow fell sharply. Q2 quoting activity was 73% lower than in Q1. Demand from the North American land market is near zero, where we expect it to remain as long as there is ample pipe available from stacked rigs to cannibalize. We're still pursuing multiple large international tenders, but we expect many projects to push to the right and are therefore proactively preparing for volumes to drop significantly over the next few quarters. Our Tuboscope business experienced a revenue decline of approximately 30% as its pipe coating and inspection operations were negatively impacted by falling drilling activity and sharply reduced demand from steel mills. Results in our Tuboscope operation are typically less volatile than other businesses within Wellbore Technologies due to a slightly heavier weighting to workover and production activities. However, negative oil prices and shut-in wells didn't allow any of our operations to find shelter during the second quarter. Our WellSite Services business unit saw a revenue decline of approximately 50% sequentially, driven by the full-quarter impact of our exit from the North American fluids business, the sharp decline in North American drilling activity, and COVID-19 related shutdowns in Latin America and West Africa. While demand for solids control services will remain challenged near-term, we are seeing competitors exiting the business and customers coming back to NOV because they know we will be there for them over the long haul. Revenues in our Downhole drilling business unit fell 41% sequentially, resulting from the rapid decline in U.S. drilling activity and COVID-19 lockdowns in Latin America and the Middle East. While we do not expect activity levels to improve in the second half, customers are focusing on maximizing cash flow through any means possible, and we expect our leading-edge downhole technologies that improve efficiencies and lower costs to garner additional share. For the third quarter, we expect the benefit of fewer COVID-19 related disruptions to be more than offset by meaningfully lower average drilling activity levels. As a result, we expect revenues for our Wellbore Technologies segment to fall another 15% to 20% with decremental margins in the mid-20% to 30% range. Our Completion & Production Solutions segment generated $611 million in revenue in the second quarter, a decrease of $64 million or 9% sequentially. Effects from the rapid deterioration in market conditions were mostly offset by strong execution on project backlogs built throughout 2019. Proactive measures to drive efficiencies and contract the footprint of our operations limited decremental margins to 5%. As a result, EBITDA declined only $3 million to $68 million or 11.1% of sales. The economic contraction caused by the COVID-19 pandemic pushed many project awards to the right. Orders for this segment fell 42% to $196 million, resulting in a book-to-bill of 51%. Backlog at quarter-end was $1 billion, down 16% from the first quarter. Most customers are telling us they're not canceling projects but rather postponing awards until the massive disruptions and uncertainty from the pandemic abate. While we take some comfort in this, we do not expect a near-term resolution of these issues and are planning for continued order weakness through at least the end of 2020. Our Subsea flexible pipe and XL Systems businesses each realized low 20% sequential increases in revenue due to strong execution on what we'd viewed as healthy backlogs coming into the year. Unfortunately, bookings were light in the second quarter, with Subsea only achieving a 76% book-to-bill and XL Systems realizing its lowest order intake on record. While backlogs are sufficient to support volumes near current activity levels through Q3, and we expect bookings to begin improving as more customers return to their offices, without a sizable improvement in near-term orders, we expect our revenues to decline slightly in Q3 and see potential for a more pronounced decline in the fourth quarter. Revenues in our production and flow technologies business unit declined 6% sequentially. Strong execution on backlogs within the unit's offshore and industrial-related businesses was more than offset by a 33% revenue decline in its production and midstream operations, which saw a sharp decline in demand from North America and COVID-19 related disruptions limiting the ability to deliver products and complete final customer acceptance testing for deliveries in the Middle East, Latin America, and Africa. Our Fiber Glass Systems business unit realized a 21% decline in revenue due to significant disruptions caused by the COVID-19 pandemic. Multiple international manufacturing locations, including our new plant in Saudi Arabia, were shut down for several weeks, and product shipping overseas from our U.S. operations encountered extended delays. Our Intervention & Stimulation Equipment business realized a 21% sequential decline in revenue as demand for coiled tubing and other consumables took a sharp step down and a number of international deliveries slipped into the third quarter. Strong execution of focused cost savings and efficiency improvement initiatives by our ISE team helps to mitigate margin erosion. For the third quarter of 2020, we anticipate revenue from our completions and production solution segment will decline 2% to 5%, with EBITDA margins decreasing between 200 to 400 basis points. Our Rig Technologies segment generated revenues of $476 million in the second quarter, a decrease of $81 million or 15% sequentially. EBITDA fell to $14 million or 2.9% of sales, representing 52% decremental leverage. Second-quarter results reflect a small sequential increase in revenue from capital equipment sales, with a less favorable mix and a 26% sequential decline in the segment's aftermarket business. The sharp drop in global rig counts caused many of our rig contractor customers, which were already under financial duress, to immediately cut spending on everything that would not result in a material disruption to active drilling operations. The large sequential decline in aftermarket, coupled with operational challenges brought about by COVID-19, were the primary reasons for the unusually high decremental margins for this segment. Last quarter, we mentioned that bookings for spare parts fell sharply in March, and unfortunately, we saw no improvement during the second quarter, which resulted in the 31% sequential decrease in revenue from spare part sales and a 42% decline in spare part bookings. Aftermarket services were also inordinately hard-hit by the COVID-19 pandemic, not only due to intentionally deferred surveys, maintenance, and other non-essential spending, but also due to the logistical headaches caused by COVID-19. Closed borders and mandatory quarantines for crews coming on or off rigs and delayed projects were part of a perfect storm that caused havoc for the operations that were scheduled during the quarter. The only good news is that we believe current spending levels on aftermarket parts and services are not sufficient to sustain even the currently depressed levels of activity and must rebound in the future. Additionally, while lockdowns and mandatory quarantines remain an issue, more countries are attempting to reopen their economies. The segment realized a 49% sequential decline in capital equipment bookings resulting in $74 million of orders and a book-to-bill of 34%. The segment ended the second quarter with approximately $2.8 billion of backlog. The outlook for our traditional capital equipment business remains challenged near-term as drilling activity remains depressed, and our drilling contractor customers do all they can to preserve cash while they fight for survival. However, we continue to see relative strength in the offshore wind market, where we believe that up to 12 heavy wind installation vessels will be ordered by the industry over the next few years. The prominent industry trend of improving offshore wind economics by using larger turbines, which use much longer blades, requires installation vessels that are substantially bigger than those built for the prior generation of wind turbine technologies. Each new installation vessel represents a revenue opportunity to NOV that is roughly equivalent to a high-spec jack-up rig. We believe we are well positioned in this market and expect to win our fair share of the coming awards. For the third quarter, we expect aftermarket sales to remain in line with the second quarter and lower revenues from capital equipment projects, resulting in a 4% to 6% decline in revenue for our Rig Technologies segment. We also anticipate that ongoing cost rationalization efforts, a slightly improved product mix, and fewer COVID-19 related extraordinary costs will result in EBITDA margins that are flat to up 300 basis points relative to the second quarter levels.

Our first question comes from Bill Herbert of Simmons Energy. Your line is open.

Thanks, good morning. Jose, your guidance for CPS Q3, it looks like the decrementals are very steep, if my math is correct, what would be the reason for that? Is that mix or what?

Yes. It's really relatively small movement at the revenue level, and it's mix that's causing that change.

Okay, got it. Clay, I want to ask you a broader question that I know you enjoy discussing. The question is this: How do you view the incremental margins emerging from the current situation when the world recognizes the necessity for oil and gas again? Many of your competitors have reported stronger incremental margins due to cost reductions compared to the previous cycle. However, the narrative emerging from the downturn in mid-2016 was similar, promising significant improvements due to cost reductions, yet the outcome was quite the opposite. Margin growth during the upturn of the cycle did not meet expectations. I'm interested in your perspective on how margins are likely to develop when that moment arrives.

Thank you for the question, Bill. I would say the improvement and initial recovery we noticed in 2017 and into the first half of 2018 in less consolidated oilfield services did not result in pricing leverage for participants. Even though many costs were reduced in 2015 and 2016, I believe few sectors achieved the pricing gains we typically see coming out of previous downturns. If you look back at earlier recoveries, as the market improves after significant rationalization, the sector usually benefits from strong performance on incremental results due to pricing leverage. Currently, in the sixth year of cost reductions, there's a strong focus on managing costs and expenses within NOV and our peers in oilfield services. When demand begins to return, which it consistently does in this industry, the immediate reaction is to fulfill that demand without significantly increasing headcount or resources. Pricing is often used to manage this demand level. As a result, we typically see quarter-over-quarter outperformance due to improved operating leverage from earlier cost reductions combined with pricing leverage, which is the recovery we anticipate. Given the current supply-demand imbalance, it seems the world might be preparing for an even larger shock. The cost reductions we're discussing signify a substantial rationalization of the capacity that builds wellbores, which is being sharply decreased amid considerable financial pressures. This is happening while demand remains artificially low, and while we can debate how much it will recover, I am confident that it will rise. Travel and computing will increase, although perhaps not as much as in 2019, but certainly beyond today's levels. Demand will rise, and supply will decline. There has been a significant drop in capital expenditures by exploration and production companies on new wells, and the depletion rates are likely higher due to the shale oil mix in global supply than historically seen. Additionally, there's a substantial amount of oil in inventory; estimates suggest over 1 billion barrels, which will take time to deplete. This inventory will likely obscure the existing imbalance for a while, worsening as time goes on. One day, we might realize that we've significantly dismantled the mechanisms needed to produce new oil and gas wells, potentially leading to a major commodity price shock. Once that day arrives, the industry will need to scale up again quickly, and well-seasoned managers will likely be hesitant to increase costs, aggressively utilizing pricing to manage the influx of demand.

Thank you, sir.

Thank you, Bill.

Our next question comes from Tommy Moll of Stephens. Your line is open.

Good morning and thanks for taking my questions.

Morning, Tommy.

I wanted to start on the cost-cut theme and really more on the process, whether that's internal with the board or potentially with third parties. Can you just lay out for us what inning we're in there in terms of what you have in front of you to review? I'm just trying to get a sense of how much work is yet to be done when we may hear from you on another target that could potentially be higher than the one that you just raised again today? And then on a related point, as you've gone through the process thus far, have you come across any areas where you are under-investing or you realize you had more commercial opportunities than anticipated and you've actually gone the other direction?

Yes. Great question, Tommy. I would say we've raised our cost estimate with this program every quarter since we started this process in early 2019, including the second quarter that we just announced last night. The process really involves our operations teams making iterative passes through how they accomplish their work and looking at how to accomplish that work most efficiently, and that answer sort of changes as the outlook for demand changes. And also, as we are willing to undertake more structural changes in how we do business. For instance, I think Jose in his prepared remarks talked about shared services, which is a little heavier lift. And so as we've moved through this process for the past few quarters, that's what we've done. The cost savings is a very, very detailed list of actions that they're undertaking ranging from new sources of materials that we use in our business to closing facilities, to workforce rationalization and those sorts of things. In the most recent quarter, we upped our estimate by $75 million. So we're now targeting $700 million by year-end. A lot of the reason for that has to do with our low order rates that we saw in both rig and Completion & Production Solutions. And so those two groups today, given outlook around orders, let's go back and see what else we can do. That's the kind of thing that we do, but it's monitored very closely. It's both a bottoms-up, so these individual steps that we track as well as sort of a top-down, we look for evidence of progress in our ledgers and make sure that this is all hanging together and we're accomplishing the cost savings that we are sharing with you quarter-by-quarter. We expect that we will continue to move through this current program through year-end; we do have some things that will undertake in 2021, but we'll wait till we get to 2021 to start talking to you about those. But to set expectations on that, certainly not nearly of the magnitude of the $700 million that we expect to accomplish by year-end. With respect to the second part of your question, I think we are appropriately funding and resourcing the opportunities and initiatives that we see across our businesses and have been thoughtful about where it's appropriate to cut and where we should not. So for instance, despite the broad cost cutting that's been underway across NOV, certain areas in new product development, we've actually increased our funding and our resources for. So there'll be some digital products in some areas in automation that we'll be talking to you more about in future quarters that are coming out of that. But it's sort of a case-by-case basis that we look at these opportunities and try to make sure that we're being good stewards of shareholder resources in funding these appropriately and proportionately to their potential payback.

Thank you, Clay. That was very helpful. And for a follow-up, I wanted to shift to a bigger picture theme here, the energy transition so-called, it's certainly garnered a lot of attention lately and both in the boardrooms and with investors. And so as you've alluded in the past though, that transition may take longer than is currently assumed by a lot of folks. So I wonder if you might share what you think some folks may be missing here and how are you positioning NOV for the way that you see the world's energy mix evolving?

Well, a great question. If you look at history, energy transitions are really all about infrastructure, capital, and technology, and history would point to transitions that take decades, many decades, arguably centuries. And mankind, sort of, transitioned from coal to oil from the 19th century to the 20th century, and the 20th century to the 21st century, and we're going to transition to something else with a lower carbon footprint. We sort of get that. But if you look around, 99 point something percent of the world's automobiles are powered by gasoline or maybe diesel, but products that the oil and gas industry produces in their tens, if not hundreds of millions of vehicles around the globe. 100% of the aircraft around the world are powered by products from the oil and gas industry. 100% of construction equipment is powered by products from the oil and gas industry. The construction equipment that build our buildings and maintain our roads, 100% of tractors and combines are powered by products from the oil and gas industry. 100% of locomotives and tractor-trailer rigs that deliver Amazon packages and all the freight that we rely on in addition to our food supply are powered by this industry. So if you step back and look at all those categories of equipment and ask yourself, so how many tens of trillions of dollars with a T, are invested in that infrastructure? And that infrastructure doesn't move one inch without products from the oil and gas industry. This is not a transition that's going to go very quickly. It's going to go, but it's not going to happen quickly. So a few years ago, we stepped back and said we can figure out how to help that and accelerate that in a lot of ways; I think that could be the business plan of the 21st century. Figuring out how to help mankind get to a lower carbon source of energy, and we have a lot of skill sets, I think that are applicable in this area, around capital deployment and project execution and the build-out of infrastructure. And so a few years ago, we've begun intentionally supplementing our investment in these areas in renewables and the energy transition, and are pretty excited about the potential of these, and we're really actually building on a pretty good base. And so, we talked in our prepared remarks a little bit about our participation in offshore wind installation vessels and technology where NOV is a clear leader. NOV is a clear leader in the geothermal space and has been for many years, and we've got some products, new products that we're selling into opportunities there. And those are established businesses that are making good profits. But in addition to these, we're investing in new opportunities and products in wind and solar and in a few other areas. And so, we really do view this as an opportunity, an opportunity that NOV may be uniquely positioned to take advantage of. So pretty excited about what the future holds here.

Very helpful. Thank you, Clay. And I'll turn it back.

Thanks, Tommy.

Our next question comes from George O'Leary of TPH and Company. Your line is open.

Good morning, guys.

Hey, George.

Hey, George.

The color on the North American fluids market over the last couple of quarters was interesting, and you mentioned you have some customers. One, you're looking at deploying new business models and changing the way the kind of game is done. But customers are looking to come back to suppliers that they can depend on. I just wondered if you could frame how that fluids business looks moving forward in more detail and compare in contrast maybe what you will do on the North American side versus the international side to the degree if that there is a major difference?

Hey, George. This is Jose. I'll add my thoughts here. There has been extensive commentary about our WellSite Services segment in our prepared remarks, and this has been a great showcase of the efforts that Blake and his team are making to assist our businesses in making informed decisions about capital deployment. During our review process, we noticed that our U.S. Fluids business, while consistently profitable, required a significant amount of working capital. Upon assessing our position in that market, we identified that we had few competitive advantages in North America. Consequently, we mentioned last quarter that we would be exiting that business, and we completed the exit during the second quarter of this year, which significantly impacted the revenue decline in that segment. Additionally, we discussed the solids control aspect of our WellSite Services business, where we maintain a strong market leadership. Looking at the returns throughout various cycles for that segment, they have been positive. However, with the recent significant drop in the rig count in North America, there has been a noticeable decline in that business. While the current outlook may not appear great, we believe there are solid long-term opportunities as more smaller competitors leave the market, creating favorable conditions for us. Furthermore, customers are increasingly acknowledging the value of reliability, long-term commitment, and quality service in their suppliers. These are the key points we aimed to emphasize in our prepared comments.

Yes. In addition to solids control, where we can measure market share, and we've clearly gained share areas like bits, coiled tubing, in other areas we're seeing market share tick up. As Jose said, on a smaller market, but we're clearly gaining share, and we're hearing from our customers that they are more comfortable with a supplier that has staying power.

Thank you, Jose and Clay, for the helpful framing. I apologize if I missed it, but I didn't hear any details about the 2020 CapEx budget, which may indicate it hasn't changed. Looking at the first half of the year, it seems possible that you might spend less than the $250 million mark. Is that a possibility, or am I overthinking it?

Yes, the $250 million figure remains our budget for 2020. We experienced a slight decrease in spending during the second quarter, partly due to challenges faced in advancing the construction of our facility in Saudi Arabia. However, we expect the spending rate to increase a bit in the third quarter. We are committed to our target. Additionally, as we have mentioned before, once the plant is operational, we anticipate returning to our previous levels of approximately 3% revenue run-rate for capital expenditures, or potentially a bit lower depending on market conditions next year.

Very helpful. Thanks for the color.

Sure. Thanks.

Thanks, George.

And our next question comes from Chase Mulvehill of Bank of America. Your line is open.

Hey, good morning. I just...

Hey, Chase.

Morning, Chase.

I guess I wanted to talk a little bit about the fourth quarter. I mean, you touched on it slightly, and I just want to make sure that I'm kind of reading the tea leaves right. Commentary seemed to suggest that Q4 could be down versus Q3. So I don't know if maybe you can confirm that; was that kind of more of a revenue commentary or an EBITDA commentary? And then, maybe just touch on to the free cash flow a little bit, you talked about it being positive. But if it's going to be down a little bit, how should we think about free cash flow and kind of some of the moving pieces between working capital and cash taxes?

Yes, Chase, it's Jose. I'll address that. The comments I made were mainly focused on our Completion & Production Services segment and a few specific business units where our bookings have been relatively weak over the past couple of quarters. We want to highlight that there remains a significant amount of uncertainty in the upcoming quarters. Looking back at the major disruption that occurred at the end of Q1 and into Q2, our customers were largely unable to access their offices, which we believe greatly affected the timing of order flow. Most of our customers have indicated that their orders are not being canceled but merely postponed, with some delays being more substantial than others. We anticipate that several orders we expected to secure in Q2 are now likely to occur in Q3. Hence, if these orders do not materialize and if we encounter additional disruptions affecting order intake, we could see a lighter backlog in some of those businesses, potentially leading to a more significant decline in Q4 if orders fail to come through. Regarding cash flow, there is considerable uncertainty regarding how the rest of the year will unfold, but we expect to generate further cash flow from our working capital, even though some of those metrics might deteriorate slightly from this point forward. Specifically, we might see an increase in Days Sales Outstanding as our revenue increasingly shifts towards international markets and as our customers experience more challenges. Longer cycle businesses also tend to have longer inventory turnover, so we expect that to worsen a bit. However, examining other components of working capital, such as contract assets and liabilities, suggests that we should still generate reasonably healthy cash flow in the second half of the year.

Okay. All right. That makes sense. One quick follow-up, kind of, maybe coming back to Bill's question at the beginning. Obviously, you've done a lot of rationalization of cost across the organization. But what levels of revenue do you think you've actually right-sized your business towards, as we think about the recovery, and maybe hitting the high end of those incrementals, as you don't have to bring back any kind of fixed costs?

Well, we are continuing to adjust to a market that's obviously facing pretty historical challenges and working hard to maintain positive EBITDA and cash flow as best we can through that. What I'd tell you is that we're doing that and taking out certain facilities and plants because we have a great deal of confidence in the ability of our leadership when called upon to rebuild that and to respond to higher levels of demand. And I think we've got a great track record with respect to doing that. And frankly, that's really kind of a necessary skill set in oilfield services. The way to survive these downturns and really prosper in the upturns is really to move aggressively on costs, and when called upon, and then when demand comes back to move aggressively to expand to rising demand in a way that's smart and cost-effective and so forth. And so, hard to put a number on that level of revenue. But as I said earlier, our management team continues to iterate, kind of quarter by quarter with respect to outlook for their businesses, not just 90 days out, but over the next few quarters as best as anyone can tell, and adjust their businesses to stay healthy as best they can through that.

Okay. All right. I'll turn it back over. Thanks.

Thanks, Chase.

Our next question comes from Sean Meakim of JPMorgan. Your line is open.

Thank you. Hey, good morning.

Good morning, Sean.

Hi, Sean.

Just a couple of points of clarification. So, you noted $320 million of annualized benefit from the costs out in the second quarter, $570 million to-date, another $75 million identified, so $700 targeted out by year-end. Can you maybe just give us an estimate of how much of a cushion that gives you when you lap that full $700 million in '21? So in other words, how much of a year-on-year benefit do you get next year? Is that maybe $100 million, $150 million something like that?

I think we have to work through the math.

Yes. Yes, there certainly is a timing element to when the savings come in. And I think we've done a reasonable job of providing you the updates in terms of the amounts realized every quarter over the last several quarters. So we could certainly go through that math and maybe we can follow up with you post-call and do that offline, Sean.

Okay. Sure. Yes, no problem. And then, I guess another point of clarification. The guidance that you gave for the third quarter is inclusive of the savings you expect to capture in the third quarter, correct?

That is correct.

Okay, great. Thanks very much.

Thanks, Sean.

Thank you.

That's all the time we have for questions. I'd like to turn the call back over to Clay for closing remarks.

Thank you, Michelle. First and foremost, I want to say again how much I appreciate the hard work that our employees are doing under some extraordinary challenges and conditions out there. And so, thank you those of you who are listening. I'd ask everybody on the call to do what you can to stay safe, to keep others around you safe. And lastly, we all look forward to speaking with you about our third quarter results in October. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.