NOV Inc. Q3 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the NOV Third 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 call 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 Third Quarter 2021 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's 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. Reconciliation to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis for the third quarter of 2021, NOV reported revenues of 1.34 billion and a net loss of 69 million. Our use of the terms EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question and answer session. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Thank you, Blake. For the third quarter ending on September 30th, 2021, NOV once again posted strong orders with consolidated book-to-bill of over 150%, reflective of steadily strengthening commodity prices and oilfield activity. However, NOV's reported consolidated revenue declined 5% sequentially, and EBITDA fell to $56 million during the third quarter. I will start by reminding everyone that our second quarter financials included credits related to a project cancellation settlement within RIG Technologies, which contributed $74 million in revenue and $57 million in EBITDA. We excluded those credits from our discussion on our last call, and excluding these credits again from the sequential comparison today points to consolidated third quarter revenues that were essentially flat, down only $2 million sequentially and EBITDA that was up with EBITDA margins on this basis rising from 3.5% to 4.2%. Throughout the quarter, we continued to face logistical and supply chain challenges, which our teams are managing effectively day-to-day. Nevertheless, these weighed on certain results in specific areas, most notably in Southeast Asia. We recognized a $12 million charge stemming from a combination of COVID disruptions and execution challenges on a large offshore project within our Completion and Production Solutions segment, which I'll describe more fully in a moment. If we look beneath the surface, the trajectory of our business is somewhat more positive in our view than the headline numbers suggest, and our outlook for 2022 and beyond continues to strengthen. In fact, given 1. Stronger oil and natural gas prices lately, 2. the emergence of many of our key offshore drilling customers from bankruptcy, 3. the significant reduction in costs that NOV has achieved for the past 2 years, 4. our third quarter in a row of sequential double-digit top-line growth, and solid flow-throughs for our Wellbore Technologies segment, and 5. book-to-bills in excess of 100% for the second quarter in a row for both the Completion and Production Solutions and RIG Technologies. I'm decidedly more positive about the outlook for the coming year. Nevertheless, global supply chain issues are making business challenging in the short run, which leads me back to the project for which we took charges. Our Completion and Production Solutions segment has been working on a large project in Southeast Asian shipyard that ran into COVID-related operational disruptions, specifically a combination of shipyard shutdowns, labor quarantines, and shortages of critical components. Additionally, our sub-suppliers in the region have faced similar disruptions, which also affect project execution. Our team is working closely with our customer to figure out how to get this vessel built and online as efficiently and as safely as possible while recognizing the need to be resilient as challenges shift and change daily. Across the Company, we are intently focused on executing effectively in the face of persistent supply chain challenges globally. Most COVID operational disruptions have been in Southeast Asia and continued to disproportionately affect the Completion and Production Solutions segment, owing to its large base of operations there. Similar to other industrial manufacturers that you read about in the financial press, we are facing inflation in labor, raw materials, and components that we buy from subcontractors. But our teams have been diligent in pursuing alternate supplies, and we are generally able to offset most of the cost inflation with higher pricing to customers. Supplies like resin, epoxy, and fiberglass integral to our composite pipe and Tuboscope tubular coating businesses remain critically low and in some instances have nearly doubled in cost. Lead times for forgings have extended out from 6 weeks to 18 weeks. And while prices for plate steel and coiled steel are now up more than 240% year-over-year, at least we appear to be seeing some stability in steel pricing as iron ore prices have declined. We are hopeful that the worst of the steel inflation is behind us. Outside of steel, epoxy, fiberglass, and other raw materials, I'd say we have generally seen low double-digit cost increases on other finished or semi-finished components that we buy. Semiconductor boards, chips, electric motors, gearboxes, and other sub-assemblies remain in very tight supply. Freight has also been challenging. Spot container shipping rates from Asia to the U.S. are now 5X what they were this time last year, 14X what they were in 2019. Additionally, ocean freight reliability is down to 38%, about half of where it was historically, which has led to more use of expensive air freight. It's more reliable than ocean freight, but it drives costs up. One NOV business unit went 2 months without steel deliveries because our European steel mill supplier could not secure a vessel into port without guaranteeing it a full load. In North America, trucks and drivers can be tough to secure, and Hotshot drivers are dropping booked shipments to take higher-priced jobs making even domestic land deliveries less reliable. Labor availability, particularly in the U.S. is very tight in certain areas. And we have stepped up recruiting and are redeploying some workers into new assignments. Our customers were also encountering these challenges. In fact, we are hearing of many instances of crew availability delaying planned equipment reactivations in West Texas and elsewhere. These challenges are affecting our customer behavior in other ways, too. NOV products like fuel handling pipes and tanks, pumps, and mixers, etc., that go into large construction projects are facing headwinds in certain instances because our customers can't secure other complementary components or can't secure construction crews to install them. So, they are delaying project launch and delaying orders to us. I want to stress, thus far NOV's team has done a good job covering inflationary cost pressures in the form of price increases. As the market leader in many categories of equipment, we benefit from scale with our suppliers vis-a-vis our competition. And we have moved raw material across our manufacturing plants to maximize value. Some of our businesses are achieving price-driven margin expansion as they recover discounts given during the downturn of 2020. And while our few products with longer production cycles like drill pipe have struggled to keep up with raw material cost increases on orders taken in early 2021, resulting in some margin compression, most are at least able to hold margins through pricing. But all are intently focused on managing inflation risks that continue to mount. Our businesses are reducing costs; Completion and Production Solutions identified another $50 million of annual cost reductions, including shuttering another half dozen facilities over the next few quarters. While volumes and margins are clearly not where they need to be to generate sufficient returns, the organization's intent focus on downsizing over the past several years together with higher orders and oilfield activity on the horizon, gives us confidence that we're moving in the right direction. We share the view expressed by others that the world is moving into a multiyear upcycle in commodity prices. The combination of significant money supply growth, economies emerging out of pandemic lockdowns, under-investment in oil and gas exploration and development over several years, high cost of capital for E&P firms, and flattening efficiency gains for North America shale producers will lead to tightening petroleum supply and demand in our view. In its current shape, the oilfield will struggle initially to respond to calls for increasing production. So far, incremental drilling activity has been cautious in measure. Our land drilling customers tell us that they find it very difficult to acquire rigs even though the rig count is still well below pre-pandemic levels. And the green crews that they hire cost more and are less productive. The industry will have to pay more to get back the expertise that it has lost. The industry is also paying more for capital and employees, following OpEx decisions to let market forces rule in Thanksgiving 2014, U.S. shale emerged as a swing source of oil, characterized by fairly rapid responsiveness to commodity prices. This is made possible by the resourcefulness, technology, and efficiencies of the U.S. oil and gas industry, as well as large, easily accessible pools of low-cost capital in the form of both equity and debt from Wall Street. However, poor returns on capital investments came in decreased focus by 2019, and this coupled with a widespread move to decarbonize investments by many capital providers led to sharply higher cost of capital for the very capital-intensive oil and gas industry. Consequently, the U.S. operator base has necessarily embraced capital discipline as its new ethos. Going forward, it stands to reason that the U.S. unconventional market will be more challenged to fulfill its role as the world's quick cycle oil supplier. Now that its constituents are more focused on returning capital to shareholders and reducing reinvestment rates. Further, we believe rising utilization of oilfield service assets, depletion of consumables, and higher labor costs will drive up pricing by oilfield service providers. We are hearing stories from the field of drilling contractors not willing to reactivate incremental rigs unless they can secure contracts at higher day rates, and a pressure pumper is not adding incremental crews unless they can achieve a certain degree of net pricing improvement, which is required to get payback on incremental costs of equipment reactivation. Higher well construction costs, made worse by overall diminishment of efficiency as green crews man incremental units going to work, will impact returns on shale wells, which will reduce the industry's responsiveness to higher commodity prices in our view. As economies and demand recover, OpEx spare capacity trickles back into the market and all supply-demand gaps become more evident. We think the industry's response will be more broad-based than just U.S. shale ramping up activity. Much of the world's international offshore oil field equipment has been stacked and neglected for some time and will require significant investment to bring it back to working order. One of the most interesting trends that we observed in the third quarter was a rising number of inquiries around potential offshore rig reactivations. Despite the level of contracted offshore rigs declining sequentially, and I'll add a low level of actual offshore equipment orders for us outside of the 20,000 PSI pressure control equipment order for Transocean. We are being quietly asked to quote on several stacked rigs that are looking at coming back to the market. This is being driven by high rig tenders currently being floated by NOC and others, who are also looking at higher levels of activity onshore in certain international markets. So to sum up where the industry is now, MLP operators worldwide are enjoying newfound prosperity as our existing production commands higher prices, but they will certainly pay more for constructing new wellbores and bringing on more production in the near future. Oilfield service providers, which are NOV's primary customer base, are just now starting to claw back discounts given last year while simultaneously facing higher labor and component costs and constraints. We see them raising their prices materially over, say, the next 18 months as prosperity trickles down to this level in the food chain. NOV's late-cycle manufacturing businesses will follow soon as prosperity continues to trickle down. As a reminder, all three of our segments engage in manufacturing, which blossoms a bit later in the oilfield upcycles given the trickle-down nature of our ecosystem. RIG Technologies has benefited strongly from its exposure to offshore wind development, which has helped offset some of the weakness it has seen in demand for traditional drilling equipment. Completion and Production Solutions has felt the brunt of the oilfield downturn, but its recent additions to backlog point to a brighter future. And although Wellbore Technologies manufactures some capital equipment like drill pipe, it tends to behave more like a traditional oilfield service provider, and it is clearly recovering quickly. Throughout the downturn, NOV has continued to invest in technologies and improve efficiency, reduce labor, and optimize operations. Whether it's through automated drilling processes with its NOVOS operating system, accompanied by our new drill floor robotics, delivering downhole data in real-time through our wire drill pipe, or reducing the emissions profile of the completion site with our ideal e-Frac fleet, NOV's oilfield product portfolio continues to evolve to enable our customers to achieve better operational performance. Concurrently, we're also developing offerings that will help our customers in their pursuit of a low carbon future. Our offshore wind installation vessel business won 2 packages from Cadeler and remains on track to achieve a revenue run rate of $400 million a year by Q4 of next year. In addition, we were awarded our first FEED study for a carbon capture system aboard an FPSO in Asia utilizing our extensive gas processing expertise. And as our other efforts in onshore and offshore wind, solar, geothermal bio-gas, and carbon capture utilization and storage continue, NOV is positioning itself as a leading technology provider to the energy transition just as it is to traditional oil and gas. On the whole, we are increasingly confident that NOV is approaching an inflection point where the hard work our team has put in over the past several years will bear fruit in a big way. To the employees of NOV who are listening today, thank you for your extraordinary efforts. Your hard work, creativity, and dedication have set us up for success and the opportunities that are coming our way. Thank you. With that, I will turn it over to Jose.

Thank you, Clay. NOV's consolidated revenue in the third quarter of 2021 was 1.34 billion, a 5% decrease compared to the second quarter. Adjusted EBITDA was 56 million, or 4.2% of sales. Excluding the credits from the rig cancellation in the second quarter, revenues were essentially flat, with cost reductions more than offsetting charges taken for our project in Southeast Asia. During the third quarter, we generated 105 million from cash flow from operations and 66 million of free cash flow. We ended Q3 with net debt of 36 million, comprised of long-term debt of 1.70 billion in cash and cash equivalents of 1.67 billion. Moving to segment results. Our Wellbore Technologies segment generated 507 million in revenue during the third quarter, an increase of 44 million or 10% sequentially. Revenue improved 6% in North America and 13% in international markets as the momentum of the global recovery continued to build in all major geographical regions. EBITDA improved 14 million to 77 million, or 15.2% of sales, as inflationary pressures and a less favorable mix limited incremental margins to 32%. Our ReedHycalog business posted another quarter of double-digit revenue growth, primarily driven by strong performance across the Western Hemisphere and Middle East. Our leading-edge cutter designs and technologies continue to drive revenue growth that exceeds the rate of improving global drilling activity. While this business faces many of the supply chain issues faced by all global manufacturing businesses and at times has been forced to substitute higher-cost materials to meet delivery schedules, management has been successful in raising prices to offset costs with minimal customer pushback as the efficiencies gained by ReedHycalog technology more than justify higher pricing. Our downhole tools business realized a 5% improvement in revenue during the third quarter. Top-line growth was constrained by shortages of key materials and therefore did not fully reflect the demand we are seeing for our downhole technologies, which continue to enable record-setting drilling performance. Our agitators system was recently used to help a customer establish a new rate of penetration benchmark in Colombia, achieving a field record rate of penetration of 201 feet per hour. Our select shift downhole adjustable motor was utilized by a large operator in the Northeast U.S. during a 12-well drilling campaign and drove a 30% reduction in average drill times due to the tools' ability to change bend settings downhole, saving trips out of the hole. Our Wellsite Services business posted double-digit revenue growth, primarily driven by demand for solids control services and equipment sales in international markets. While the business unit saw improvements in all regions, the North Sea and Latin America were particularly strong in offshore job counts, which improved by 17% sequentially despite the impact of hurricanes in the Gulf of Mexico during the quarter. Recent tendering activity points to continued improvement in the outlook for our Wellsite Services business unit. Our MD Togo business realized double-digit sequential revenue growth, with strong incremental margins. Higher global drilling activity levels drove demand for sales and rentals of our surface sensor data acquisition systems, and we saw a sizable pickup in revenue for more digital solutions. We were awarded an additional 3-year contract from a customer in the North Sea for our Evo digital drilling optimization services, which leverage high-speed telemetry from our IntelliServ Wired Drill Pipe. We also secured several international contracts for a well data remote drilling monitor solution, which allows operators to easily analyze well performance against offset wells, identify potential upcoming trouble spots, and oversee drilling efficiency across all wells from any location. Looking forward, we anticipate our legacy data acquisition offerings will continue to benefit from rising activity levels and market share gains, and we expect our digital offerings will gain greater market adoption by operators looking to extract additional operational efficiencies to offset inflationary pressures. Our Tuboscope business experienced a mid-single digit sequential increase in revenue driven by improving demand for our coating and inspection services. While demand is strong and our backlog of inspection and coating projects has grown, revenue growth was hindered in the third quarter by operational disruptions related to Hurricanes Ida and Nicholas and the COVID outbreak at a key coating facility. Additionally, constrained supplies of raw materials limited our ability to capitalize on our backlog and resulted in higher costs as we were required to air freight resin from Asia to the U.S. to meet certain customer delivery requirements. In the fourth quarter, we expect operational challenges to subside, allowing the business unit to capitalize on its growing backlog and improved pricing to drive better results. Our Grant Prideco drill pipe business posted solid top-line growth on higher volumes. EBITDA flow-through was restrained due to a less favorable sales mix and inflationary pressures. New orders remain solid with a notable improvement in demand for larger diameter premium pipe. U.S. operators are showing an increasing preference for 5.5-inch drill pipe, which, unlike smaller diameter pipe sizes, is in limited supply. Additionally, operators are specifying specific grades of drill pipe and recent offshore rig tenders, driving additional demand for premium pipe. While fourth-quarter results will be muted by ongoing supply chain challenges and cost inflation, recent orders, growing global drilling activity, and improved pricing have us increasingly optimistic regarding 2022. For our Wellbore Technologies segment, improving global activity levels, partially offset by lingering supply chain challenges, should allow for sequential revenue growth between 3% to 6% in the fourth quarter. We expect improving absorption in our manufacturing facilities and better pricing to be partially offset by supply chain challenges and continued inflationary pressures, limiting incremental margins to around 20% in the fourth quarter. Our Completion and Production Solutions segment generated 478 million in revenue during the third quarter, a decrease of 19 million or 4% sequentially. EBITDA for the quarter was a loss of $5 million or 1% of sales. Orders during the third quarter were 384 million, yielding a book-to-bill of 144%, with all but one business realizing a book-to-bill greater than one. The backlog for the segment ended at approximately $100 million higher sequentially to end the quarter at 1.1 billion. A second consecutive quarter of strong order intake, along with constructive ongoing customer dialogue gives us growing confidence in the sustainability of this higher level of orders as we head into 2022. Our intervention and stimulation equipment business experienced a double-digit sequential decline in revenue on lower capital equipment sales. The impact to EBITDA was limited primarily due to an improved sales mix resulting from steady global aftermarket sales activity. New capital equipment orders remained light, but improved sequentially. In North America, we're seeing higher quoting activity, particularly around dual-fuel conversions, reactivations, and rebuilds, with the average size of quotes increasing as the industry is now preparing to take its last mile of inventory off the fence line. We're also seeing more inquiries about bulk cementing and pumping equipment to support increasing drilling activity levels. Prospects for the international markets are equally, if not more compelling. As one of our customers described on its conference call, lower spending by service companies in international markets for more than a half-decade, and improving activity is resulting in tightening supply of equipment. Although orders remain light, we're seeing growing inquiries for pressure control equipment in many regions around the world, and greater inquiries around next-generation coiled tubing equipment, particularly for the Middle East and in the former Soviet bloc countries. Our Fiber Glass business unit saw relatively flat sequential results, as improving demand across the business's end markets was offset by continued supplier disruptions. Global supplies of key raw materials such as resin and glass remain extremely tight, a condition we expect to extend over the next few quarters. Additionally, while we're experiencing fewer direct effects of COVID, such as government-mandated lockdowns, we're now working through derivative effects in the form of ongoing logistical challenges and even power shortages, which are occasionally shutting down our operations in China. Despite these headwinds, the outlook for the business is strengthening, driven by increasing oil and gas activity in the Middle East, improving marine and offshore activity in Southeast Asia, and continued strong demand for our fuel handling products. Our Process & Flow Technologies business realized a high-single-digit sequential decrease in revenue. Clay described the significant operational challenges this business faced during the quarter. And while operational challenges will linger into the fourth quarter, we remain optimistic regarding the longer-term outlook for this business. We're seeing growing demand for chokes and pumps for gas processing equipment and for FPSO process modules. And as Clay highlighted, we anticipate additional opportunities to showcase the carbon capture usage and storage skill set we've been cultivating within this business unit. For the subsea flexible pipe business, we realized a double-digit percentage sequential increase in revenue with strong EBITDA flow-through due to solid execution and a better sales mix. Indicative of the improving outlook for offshore activity, orders improved sequentially, achieving their highest levels since 2019, resulting in a book-to-bill that exceeded 140% for the second straight quarter. The outlook for orders remains solid and we expect to continue replenishing the business's backlog and move prices higher. For the fourth quarter of 2021, we anticipate our Completion and Production Solutions segment will continue to face COVID and supply chain challenges, but improved backlogs and growing aftermarket activity should allow for segment revenues to improve 10% to 15% with incremental margins in the mid-30% range. Our RIG Technologies segment generated revenues of 390 million in the third quarter, a decrease of 97 million or 20% sequentially, excluding the 74 million in revenue recognized in the second quarter from the settlement of the offshore rig project cancellation, revenues declined to 23 million sequentially, primarily due to the timing of certain projects nearing completion during the third quarter. Adjusting for the impact of the offshore rig project cancellation, EBITDA increased 7 million on the improved sales mix and cost savings. Orders for the segment increased to 300 million, yielding a book-to-bill of 190%. Once again, wind installation vessel equipment orders comprised over half our bookings as we continue to establish ourselves as the most trusted provider of vessel designs, jacking systems, and heavy lift equipment to the offshore wind industry. As Clay mentioned, we remain on track to achieve an annualized revenue run rate of $200 million by the end of this year and a run rate of approximately $400 million by the end of 2022. Additionally, we remain optimistic that the number of offshore wind installation vessel projects will continue to grow. Rig capital equipment orders improved for the second straight quarter, highlighted by an award for our third 20,000 PSI BOP project. Last quarter, we noted a growing sense of optimism from our offshore driller customer base, which we believe continues to build. The global offshore rig count is trending higher and rig tendering activity is growing more active in Brazil, West Africa, the Middle East, and Southeast Asia. One of our customers recently indicated that it expects to have the entirety of its fleet under contract by the end of 2021, a remarkable feat considering where the industry was just 12 months ago. With fleets of hot rigs approaching full utilization and operators unwilling to accept rigs that are not in near-perfect condition, a number of NOV's customers have approached us about rig recertifications, upgrades, and potential reactivation projects. Most of the upgrade conversions have centered around BOP equipment, automation, and emissions-reducing technology like our PowerBlade offering. We expect most near-term reactivations to be centered around rigs that are in relatively good shape and will only require modest overhauls. But as we get deeper into the stack, the scope of these rig reactivation projects will grow significantly, and in turn, so will the revenue opportunity for NOV. Demand for land drilling equipment remains low, but we're seeing positive developments in land markets. As the rig count recovers in the U.S., there is a clear preference for rigs that have leading edge torque, flow rate, and pressure capabilities along with larger setbacks to efficiently handle larger diameter drill pipe. Operators are also demanding the latest control systems and automation capabilities with interest in our NOVOS and multi-machine controls growing stronger by the day. The domestic rig fleet is quickly approaching full utilization of rigs meeting the desired specifications and day rates are rising, leading to increasing inquiries for land rig upgrades that will bring currently idle rigs into this ultra-premium rig class. In our aftermarket business, we realized our third straight quarter of improved spare part bookings. And based on what we've seen to date, we expect this trend to continue into the fourth quarter. After more than a half-decade of rationed maintenance, spending is beginning to normalize as offshore drilling customers gain more confidence in their capital structures and business outlook. We also saw a 30% sequential increase in the number of quotations by our field engineering group, predominantly driven by the customers I described earlier. We would like help from our engineers in determining the requirements to reactivate the stacked rigs. Looking ahead, we find ourselves becoming increasingly optimistic around the prospect of improved financial results from our RIG Technologies segment in 2022 due to several specific segment tailwinds: 1. improving maintenance spend for more contract drilling customers, 2. a growing pipeline of potential rig activation projects, 3. ramping production from our rig manufacturing operations in Saudi, and 4. an increasing rate of converting wind installation vessel backlog into revenue. Near-term, our RIG Technologies segment must contend with the same headwinds currently faced by all global manufacturers, primarily supply chain and labor shortage issues, which will likely blunt incremental operating leverage. For the fourth quarter, we expect revenues for the segment to grow 8% to 12% with incremental margins in the mid-teens.

Thank you. Your first question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

Thanks. Good morning, everybody.

Hi Stephen.

A couple of things, but can we start on the rig tech order side, you highlighted NOV's, and I think earlier that the two offshore wind installation vessels. Can you talk a little bit about the market and sort of the opportunity you see there unfolding over the next couple of years?

In addition to those two, we also booked a jacking system for a third vessel in the third quarter, which contributed to a strong level of orders for wind installation vessels for Q3. I expect a slight decrease in Q4 due to our pipeline of opportunities. However, as we move into 2022, we are optimistic that we could see an additional four, five, or six vessels ordered, including likely another Jones Act qualified vessel for the U.S. market. Our outlook is strong, supported by the Biden administration's announcement of its goal for 30 gigawatts of wind power generation capability in U.S. waters, along with a positive outlook for further offshore installations in Europe, Asia, and beyond. Overall, we are in a solid position in that market segment.

Thanks. As we think about 2022 and I know there's a lot of moving pieces with costs and COVID disruptions still lingering, etc. How are you guys thinking about getting back to more normal incremental margins as you look at 2022 of the different segments? Do you think we're close or do you think you still have some transition as you go through the year?

A lot. It's a good question. A lot, in my view, depends on how we battle our way through all these supply chain challenges that we talked about. It's still a wildcard out there. But we do think at some point gets back to normal, things even out, the economy's open up fully, demand for crude grows. Under-investment in crude and natural gas over the past few years, I think sets up a really interesting backdrop. Just the situation we find ourselves in, I think, is pretty constructive with respect to how we can do in 2022 and beyond. And then that's on the heels of a very significant cost-out effort that we've had underway here for a couple of years. That's now north of $800 million and headed closer to $900 million. And so we think the business is really, really well-positioned to put up better margins, better profitability going forward. So that's where we find ourselves; I can't speak to how quickly that unfolds, but I think it stands to reason that the world does get back to normal. We get COVID disruptions and economic disruptions behind us, and I think that's still a good thing for NOV's future.

Is there a segment that's leading the way or not necessarily?

Yes. Yes. Well, you're already seeing Wellbore Technologies, right? So double-digit growth, three quarters in a row, 15.2% EBITDA margins in Q3. And that, by the way, that's in spite of its own sort of COVID, supply chain issues too, so it's sort of overcoming those. But as you know, that's a little earlier cycle compared to Completion and Production Solutions in RIG Technology, a little less capital equipment driven. And so it's on its way. And then with respect to the other two, I touched on this in my prepared remarks, prosperity rolls downhill through the oilfield and it starts with high commodity prices that help restore the oil and gas producers' balance sheets, and gets them back to higher levels of activity and then it shows up in the services segment. And I think they're going to be quickly realizing higher day rates and margins. And it will flow into higher demand for capital equipment. But big picture, we're on the heels of several years here of depleting the stocks of capital equipment that perform oil Wellbore construction activities in the oilfield. And so there's been under-investment, and that equipment wears out and as utilization rises, activity rises, I think there will be a call on some of the things that NOV makes.

That's all. Thank you.

You bet. Thanks, Stephen.

Your next question comes from the line of Ian Macpherson from Piper Sandler. Your line is now open.

Good morning.

Thanks. Good morning, Clay, Jose. Good morning. Clay, I know that you said that some of the offshore rigs that come out first will be relatively less coal, but I know that you never like to let a reactivation go without an upselling opportunity on upgrades as well. And, we know there's upgrades that could apply to the remaining U.S. land rigs that need to come out and get to super-spec. Could you compare and contrast what that delta of opportunity is for NOV near term between land rigs and offshore rigs, between a fairly minimalistic reactivation versus what you're upgrading upsell opportunity is?

It's difficult to provide a general answer, as it varies by rig. Regarding offshore operations, we're observing that if a rig has been inactive for over a year, oil companies now require a survey to verify its classification. This means a classification society will inspect the rig, including equipment checks by the original equipment manufacturers, as the oil companies want assurance that what they're contracting meets their expectations. This is leading more rigs to shipyards, and we've seen an increase of about six rigs quarter-on-quarter in shipyards. We are involved in providing certification for equipment. Additionally, there are increasing demands for enhanced pipe handling capabilities by the blowout preventer. This typically requires increasing accumulator bottle capacity and possibly making other modifications, which improves rig efficiency and speeds up the process of tripping pipe. Another significant area of interest is emissions reduction. We previously mentioned our PowerBlade product designed to lower emissions offshore, and we are currently measuring the emissions reductions from the first installation, which has garnered considerable attention from customers. In terms of upgrade opportunities related to rig reactivations, these equipment categories appear to be the most promising and imminent. Each rig is evaluating its capabilities to distinguish itself from competitors, but these trends represent what we are primarily observing during the re-certification process offshore. On the onshore side, as Jose noted, there is growing interest from land drillers now that utilization is increasing, particularly for high-capacity rigs. This relates to the rising demand for 5.5-inch drill pipe. North American shale drillers are favoring this larger diameter pipe for its superior hydraulics and larger internal diameter, which enhances performance when drilling. Coupling 5.5-inch drill pipe with our Delta premium connection allows for a smaller outside diameter tool joint, which better facilitates mud return. Upgrading iron roughnecks to handle 5.5-inch pipe and the torque it requires is anticipated. Although we haven't seen this trend fully materialize, we expect a surge in inquiries around such upgrades and the associated engineering needed for setting back larger quantities of pipe. Moreover, there's continued growth in interest in our NOVOS Operating System, which we're excited about as it serves as a digital operating system that will be foundational for rig floor robotics, set to debut in Q4. This system provides a cost-effective method to reduce labor needs on drilling rigs, allowing machines to trip pipe instead of human crews, performing at a level comparable to human crews in a more cost-efficient manner. Overall, NOV is well-prepared with the technology we've developed and improved over the years to enhance rig safety and efficiency, and we are ready to meet the needs of our customers, both on land and offshore.

Good stuff. Thank you, Clay. Jose, you had a good quarter for free cash flow during the third quarter, I was just going to invite you to refresh the full-year free cash outlook if it needs to be or just leave it where it is?

Yeah. It was a good quarter from a free cash flow standpoint. So we continue to get better and better in terms of managing working capital. No real revision to full-year cash flow. We're obviously well within the original targets that we had originally provided. I'd say that typically Q4 tends to be our best cash flow generation quarter of the year if you look back at the last several years and certainly hope to generate a little bit more free cash flow in Q4, but it might be a little bit different this time around. So if you look closely at the balance sheet, you saw that we had a good release of cash from working capital, about 108 million, with the majority of that coming from the difference between our contract assets and contract liabilities. And if you look forward to Q4, that probably goes a little bit the other direction. Plus if you look at the guidance that we provided and you do the math, there's a pretty sizable step-up in the top line, so it could be a little bit of a buildup in AR. And then lastly, as we sort of went on in great detail related to the supply chain challenges that we've been having and expect to continue into Q4, we are building buffers in certain parts of our supply chain to try to better withstand some of the potential disruptions that we see on the horizon. It's a long way of saying that we're still optimistic about future cash flow generation, not just Q4, but certainly into 2022, we're getting better in terms of our working capital management. But don't expect another very large windfall of free cash flow in Q4, but overall feel fantastic about the condition of the balance sheet.

Thank you, Jose. I'll pass it.

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

Hi, Neil.

Hey, good morning, guys. If I could ask a strategic question here around M&A. And the Company hasn't pursued a transaction in some time, but you're evolving the business and you're focusing on some new growth areas, including offshore wind. Do you think you can build the business organically as you diversify or do you think there is a role for both on M&A in your strategy?

Yes, that’s a great question, Neil. I want to clarify that we have been actively engaged in mergers and acquisitions. However, we find that many opportunities, especially in the renewables sector, are quite costly, particularly with the influx of capital available at low costs pursuing these deals. Therefore, we feel confident in focusing on organic growth. If you assess the Company’s capabilities—our assets, global presence, and innovative engineers, along with our extensive expertise in materials, metallurgy, robotics, and digital technologies—you'll see we have the necessary tools to grow organically and potentially get ahead of our competitors in various areas. That’s our strategy moving forward. We have made a few minor investments, including in land wind tower manufacturing technology, where we’ve utilized our skills to help them achieve their strategic objectives, and we’re excited about that progress. Additionally, we’ve developed complementary products, specifically a mobile tower crane lifting system for that technology, which we plan to launch in early 2022. Overall, I’m optimistic about our ability to continue advancing primarily through organic means. However, I want to emphasize that we are always exploring acquisition opportunities to enhance our capabilities in both the energy transition arena and our traditional oil and gas sector, where we are also investing organically.

Well that's great Clay. Maybe you can talk about how you're seeing the offshore opportunity and quantify for us what the opportunity with the cash flow or EBITDA opportunity set would look at it as we look at your slides, you do talk about 240 gigawatts of offshore wind capacity over time by 2030. It's a big price, but help tie that back into what it means for your model.

We previously discussed the necessity of installation vessels for the large wind turbines in offshore projects, which are massive pieces of equipment. The leading-edge turbines we're focusing on, with 14-15 megawatt capacities, have hub heights of 500 feet—which is equivalent to a 50-story building—and blades that extend over 100 yards. Assembling these components at such heights is a significant challenge. The demand for vessels has increased along with the height and weight of these turbines, in addition to the industry's goals for more efficient installations and reduced costs. This aligns well with NOV's expertise in equipment handling and process optimization. The outlook is promising as we believe the industry will push beyond 15 megawatts, potentially reaching 20 megawatts or more in the coming years. Furthermore, a more intriguing opportunity lies in floating wind technology. Unlike fixed wind projects that require shallow waters, we are developing installation vessels suited for deepwater, essential for floating wind turbines. Our GustoMSC group has been innovating in this field for 20 years, focusing on designs that can be produced efficiently with less steel in collaboration with shipyards. Over the past two decades, we have built 400 offshore rigs and established partnerships with major shipyards globally. We aim to help these shipyards streamline their processes to produce these vessels at scale. Additionally, NOV plans to provide proprietary kits for anchoring these vessels. What sets the floating wind opportunity apart from fixed wind is that we would have an economic stake in each asset, making the total market for floating wind significantly larger than that for fixed wind over the long term.

Yeah. And Clay, going back to the fixed I'm sure you talked about $400 million of annual run rate by I think it was fourth quarter of 2022. Does that still feel like a good number? And is there an upward or downward bias to that?

I think that's right down the middle of the fairway. I think it fits with the orders that we've won up through the third quarter that we just announced. We're on that trajectory to be able to hit that by the end of 2022. As you can appreciate, Neil, these vessels take several months of gestation and so forth. We're working closely with these customers to get everything right and plan effectively to execute these projects. And so line of sight on that has been pretty decent. The $400 million guidance that we gave a couple of quarters ago fits that pipeline of sales opportunities.

Alright, great color, guys. Thank you.

Thank you.

Your next question comes from the line of Marc Bianchi from Cowen. Your line is now open.

Hi, Marc.

Thank you. Hey. How are you doing, guys? I wanted to start with the charge that you took on the vessel projects in the third quarter. Just to clarify, is this a charge on a percentage of completion type project so you're recognizing all the expected higher costs for the projects here in third quarter, and we really shouldn't have any of that effect in the fourth quarter and beyond assuming things don't get any worse?

That is correct. It's a POC project. We've roped in all of the extraordinary costs that we have encountered there. And we're fairly far along getting it done, but we still have a ways to go and just worth noting, there's still COVID challenges out there, but this is our latest Investor view on cost to get this vessel completed.

Right. Okay. So if I sort of exclude that from or put that back into third quarter in caps, it would look like the implied incremental is maybe in the mid-teens. And I know there's lots of supply chain issues and so forth, but maybe you could talk about what's going on in the fourth quarter that could be holding back incrementals and how you see that progressing beyond fourth quarter.

You're correct. If we set that aside, completion and production solutions revenue decreased by $19 million, but EBITDA actually rose by three in Q3 based on that calculation. Looking ahead to Q4, our guidance reflects low incrementals, which acknowledges that the global supply chain is in an unprecedented state. We are facing shifting constraints and challenges, including freight issues. I admit there might be some conservatism in Q4, which I believe is justified considering what we experienced in Q3 and the ongoing COVID supply chain disruptions. Over the past two quarters, particularly in Q1 and Q2, our challenges were primarily related to moving our workforce globally, with service technicians encountering potential quarantines when going offshore or returning home. This situation seems to be improving slightly, but in Q3, we are now more affected by the secondary impacts as our sub-suppliers are disrupted by supply-chain issues. Freight has become more difficult, along with constraints and allocations of raw materials in some cases. The nature of these challenges is evolving, but we are in an uncertain period as the world navigates out of this pandemic and deals with the economic consequences of last year's and early this year's shutdowns.

Make sense. On the order outlook, I didn't quite catch, because you've got so many moving pieces within the segments that Jose was discussing. But just if you look overall, like Rig Tech and overall caps orders, strong performance here in the last two quarters, how do you see that shaping up over the next quarter? And how do the supply chain issues influence that? Do they hold back orders? Do they cause customers to pull orders forward because they want to get ahead of potential supply chain issues? Just if you could talk through that a little bit.

Marc, it's a good question. As it relates to the order outlook, we feel really good about sort of the sustainability of this new level of orders that we're receiving within our order book. And so we see that continuing to build some momentum into 2022, but a lot of the things that we're booking right now, particularly within our CAP segment. Our CAP segment, as you might imagine, order intake for sort of the smaller type items, i.e. pieces of completion-related equipment, are still pretty light. And so we're talking about big chunky orders that are coming in. And if those slip or pull, one quarter, that can make a pretty big difference. But the good news is that what we're seeing right now is things are either pushing or pulling, they're not going away, right? Momentum is continuing to build for the order book. So I'd say all-in, things are going really well, but you talked about the current supply chain dynamics. I think does add some wrinkles into the precise timing of when these things come in. So there is a little bit of uncertainty that's never good for order intake. But I think some of that is starting to get resolved. People are getting more confident, and they are cognizant of inflationary forces and the potential impact of what might take place going forward. So in some instances, customers are trying to move forward very quickly and lock in pricing and build in that type of certainty. In other instances, and this ranges the gamut from the very large projects to small one-off orders, even that we see within our Wellbore Technologies space. Sometimes, you know, somebody asks for a bid and we quote them a price. They sit on their hands for a little while and come back for an updated price and they're not happy with it. So they may choose to wait, hoping that what we're seeing in terms of steel costs abate to a certain extent. So it's a little bit of a mixed bag, but overall heading in the right direction.

Super, thanks so much, I'll turn it back.

Thanks, Marc.

Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is now open.

Thanks for squeezing me in here. So I guess the first thing I wanted to ask about was really just, when you think about the cost pressures that you've seen with steel costs, container rates, and just overall kind of supply chain friction, can you talk about how much of that is actually flowing through numbers in 3Q? And for example, container rates, are they flowing through at the leading edge. I know you said you're doing some air freight instead of that. And then HRC and steel costs and everything, like, you've seen kind of those cost stuff a lot. So the costs that are running through in the third quarter or are they really reflective of what the costs are today? And then, you know, you talked about increasing prices and I don't know if you do in surcharges. And so when do those really start flowing through? So just trying to understand the moving pieces of those two.

Good question, Chase. It seems that freight has worsened during the quarter, and it's hard to predict what Q4 will look like. It's difficult for us to conduct large-scale studies. Freight has become more congested, getting vessels is challenging, and container costs remain high. We experienced a significant decline in Q3, and it's tough to speculate on whether that will continue into Q4. I believe that over time, these issues will subside, and things will return to normal. In the short term, however, we are feeling the effects of freight challenges. Regarding inflation, it appears to be increasing in most areas, except for steel. Steel prices surged in Q2, but some of our business units report more stability now. Although iron ore prices have dropped significantly, coking coal prices have risen. This follows some major fluctuations, such as a 200% increase in hot-rolled steel prices, with other steel types increasing by 25% to 30%. Casing prices also seem to have risen by similar margins. We hope that steel prices are stabilizing and that the worst is behind us. However, other materials like resins and epoxies, which we use in our Fiber Glass, Threat Protector, and Tuboscope lining businesses, are still impacted. There's a lot happening in the market. I am confident we will manage these challenges and overcome them. I'm proud of our team for addressing these issues by implementing price increases, surcharges, or a mix of both while trying to minimize our inflation risk exposure as best as possible.

In case maybe just a little bit more color and tag on what Clay was saying. Certainly from an overall pricing perspective in terms of our pricing for more vendors and prices for our customers, it's a little bit of a mixed bag. So in some instances, we have fixed pricing for our raw materials for an extended period of time. And so we are extremely well situated in that situation. In other instances, we have provided fixed pricing to our customers for a period of time and we may not have been perfectly matched up from a cost perspective, but as Clay mentioned, our team is managing it extremely well. So it is a mixed bag across the portfolio. And I think Clay touched on it a little bit in his prepared remarks, and then a little bit of color that might help from the impact of freight. It's really remarkable because obviously one of the benefits NOV has is our size and scale and our diversified footprint that we have around the world. And so over the last couple of quarters, there are several of our businesses that over the last several years, we have done what makes sense, right? Which is to locate a lot of our manufacturing in low-cost regions around the world. But we preserved some manufacturing within North America as part of diversifying our overall supply chain and manufacturing footprint. What we've seen over the last quarter, or two, or three, is that freight costs are getting to be so excessive that the benefit of that low-cost manufacturing doesn't work for us. And so we have actually repatriated a lot of our manufacturing back to North America while we're dealing with these massive freight charges.

Yeah, absolutely, one quick follow-up here. I didn't hear anything mentioned about the new facility.

Oh, yeah.

Just kind of talk about how that ramps going is looking to slow down and do less than 5 per year near term because they look into accelerate? So just talk about what's going on with that facility there.

No. Thank you, Chase. I was just there a few weeks ago. It's going really well. If anything, the projects are accelerating. You may have heard about their unconventional gas development plans and their goals to increase crude productive capacity. I'm very excited that we will have the first rig commissioned by the end of the year, and a second one will follow a few months later. The facility is almost completely finished, and I'm very optimistic about the outlook for that region. Thank you for asking.

Okay, perfect. I will turn it over. Thanks, everybody. Thank you, guys.

Thank you. This concludes today's Q&A session. I will now turn the conference back over to Clay Williams.

Thanks, Flue and thanks to everybody for joining us today. I'm going to end again by thanking our terrific employees for your diligence, your hard work, your creativity, and particularly, the care that you show for our customers and for each other. So thank you all for what you're doing. And those of you listening, we look forward to speaking to you on our fourth quarter results in February. Have a good day.

This concludes this conference call. Thank you for participating. You may now disconnect.