NOV Inc. Q1 FY2022 Earnings Call

Welcome, everyone, to NOV's First Quarter 2022 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, 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 a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis for the first quarter of 2022, NOV reported revenues of $1.55 billion and a net loss of $50 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. Now let me turn the call over to Clay.

Thank you, Blake. For the first quarter of 2022, NOV's revenue of $1.548 billion grew 2% sequentially, and EBITDA increased $34 million to $103 million or 6.7% of revenue. Year-over-year, revenues were up 24% at 34% leverage, reflecting positive impacts of aggressive cost reductions and some recent pricing recovery, offset by continued inflation and supply chain disruptions. Helped by continued high demand for offshore wind renewables along with rising oil and gas demand, orders were strong across the board as we put up a consolidated book-to-bill of 115% in the first quarter. The organization's execution against shifting challenges and supply chain freight and labor improved during the first quarter, in part by broadening our base of suppliers as well as recovering escalating costs through higher pricing, where costs for certain raw materials like resins appear to be easing. Unfortunately, a lot of components got worse during the quarter, steel forgings, polymers, fiberglass, electronics, stainless steel and switchgear most notably. Freight challenges intensified in the Eastern Hemisphere owing to the conflict in Ukraine and continued COVID impacts in the quarter. Recent standard cost rolls on many of our products moved up materially, reflecting the higher costs we face. Thus, considering all these extraordinary challenges, we were pleased to see improved execution and better financial results for the quarter. While results are still below acceptable levels, our outlook is constructive, given the steady tightening of oilfield services capacity that is driving accelerating demand for NOV's core oilfield products. This uplift is giving us improved line of sight towards healthier returns for our shareholders. For reasons I'll go into in just a moment, I believe this upcycle will last a while. First, however, I'd like to take a minute and speak to some oilfield fundamentals. Construction in oil or gas well takes much more than good reservoir rocks in a drilling rig. Oil and gas companies rely on highly specialized geotechnical talent to identify and delineate drilling locations and on petroleum and processing engineers who design wells, production systems and processing and transportation facilities. The business requires investments in expensive leaseholds, wells and fabrication of platforms, processing plants, gathering systems and refineries that make oil and gas production one of the most capital-intensive industrial undertakings. The actual well construction is performed by oilfield service companies that, in turn, operate very expensive, highly engineered fit-for-purpose equipment fleets, which probably make it the second most capital-intensive industrial undertaking around. All this plant equipment and well construction process utilizes a lot of steel as well as exotic metallurgies, polymers, resins, computer chips, electric motors and electronics. The work is performed by hardworking men and women from roughnecks to drillers to truck drivers, working long hours in remote locations for usually above-average pay in tandem with talented geoscientists and engineers supporting these complex operations. One way to think about our industry is a finely tuned and optimized machine into which goes capital, a lot of capital, highly skilled engineering talent, hard work by experienced oilfield hands, fertile acreage identified by geoscientists that holds the promise of profitable production and a lot of highly specified pipe, plastics, engines, resins and computer chips. Out of this oil and gas machine comes your high standard of living. The high standard of living that your family and my family and millions of others enjoy along with the hope of a better standard of living for literally billions of people in lesser developed economies around the world. Out of this machine comes the food that we eat and the fertilizer made from natural gas that the farmer uses to achieve amazing agricultural productivity from fields plowed and harvested using diesel-powered equipment. All air travel. Most transportation on-demand plus all oceangoing freight and rail that brings food and products into our lives, the plastics that doctors use to deliver our medical care and a thousand other things that make our lives better. From construction to transportation to petrochemicals to pharmaceuticals to consumer goods to you name it, the oil and gas industry connects with and supports 100 industries that form the foundation of our modern lives. This leads me to our current predicament. Two years ago, remarkably, we faced negative oil prices. Today, the world is confronting triple-digit crude prices and all-time high global natural gas prices. While this rapid shift is drawing and damaging the global economies, frankly, it should not have been entirely unexpected. For the past few years, governments and capital allocators have been playing a dangerous game with respect to energy and the global economy. While the transition to lower carbon renewable sources of energy for the world is required for the long-term good of the planet, it seems we've gotten ahead of ourselves as we've attempted to pivot away from fossil fuels, which are inherently reliable and energy-dense sources of power to lower density forms of energy with intermittency issues and inferior economic profiles. Prior pivots to new energy sources were accomplished over decades. Think about the shift from firewood to coal through the 18th and 19th centuries, the shift from coal to oil through the 20th century, the emerging shift to natural gas over the past 25 years. These were driven by economics, superior energy density and value for lower cost to supply rising per capita energy demand. Unfortunately, the lower carbon energy transition today lacks a robust economic engine driving it forward. While LCOEs have fallen for solar, wind and other forms of renewable energy, I believe LCOEs will continue to fall through technical advancements that NOV and others are making, renewables are still expensive and suffer from intermittency challenges that require storage solutions that add to their all-in cost frequently not accounted for in LCOE calculations. To accelerate this transition in the absence of a compelling economic driver, governments, regulatory agencies and media decided it would be a good idea to demonize the oil and gas industry. And let's be honest, you know what I'm talking about. I think the motives behind this are pretty evident to bring about the acceleration of a desired energy transition outcome namely a more rapid pivot to renewables. Specifically, the oil and gas industry has been under attack by political bureaucratic and media leadership that have been very effective in choking off the inputs into the oil and gas machine I described earlier. Now let's turn back to those, starting with capital. Unrealistic near-term peak oil demand narratives built on the promise of rapid substitution of renewable energy have significantly dampened equity investor interest in oil and gas stocks both in public markets, where energy weighting in the S&P 500 bottomed recently at less than 2% compared to 14% in 2008 and more than 20% in the 1970s. And in private equity, with little or no terminal value expectation due to a broadly accepted narrative that oil and gas goes away soon, it's easy to understand why equity investors have been reticent to invest in and with the relentlessly negative PR the industry receives, we understand why it's been fashionable for college endowments and other institutions to trumpet their divestitures out of the space. Meanwhile, commercial banks are being pressured by both their shareholders and regulators to trim lending to the sector. In short, capital in all forms has become much more expensive for oil and gas. Next, the industry needs engineering talent. Again, unrealistic peak demand scenarios and negative PR have frustrated efforts by the oil and gas industry to recruit young, talented engineers who worry about investing their careers in a sunset industry. This recruiting effort is becoming more urgent as the industry needs to replace its experienced but aging baby boomer workforce soon, referred to by industry insiders as the great crew change. Oilfield work has provided high wages and high standards of living in small towns in remote areas for generations of blue-collar workers, but it's not for the faint of heart. Deep cyclicality requires painful significant cuts during oilfield downturns, which can be brutal. As the U.S. rig count dropped to record low levels in the summer of 2020 following the global government decisions to shut down economies, the oilfield did the difficult task that we are unfortunately called to do from time to time. We laid off a lot of good employees. This was very, very tough on many good people and families, and they remember it. When we fast forward to today, when the broad economy is growing, unemployment is low, attractive job opportunities are available outside the oil patch and family balance sheets are in much better shape owing to the pandemic stimulus checks, it is extremely difficult to attract direct labor back to the oil patch and frankly, it requires much higher wages. Oilfield services also cut investments in its hard assets. The downturn saw companies cannibalize underutilized oilfield equipment for spare parts rather than spend precious cash needed to survive on properly maintaining fleets required for more normal levels of activity. As industry activity ramps, oilfield service companies are swimming upstream against the congested supply chains as they scramble to put incremental equipment back in shape to work. The physical inputs required for these equipment overhauls, bearings and hoses, engines and transmissions, polymers and resins, chips and circuit boards are incredibly tight. While the U.S. is back to growing production off of 2020 lows by drawing down DUC inventories, we are the only such country that's growing. Global crude inventories are well below average and still trending in the wrong direction because we are no longer the just-in-time industry we were in the prior decade. The oil and gas machine needs promising acreage as well. Our E&P customers tell us that the current regulatory environment continues to get more expensive and challenging orchestrated in their view by agencies that are all trying to effect a more rapid energy transition, while in other developed countries they faced outright bans on the oilfield activity. By the way, geoscientists need years to find and delineate fertile acreage to exploration. Unfortunately, global exploration was severely cut following the downturn of 2015, meaning the pipeline of prospects to develop is very limited after 7 years of underexploring. To summarize, when we survey the inputs required to construct oil and gas wells from capital to labor to workable regulations to prospect development pipelines to engineering talent to consumables and equipment, all face significant hurdles put in place by politicians, regulators and media. My question is this. Has this been a good idea? Has it been a good policy to demonize the industry that quite literally powers all other industries? Political leaders across the globe have not been honest with voters and consumers about the cost, feasibility, difficulty, inconvenience and time required to fully pivot to renewable sources of energy in my view. I'm not questioning the need to make the pivot, but rather the plan to get there. The de facto policy of choking off inputs of a critical industry, not just years, but decades before we have a good alternative is a very bad policy. Many will suffer as a result. To make matters worse, the enormous economic stimulus that occurred before shutdown of the global economy during the pandemic massively increased money supply across developed economies. Those governments printed money at a breathtaking rate. The U.S. M2 money supply is up over 40%, for example. Historically, inflation rolls directly into commodity markets like oil and gas. This time, I believe it will be amplified by input constraints that I cataloged earlier. Add to this productivity gains from workforce demographics and globalization that offset many supply growth in power generation that today are going in the other direction, and it's no surprise that dollar inflation is at 40-year highs and rising. In summary, I could not have scripted a more compelling setup for an energy crisis. While this points to rising demand for equipment and services NOV brings to the oil patch over the coming quarters and years, it also points to a pretty dark view of economic challenges we face as we undo the mess created. The world now finds itself in critical need of an industry that it had written off as a sunset industry, and reconstructing this industry will not be easy. Seven years of E&P underinvestment of oilfield services effectively dismantling much of its capacity and drastically shrinking its workforce in order to survive together with the additional hurdles created by the vilification of oil and gas, make what is required of us a very heavy lift. According to a recent research report, the industry has faced resource life since 2014 and fewer FIDs in recent years will potentially lead to approximately 10 million barrels of lost production by 2024. The prospect pipeline continues to shrink, while ESG measures drive operating and financing costs higher, skilled labor markets are tightening, inflation and supply chain disruptions are pushing large project cost curves significantly above the levels seen in the prior decade. And accelerating global decline rates adds further risk of global production shortfalls. In order for the world to avoid an energy crisis, the likes of which we haven't seen since the 1970s, we need a synchronized global oil and gas super cycle of some duration and we need it to start yesterday. We need, and thankfully, we are starting to see both short-cycle shale oil and longer-cycle offshore development of petroleum resources. The low rates charged by oilfield service participants over the past several years did not reflect the physical consumption of capital equipment used in operations, much less earn a decent return for oilfield service shareholders. However, that overhang is diminishing rapidly and has been replaced with tightening schedules and lean, if not bare shelves. Pricing is beginning to move across the oilfield after years of services industry subsidizing its customers by cannibalizing its own capital base. While the moves thus far have been small, mainly to keep pace with inflation, our oilfield service customers report net pricing momentum is beginning to grow. Nevertheless, while all the foregoing is worrisome for the global economy, I am confident our company, our industry and the producers we serve are up to the extraordinary task of growing production to provide energy security and better standards of living for humanity just as we have done for 163 years. The oilfield is nothing, if not resourceful and resilient. Since 2014, our organization has shrunk dramatically to make it to the other side of this 7-year downcycle, but we never took our eye off the ball in technology development initiatives. NOV continues to invest in and lead in both oil and gas technologies along with the emerging renewable technologies that we've spoken of through the downturn. While an energy transition to a lower carbon future is required, the world is finally waking up to the fact that oil and gas is still absolutely essential to our modern way of life. And the oil and gas industry is quickly becoming aware that it can't continue to meet the world's demand for its products without significant further investment. NOV is the enabler of what still is the most important industry in the world, and we stand ready to meet the challenges of the coming upcycle. To the employees of NOV, who are listening today, thank you for all that you've accomplished through this tough historic downturn. Your hard work and perseverance got us here. We have a lot more hard work ahead and now it’s showtime. The world will be counting on us.

Thank you, Clay. NOV's consolidated revenue for the first quarter of 2022 was $1.55 billion, a 2% sequential increase compared to the fourth quarter of 2021 and a 24% increase compared to the first quarter of 2021. Rapidly improving market fundamentals, growing global drilling activity and actions taken to mitigate operational disruptions more than offset seasonal declines and continued extraordinary supply chain challenges. Adjusted EBITDA totaled $103 million or 6.7% of sales, a 220 basis point improvement in EBITDA margin compared to the fourth quarter and a 670 basis point improvement compared to the first quarter of 2021, representing 34% EBITDA flow-through. Our GAAP results for the first quarter of 2022 included $45 million of other items, which were primarily due to the partial impairment of assets and other charges associated with our operations in Russia, Belarus and Ukraine. Working capital increased $163 million, primarily due to a disproportionate number of shipments that occurred late in the quarter and intentional inventory builds to mitigate operational disruptions. Working capital was also affected by the normal increase in Q1 tax employee benefit and other payments, which further contributed to a $103 million use of cash from operations. Capital expenditures totaled $46 million for the quarter. While we've become more adept at navigating through the unprecedented number of ever-changing supply chain challenges, all of our businesses remain constrained by raw material shortages with significantly protracted and growing lead times for subassemblies, castings, forgings, electronics and motors. As a result, our throughput is constrained and we are not fully keeping up with inflecting demand. During the second quarter, we plan to build additional inventory buffers to position the organization to meaningfully improve throughput and operational results in the second half of the year. Moving on to segment results. Our Wellbore Technologies segment generated $608 million in revenue during the first quarter, an increase of $32 million or 6% compared to the fourth quarter and 47% compared to the first quarter of 2021. Growing global activity led by North America and the Middle East drove solid revenue growth across the segment's portfolio of businesses despite headwinds from supply chain disruptions. Pricing gains and an improved product mix offset inflationary pressures to drive incremental margins of 41%, resulting in a $13 million sequential improvement in EBITDA to $101 million or 16.6% of sales. Compared to the first quarter of 2021, EBITDA improved $67 million, representing 34% EBITDA flow-through. Our ReedHycalog drill bit business posted revenue growth in the upper single digits driven by strong performance in the U.S. and Middle East. A less favorable mix limited sequential EBITDA flow-through; however, the business unit realized a mid-40% incremental margin relative to the first quarter of 2021. Despite intense inflationary pressures on several key material inputs, the business has secured net pricing gains in most markets and its leading bit technologies positioned the business to continue its strong performance in the second half of the year. Our downhole business reported a low single-digit percentage improvement in revenue as solid growth in North America was offset by large Q4 shipments into international markets that did not repeat. This business unit has been disproportionately impacted by supply chain challenges with difficulties accessing elastomers and special grades of steel used in our high-spec products, resulting in growing backlogs for our tools. In our primary North American manufacturing facility, backlog for our power section increased 38% in Q1 due to stators awaiting relines. Despite an important due to these difficulties, the business has been able to push pricing to partially offset the supply constraints and is executing on plans to significantly increase throughput during the second half of 2022. Our WellSite Services business posted mid-teens sequential revenue growth with strong incremental margins. The business realized a solid full quarter contribution from its recent managed pressure drilling acquisition and strong contributions from the unit's core solids control operations. As activity increases and more rigs are reactivated, this business is particularly well positioned as we expect drilling contractors will look to differentiate their rigs with the latest generation of solids control and MPD equipment. Our M/D Totco business posted low single-digit sequential revenue growth with negative incremental margins due to the seasonal falloff in capital equipment sales into international markets and a less favorable sales mix. Despite the soft quarter, the business unit achieved 41% revenue growth with incremental margins in the 70% range in comparison to the first quarter of 2021 and had several recent commercial successes, which should drive wider adoption of the unit's newer technology offerings. Working in tandem with our rig business, the unit initiated a trial project with a key NOC in the Middle East utilizing our Kaizen intelligent drilling optimizer running on our NOVOS platform. The project demonstrated notable drilling improvements, reducing average days to drill by 35% in comparison to offset wells. Additionally, M/D Totco's Evolve broadband wired drill pipe solution was commended by a key offshore customer for helping avoid a well control event. When the operator encountered an unexpected change in downhole conditions and the subsequent loss of well circulation, M/D Totco's wired drill pipe and distributed long string measurements continued to provide real-time annular pressure readings, which would not have been possible with mud pulse telemetry. This allowed the operator to effectively manage the situation and backfill the annulus. The operator estimated solution helped avoid a loss in hole incident, if not a full blowout. We expect adoption of M/D Totco's technologies to accelerate among leading operators as we continue to demonstrate meaningful improvements in drilling efficiencies, well productivity and safety. Our Tuboscope business delivered a sequential revenue increase in the mid-single digits, driven primarily by improving demand in our U.S. inspection and Eastern hemisphere coating businesses. Despite continued inflationary pressures on raw materials and labor, incremental flow-through for the business materially improved as demand is now driving opportunities to ratchet pricing at a rate that should outpace the combined effect on inflationary costs and operational disruptions. Our Grant Prideco drill pipe business posted mid-single-digit revenue growth with outsized incremental margins as the business realized a 15% increase in the mix of large diameter premium pipe sales, which more than offset a dip in volume. While we expect supply chain disruptions, inflationary costs and a slight deterioration in sales mix to result in softer Q2 results, new order outlook and pricing are growing increasingly favorable with tracked pipe inventories at near record lows. For our Wellbore Technologies segment, we expect the continued improvements in global oil field activity to drive revenue growth despite ongoing supply chain challenges, resulting in a sequential revenue improvement of 1% to 5% during the second quarter. While we expect pricing for many Wellbore's businesses will gain momentum, inflationary pressures will limit incremental flow through to the mid- to upper teens. We believe this segment is on track to achieve EBITDA margins in the high teens by year-end. Our Completion & Production Solutions segment generated revenues of $530 million in the first quarter of 2022, a decrease of 3% from the fourth quarter of 2021, but an increase of 21% compared to the first quarter of 2021. The sequential decline in revenue was driven by continued supply chain challenges, along with typical seasonal declines. Despite the sequential decrease in revenue, adjusted EBITDA increased $8 million due to better execution against ongoing supply chain disruptions, improved product mix and a better absorption in our manufacturing plans. While orders declined sequentially, book-to-bill was 110%, the fifth straight quarter in which the segment has achieved a book-to-bill greater than 1. Quarter ending backlog increased 6% sequentially to $1.36 billion, which is up 68% from the first quarter of 2021 and reached its highest level in more than 5 years. Q1 bookings were solid, but a number of our offshore customers took a step back and deferred new orders while they work with suppliers to get their arms around the unprecedented disruptions, delays and rising costs in shipyards around the world. Despite this temporary pause, the outlook remains robust as improved commodity prices have significantly enhanced project economics despite rising costs. Our Process and Flow Technologies unit has posted mid-double-digit sequential revenue growth in the first quarter as progress improved on several projects that experienced COVID-related disruptions over the last few quarters. While profitability for this business improved, margins remain at unacceptable levels due to cost overruns caused by shutdowns and quarantine driven delays at shipyards and engineering cost overruns resulting from the inability to efficiently collaborate on complex projects, while in remote work settings. We expect the magnitude of disruptions to decline, but the effects will continue to pressure results through the second half of the year. Our Subsea flexible pipe business recorded a sequential revenue decline in the low single digits but was able to achieve a modest improvement in profitability through a higher-margin sales mix and through Herculean efforts to control costs throughout the quarter to make up for a 3-week shutdown in one of our two manufacturing plants caused by a lack of raw materials. While the primary issue has been resolved, we expect profitability to remain challenged for this unit for at least the next quarter or two. Our Intervention & Stimulation Equipment business experienced a low double-digit drop in sequential revenue driven by strong Q4 coiled tubing equipment sales and a late 2021 push to sell lower margin prior generation capital equipment that did not repeat in Q1. Profitability improved due to a better product mix, higher pricing and incremental cost savings achieved during the first quarter, which more than offset continued inflation and supply chain challenges. Bookings increased 44% sequentially and included strong orders for a hydro rig-6120 large-diameter coiled tubing injector that provides 120,000 pounds of continuous lifting capacity and 60,000 pounds of continuous snubbing capacity. While we're not yet seeing demand for new units in North America, customers are realizing much improved pricing and are now upgrading existing units with better technology. This means aftermarket activity continues to drive our ISC business. However, during Q1, we saw a pickup in demand for wireline equipment in international markets and cementing equipment in the U.S. as we are also seeing U.S. pressure pumpers purchase additional pump units to supplement current fleets as horsepower demand per spread continues to increase. With our service company customers beginning to realize net pricing for the first time in several years and high-spec equipment nearing full utilization, we expect to see increasing sales of capital equipment moving forward. Our Fiber Glass Systems business posted a sequential revenue decline in the upper single digits due to seasonality in our fuel handling systems operation and continued supply chain issues, which has made operations for this business particularly noisy. Many of our key inputs such as glass, resin, and epoxy were primarily sourced from Asia, with a dramatic increase in shipping costs and the inability to predict delivery times, the business has worked to diversify and reallocate its supply chain to better insulate it from disruptions. Despite the challenges faced by this business and the sequential revenue decline, the team was able to improve profitability in Q1 through a focus on cost control and pushing price to make up for increased costs associated with raw materials and operational disruptions. After a difficult 2021, the business is now seeing its sales pipeline grow at a rapid pace, particularly in the Middle East, portending improved results for the business in the second half of the year. While supply chain challenges and inflationary pressures will persist through the second quarter, execution from our completion and production businesses should continue to improve. As a result, we expect Completion & Production Solutions segment to achieve a 10% to 15% increase in revenues with incremental EBITDA margins in the 15% to 20% range. We continue to believe the segment can achieve mid- to upper single-digit EBITDA margins by year-end. Our Rig Technologies segment generated revenues of $441 million in the first quarter, an increase of $10 million or 2% sequentially. The modest top line growth was a result of rapidly improving market fundamentals, which are driving a growing backlog in both capital equipment and aftermarket offerings, mostly offset by seasonal declines in supply chain challenges that are restraining our ability to ramp production in lockstep with inflecting demand in our aftermarket business. Adjusted EBITDA improved $15 million to $36 million or 8.2% of sales due to a more favorable sales mix, improved pricing and cost savings initiatives. New orders totaled $236 million, representing a book-to-bill of 124%. We also posted an additional $80 million positive adjustment to our backlog, primarily related to an annual inflationary price index adjustment associated with our Saudi new-build rig program. As a result, total backlog for the segment at quarter-end was $2.89 billion, the highest level the segment achieved since Q1 of 2020. Demand for wind power installation vessel equipment remains robust, and we booked a large equipment package for a new wind power installation vessel during the first quarter. The award includes a jacking system, heavy lift crane and a special feeder board handling system, which is designed to provide a cost-effective Jones Act compliant solution that can improve installation process efficiencies by up to 30% compared to conventional vessels. The offshore wind power installation equipment market remains a compelling near-term opportunity, and we see the potential for 5 to 6 additional vessels reaching FID over the next 12 to 18 months. We're equally excited about NOV's mid- to longer-term opportunities within the wind power space. We've previously discussed our taller tower thesis, which continues to be the primary driver for improving economics in the wind power space and continues to drive our R&D efforts and the proprietary solutions we are developing for the market. We previously described a patented technology in which we've invested spiral weld tapered wind tower sections via an automated process allowing for infield manufacturing, thereby eliminating the many logistical limitations of transporting the larger diameter sections necessary for tall tower developments. We are pleased to announce that production of the first commercial tower sections is now underway at our Pampa, Texas facility. While this system will address the logistical challenges and costs associated with delivering taller wind turbine towers to location, installing towers and the cells with higher hub heights presents other challenges and opportunities. We're in the process of finalizing the design of a fit-for-purpose onshore mobile wind tower erection system, leveraging our core design and manufacturing competencies for large industrial capital equipment and experience developing complex control systems. This patent-pending system should significantly improve the safety, reliability and efficiency of tall tower installations. Longer term, we're seeing the emerging floating offshore wind market as a compelling opportunity for NOV. Floating wind turbines will be key to unlocking massive renewable energy potential in many markets around the world that don't have access to large areas of coastal waters. Beyond our existing product portfolio, which includes cranes, winches, mooring systems, cable lay systems, ballasting systems and chain connectors and tensioners, we're leveraging our deep expertise in marine and offshore engineering design and manufacturing to actively develop new products and technologies to support this nascent opportunity. Our patent-pending trifloater semi-submersible floating system has a cost advantage shallow draft design that reduces steel requirements, capital expenditures and overall project execution risk. We're also designing several proprietary lifting and handling tools to streamline the installation and commissioning of offshore wind turbine components. To date, we've completed several pre-FEED and FEED studies related to potential deepwater wind development projects and we were recently awarded a pre-FEED study for a project in South Korea. We're also working with partners on several other potential projects around the world, including opportunities within the prospective 25-gigawatt Scott wind development area, where 17 C-bed blocks covering 2,700 square miles were recently auctioned. Of the 17 blocks awarded, 11 will utilize floating wind systems and NOV has been actively engaged in discussions with the winners of 6 of the 11 licensees. While there is no guarantee that NOV will be selected to equip these developments, we are well-positioned for this large long-term opportunity, which could result in pre-FEED activities taking place over the next 2 years, full-FEED studies during 2024 and '25, and construction beginning in 2026 with first power by 2030. We're enthusiastic about NOV's long-term prospects within the wind space, but remain extremely focused on our current wind power construction vessel opportunities and on the growing demand from our conventional rig equipment business. While orders for rig capital equipment in Q1 2022 were up 83% over Q1 of '21, they remain light by historical measures. However, we're seeing accelerating improvement in underlying fundamentals in the U.S. land market, leading-edge day rates for top-tier rigs are up to $30,000, up from the low $20,000s just a few quarters ago. And the active rig count continues to march higher. We expect to see similar day rate dynamics for top-end rigs in international markets with improving activity. Leading-edge offshore day rates have climbed into the $300,000 to $400,000 range, levels that are encouraging reactivation and reinvestment activities to accelerate and generating orders for both our aftermarket and capital equipment businesses. During Q1, we were awarded multiple contracts to help customers ready equipment for upcoming drilling campaigns, including an agreement with an international drilling contractor to reactivate 3 jack-up rigs and recertify an additional 8. We've seen a dramatic change in the sense of urgency among our customers. Last quarter, we described a rise in inquiries for top drives, high tour handling equipment and pressure control gear, which are now converting into orders. During most of 2021, customers wouldn't have had any qualms incurring downtime to recertify pressure control gear, but we're now seeing customers buy spare sets of blowout preventers to eliminate downtime during recertifications, avoiding the need to miss out on much improved day rates. While we welcome this newfound urgency and how it is creating opportunities to strip away the last vestiges of price discounts we offered during the depths of the downturn, major supply chain bottlenecks have frustrated and will continue to frustrate our efforts to ramp our output in step with surging aftermarket demand for at least another quarter. Supply chain constraints are impacting all our businesses but are most acute within our rig aftermarket operation. While aftermarket revenues improved roughly 5% sequentially and growing demand from recertification, reactivation and upgrade projects in North America and Europe allowed us to avoid the typical seasonal declines in service and repair work, revenues from spare part sales declined, but not due to a lack of demand. In fact, spare part bookings increased 16%, achieving its highest level since Q1 of 2020, and was 67% higher than the low we saw in Q4 of 2020. Unfortunately, supply chain constraints led to a decline in revenue from spare part sales and resulted in our backlog increasing 31% over Q4. We expect throughput to remain constrained through at least the second quarter as supply chain remains challenged and lead times continue to stretch. The supply chain bottlenecks are numerous and include difficulties procuring all sorts of raw materials, castings, forgings, electronic circuits, electric motors, gearboxes and even large bearings. While most of the difficulties are due to lead times from third-party providers blowing out, we also made some of our own missteps related to underestimating how rapidly demand would begin to inflect. Over the past 18 months, we've been working to consolidate the operations of our large manufacturing facility in Orange, California, where we produce the bulk of our top drives into other plants in Houston and Mexicali. While this was a high degree of difficulty endeavor, the consolidation will generate meaningful cost savings. Prior to the moves, we built buffers of finished goods that we expected to carry us through the consolidation, but the moves in associated manufacturing startups took longer than anticipated and occurred while demand was beginning to inflect. While we're now ramping production, the challenges we're facing with access to raw materials, castings and forgings, along with our own manufacturing bottlenecks will constrain our ability to keep up with demand through the second quarter. As a result, we expect operational headwinds will keep financial results for our Rig Technologies segment flat with those of the first quarter. However, we're growing increasingly confident in a much stronger second half of 2022 and in our belief that our Rig Technologies segment can achieve EBITDA margins of 10% by year-end.

I appreciate the opening remarks; that was a really accurate overview of our recent history, and I'm sure you'll enjoy drinks at the bar this afternoon after that.

Yes, and that was my goal.

There's always a lot going on with NOV, and this may be a challenging question to answer. However, everything is currently heating up and congested. Are there two or three product categories within your main segments that could be the biggest drivers of improvement in your throughput as we enter the second half, particularly as some of the supply chain issues get resolved? Is it primarily the significant offshore rig reactivation projects that will have the greatest impact? Or could it be the offshore wind vessels, with possibly five or six more similar to the one booked in Q1? Alternatively, is it the shorter cycle projects that are accumulating and currently facing a more congested backlog?

I'll let Jose share his thoughts. Off the top of my head, I believe that the shorter cycle projects catching up will help improve our very constrained supply chain challenges in meeting the near-term demand for supporting rigs, frac fleets, and stimulation equipment going back to work, both on land and offshore. I see this as the main driver for NOV in the near term. As Jose noted in the guidance, we are dealing with some constraints in the rig area as we work to catch up on our spare parts backlog. The other two segments are also managing their challenges. However, in the long run, I believe these larger projects will play a significant role, and we will continue to see strong demand for renewables and offshore wind revenue opportunities for NOV. What I find encouraging about our current position is that I feel we are at an energy crossroads, and it will require all forms of energy. I believe NOV has enhanced the flexibility within our portfolio, allowing us to cater to not just traditional oil and gas and LNG, but also to the renewable sector as well.

I’d add that, yes, I absolutely agree with what Clay said. In the prepared remarks, we attempted to highlight a couple of the areas that are more constrained from a near-term standpoint in our downhole tools business and our rig aftermarket operations. We've got some real constraints there. But really we've got the same kind of constraints all across the organization. So we have constricted throughput due to the supply chain challenges that we've been having across the organization. Yes, I think one of the things that Clay also touched on in his prepared remarks is that basically the need is for oil from all sources of the - around the world. And we're starting to see that in the conversations with our customers. And so it's hard to single out any one specific business that over the mid- to longer term is going to do particularly better because right now, it feels like demand is on the cusp of inflecting all across the board. So clearly, Wellbore has had a really nice recovery to date, but that recovery has been disproportionately weighted towards the North American marketplace, with international markets starting to come on. So still see a lot of running room in terms of Wellbore's ability to continue to generate really good growth at good incrementals going forward. And the other 2 segments being much more capital-oriented, are really just starting to get up and going, and we've got to really resolve some of the supply chain trends that we think will get much better. We'll be able to manage much better as we get into the second half.

Okay. And then along that same day in Jose, I think one thing that everyone in OFS and equipment has had in common this quarter has been more working capital intensity in the beginning of the year, a symptom of better growth for the year. But I don't know. I'm sorry if I missed this in your comments, does that impact your prior view on getting to positive free cash flow for the full year? Does it move it out to next year? Or do you see the swings coming back your way to deposit free cash for the full year?

Yes. It's a good question, Ian. And it's really to be determined to some extent, I'll explain what I mean by that. But really, the use of cash in Q1 really shouldn't have been a surprise. Typically, that's what happens during Q1 due to seasonality associated with employee benefit costs, tax payments, other annual-type payments that take place early in the year. And additionally, as I mentioned during the prepared comments, we had quite a large amount of our sales and products shipped late in the quarter, which resulted in a bigger - a slightly bigger than anticipated build in AR, but also beginning taking much more proactive measures to build buffers within our inventory base to mitigate - to attempt to mitigate those supply chain disruptions. And so as we look forward, we're not focused - certainly, we've always been very focused on free cash flow generation throughout the cycle, right? But there are times in the cycle when things are going really well, meaning revenue is growing at a rapid pace to where that becomes a little bit more challenged. And so through a combination of our view of a much higher exit rate to 2022 and the need to continue building buffers in our supply chain through the course of the year, we're not really extremely focused on making sure that we're free cash flow positive for the full year. But what ultimately happens there will be dependent on the trajectory of the business, and we're anticipating there to be a pretty steep trajectory going into 2023.

Yes. Yes. And I would add too, I think, longer term, the organization has done a really good job of developing muscles around working capital intensity. If you look at our - this quarter, I think we were 27% of annualized revenue, working capital intensity at year-end, we're 25%. Those are materially lower than they were a year or 2 ago. We got a lot better at this. But as Jose said, in response to sort of making our supply chain a little more bulletproof and response to vendors, for instance, having increasing their minimum order quantities, things like that, that's pushing us up a little bit. But I think longer term, that better management of working capital is going to translate to higher cash flow in the future.

So coming back to the outlook for Wellbore beyond the second quarter, if we do start to see some of these supply chain issues affecting that segment begin to fade, is there another period of growth in Wellbore in the U.S. that would be in excess of the rig count? Or we have to point the cycle where those begin to converge? And then thinking on the international side of the business, obviously early innings. The big service companies are discussing 15% growth in the second half. I just wanted to see if you guys would expect something similar for Wellbore on the international side?

Yes. There are several factors contributing to Wellbore's growth that go beyond the rig count. First, we need to achieve significant pricing increases for our services. Second, many of the technologies we have invested in are now entering the North American market and others, particularly innovations like drill bit cutters that show improved efficiency. Third, drilling contractors are gravitating towards larger drill pipe. Operators are increasingly adopting 5.5-inch drill pipe, which is slightly larger than the conventional 5-inch pipe, due to its better hydraulics. This shift indicates a growing need to replace drill streams in support of the drilling activities in North America. Additionally, we have developed various downhole tools and motors that enhance productivity, which, combined, create a favorable environment for Wellbore Technologies to exceed the growth of the rig count. Lastly, our digital solutions, particularly from the M/D Totco Group within Wellbore Technologies, are gaining significant traction with their edge computing solutions and wired drill pipe drilling optimization offerings.

And Scott, I want to add that we don't expect everything to unfold exactly like it has in the past. However, if we look at the recent performance of the Wellbore segment, we can compare it to the previous downturn in 2016, which marked a low point for the business with about $511 million in revenue. Currently, we are approximately 19% above that level. When we look back to 2018 and 2019, that segment was generating over $800 million in quarterly revenue. At that time, we observed a decent recovery in the North American market, but did not fully capitalize on the strong international market. Now, as we are entering a prolonged multiyear upcycle, I believe there is significant long-term potential for growth in the Wellbore Technologies segment.

That's a good lead into my follow-up question, which is on the international side. There just still seems to be an unduly large technology gap between onshore drilling in the U.S. and the rest of the world. As we think about the retooling cycle here, is this just going to be a typical retooling cycle internationally? Or do you sense a real appetite to meaningfully enhance the technology deployed, thinking about material upgrades to rigs, potentially new build rigs and then obviously, the digital application side of things. Are you starting to sense a real appetite to meaningfully step up the technology to deploy internationally?

That is a great question. Many operators in the Arabian Gulf are observing the significant advancements in drilling efficiency that have occurred in North America and comparing them to their own rig fleets and capabilities. While the geological conditions and challenges differ, there is a clear opportunity for improvement in that region. This need for improvement is becoming critical as several countries in the Middle East aim to increase their natural gas production or explore unconventional technologies to achieve that goal, which hinges on enhanced drilling efficiencies. This understanding played a role in our joint venture with Aramco in the Kingdom to develop rig manufacturing capabilities. We are producing high-capability rigs, having delivered our first one in January, with the second one soon ready. This will introduce new technology. Additionally, we have initiated pilot projects in the Middle East where national oil companies are beginning to test our new digital products and our machine learning and artificial intelligence capabilities for optimizing drilling. One of these national oil companies is preparing to start its third pilot using wired drill pipe. There is considerable interest in the potential of new technology and what NOV can contribute to improving their drilling operations, making them more efficient, safer, and more predictable. We believe this positions us favorably for a significant upgrade in capabilities across the Middle East region.

Clay, I wanted to get your thoughts on how the long cycle part of your business could play out from here. We see a couple of divergent trends. One, obviously, high commodity prices and energy security concerns, particularly post Russia-Ukraine. But on the other hand, your traditional OFS clients appear to be being much more measured on spending growth capital or adding incremental capacity with most of their CapEx now focused, call it, on refurbishment and reactivation. So I wanted to see if you could offer some thoughts there.

Yes, that's a great question, Arun. All up cycles tend to start this way. Companies emerge from downturns after having cut costs and downsized their workforce, and they are cautious about re-investing in their businesses. However, we face significant structural challenges in returning production to growth on a global scale. One issue is that there may not be enough rigs available for reactivation from frac fleets to be deployed in the field. The remaining rigs have been stripped for parts, which requires capital to address. As companies gain pricing power, as we've seen in recent quarterly reports, this encourages them to reinvest in their fleets and build the necessary infrastructure to drill wells and boost production. I believe as we progress, these supply challenges will become even clearer. Moreover, on the offshore side, we need to consider the availability of capital. Many public drillers are just emerging from bankruptcy. Ultimately, we will need production from all sources in the coming years. Higher day rates will likely support stronger cash flows, which will help reduce capital costs for those drillers, helping them return to growth, which the world will need significantly.

Great. For my follow-up, Jose, looking at the numbers, NOV managed to achieve in the first quarter what the Street expected for the second quarter in terms of EBITDA. I have some questions regarding the revenue growth you discussed and the general comments on margins. We noticed your guidance on Wellbore caps and Rig Tech, and we anticipate EBITDA in the low 120s. Could you possibly provide us with a range for our calculations that aligns with the second quarter?

Yes. So I think we were pretty clear in terms of the typical guidance that we give by segment for each of the 3 segments in the prepared remarks, and as usual, we'll be posting a copy of the prepared remarks immediately following the call so you can get additional clarity on that. But in terms of where you're coming out, I think if you take the midpoint of the range that we provided, you're not far off of that guidance.

I wanted to revisit the order outlook. You mentioned that customers currently have significant pricing power, with rig rates rising to $30,000 a day. This seems like a point where they should be considering new builds. However, during public company calls, they all indicated a commitment to capital discipline and stated they wouldn't pursue new builds. I'm curious whether your perspective is based on what these companies ought to be doing or if you're receiving actual feedback and requests for proposals for potential new builds, possibly from private companies. Could you clarify this for us?

First, if you look at the absolute rig count, let's discuss North America first. The absolute rig count is still not where it was before the pandemic. There is still a significant amount of underutilized equipment available. As Jose mentioned, we are assisting in efforts to reactivate rigs and deploy them in the field. Additionally, compared to the market before the pandemic, today's costs are higher, and therefore, they require a higher day rate to justify new builds. Our outlook for new land rigs in North America suggests that this may take several quarters, if not longer, to materialize. However, if you shift your focus to international markets, especially in the Middle East, for the reasons I have outlined, we are starting to see increased interest in new builds. That is how I anticipate the next 18 months will unfold, Marc.

Okay, that makes sense, Clay. I guess in that context, everyone is curious about when we will see a significant increase in orders. Last year's second quarter showed some recovery, but we've been somewhat stagnant in this range for several quarters now. I suspect that inflation is creating challenges, and there's a lot of adjustments being made to terms as we try to secure orders. What can we expect in the coming quarters?

We've experienced five consecutive quarters of a book-to-bill ratio above one, indicating that orders are trending positively, and our backlog is increasing. Previously, I mentioned that the demand for land rigs is shifting towards caps, and the backlog for caps has approximately doubled compared to last year. Our outlook remains very promising. Although sequential orders for caps decreased, the book-to-bill ratio of 110% is still above one, which means we are continuing to build our backlog, and there was a slight sequential increase in the Completion & Production Solutions backlog. One of the immediate challenges we face regarding caps is production-related. There are significant offshore projects currently being bid and examined for booking. Some project owners in the first quarter are receiving revised cost estimates from our teams. In reflection of our recent experiences with project fabrication in Asian shipyards and the challenges we've encountered due to COVID and supply chain issues—along with the same challenges faced by other vendors—shipyards are adjusting to increased costs as demand has risen with LNG. In the first quarter, several stakeholders are re-evaluating their commitment to higher price decks in light of these increased costs. Nevertheless, I believe the underlying economics remain favorable and that orders will continue to come in. However, in the short term, this has slightly slowed recent orders. That said, let's not complicate things too much. Oil prices are currently high, and there has been extensive reengineering on many major projects worldwide, which are essential for the global market. I believe this will become more apparent as we move into next year, and these projects will proceed, resulting in increased orders for NOV. Great. Thank you. I appreciate everyone joining us this morning, and we look forward to discussing our second quarter results with you in late July. So have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.