NOV Inc. Q4 FY2023 Earnings Call

Good day, ladies and gentlemen, and welcome to the NOV Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Amie D'Ambrosio, Director of Investor Relations. Ma'am, please begin.

Welcome, everyone, to NOV's fourth quarter and full year 2023 earnings conference call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a US GAAP basis, for the fourth quarter of 2023, NOV reported revenues of $2.34 billion and a net income of $598 million or $1.51 per fully diluted share. For the full year of 2023, revenues were $8.58 billion and net income was $993 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay.

Thanks, Amie. NOV continued its strong sales growth through the fourth quarter of 2023 with revenues of $2.3 billion, up 7% sequentially, completing a year in which the company generated $8.6 billion in sales. Full year revenues increased 19% from 2023 versus 2022, driven by strong offshore and international demand, continued supply chain improvement, and increasing uptake in the new technologies NOV has been introducing to its customers. Fourth quarter EBITDA increased to $294 million or 12.5% of revenue, up 30 basis points from the prior quarter and up 140 basis points from the fourth quarter of last year. Despite the higher than expected sales for the fourth quarter, EBITDA leverage was lighter than expected at 17%, falling short of our forecast, due in part to continuing activity declines in North America and in part to some unexpected charges. Revenues for North America land declined 5% sequentially, hitting our Wellbore Technology Services businesses disproportionately hard. Additionally, we had an approximately $20 million impact on EBITDA in the quarter due to the 55% devaluation in the Argentine peso in December, higher US medical costs, and workers' compensation insurance accruals. Fourth quarter offshore revenue grew 7% sequentially, a large increase in managed pressure drilling, equipment sales, flexible pipe, conductor pipe, and aftermarket spares for offshore rigs. NOV’s international land revenues grew by more than 20% sequentially on stronger shipments of drill pipe, composite pipe, stimulation equipment, and drilling equipment for the Middle East. The company's offshore and international revenue strength more than offset North America, leading to consolidated sequential sales growth of 7%. Free cash flow improved significantly during the fourth quarter to $301 million. The inflection in free cash flow signaled relief from the supply chain challenges of the first half of 2023 as additional inventory enabled higher flush year-end shipments, including strong double-digit sequential growth for the Rig Technologies segment and spare parts and drilling equipment. While 2022 was characterized by the recovery of activity in North America, 2023 saw continuing momentum in offshore and international markets that is underpinning the steady upcycle we believe will continue to unfold over the next several years, Aramco's Safinaya plans notwithstanding. Despite the postponement of plans to grow production capacity to 13 million barrels per day, we still expect the Kingdom to remain quite busy as it drills to stem declines in conventional oil wells and develop unconventional gas. We expect our revenues in 2024 there to continue to grow. Broadly speaking, rising activity in critical global offshore and international markets is leading to purchases of the tools and kit needed for our oilfield customers to execute development plans. We remain constructive in our global outlook over the next several years because there are so many areas that look so strong. 2023 saw the reentry of IOC customers into the deepwater market after a decade-long hiatus, with several basins seeing renewed energy and focus on exploration, like Namibia and Suriname, brownfield developments like Norway, West Africa, and the Gulf of Mexico, and greenfield developments like Brazil, Guyana, and Australia. Although we view US permitting constraints on further LNG export growth as unwise from an energy security standpoint, such a move would drive additional calls on LNG production from offshore Australia and Qatar, in our view. Increasing offshore activity is tightening the market for floating rigs, leading to a doubling of dayrates with high-spec floaters utilizing sophisticated NOV technologies benefiting the most. Likewise, growing offshore drilling in the Arabian Gulf has materially improved utilization and day rates for jack-ups. Despite some white space and specific rig contracts popping up in 2024 arising from the completion of older, shorter well-to-well contracts, our customers are using this idle time to accomplish maintenance and SPS surveys. They also report rising operator interest in longer three to five year term contracts. This bodes well for future NOV rig technology demand as customers can achieve payback on incremental CapEx upgrades on their rigs, given the greater visibility in their future utilization. We are more subdued in our 2024 outlook for North America. The euphoria of 2022 has matured into a phase of consolidation and strict capital discipline in 2023, exacerbated by continued volatility in oil prices and depressed domestic natural gas prices. I believe E&P CapEx will likely decline slightly year-over-year. Nevertheless, North America production will remain vital to the global supply and energy security. The expected commissioning of incremental US LNG export capacity in 2025 could spark additional North American gas drilling activity later in the year to prove me wrong. Against this market backdrop of growing offshore international markets offset by declining North American activity, NOV is posting much improved results, driven by projects aimed at reactivating and upgrading offshore rigs and significant uptake of our new advanced technology to meet operators' demands for more efficient operations. There remains room for improvement in our profitability and return profile, and we are focused on improving our margins by executing our cost reduction plan and continuing our commitment to improve pricing where we can. NOV's investments in technologies over the past several years have focused squarely on providing solutions that drive improved economics for our customers, utilizing new robotics and digital advancements to expand and enhance our traditional product portfolio. We have very intentionally repositioned ourselves to support future energy investments of all kinds, with continued traction in North America and the Middle East. Our edge compute, edge-to-cloud and cloud-based solutions are equipping drilling, intervention and completions operators on the front lines with more information to make better decisions. The fourth quarter saw two independents adopt our new artificial intelligence edge compute technology to identify critical downhole events like washouts hours earlier than traditional methods. We are also seeing gains in our 1-click cloud data delivery and our new high-frequency data services. In December, NOV was celebrated by a major NOC for providing high-speed data streaming from over 100 rigs from a dozen drilling contractors to enable its big data scientists and algorithms to identify and act on opportunities to drive better efficiency. Our completions customers are also seeing the benefits of real-time interaction with aggregated field data. We ended the year with more than 3,500 active users of our remote monitoring tools for completion operations, up 70% compared to the first half of 2023, and we are introducing new frac monitoring capabilities through our Max Edge platform this year. Overall, fourth quarter Max Edge product revenue more than tripled versus the fourth quarter of 2022. NOV's proprietary wired drill pipe and high-speed data delivery system has seen widespread adoption in the North Sea over the past few years. And now, a major NOC in the Middle East is reporting a 30% improvement in well placement on its pilot drilled last year, significantly improving well economics. Strong results arising from better data prompted another Arabian Gulf operator to spud with the technology a few days ago, with several others planning to adopt the technology in the region later this year. We believe we are pioneering a new and better way to drill. Wire drill pipe technology, combined with NOV's new managed pressure drilling offering, will provide unprecedented control and performance. And I believe this technology will become standard in the offshore arena in the coming decades. Better drilling performance enabled by NOV's cutters drove significant market share gains in drill bits in several regions throughout 2023. And revenue from new downhole tools grew 27% sequentially. Our new PosiTrack torsional vibration mitigation tool completed its 100th run during the quarter, enabling a doubling of the rate of penetration for a customer in Indonesia where our new Agitator ZP friction reduction tools are enabling operators to move to three-mile laterals in the Permian. Bits, motors and MWD failures are the leading causes of expensive, unplanned trips for horizontal drillers, which has led many E&P operators to rent this equipment directly from NOV because of our exceptional reliability and performance rather than delegate the supply of these to their directional drillers as they have traditionally done. NOV is very well positioned in the performance drilling sector for future share gains. Similarly, in high-temperature basins like the Haynesville and Eagle Ford, we are receiving repeat orders for our Tube-Kote-TK-340TC coating, which insulates drill pipe, and our TUNDRA MAX Mud chiller to help reduce downhole temperatures that can damage downhole electronics. Again, operators are buying directly from NOV and are reporting fewer equipment failures and improved cost savings as a result. Leveraging our existing expertise in harsh environment drilling, we are addressing the high-temperature hard rock challenges faced in the growing geothermal market. Our portfolio of drill bits and MWD tools, composite pipe, liner hangers, and corrosion-resistant pipeliners combat the tough challenges faced in geothermal wells, and we've seen strong demand, particularly in Europe. Oil and gas producers are committed to reducing the environmental impact of their operations. NOV's proprietary and iNOVaTHERM cuttings treatment technology is seeing strong demand, particularly in areas like Angola and the Arabian Gulf, which are tightening drill cuttings discharge requirements. Treating drill cuttings on the rig reduces the high CO2 footprint associated with shipping these to shore. Operators are also demanding drilling contractors cut CO2 emissions, driving interest in NOV's new PowerBlade and Maestro engine management technologies. Committing to a cleaner future, operators are applying their expertise to carbon capture and storage and using NOV's deep experience in this area as well. We secured the dehydration package for a large carbon capture and storage project in Louisiana aimed at reducing emissions from industrial processes, and we are pursuing several additional CCUS opportunities. Our sustained investments in new products and technologies helped drive our strong topline results, as fourth quarter 2023 revenues have increased nearly 90% from the first quarter of 2021 low, which compares to the Big Three average of about 60% over the same time period, equating to approximately 26% compound annual growth rate for NOV versus 19% for the Big Three. And we believe we have room to run. As more E&Ps try wired drill pipe, Max Edge compute solutions, AI-powered optimization software, and more sophisticated drilling tools and robotics, we expect our adaptation to the reality of the industry and the strong results these technologies provide will continue to drive improving top line results. As part of NOV's repositioning of its product portfolio, we also continue to review and optimize our shareholders' capital employed across the portfolio. We expect to divest one or possibly two businesses in the coming year and redeploy capital into higher-performing opportunities like electrical submersible pumps, which we added this week through an acquisition. Additionally, we expect that improved cash flows in 2024 following supply chain normalization will enable us to increase our return of capital to shareholders in the coming year. In sum, NOV is well positioned to capitalize on the world's need to invest in energy of all forms. We have a lot of work ahead of us, and I'm grateful for NOV's team and their extraordinary professionalism, their intense focus on the critical needs of our customers, the creativity and innovation they apply to technology to meet those needs, and above all, their ability and willingness to get the job done. Many thanks to all of you who are listening. With that, I will turn it over to Jose.

Thank you, Clay. NOV's consolidated revenues for the fourth quarter totaled $2.34 billion, and revenues for the full year 2023 totaled $8.58 billion, an increase of 19% or $1.35 billion from 2022. EBITDA increased 10% sequentially to $294 million, or 12.5% of sales. As Clay mentioned, flow-through was limited in part due to larger-than-anticipated year-end adjustments to our medical and workers' comp accruals and the devaluation of the Argentine peso. For the full year, EBITDA increased 47% to $1 billion, or 11.7% of sales. During the fourth quarter, we recorded $55 million in other items primarily related to a voluntary early retirement program. Additionally, NOV's effective tax rate was favorably impacted by the release of $485 million in valuation allowances resulting from the company's assessment of the carrying value of its deferred tax assets and future projections of taxable income. We estimate that our tax rate for 2024 will be approximately 26%. Cash flow from operations totaled a healthy $377 million in the fourth quarter, supported by a reduction in working capital, but partially offset by $42 million in cash severance charges associated with the voluntary early retirement program and other restructuring-related actions. Capital expenditures totaled $76 million in the fourth quarter, and when netted against cash flow from operations, resulted in $301 million in free cash flow. During 2024, we expect to generate free cash flow in excess of 50% of EBITDA with a seasonal use of cash in the first quarter and steadily improving cash flow through the remainder of the year. Our capital allocation hierarchy remains the same as it has been. First and foremost, we prioritized compelling organic investment opportunities, which historically provide us with the greatest risk-weighted returns. As Clay discussed, the new products that we've recently introduced are gaining rapid adoption in the market, and we plan to accelerate our build-out of these offerings. As a result, we expect to increase our capital expenditures in 2024 to approximately $330 million. We continue to take a portfolio management approach to capital allocation, and we'll invest in businesses at compelling valuations where we can leverage our core competencies, manufacturing capabilities, global distribution infrastructure, digital platforms, and world-class R&D facilities. An example of this is the very recent acquisition of Extract, a leading provider of artificial lift technologies and services. We'll also look to divest businesses where we are not the best owner. And as Clay mentioned, plan to do so for one or two businesses in 2024. With the cash flow guidance I provided, it's also worthwhile to reiterate Clay's previous comments that we remain committed to returning excess capital to our shareholders and that we anticipate being able to increase the return of capital later this year. Next, I'll walk through our historical segment results then provide our outlook based on our new segment structure, Energy Products and Services and Energy Equipment. Our Wellbore Technologies segment generated $824 million in revenue during the fourth quarter, an increase of $25 million or 3% compared to the third quarter and 8% compared to the fourth quarter of 2022. Exceptionally strong year-end shipments of drill pipe and managed pressure drilling equipment, along with healthy drilling activity levels in international and offshore markets more than offset a softening North American market. EBITDA was $160 million or 19.4% of revenue, with soft flow-through due to a less favorable mix and operations that were disproportionately affected by the increase in employee benefit costs and the devaluation of the Argentine peso. Our Downhole Tools business reported a modest increase in revenue and EBITDA. Strong year-end drilling motor and fishing tool packages sales into Asia and Sub-Saharan Africa along with higher rental activity and service equipment sales in the Middle East drove a solid increase in Eastern Hemisphere revenues, while sales in North America decreased 1% against a 4% decline in drilling activity. Our M/D Totco business posted a high single-digit revenue increase to achieve another quarterly record high revenue level. The sequential increase was primarily due to growth from its core drilling surface data system sales and rentals, driven by strong activity in the Middle East and Far East. Surface data system rentals remained stable in North America despite the lower rig count. Revenues from our eVolve wired drill pipe drilling optimization services decreased slightly due to the early completion of two North Sea projects, which we expect will resume in early 2024. Further expansion of eVolve wired drill pipe services and accelerating rates of adoption of our Max products further underscore NOV's continued success in developing industry-leading digital solutions that Clay discussed. Our ReedHycalog drill bit business posted a mid-single-digit percent sequential decrease in revenues during the fourth quarter, largely due to softening drilling activity in North America. After three quarters of growing US revenues through market share gains, the 20% year-on-year decline in drilling activity finally prevented the unit's revenues from grinding higher. Despite the challenges in North America, the business partially offset these declines with solid gains in several Middle Eastern countries, including Turkey, Qatar, and Kuwait. Additionally, the business expects to return to its growth trajectory in the first quarter with a rebound in Canadian drilling activity and continued strength in the Middle East and North Africa. Our Tuboscope Pipe Inspection and Coating business realized a low single-digit sequential decrease in revenue during the fourth quarter. Inspection revenues were impacted by the continued rig activity declines in North America, the currency devaluation in Argentina, and a decrease in product sales in the Far East, partially offset by improved activity in Mexico, Europe, and the Middle East. Revenue from the unit's coating operation declined on lower sleeve shipments and lower pipe coating volumes in the Eastern Hemisphere, partially offset by improved activity in the Middle East and Mexico. Despite lower drilling activity, US coating revenues and volumes were flat and backlog remained strong. Our Grant Prideco drill pipe business realized strong top-line growth with flush shipments following supply chain normalization, permitting the unit to achieve its highest revenue levels since the first quarter of 2015. A more favorable offshore and international sales mix that drove average pricing higher also contributed to the sequential growth. New orders increased sharply from low levels in the third quarter and were weighted toward the offshore and Western Hemisphere customers. Unfortunately, the strong bookings take a few quarters to convert into revenue, and we expect lower volumes and a less favorable sales mix to result in a sharp revenue decline in the first quarter for our Grant Prideco business. Our WellSite Services business delivered strong sequential growth in revenue during the fourth quarter, driven by sizable year-end shipments of managed pressure drilling equipment and strong demand for our solids control offerings. The revenue gains were partially offset by the currency devaluation and reduced solids control activity in Latin America. While the strong capital equipment deliveries are not expected to repeat in the first quarter, we expect strong sales for both our solids control and MPD offerings to return later in the year in key offshore markets, including Brazil, Mexico, and Guyana, as well as in strategic international land markets, such as the Middle East. Our Completion & Production Solutions segment generated revenue of $803 million in the fourth quarter of 2023, a 6% sequential increase and a 9% improvement compared to the fourth quarter of 2022. EBITDA was $86 million or 10.7% of sales, representing a healthy flow-through of 44% compared to the third quarter. We continue to see strong demand from international and offshore markets, pushing orders up 28% sequentially to $676 million, representing a book-to-bill of 132% and the highest level of orders since 2014. Backlog at year-end was $1.82 billion, up 12% sequentially and 14% year-over-year. Our Intervention & Stimulation Equipment business posted an upper single-digit sequential increase in revenue with solid EBITDA flow-through. The unit benefited from flush year-end deliveries in all major product lines following supply chain normalization. Pressure pumping revenues improved on higher pump and blender deliveries. Coiled tubing sales increased with the delivery of a new unit, several support trailers, and nitrogen units. Wireline improved with strong deliveries into Latin America and the Middle East. The business also posted strong bookings, which improved 71% sequentially, resulting in a 154% book-to-bill. Despite the softening North American market impacting shorter-cycle products like coiled tubing strings and aftermarket spares and services, we saw strong demand for capital equipment orders to close out the year. While much of the demand is coming from the Middle East, Latin America, and Asia-Pacific regions, service intensity is only increasing in North America, and the wear and tear continues to drive attrition and the need to replace equipment. During the fourth quarter, we booked a replacement DGB frac fleet for a customer in the US and continue to have active discussions with customers regarding additional DGB and e-frac spreads. Despite strong orders in backlog, we expect Q1 revenues to decline following flush year-end shipments. Our Subsea flexible pipe business posted a strong finish to the year with solid revenue growth, healthy EBITDA flow-through, and strong bookings. Throughout 2023, the business unit continued to work through some lower-margin projects but produced its highest footage of pipe in its history, and our discipline to hold out for better pricing is being rewarded with strong bookings at highly accretive margins. The business unit posted a book-to-bill of 147%, and we also expect strong bookings in the first quarter. Although we still have lower-margin projects in our backlog and anticipate a sequentially less favorable mix with lower volumes in the first quarter, we expect the business unit's margins to steadily improve throughout the course of 2024. Our XL Systems conductor pipe business achieved significant revenue growth during the quarter with strong shipments to both the Gulf of Mexico and offshore West Africa. While we expect a sharp sequential decline in first quarter revenues, we expect the unit's results to improve through 2024 with increasing exploration and development activity in most offshore regions. Our Process and Flow Technologies business experienced a modest drop in revenue after a very strong third quarter from our Wellstream Processing operations. Despite the decline in revenues, margins improved slightly with higher margin backlog continuing to displace less favorable projects. Bookings increased 29% sequentially and included orders for a monoethylene glycol module and a sulfate removal unit for projects in the North Sea. Additionally, we were awarded a contract to provide a CO2 dehydration package for a supermajor's carbon capture and storage project on the Gulf Coast, which will capture 800,000 tons of CO2 annually. These project awards demonstrate NOV's continued leadership in gas and liquid processing technology and capabilities. Our Fiberglass business unit posted flat sequential revenue with improved demand from oil and gas, chemical/industrial, and marine sectors offsetting declines in revenue from the wastewater sector and in fuel handling product sales. EBITDA improved due to a more favorable sales mix. Demand remains strong for our Fiberglass business, and we continue to realize solid growth from multiple countries in the Middle East, where we're increasing our capacity to better serve the region. In North America, we received an order from an operator for 11,000 feet of 8-inch composite spoolable DuraFlex pipe, which is the largest order we have ever received for this product. We continue to make inroads into the semiconductor market and received an order to supply a large tank farm for a major new semiconductor fabrication facility. Additionally, we are realizing more opportunities to provide our lightweight corrosion-resistant Bondstrand solutions for ballast systems and FPSOs, leaving the business well positioned to capitalize on growing offshore activity. Our Rig Technologies segment generated revenues of $766 million in the fourth quarter, an increase of $80 million or 12% compared to the third quarter and 24% compared to the fourth quarter of 2022. The strong growth was primarily the result of large capital equipment deliveries at year-end, a higher rate of progress on projects, and the typical seasonal fourth quarter increase in aftermarket activities. Adjusted EBITDA improved $9 million sequentially and $21 million year-over-year to $109 million or 14.2% of sales. EBITDA flow-through was limited by a less favorable sales mix and higher medical workers' comp-related costs. New capital equipment orders increased $36 million or 20% sequentially, totaling $214 million. Total backlog for the segment at year-end was $2.87 billion, an increase of $75 million over the prior year. Solid offshore and international industry fundamentals continue to support the segment's aftermarket operations, which has doubled its revenue since the fourth quarter of 2021. The outlook remains positive, with customers continuing to push forward reactivation, upgrade, and recertification projects. Our total value of projects rose another $71 million, with the average size per project increasing 10% sequentially. As customers dig deeper into their stacks for reactivation and as the broader rig fleet continues to age, the size and scope of projects continue to increase. This growth in service and repair work more than offset a small decline in spare part bookings, where an understandable decline in orders from the US was mostly offset by increased orders from the Middle East and Asia. Continued improvement in on-time deliveries from our vendors has enabled better execution for more manufacturing facilities, allowing us to continue to chip away at the backlog of orders in both our spare parts and capital equipment operations and better manage our inventory levels. A meaningful improvement in casting deliveries from our vendors helped increase our ability to manufacture key product components, contributing to a sizable increase in shipments of top drives, BOPs, and Iron Roughnecks for our customers. The outlook for rig capital equipment continues to improve in international and offshore markets, particularly in the Middle East, where activity is grinding higher, driving incremental demand for equipment orders. We're seeing a growing number of opportunities to upgrade rigs in the Middle East and North Africa, with operators pushing for contractors to update DC rigs to AC power systems and improve mechanization. While we expect demand from North America to remain soft until excess equipment capacity in our customers' yards is absorbed, we're capitalizing on opportunities to support upcoming drilling projects in Alaska and continue to gain traction in the Lower 48 land markets with automation upgrades. Despite the increase in project costs from higher interest rates and inflation, the economics of offshore wind remain attractive in many regions of the world outside of North America. We and our customers still see a sizable shortfall in vessel capacity needed for projects that have been sanctioned, and we're continuing to have promising conversations with multiple contractors. While new WTIB orders have been delayed, we expect a couple of projects will move forward later this year, and we continue to capitalize on other investments required to build out key infrastructure for offshore wind power development. During the fourth quarter, we received an order for a large interconnector cable lay system and crane from a key European provider of power transmission cables. The order bookings mark our second order for a large power transmission cable lay vessel, further solidifying our position as a leader in providing the key enabling technology and equipment needed for large-scale related infrastructure projects. In addition to our prospects for additional WTIV and large transmission cable lay vessel orders, we also see opportunities to build smaller inter-array vessels, which will lay cables between wind turbines and feed into larger transmission lines. Looking forward to the first quarter, the flush shipments we delivered in the fourth quarter, following supply chain normalization in all three segments, combined with an incrementally more cautious outlook for North America, will result in a larger than average seasonal drop in the first quarter. We anticipate our legacy Completion & Production Solutions and Rig Technologies segments will see seasonal declines that are in line with their average over the last seven years. However, our legacy Wellbore Technologies segment will see a greater-than-average decline, primarily due to extraordinarily strong shipments of high-spec drill pipe and MPD capital equipment that will not repeat in the first quarter, all of which points to a year-over-year increase in consolidated first quarter revenues of between 5% to 10%. For our new Energy Products and Services segment, we expect Q1 revenues to improve in the mid-single-digit percent range year-over-year, with EBITDA flow-through in the 30% range. For our new Energy Equipment segment, we expect revenues to improve between 8% to 10% year-over-year with EBITDA flow-through in the mid-20% range. We also expect first quarter eliminations and corporate costs to be in line with the first quarter of 2023. For the year, we expect our consolidated company revenues from North America to decrease in the low to mid-single-digit percent range and our revenues from international markets to grow in the low double-digits, resulting in 2024 full year revenue to improve 4% to 8% year-over-year. We also expect continued margin improvement through a combination of improving quality of our backlog and our cost-out program to result in full year EBITDA flow-through in the mid-30% range. With that, we'll now open the call to questions.

Thank you. And our first question comes from Arun Jayaram with JPMorgan Securities. Your line is open. Please go ahead.

Good morning, gentlemen. I'd like to hear your thoughts on the outlook comments for the first quarter. Clay, you mentioned that revenue growth for NOV has been very strong compared to the Big 3, but margin improvements have not been as significant. Could you share your insights on how you expect margins to trend in 2024, especially considering the robust revenue growth? Additionally, could you provide an overview of the margin expectations in your backlog compared to the 12.5% EBITDA margin you reported for the fourth quarter and just under 12% for the entire year of 2023?

Yes, that's a great question, Arun. Thank you for it. We've been heavily focused on improving margins and leveraging our costs for some time now. We've been reducing expenses since 2019, with more reductions planned for 2024. However, we've encountered several challenges, particularly with supply chain disruptions, which have affected us more than others in the oilfield services sector, along with inflation. These headwinds have made it difficult to enhance our margins. Despite that, we made significant progress in 2023, with margins in the first quarter slightly below 10% and finishing at 12.5% EBITDA margins in the fourth quarter. Looking ahead to 2024, we anticipate this trend continuing. The supply chain is normalizing, which will be beneficial, and inflation seems to be easing a bit in the U.S., which should also help. We've been adding fruitful projects to our backlogs and signed large agreements during the pandemic that were heavily impacted by inflation. We're working through these challenges quarter by quarter. This all suggests we can improve margin performance as we move through 2024. Additionally, we are excited about our new products and technologies, particularly in renewables. Although the overall impact may not be large, the start-up costs associated with these initiatives are significant. For example, our Keystone Tower Systems business has the potential to revolutionize the wind tower industry, but it does come with start-up costs that we need to manage. We recognize that there is room for improvement in our leverage and margins, and we are committed to that. Our focus starts with strengthening our top line and translating our impressive revenue growth into better profitability for our shareholders.

Great. My follow-up, Clay, you mentioned that you may be shedding one to two businesses. And you also announced an acquisition of Extract, I guess, after the quarter closed. Maybe just some thoughts on the portfolio repositioning? And how do these moves impact your thoughts on return of capital later this year? Increasing that?

Yes, with a stronger outlook for cash flow in 2024 and a significantly higher conversion rate of EBITDA to free cash flow, we expect to have more options to return capital to shareholders and seize some interesting opportunities we see emerging. We constantly review our portfolio and explore acquisition opportunities, though we've been relatively quiet in that area. We didn't finalize any deals in 2023, even after evaluating nearly three dozen opportunities. Only two of those resulted in acquisitions, one being Extract, and we anticipate closing another soon. These businesses align strategically with us, provide good value, and are immediately beneficial to EBITDA, cash flow, and earnings for our shareholders. Additionally, we have strong businesses in our portfolio that may hold more value for others compared to their current capitalization under NOV's multiple. We are assessing the worth of each component in our portfolio and have one process in progress that we're excited about. Overall, we believe that buying low and selling high benefits our shareholders.

Great. Thanks a lot.

You bet. Thanks, Arun.

Thank you. And our next question is going to come from the line of Jim Rollyson with Raymond James. Your line is open. Please go ahead.

Hey, good morning guys.

Hi, Jim.

If I did my math right from what Jose said on revenue growth and incremental margins, kind of implies your range of EBITDA margins for 2024 full year somewhere in the mid-12% range to almost the mid-13% range. Curious, in the recent past, you guys have talked about getting a 15% EBITDA margin number possibly sometime in 2024. Is that pared back maybe because of the kind of what's happening in North America not being quite as strong as maybe everyone was thinking here three to six months ago? Just kind of curious how you think of margins stepping up between higher-margin backlog and obviously, the cost moves that you're making as we progress through this year and into next, actually.

Yes, you mentioned 15%, but more accurately, we said mid-teens. Since that call, we've become a bit more cautious regarding North America, now expecting E&P capital expenditures to decrease in 2024 compared to 2023. This is definitely affecting our outlook. I want to emphasize that I hope we're mistaken and that natural gas stimulates more drilling later in the year. However, this is impacting our exit margins right now. That said, we still have a long way to go before the year ends, and we will continue to focus on maximizing margins based on market conditions.

Yes, I'm trying to ensure that I understand the components mentioned. Additionally, I wanted to follow up on your discussion about the AI edge products, which seem to be gaining significant traction. Can you provide any insight into how much this contributes to NOV overall and how you're approaching it from a growth rate perspective?

Yes, that's a great question, and I'm very excited about it. I'm not going to quantify just yet. We've been introducing all new products, some just this past quarter. Our approach over the past few years has been to develop our Max Edge platform as a corporate resource, allowing our business units to create products from that foundation without reinventing the wheel. What we've established is a robust platform that supports the Internet of Things and edge computing, which has garnered significant interest among producers. This platform is being applied to various products we offer through different business units at NOV, and more is on the way. In the drilling sector, we were honored by one of the major Middle Eastern national oil companies for streaming data from 100 rigs at a significantly higher rate than their previous service provider. In the completion sector, our Max Completion is attracting considerable interest from pressure pumpers and their clients, improving the optimization of frac jobs. We are continuing to enhance that product, now having over 3,500 users, and it's expanding rapidly. Additionally, we are exploring several other areas where we utilize that platform alongside artificial intelligence to achieve better results, such as our KAIZEN drilling optimization program and our new drilling beliefs and analytics, which I mentioned in my prepared remarks has already been adopted by a couple of large independents after its introduction just a few months ago. I'm really pleased with the progress of all of this.

Yes. Understood. Sounds exciting.

Thanks Jim.

Thank you. And our next question is going to come from the line of Ati Modak with Goldman Sachs. Your line is open, please go ahead.

Hi, good morning guys.

Good morning.

You mentioned some divestiture plans. Can we get some more color on what the size of those proceeds could look like? And how should we think about the nature of those asset sales?

We prefer not to disclose anything more, other than we think this is prudent. We think this is prudent stewardship of our capital and see an opportunity to reposition, adding a product line and then capitalizing on the fact that others value another product line more highly than us. And so I'm kind of just going to leave it at that.

Okay, got it. And then you provided a range for your revenue growth for the full year. Can you help us understand the drivers of the low and high end there and the subsequent impact on EBITDA? How should we think about the drivers?

Yes, it's Jose. We are looking at providing guidance by major regions, specifically North America and international markets. To reiterate, we anticipate a low to mid-single-digit percentage range for North America and low double-digit percentages for international markets. These percentages can be generally applied across the segments to estimate where we expect revenues for each of the three segments to land. Overall, these projections are a bit more optimistic than what we foresee in the marketplace regarding E&P CapEx. Essentially, we believe we will continue to exceed the global spending growth rate due to the technology innovations highlighted by Clay and our strong presence in higher growth regions. Additionally, we expect the EBITDA flow through to be in the mid-30% range, reflecting an improvement from our previous performance. This is attributed to a better quality of backlog, improved pricing, and the impact of the cost-saving measures we have been diligently implementing. That's the summary.

Thank you. I'll turn it over.

Thanks, Ati.

Thank you. And our next question is going to come from the line of Doug Becker with Capital One. Your line is open, please go ahead.

Thanks. I didn't catch any update on the $75 million cost-out program. Could you provide any information on how that impacted the fourth quarter and your expectations for this year?

Yes, Doug. As mentioned in the commentary and the press release, the main initial driver for our cost savings program is the voluntary early retirement program along with the restructuring of our segment structure, moving from three segments to two. All of that has just started, so there was a very minimal impact from our cost savings efforts in Q4. We expect a little progress in Q1, but anticipate that it will really gain momentum throughout the remainder of 2024.

Another aspect to consider is the closure of facilities. We recently closed a couple of facilities in South America and Europe, and those savings will begin to materialize around midyear.

Got it. And no change to the $75 million?

No, I think we're on track for that.

Clay, you mentioned that you still anticipate growth in Saudi Arabia. I would like to know if your internal expectations have changed, especially in light of recent developments. Additionally, how do you view the situation for 2025 or 2026 if there are fewer jack-ups operating offshore in Saudi Arabia?

Yes, that's a good question. I want to clarify that I don't want to speak for our customer, Aramco, and we will have more updates in the coming weeks. With that said, we believe they are likely referring to the final investment decision (FID) of Safinaya, which is a significant offshore development still pending and valued above $20 billion. This won’t affect 2024. However, for 2025 and 2026, even without Safinaya, we expect the Kingdom to continue growing revenues as they advance development drilling to counteract declines in conventional oil wells, boost production from existing offshore fields already under FID, increase gas production to support domestic needs, and progress with the unconventional Jafurah development. Overall, this points to a region that should see growth over the next several years, even if a few major offshore projects are delayed. We remain very optimistic about the Kingdom’s outlook. In fact, just yesterday, we received an award for our nonmetallic liner-steel tubing business at our Tuboscope plant in the Kingdom. Across our portfolio, we expect ongoing activities supporting all this work. Regarding jack-ups, just to give some context, they have significantly expanded their fleet from about 50 to around 78 or 80 rigs currently operational, with an additional dozen scheduled to come online. This results in approximately 91 jack-ups, up from about 50 recently, marking a substantial increase in drilling activity with new contracts for good rigs. While I can’t predict the exact impact of their announcements on our operations, we are actively supporting all those rigs and are reactivating some of the contracted ones for this market.

Thank you very much.

Thanks Doug.

Thanks Doug.

Thank you. Our next question is going to come from the line of Kurt Hallead with Benchmark. Your line is open, please go ahead.

Hey, good morning, everybody.

Hi, Kurt.

Interesting time as always, right?

No doubt.

Yes. Your comments about AI, its growth, and its use across various functions really stood out to me, and I understand it’s still in the early stages. However, considering our long experience in this area, what is your perspective on the adoption rate moving forward? Is the industry embracing this, and do you believe it will pick up speed? Additionally, how do you see the value proposition evolving?

Yes, that's a great question, and I appreciate it. The outlook is very promising. Although it's still early, we are seeing a positive response to many of our new products. It is a competitive market, and standing out can be tough, but we've gained solid traction by demonstrating value. Many of our products have been developed in collaboration with engineers from oil and gas companies who have worked alongside our developers to tailor features to their needs. We've engaged in extensive discussions with customers to ensure we're delivering what they truly want and need, which has led us to create products that provide significant value. Additionally, a lot of our digital offerings, like our NOVOS operating system, which is currently active on around 125 rigs worldwide, serve as a digital foundation for future sales. For example, our NOVOS system supports the new ATOM RTX rig automation package, which is already operating on a rig offshore in South America and will be deployed onshore by another customer this quarter. We have also partnered with a client utilizing it at their training facility. There's considerable excitement about this technology, not only from drilling contractors but also from operators who recognize its substantial improvements. Our digital products are not being rolled out in isolation; they are interconnected with our traditional product lines, aiding future sales in those areas as well. Overall, I am proud of our team's achievements in developing powerful computing capabilities for edge environments. Working in the oilfield presents unique challenges such as remote locations and unreliable communication, which we've effectively addressed by incorporating big data analytics and artificial intelligence into our operations. I believe there is much more to look forward to in the future.

Just following up on the pause that Saudi Arabia is implementing regarding the expansion of the Safinaya and Manifa fields. What do you think they are likely to do? Will they pause their new build program, or will they proceed with it while allowing some existing rigs to roll off contract? What is your instinct on this?

There are two new build programs. One is the land rig program, which should not be affected by that, as they operate offshore. We are successfully executing those rigs, and they are operating very well. The other program is offshore. A few years ago, plans were announced to build a total of 20 jack-ups for the Kingdom. Since then, a shipyard has been under construction in Ras Al-Khair, next to our facility. The contracting progress has been somewhat dependent on the shipyard's development for future work. However, at this time, the short answer to your question is that I don't know. We remain optimistic that they will proceed with their plans, but I will allow Aramco to provide updates on their situation.

Of course, yes. Got it. Hey, thanks. I appreciate the insight.

You bet. Thank you.

Thank you. And our last question is going to come from the line of Stephen Gengaro with Stifel. Your line is open, please go ahead.

Thanks. Good morning everybody.

Hi Stephen.

So, the re-segmentation chart, Jose, do I need a protractor? Like is this to scale?

You might need a magnifying glass for the table. But no, the chart is obviously not to scale. I just wanted to clarify which business units are included in each segment. Hopefully, that's helpful. Additionally, I wanted to provide you with plenty of data to refine your model, including five years of pro forma information on the second page if you haven't reviewed that yet.

Great. It's very helpful. So, when we consider the expectations for free cash flow along with our return on capital plans, I have two parts to the question. First, should we anticipate that working capital will trend back toward historical norms? And second, what factors will influence the decision on when to potentially accelerate a return of capital program?

We were very pleased to turn the corner in Q4 and generate strong free cash flow, which reflects our potential for 2024 and beyond. Traditionally, this company has operated with low capital intensity within a high capital intensity industry, leading to robust free cash flow. We expect this trend to continue, even considering that Q1 usually experiences higher cash consumption due to seasonal payment impacts. We anticipate a steady improvement in free cash flow generation throughout the rest of the year, partly due to the profitability improvements we've seen so far, with more expected in 2024. We're also working on normalizing our working capital, finishing the year with about 29% working capital as a percentage of revenue run rate. While we may see a slight regression in Q1, we expect to return to steady improvement, aiming for a 100 to 200 basis points improvement by the end of 2024. Collectively, this sets a positive outlook for free cash flow in 2024, and as mentioned earlier, we're optimistic about increasing our return of capital as we progress into 2024. Our priority has been to improve our balance sheet metrics, which we have achieved, and now we are focused on strengthening our cash balances and ensuring consistent expectations for free cash flow. We anticipate that around midyear would be an appropriate time to consider leveraging our return of capital, a topic we've discussed with our Board over recent quarters and will continue to address in the coming months.

Okay, great. No, that's great color. Thank you, Jose. That's all for me.

Thanks, Stephen.

Great. Thanks, Stephen.

Thank you. And I would now like to turn the conference back to Clay Williams for closing remarks.

Thank you, Michelle, and thanks to all of you for joining us today. We look forward to reviewing our first quarter results in April. And I hope everyone has a nice day. Thank you. Bye-bye.

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