NOV Inc. Q4 FY2024 Earnings Call

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NOV Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question at that time, you need to press star one one on your telephone keypad. At this time, I would like to turn the conference over to Ms. Amie D'Ambrosio. Ma'am, you may begin.

Welcome, everyone, to NOV's fourth quarter and full year 2024 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 law. 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 detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-Ks and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a US GAAP basis for the fourth quarter of 2024, NOV reported revenues of $2.31 billion and a net income of $160 million or $0.41 per fully diluted share. For the full year 2024, revenues were $8.87 billion and net income was $635 million or $1.60 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted. Later in the call, we will host a question and answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay.

Thank you, Amie, and good morning, everyone. NOV's fourth quarter marked a strong finish to a good year. Fourth quarter revenues grew 5% sequentially to $2.3 billion and net income was $160 million resulting in fully diluted earnings of $0.41 per share. EBITDA was $302 million or 13.1% of sales. Fourth quarter book to bill was 121%. Shipments out of backlog were up 12% sequentially. NOV has achieved greater than one to one book to bill in ten of its last twelve quarters, growing its backlog 22% over the past four years while quarterly shipments out of backlog have risen more than 60% in the same period. The company continued to benefit from rising demand for its critical technology through the fourth quarter despite slowing momentum in E&P spending in several key markets. For the full year 2024, in addition to growing backlog year on year, NOV increased revenue, improved profitability, and generated exceptionally strong free cash flow. Revenue for the full year increased 3% to $8.9 billion and EBITDA improved to $1.1 billion or 12.5% of sales. Incremental flow through for the year was strong at 38%. The Energy Equipment segment led the way, growing its revenue by 5% and expanding segment margins by 250 basis points. Recovery of supply chains and lower inflation, together with higher margin contracts flowing out of backlog helped the segment improve its performance significantly in 2024, and we expect further improvements in 2025. Offshore investment continued to recover fueled by deepwater exploration and follow-on development, prompting demand for floating vessels to produce, store, and offload oil and to liquefy natural gas. NOV has continued to secure large orders for gas and produced water processing equipment, subsea flexible pipe, chokes, offshore completion, and other production equipment. In fact, nearly 60% of the fourth quarter's reported orders were for production equipment NOV provides. The balance of our fourth quarter orders included a complete drilling package for a new build jackup rig to be constructed in Saudi Arabia, which helped drive a 20% sequential improvement in orders for drilling equipment. For the full year, drilling capital equipment within the Energy Equipment segment totaled 8% of our consolidated NOV revenues. Our shorter cycle segment, energy products and services, also grew revenue in 2024, though modestly. Margins fell 120 basis points year over year, due mostly to large declines in drill pipe demand and related pipe coating services. The segment's top line growth came despite lower global drilling activity, which was down 5% year over year. Sales growth was aided by increasing tools and artificial lift made during the year. NOV's digital services continued to gain traction with users of our Mac data aggregation, visualization, and analytics platform more than doubling through 2024. Our Max Edge platform is a key component of the connected digital network we have developed, which spans high-speed data measured at the bit and transmitted through our proprietary wired drill pipe to AI applications that work in conjunction with NOV's machine controls to optimize safety and performance while feeding data real-time into the cloud and into our customers' command centers. We are continuing to develop new digital products built on the Max Edge platform for new areas of the development lifecycle like well completion and production optimization. NOV's unique proprietary data transmission capability along with its large installed base of equipment in chokes, separation, processing, completions, and drilling create an interesting opportunity for our company. NOV's energy products and services segment also benefited from strong share gains with new downhole technologies. Continued innovations in cutter technology enabled NOV Read HiCalog to capture the leading position in the supply of drill bits. Our new downhole drilling motors, friction reduction tools, and torsional vibration mitigation tools are proving critical to shale drillers pushing laterals out to three and even four miles, leading to 89% year over year growth for these downhole technologies in the fourth quarter. And as operators invest in new unconventional shale opportunities in the Middle East and Latin America, we see further growth ahead. Overall share gains with organically developed technologies and back despite the headwinds that began to emerge in the second half of the year. Concerns regarding potential near-term oversupply are making everybody nervous so many producers and service companies are more cautious in their near-term spending plans. Nevertheless, higher revenue, profit, and improved working capital efficiency resulted in full year free cash flow of $953 million or 86% of EBITDA. Energy demand continues to grow as it has for the 166-year history of the oil and gas industry. Secure and reliable energy supports economic growth and improves the lives of people globally. While macroeconomic and geopolitical uncertainty persists, NOV enters 2025 with a strong foundation. We expect North America activity to remain subdued, probably flat at best. Continued capital discipline among more consolidated E&P operators together with some astounding efficiency gains, largely due to NOV's technologies, will continue to be a headwind for short cycle drilling and completion activity in the United States. However, we expect NOV's technology leadership and strategic positioning to continue to enable us to outperform activity levels in the region. We're actively increasing our fleet of proprietary drill bits and downhole tools in response to market demand, and we expect further share gains to offset the softness in North American activity within energy products and services. We also expect weak demand for pressure pumping and stimulation equipment for North America, which will weigh on energy equipment results in 2025. Looking to international markets, we believe activity will be flattish year over year. The Middle East will see declines in Saudi Arabia offset by increases in Kuwait, UAE, and Oman. Latin America should remain strong led by Brazil, and we continue to view unconventional development in the Bakkenerta in Argentina, the Jafar field in Saudi Arabia, and unconventional elsewhere in the Middle East as bright spots for future NOV demand. Unconventional shale plays need high spec land rigs, coiled tubing, completion kits, chokes, separators, and corrosion-resistant flow lines, all categories where NOV provides global market leadership. We continue to see signs of building demand from these emerging unconventional basins. Turning to offshore, despite a pickup in contracting in December, our offshore drilling customers remain concerned about lower utilization or white space in their schedules in 2025. Nearly $300 billion in offshore FIDs in the past three years, up about 50% from the preceding year period, has led to the filling of Asian shipyards. About 60 new conversion or construction projects for floating production storage, liquefaction, and regasification vessels have resulted in higher congestion and costs, something we talked about last quarter. As the vessel supply chain has filled, delivery dates have elongated somewhat, which has cooled the urgency for Deepwater E&P operators to drill. Some of our drilling contractor customers are facing temporary gaps in utilization due to delayed production plans. However, they expect contracting activity to pick up possibly as early as the second half of 2025, anticipating higher deepwater drilling in 2026. This view is supported by the emerging offshore natural gas as an economic target for E&P operators. Alongside success in exploration in Latin America, West Africa, Eastern Mediterranean, and the Palaeogene in the Gulf of Mexico, economics have been helped by greater industrialization and standardization throughout the subsea production and FPSO supply chains, which we believe will help normalize supply chains and facilitate higher levels of offshore drilling. During the fourth quarter, we saw a slowdown in spare parts demand from offshore drillers as a result of the white space phenomenon. However, these were mostly offset by higher service and repair revenues, resulting in a modest 1% sequential decline in rig aftermarket. The rig aftermarket within energy equipment totaled 18% of NOV's consolidated mix in 2024. The number of offshore projects we are engaged in is roughly flat year on year with a higher mix of longer-term or revenue-intensive recertifications than last year but offset by fewer reactivations. Despite several examples of offshore drillers using white space upgrade and repair rigs for 2026 activity, we expect to see rig aftermarket activity down in the mid to upper single digits and rig equipment down in low single digits in 2025. Notably, we may see a stronger recovery in the latter half of the year, as I mentioned, as drillers prepare for a more robust 2026. Our growing backlog within energy equipment reflects the high demand for NOV production equipment rising from the sharp expansion of deepwater FIDs and the developments I noted earlier, particularly in offshore production processing and subsea flexible pipe. We are well positioned to support the next phase of deepwater expansion offering critical technologies in gas, dehydration, produced water and CO2 handling, as well as emissions reduction. More complex offshore wells will continue to drive demand. Likewise, we foresee growing international onshore deployment of unconventional drilling and completion techniques creating additional avenues for growth across our comprehensive portfolio. Overall, we expect energy equipment revenue to decline in low single digits in 2025 as lower demand for offshore drilling support in North American stimulation equipment more than offset growth in production equipment. We expect modest growth in energy products and services revenue to more or less offset these declines. To summarize, our base case across different markets points to a flattish environment in 2025. We acknowledge that OPEC excess supply continued strong shale efficiency gains in the U.S. and growing OPEC offshore production, which appears to be supplanting U.S. shale as a swing source of oil supply, could unleash greater commodity price-driven headwinds in 2025. Nevertheless, in the absence of a significant downturn in activity, we expect NOV's margins to improve further in 2025. Margin expansion will be driven by the improving quality of margins rolling out of backlog, our focus on driving further efficiencies in our business, and continued market share gains of our new products that have gained pricing premiums. As always, NOV remains committed to delivering value to our shareholders. Our disciplined capital allocation strategy, maintaining a strong balance sheet while balancing reinvestment, will continue to guide our decisions. In 2024, we meaningfully increased our return of capital, accelerating share buybacks and increasing our dividend to return $337 million to shareholders during the year. As we look forward, we remain steadfast in our approach to delivering consistent and sustainable financial performance. In closing, 2024 was a year that demonstrated NOV's resilience and strategic strength. Despite market and macro headwinds, we delivered strong operational execution, capitalized on offshore and international tailwinds, and maintained a disciplined approach to cost control and capital deployment. As we move into 2025, NOV is well positioned to build on the momentum of this year, capitalize on growing opportunities ahead, and drive strong returns for our stakeholders. I want to tell all the NOV employees listening today, thank you. I appreciate you. Your strong commitment to innovation, execution, and service excellence is what drives NOV's success. Our customers count on you and me for the critical solutions that enhance efficiency, safety, and sustainability. Thanks to your hard work, NOV will continue to exceed their expectations in the coming years. Jose?

As Clay mentioned, NOV had a solid 2024. During the year when drilling activity was down 9% in North America and flat in international markets, our full year revenue improved 3% with a 38% EBITDA flow through. We also generated $953 million of free cash flow and achieved a book to bill of 122%. For the fourth quarter, NOV's consolidated revenue decreased 1% year over year, but EBITDA increased 3% to $302 million, with margins increasing 60 basis points to 13.1% of sales. Steadily improving quality of our capital equipment backlog, market share gains from new higher margin technologies and services, and operational efficiencies more than offset the effect of lower activity levels. Cash flow from operations was robust, totaling $591 million in the fourth quarter due to higher levels of profitability. Capital expenditures totaled $118 million, resulting in $473 million of free cash flow. For the full year 2024, NOV generated $1.3 billion in cash flow from operations, invested $351 million in capital expenditures, resulting in the $953 million of free cash flow. We expect capital expenditures in 2025 to be in line with 2024. We achieved an 86% conversion rate of EBITDA to free cash flow in 2024. While we do not expect the exceptional improvement in working capital to repeat this year, we still expect a healthy EBITDA free cash flow conversion rate of more than 50% in 2025. During the fourth quarter, we repurchased 7.5 million shares for $112 million and paid a $29 million dividend, returning $141 million to our shareholders. Our repurchases were heavily weighted towards the end of the quarter, so we exited the year with 384 million fully diluted shares outstanding, six million shares lower than the weighted average number of shares outstanding during the quarter. For the full year, we returned a total of $337 million to our shareholders or 41% of our excess free cash flow. We remain committed to returning at least 50% of our excess free cash flow to our shareholders on an annual basis and therefore expect to true up to that threshold through a supplemental dividend in the first half of 2025. Our exceptionally strong cash flow also allowed us to improve our cash balance by $414 million during 2024. With our robust balance sheet, we now expect to return well over 50% of our excess free cash flow in 2025, excluding the supplemental dividend related to our 2024 return target. Moving on to segment results. During the fourth quarter of 2024, our energy products and services segment generated revenue of $1.06 billion, a modest decrease compared to the fourth quarter of 2023. EBITDA decreased $20 million to $173 million or 16.3% of sales. The decrease in revenue and profitability was due to lower global drilling activity and the effect of heightened geopolitical and macroeconomic uncertainty, which had a disproportionate effect on demand for the segment's shorter cycle capital equipment offerings. For the fourth quarter, the sales mix for energy products and services was 49% services and rentals, 19% product sales, and 32% shorter-lived capital equipment. Sales of capital equipment decreased 15% year over year due to strong deliveries of drill pipe, managed pressure drilling equipment, and conductor casing connections in the fourth quarter of 2023, which did not repeat. While demand for these offerings decreased year over year, each product line has seen solid orders as of late. Partially offsetting the overall decline in capital equipment sales was a strong increase in revenue from the segment's composite pipes, fittings, and structures. We continue to experience robust demand for fiberglass pipes and tanks in support of production, and recently, shipyards seem to have found a new sense of urgency in taking deliveries of piping, ducts, and ballast tanks for floating production storage and offloading vessels. The segment's revenues from services and rent from our artificial lift and setting tool acquisitions, excluding the acquisitions, service and rental revenue was up slightly year over year as market share gains offset lower drilling activity levels. Despite steady declines in drilling activity, revenue from rentals of our drill bits in the U.S. has increased over the last four quarters as a result of our industry-leading cutter technologies and close engineering coordination with operators to provide an optimal bit for the specific hole application. Demand for our solids control services remained robust with year over year revenue up in the low double-digit percent range, led by demand for our latest generation of technologies. Over the past year, we've realized rapid market adoption of our Alpha Chegg, which can process 20% to 30% more cuttings than other shakers on the market, and our Inovatherm thermal desorption systems, which efficiently removes oil-based waste from cuttings, significantly decreasing transport costs associated with waste disposal. Our digital services operation, which includes our legacy MDTACCO business, MAX digital service offerings, and our wired drill pipe-enabled downhole broadband solutions declined in the upper single-digit percent range due to lower drilling activity levels impacting demand for electronic drilling data recorders and spud dates for DBS projects in the Middle East sliding to the right. Both of which more than offset contributions from the continued growth in the user base of our Max Digital Solutions platform. Revenue from our tubular coating and inspection services were flat year over year, with steady demand for coating services in North America offsetting declines in higher margin coating services in the Eastern Hemisphere and Latin America. Revenue from inspection services was down slightly due to lower activity in North America, mostly offset by higher demand from Latin America. We're realizing strong growth in downhole tool rentals from international markets by capitalizing on opportunities to expand the use of our leading-edge extended lateral tools into unconventional fields in international markets, including Saudi Arabia, the UAE, and Argentina. In the Middle East, we began executing on a contract to provide complete bottom hole assemblies, including our advanced drill bits, motors, and measurement while drilling tools for a large service provider drilling extended lateral wells in an unconventional field. We've already helped the customer set a record for rate of penetration for the sixteen inches section in the field. We're also seeing accelerated adoption of friction reduction and torsional vibration mitigation tools in the Middle East and pushing those products along with our advanced drilling motors and power sections into the Vaca Muerta field in Argentina. The strong demand for our downhole tools in international markets and market share gains in the U.S. are mostly offsetting the decline in drilling activity and an increase in direct sales of our products to operators, more of whom are starting to build out their own fleet of high spec drilling tools. Revenues from product sales increased in the low double-digit percent compared to the fourth quarter of 2023. Our artificial lift franchise continues to see healthy demand in the Permian while pursuing growth in additional regions. Excluding the acquisition of our artificial lift business, revenue from consumable products was down in the low to mid-teen percent range. Strong shipments of downhole drilling and fishing tools to customers in India, Indonesia, and China were more than offset by lower shipments of tubular liners and sleeves, MPD consumables, and a fall-off of drill bit sales in Saudi Arabia during the last couple of months of the year. For the first quarter of 2025, we expect our energy products and services segment to realize a seasonal decline that is in line with what the segment experienced last year, translating into revenue that is flat to down 2% year over year, with EBITDA between $145 and $165 million. Moving to our Energy Equipment segment. Revenue for the fourth quarter of 2024 was $1.29 billion, down 1% from the fourth quarter of 2023. EBITDA increased $38 million to $185 million, resulting in a 310 basis point increase in margin to 14.4% of sales. The fourth quarter of 2024 marks the tenth straight quarter of year over year margin growth for this segment, resulting from the continued improvement in the quality of our backlog and improvements in operational efficiencies. During the fourth quarter, sales of capital equipment accounted for approximately 57% of the segment's revenues, unchanged from the fourth quarter of 2023, but up three percentage points from the third quarter of 2024 due to the typical seasonal pickup in year-end capital equipment deliveries. Aftermarket sales and services accounted for the remaining 43% of revenue in the fourth quarter of 2024, which declined 3% year over year due primarily to a mid-single-digit percentage decrease in aftermarket support for intervention stimulation equipment and a 1% decrease in our drilling equipment aftermarket operations. Revenue from aftermarket parts and services for intervention and stimulation equipment in the U.S. decreased in the mid-teen percent range year over year. With a steady decline in completions activity causing customers to idle and stack frac spreads and other equipment. Partially offsetting the lower revenue from North America was a mid-teen percent increase in demand for aftermarket services in the Middle East, where growing activity in unconventional resources is requiring more aftermarket support for a growing base of service equipment. In our drilling equipment business, lower demand for spare parts was mostly offset by higher revenues from service and repair work. As Clay mentioned, we've started to experience softening demand for aftermarket parts and services as our offshore drilling contractor customers anticipate seeing a larger effect on demand for spare parts versus service and repair with many customers taking advantage of low activity. to complete upgrades and recertifications. Despite a lower number of recertifications expected in 2025, the offshore rig fleet is getting older, and we expect our average recertification project will have a larger scope than what we saw in 2024. Our expectation is that we will have fewer drillship reactivations and recertifications, but we should see a meaningful number of upgrades and a larger scope per recertification project, resulting in aftermarket revenue that will decline in the mid to upper single digits for the full year. With the expectation for significantly higher offshore activity in 2026, we expect aftermarket orders to bottom in the second quarter and revenues to trough in the third quarter before results improve in the fourth quarter of 2025. Turning to the capital equipment portion of the energy equipment segment, higher sales of drilling, production, and completion equipment more than offset vessels. Fourth quarter bookings remained strong, with the segment posting a book to bill of 121%. Backlog ended 2024 at $4.43 billion, up 7% from year-end 2023 despite the negative impact of the strengthening U.S. Dollar on our heavily international market-weighted backlog. Revenue in our offshore production-oriented businesses improved slightly year over year with higher progress on process system projects partially offset by a decline in our subsea flexible pipe operation after an extraordinarily strong Q4 of 2023. The outlook for offshore production offerings remains very strong. We secured new orders for equipment packages associated with three new build FPSOs that will operate in Brazil and West Africa. The scope includes advanced natural gas dehydration CO2 handling, and produced water treatment systems. Our Subsea Flexible Pipe business had another strong booking quarter, and backlog is at a record high, up 62% from the end of last year. Importantly, the backlog consists of projects with much improved prices. Sales of intervention stimulation capital equipment improved high single digits over the fourth quarter of 2023 with strong sales of coiled tubing and wireline equipment in the Middle East more than offsetting a sharp decrease in demand for pressure pumping equipment in North America. As activity declines, operators are doing more with less. We expect to see more attrition of the service equipment base over the next couple of quarters before our customers will need to resume replacing worn-out assets with our latest generation of equipment, which offers greater operational efficiencies and a lower total cost of ownership. While rig curtailments in conventional Saudi fields are causing some cautiousness, we expect the Middle East region will continue to be a solid source of demand for completion equipment that is needed to feed the development of the service-intensive unconventional plays that are now underway. Revenue from drilling capital equipment grew mid-single digits year over year due to increased progress on offshore projects, including a 20,000 psi BOP upgrade we announced in 2024. We continue to execute well on our sizable backlog at new build rigs in Saudi, where we recently delivered our tenth rig. Our operations remain busy building equipment for offshore upgrades, and we recently booked a drilling equipment package for a new jackup rig. However, the outlook for rig equipment looks modest in 2025. As Clay mentioned, we expect revenues to decrease in the low single-digit percent range in 2025 due to the offshore white space and macroeconomic uncertainties. Longer term, we see building pent-up demand for high spec rigs in emerging international unconventional basins and more opportunities to upgrade offshore rigs with the latest capabilities. Our marine and construction business experienced a steady decline in revenues throughout 2024, as higher revenue from pipe and cable lay vessels could not offset the completion of WTIV projects that occurred throughout the year. While orders for WTIVs have been somewhat sparse over the last two years, our customers in Western Europe continue to project a shortage of vessels by 2028 and are beginning to initiate tenders with shipyards, giving us optimism that we can realize a couple of orders during 2025. We also see the potential for additional pipeline vessels and expect demand for cranes and deck machinery to remain solid. With increasing macroeconomic and geopolitical uncertainty, we expect the Energy Equipment segment to realize a slightly larger than usual seasonal decline, resulting in revenue that will be down 3% to 5% year over year with margins improving between 150 to 250 basis points to yield EBITDA in the range of $135 million. With that, we'll now open the call to questions.

Simply press star one one again. Again, if you have a question or comment at this time, please press star one one on your keypad. Please standby while we compile the Q&A roster. Our first question or comment comes from the line of James Rollyson from Raymond James. Mr. Rollyson, your line is open.

Hey, good morning, guys, and nice way to finish off the year, especially on the free cash flow side.

Thank you, James.

Clay, you went through a lot of puts and takes as you kind of built up to a basically flat revenue year for 2025 as your current outlook. But you guys have stated, you know, margins for a whole bunch of reasons should improve. If I kind of start with one Q guidance where you know, the midpoint of that is kind of 65 basis points improvement year over year in margins. Trying to get to how you're thinking about the magnitude of margin increase based on where your backlog sits and what you guys have done internally on cost and efficiencies, etcetera. Like, what kind of magnitude of year over year margin are you thinking it's gonna look like?

At this stage? Well, first, James, you're right in pointing out there are a lot of puts and takes or some emerging headwinds that get in the way of some of the margin improvements. But, nevertheless, we're optimistic margins should continue to rise in 2025. First, I point to clear success that we're achieving in energy equipment that group's margins up over 300 basis points year on year for Q4. Q1 through Q4 rose from 10.1% to 14.4%. The better margins in backlog, the costs that they've taken out, and the normalization of the supply chain have all contributed to that. We expect further improvement in margins out of backlog as we move into the first part of 2025 and the completion of some margin challenge projects we've been dealing with for the past couple of years. So, really good momentum in that group, and that's going the right way. We do expect revenue for that group to be down a tad in 2025. And so that's a bit of a headwind, but nevertheless, the expectation is they're going to overcome that. The real challenge has been in energy products and services. And we've faced some more challenging market conditions within that segment. In 2024, those are likely to persist in 2025. The group is much more exposed to North America, and I think 52% of our mix in Q4 in that segment is North America. And so, rig counts down 9% year over year has certainly been a headwind. They've also faced some mixed challenges year over year for the fourth quarter. We saw drill pipe volumes way down for the full year down about 20% for Q4 to Q4. Down something like almost a third. It's a high fixed cost type business. And so one of the steps towards improving margins is working on the cost of manufacturing drill pipe. There are a number of initiatives underway there to improve our workflows at our plant here in Navasota, Texas, and also to reorganize our Asian manufacturing. We will see progress on that through the first half of 2025. The other area that we're very focused on improving costs in energy products and services is within our tuboscope business. It's seen lower volumes in North America, tied tied to the rig count and also some opportunities to further debottleneck its coating operations here on the Gulf Coast. And so it's moving to improve operations out of coding, which will drive better margins here. Very excited about the outlook for improvements in that business. Those are kind of the two cost initiatives we have underway. On the other side of the ledger for energy products and services, as we noted in our prepared remarks, we have a number of new products that we've introduced that are demonstrating real value to our EMP operators. If you focus in on our downhole tools offerings, for example, our BITS offerings, we are introducing new products with a significant double-digit price premium. That also have lower operating costs for us. They're very accretive to our margins, and we're continuing to grow those in response to market demand. If we can continue to shift the mix of our offerings and EPS over towards those more accretive higher margin products, that's going to help margins in 2025. The last thing I'd point to is we're seeing good demand for our downhole wire, drill pipe, downhole broadband services, and we've been carrying some startup costs around a number of rig spuds that we expect. Some of those have pushed to the right a bit, not related to our service, but for other reasons. Those are going to work now. We expect the volume in that area to pick up. We will do a better job absorbing some of the costs of that in 2025 as those programs get underway. As I think either I or Jose noted a few minutes ago, we do expect share gains despite a kind of a flattish environment. A lot of puts and takes. But, we expect share gains to drive a little bit of revenue growth in energy products and services to more or less offset the declines in energy Equipment. If you add all that up, and this might be a Jose question, does that give you a 50 to a 100 basis point type of potential margin improvement year over year, do you think? Or is that too high?

James, I think I mean, ultimately, we'll have to see what kind of market presents itself through the course of 2025. There's still a whole lot of macroeconomic and geopolitical uncertainty for the year but your assumption is not unreasonable. Probably somewhere between 50 to 150 basis point possibility for 2025. So we'll see. Don't take that as official guidance other than to say, yeah, you're not being unreasonable in terms of your assumption.

No. That's helpful. It's kind of a bracket. And then maybe just to add one more, sure. You guys have obviously done a lot on the free cash flow and working capital side of things and posted really strong numbers for the year. As you alluded, you're not gonna keep getting those gains necessarily, but as we think about that continued 50% free cash flow plus flow through from EBITDA and how you think about that regarding returning capital, I know the 50% number is kind of the baseline bogey, but if I remember right, Jose, when we were on the road a few months ago, you were kind of thinking maybe that number gets a bit better in terms of your share of territory visibility now that the working capital has done what you wanted to do, the balance sheet's where you want it to be, etcetera. Just spend a minute on kind of how you're thinking about the level of return of capital as you look in 2025 and maybe even beyond?

Good question, James. Yeah. So at the beginning of last year when we unveiled our return of capital program, one of the reasons why we did it is as we sort of looked forward over the next three, four years, we saw a prolonged recovery cycle that would obviously have some ups and downs during the course of the way. But our view was and remains that we're still in a fairly early portion of the recovery cycle and that we should see a little bit less volatility over the next several years. That combined with significantly improved profitability and the rapid healing of the global supply chain gave us a tremendous amount of confidence that we would get back to our old ways of being a low capital intensity business that would throw off a tremendous amount of free cash flow. So we were very upfront that we would convert at least 50% of our EBITDA to free cash flow over that time period, and we remain confident in that. Obviously, 2024, things went a lot better than anticipated from a free cash flow conversion standpoint, particularly in the fourth quarter. We had a lot of things go our way. Things went the way that we thought they would from a supply chain and inventory management standpoint. A lot of teams around the company have been really focused on just getting better and capitalizing on that healed global supply chain. That went according to plan. Also, Q3 to Q4, we normally ship a lot of stuff out the door, which helps us reduce inventory levels. This usually results in reducing our costs in excess of our contract assets and our short-term assets on our balance sheet. This usually flips into a build in receivables. However, during the fourth quarter, we had exceptional collections. It’s a result of one, some work by our teams but two, the general improved health of our customer base, the vast majority of which is paying on time for the first time in a while. We had really, really healthy free cash flow in the fourth quarter due to a $397 million improvement in working capital from Q3 to Q4. We ended the year at about a 25% working capital to revenue run rate. It's going to be challenging to to get improvements in 2025. Still confident we're going to get better from an inventory management standpoint, but overall expectation is that you know, working capital intensity will remain kind of flat. So that kind of gets us to, you know, if you consider EBITDA or CapEx load or interest payments and tax, you kind of get to a conversion of EBITDA to free cash flow that’s north of 50%. So that's kind of where we feel like we'll be for 2025 and don't see any reason why that wouldn't continue to be the case as we go forward in time. But ultimately, that kind of ties back to the market environment as well, top line growth rate, but feel really, really good about free cash flow generation going forward. Now, as it relates to our return of capital, you know, as I mentioned in the prepared remarks, as a result of that really strong free cash flow, we improved our cash balance by $414 million year over year. Our target of returning at least 50% of our excess free cash flow during the course of 2024 was set in order to help rebuild some of those cash balances that got a little lower than where we wanted them to be at the end of last year. Our cash balances are back up to where we think they should be. As we look at 2025, I would expect us to return the majority, the vast majority of our excess free cash flow to our shareholders during the course of the year. So that's kind of the way we're looking at things.

I appreciate all that detail, and I'll turn it back. Thank you, guys.

Thanks, James.

Thank you. Our next question or comment comes from the line of Roger Reid from Wells Fargo Security. Mr. Reid, your line is open.

Hey. Good morning. Yeah. Roger Reid, actually. But what?

Good morning, Roger.

Same, Clay. Hey. I'd like to come out kind of how you're looking at the offshore market. I mean, you mentioned, you know, I think it's well known some white space and some of the drillers' schedules. But as you're looking at what it might take to fill that or what signs there are by I think you said the latter half of the year might look a little better for some of the equipment orders. What are some of the signs you're paying attention to? What should we be watching?

Yeah. I would say, it's interesting. All of our offshore drilling contractor customers are talking about it and very focused on it. Some have said, you know, we're gonna defer some projects that we were thinking about doing. Others have said, you know, we're gonna pull forward some projects we were thinking about doing to use this idle time to prepare our rigs for the upturn in 2026. It's sort of a mixed bag out there. Specifically, I'd point to a couple of rigs that are increasing their hook load capabilities that we won last quarter, Q3. We've had some additional orders for pipe handling and automation. It's being done during the idle time. I think the consensus out there, though, is that 2026 is going to be a much better year for contracting. As you're aware, but not everybody else may be, December was actually a pretty good month for contracting. Contracting is down year over year, but with respect to floaters, it's down something like 20%. We made up a little ground in in December. I think it all speaks to the fact that you've had some very economic discoveries in these new basins around the world. You now have natural gas as a viable economic target offshore with the advent of offshore LNG. There's just a lot more activity going on offshore that's led to higher FIDs. As I noted earlier, $300 billion a year in FIDs for the offshore and the pipeline looks like it's still pretty full. We're doing a lot of feed studies on the production side for FIDs that we think are coming up in the next couple of years. So there's drilling to be done out there; it's just sort of one part of the supply chain slowing, which is drilling, when activity slows down a bit to allow the other part of the supply chain, which is the FPSOs, to get caught up and come online, and to match those activities together. I think that's the root cause of the white space phenomenon. There's a lot of discussion out there; I know offshore drillers are, in the aggregate, saying they're reducing their CapEx across a lot of different activities beyond what, you know, these sales to them would warrant. If I share with you a snapshot of what we see today versus what we saw last year, it's actually pretty flat. So the number of rigs we're working on, the number of projects we're discussing with our customers upcoming is a little over a hundred now. It was a little over a hundred last year. And so we haven't seen a big diminishment in demand tied to the white space phenomenon yet other than, as we've noted, spare parts orders in the fourth quarter were flat. Once again, they fell in the third quarter too. But in January, they picked back up. The good news is our rig aftermarket was able to replace almost all of that with additional service and repair revenues. I think, sequentially, our aftermarket business was down only 1%. A little more color on this: the projects we're working on, and I think Jose talked about this earlier, we're seeing a higher mix of SPSs versus reactivations. Generally, SPS recertifications are lower revenue opportunities for us. But the good news is the mix of longer-term SPSs is much, much higher with fewer five-year SPSs. The magnitude of expenditures within NOV on a ten-year SPS is double for a drillship what it is on a five-year SPS. A fifteen-year SPS has some multiple of a five-year. Anyway, there's a lot of information in there. Right now, we expect our rig business to be down a little bit. Production continues to go up; there are a lot of great highlights this quarter with respect to orders and activity in the FPSO world. NOV has added a lot of market share during the last several years. Hopefully, that answers your question.

No. It is helpful. I appreciate it. And given the depth of the answer, I'm going to turn it back to you rather than hammer another question there. Thanks, guys.

Thank you. And my apologies, Mr. Reid. The next question or comment comes from the line of Dan Kutz from Morgan Stanley. Mr. Kutz, your line is open.

Hey. Thanks a lot. Good morning.

Morning, Dan.

So I just wanted to ask a question that's posed similarly to the consolidated revenue question earlier, but in reference to backlog and book to bill on orders in 2025. I guess, you know, you guys have given us a ton of components, but if you had to roll everything up on a consolidated basis, just directionally, where would you point us from a book to bill perspective?

Yeah. Great question. You know, we're coming off of a lot of momentum. So Q4 book to bill, 121%. Full year book to bill, 122%, so a lot of demand. But as you correctly note, it comes from a lot of different sources. As we look to 2025, I think demand for pressure pumping stimulation equipment in North America is certainly going to be challenged. Hopeful that as we get deeper into the depletion of horsepower assets, later in the year, it turns around a bit. On the other hand, there's good demand for stimulation equipment in these emerging unconventional plays in South America and in the Middle East, helping offset that somewhat. I just talked a lot about offshore drilling in 2025, and so, you know, directionally, that may be challenging as well. Although we are pleased to win a jackup rig package in Q4, so that helped a lot with respect to orders in that area. We continue to be most excited about our production equipment into the deepwater. We'll maintain strong market positions in the supply of subsea flexible pipe and gas processing systems in chokes, valves, manifolds, a whole litany of components that we sell into that. A lot of feed studies are underway. We've already executed FIDs to kind of move through the planning process and PO placement process with the EPCs there. What we don't talk as much about now that could be a real turnaround in 2025 is our wind turbine installation vessel business. That business has been pretty slow on orders the last couple of years. I think in 2024, we had one vessel, and in 2025, we have a number of conversations underway. There’s a consensus out there that there will be a shortage of those vessels in 2028. Participants in that construction sector are looking at placing orders for new vessels in 2025 to be able to sell into that market at that time. We expect a couple of WTIV orders this year, which will help reload that backlog. We’ve seen good demand for cable lay vessels to wire up these offshore wind farms that are still in development, particularly inter array cable vessels, which connect the turbines between one another. I think, I think wind, actually, as a source of orders in 2025 is going to turn around and be pretty good. Additionally, we’re seeing rising demand for construction vessels broadly as well, including several that are adding cable lay optionality to their designs. I hope that addresses your question, Dan. Again, a lot of puts and takes in there, but the good news is the diversity of NOV's offerings into all those different market segments helps us offset softness in one particular area with strengths in others.

Yep. That's all super helpful. Maybe just one on shareholder returns and your thoughts around capital allocation. I guess could you just talk through some of the puts and takes of the decision to have the kind of 50% true up for total shareholder returns via supplemental dividend versus maybe the optionality to say we'll true up to 50%, but, you know, that component could be a supplemental dividend, and that component could be incremental buybacks. Can you just talk about the thought process in coming to that decision? Thanks.

Yeah, Dan. It's Jose. So look, we wanted to unveil a return of capital framework that was very clear in terms of what we would do in the decisions that we would make. So we intentionally put in place the supplemental dividend concept in order to hold us accountable to meet the minimum threshold that we set to the street. We very much intend to live up to that. If you do the math, that puts in place an expectation where we should have a supplemental dividend in the order of magnitude of $80 million in the first half of 2025. We're not firmly saying that at this point because, obviously, we need a board approval to move forward or change anything around. But we intend to live up to that commitment. As we go forward in time, through the course of 2025, with where the share price has been and where it is today, we think that it is a compelling value and still anticipate being pretty aggressive concerning share buybacks. We significantly stepped up our share buybacks in Q4 and stepped into it, as the market for whatever reason had a big downdraft in December. We ended up with an average share price below $15 per share, and we think we'll look back in the future and feel really good about that. Even at current values, we think that stock value is compelling. So we anticipate continuing to be pretty aggressive with share buybacks. But the framework is what it is. We're gonna live with it. We’re going to live up to it. I think it strikes a nice balance for our shareholders.

Great. That's really helpful context. I'll turn it back. Thanks again.

Thank you. Our next question or comment comes from the line of Wigar Saeed from ATB Capital Markets. Your line is open, sir.

Thanks for taking my question. Clay or Jose, you know, natural gas is a pretty key team these days in North America. And, you know, if activity for natural gas takes over or North America production grows because of, or because of gas-fired power plants, how does NOV benefit? Do you provide services? You know, we are aware of the services on the products on the D&C side. Could you highlight some of the other products that you could be selling into the midstream market or for power generation or LNG?

You bet, Wigar. Good question, and nice to hear from you this morning. If you look at, for example, the Haynesville as a source of gas, we're hopeful that in the back half of 2025 as LNG exports, Haynesville activity picks up. Other gas drilling picks up across North America. It all starts with horizontal drilling, better bits, better downhole tools. We've emerged as really a leader in those areas, enabling longer laterals with respect to pressure pumping. We're a major provider of pressure pumping, coiled tubing, completion tools that help enable that production. We're the leader in production chokes for those wells, and our composite flexible flow lines make us a market leader in that space. We participate mostly on the upstream side of it with respect to midstream. We do sell some valves and traps and other things to the pipeline industry as well. Additionally, NOV is the global leader in providing monoethylene glycol processes to dehydrate gas and process gas. There are so many critical components that go into gas production in North America where NOV is a market leader. We certainly benefit from an uptick in natural gas drilling in North America, and, again, hopeful that projections for more natural gas activity and production related to power demand and LNG exports from the United States will drive a recovery in that area here later in 2025.

Hey. And, Wigar, just to add a couple of things. Yeah, we're pretty excited about the appetite and recognition that gas is going to be a transition fuel. I think the world is recognizing the importance of gas in powering much of the global economy going forward. Just a couple of other things; as it relates to LNG, everything that Clay talked about, but just a couple of items. As it relates to FLNG, our processing systems for all gas treatment have been a source of really good bookings as we look forward over the next couple of quarters and will continue to be a source of strength. Additionally, some of the items that we don't talk about a lot are subsea yokes and mooring systems necessary for transporting, offloading, and shipping large quantities of natural gas. They're also a big component of some of the things that we're booking now. So there are many areas where we are heavily involved in the entire LNG chain. We’re excited about the opportunities in front of us related to that.

Thank you. Just on the Middle East jackup that you booked, would it be safe to assume that they could be in order, you know, one year type order coming in for the next couple of years, or do you see this to be a one-off type jackup package?

I'm going to be careful. I don't want to overstate this. I do think there will be future orders. This is a jackup that's being constructed in the kingdom in a newly constructed shipyard. I do believe this isn't the last rig that that shipyard will build. But I'm going to beg off predicting a date or any specificity around future orders. We're very pleased to land this one and very focused on executing it well. I am hopeful that our customer there and other customers place additional orders for jackups, but I'm not going to tell you a particular quarter or year.

Sounds good. Well, thank you very much for your comments. Appreciate it, and best of luck.

Thank you. Thanks for taking my call.

I'm showing no additional questions in the queue at this time. I'd like to turn the call back over to management for any closing remarks.

Thank you, Howard, and thanks to all of you for joining us today. We look forward to discussing our first quarter 2025 results with you in April. We wish you all a very happy Wednesday. Operator, we can disconnect now.

Alright. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.