NOV Inc. Q3 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to NOV Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to turn the call over to Amie D'Ambrosio, Director of Investor Relations. Please go ahead.

Welcome, everyone, to NOV's Third Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and CEO; Jose Bayardo, our President and COO; and Rodney Reed, 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 U.S. GAAP basis, for the third quarter of 2025, NOV reported revenues of $2.18 billion and a net income of $42 million or $0.11 per fully diluted share. 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, and good morning. NOV executed well in the third quarter. Revenues of $2.2 billion were down just slightly, less than 1% year-over-year and sequentially despite a challenging macro environment and softening oilfield activity. EBITDA was $258 million or 11.9% of revenue, up sequentially despite rising tariff and inflationary headwinds. Cost control and strong project execution allowed NOV to lift margins sequentially while increasing free cash flow to $245 million. Energy Equipment saw strong demand for its growing production-related portfolio, leading to higher backlogs and record revenues from our subsea flexible pipe and our gas-focused process systems businesses. These businesses as well as our marine construction and production and midstream units all achieved their highest EBITDA in five years, expanding segment year-over-year margins for the 13th consecutive quarter. Our drilling activity-driven Energy Products and Services segment once again outperformed the underlying global rig count declines of 8% year-over-year, aided by our growing share of efficiency-enhancing downhole technologies and strong demand for drill pipe, including NOV's proprietary wired drill pipe data telemetry system. But generally, activity continued to soften. In North America, E&Ps once again trimmed short-cycle oil activity which is likely to slow further seasonally in the fourth quarter. Internationally, the Saudi rig suspensions appear to be behind us. And while spending there remains low, expectations are building for a few more rigs to go back to work in 2026. Elsewhere in the Middle East, demand from the UAE, Qatar, and Kuwait remains healthy as customers continue to invest to meet production goals. Many are pursuing unconventional shale developments. Argentina, Saudi Arabia, and the UAE are leading the way, but interest is emerging elsewhere around the globe, as I'll speak to in a moment. Offshore, our customers expect a meaningful exploration and development drilling ramp to begin in late 2026. Offshore FIDs are expected to pick up over the next few years following a lull in 2025, and our discussions with customers around deepwater FEED studies support this view. Bookings tied to offshore development are already up double digits year-over-year. Further out, NOV's prospects through the next decade are extraordinarily bright. Why? Step back from the near-term noise created by OPEC quota unwinding, oil oversupply, commodity price pressures, tariffs, inflation, and geopolitical uncertainty, and you will see two major structural shifts that are setting up a powerful decade of opportunity for our company. First, the globalization of unconventional shale development. Oil and gas are commodities and the winners and losers in all commodity industries live and die based on costs, development costs, and marginal production costs. The clear winner in the race to lower marginal production costs since about 2012 has been North American unconventional shale, which has arguably provided more than 80% of global supply growth since then. It's been the winner of the horse race to lower cost. And as the winner, it has attracted the most capital. Technology, capital, and ingenuity led marginal cost for the shale juggernaut lower and lower, outpacing the marginal cost reduction secured for offshore and other sources of oil and gas. And these competing sources saw capital investment fall sharply throughout the same period. But as North American shale producers have chipped away at Tier 1 inventory locations, production growth is flattening here and may well be peaking now. And as the mix of lower quality Tier 2 locations rises, marginal cost per barrel for North American unconventional shales is creeping up as comments from producers in the past few Dallas Fed surveys note. After 20-plus years of refining the technology to enable the North American shale revolution, these same technologies are now being deployed at scale internationally because international E&Ps see the opportunity to develop lower marginal cost sources of oil and gas elsewhere. The advantage international shales have at this point is that they will benefit from decades of advancement and several hundred thousand shale wells that have been drilled and experimented with and continuously optimized here in North America. And these learnings will now be applied to new virgin international rock. The near-term challenge they have is they lack the necessary tools and equipment. That's where NOV comes in. Since prosecuting a successful unconventional shale play requires pretty much everything NOV makes, we're pretty excited about this. Recall that the U.S. shale miracle started with a complete retooling of its land rig fleet and the build-out of a lot of frac, coiled tubing, wireline completion, and production equipment. These tools and technologies are squarely in our wheelhouse, and we see the emerging build-out of infrastructure to support international shale development is driving demand for us for years to come. Second, the reemergence of deepwater and offshore development. After years of second-place finishes and the marginal cost horse race, deepwater is back to winning. Deepwater has quietly but steadily gotten better since 2012. NOV-supplied offshore drilling rigs are drilling more efficiently, higher hook load capacities are enabling more cost-effective casing programs. The standardization of subsea production kits and FPSO designs have all served to steadily reduce the marginal cost of deepwater barrels and make its economics more compelling. Simply put, we believe that deepwater broadly has brought marginal costs below North American shales, and it is now winning the marginal cost horse race. This is a big deal. We believe this inflection, this leadership change will drive many more investment dollars into deepwater in the coming decade to satisfy growing global energy demand. Evidence of this is apparent in exploration success stories in new basins in Guyana, Suriname, Namibia, Senegal, the Eastern Mediterranean, the Paleogene, and the Gulf of Mexico. Industry forecasts call for offshore oil output to rise to roughly 13 million barrels a day by 2026, making deepwater the leading source of incremental supply growth. The pivot in spend is further helped by the emergence of profitable floating LNG, which adds natural gas as another viable target for offshore E&Ps. NOV's technology portfolio from subsea flexible pipe and process systems to mooring solutions and rig aftermarket and automation is critical to enabling this expansion. Customer performance expectations favor selection of NOV technology, providing NOV a strong competitive advantage in deepwater operations. Finally, I'll stress that this 166-year-old horse race is never over. Innovative North American shale operators have an amazing track record of honing costs to improve competitiveness. But honestly, all operators in all basins do, and they have to, given the business they're in. But right now, we see deepwater pulling into the lead and international shales entering the race as serious contenders. We believe these two will define the next decade plus of oil and gas development and both depend on the tools, equipment, and technology that NOV delivers. Back to the near term, however, as I said, we expect market conditions to remain soft through the next few quarters. Tariffs and inflation uncertainty will continue to weigh on margins in the near term and global drilling activity is likely to drift lower. But looking further ahead, we see the back half of 2026 and beyond as a period of strengthening demand across both offshore and international land markets. As deepwater projects ramp and unconventional development expands globally, NOV's technology leadership and global platform will enable us to capture the growth efficiently and profitably. And that's why I'm so excited about NOV's future. To my NOV teammates listening this morning, thank you for all that you do to strengthen, improve, and lower the marginal cost of the operations of all of our customers globally. You've helped build NOV to perform through cycles and to lead in the next phase of global energy development. And I'm grateful for the way that you get up every day, put your boots on, and make this industry better. Now let me turn it over to Rodney.

Thank you, Clay. Consolidated revenue was $2.18 billion, down slightly year-over-year and sequentially. Operating profit was $107 million or 4.9% of sales. Net income was $42 million, and the company recorded $65 million within other items. Adjusted EBITDA totaled $258 million, representing 11.9% of sales. Sequentially, EBITDA margins improved as strong operational execution and cost controls offset the effects of softening oilfield activity and higher sequential tariff expense. Free cash flow generation remained robust at $245 million. Over the last nine months, NOV converted 53% of EBITDA to free cash flow and achieved a 95% conversion rate during the quarter, which was a result of strong cash collections on projects and a focus on systematic structural working capital efficiency improvements. During the quarter, we repurchased 6.2 million shares for $80 million and paid dividends of $28 million, bringing total capital returned to shareholders year-to-date to $393 million, which includes a supplemental dividend of approximately $78 million paid in the second quarter. During 2025, we expect to significantly exceed our minimum threshold of returning 50% of excess free cash flow to our shareholders. For the quarter, tariff expense came in just under $20 million, increasing approximately $6 million sequentially. For the fourth quarter, we expect our tariff expense to be around $25 million. We continue to realign our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. We also remain focused on removing structural costs to improve margins and returns, including consolidating facilities, standardizing internal processes, and rationalizing product lines or regions that don't meet our profitability requirements. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. While we expect the near-term environment to remain choppy, we're executing well, managing what we can control, and positioning NOV well for the future. With that, I'll turn to segment results. Starting with our Energy Equipment segment. Third quarter revenue was $1.25 billion, up 2% from the third quarter of 2024. EBITDA increased by $21 million to $180 million, resulting in a 140 basis point increase in EBITDA margins to 14.4% of sales, driven by strong execution in our capital equipment business more than offsetting lower aftermarket revenue. Capital equipment sales accounted for 63% of the segment's revenue in the third quarter of 2025, increasing 20% year-over-year due to strong growth in offshore production equipment. Aftermarket sales and services accounted for the remaining 37% of energy equipment revenue with sales declining year-over-year by 19%. Capital equipment orders of $951 million for the quarter more than doubled sequentially, reaching our second highest quarterly bookings in the last 18 quarters. Orders represented a book-to-bill of 141% for the quarter and 103% book-to-bill over the trailing 12 months. Continued strength in demand for our offshore-related production equipment offerings led the order book with multiple orders for subsea flexible pipe, a monoethylene glycol processing module, and our second order for a large submerged swivel and yolk system for LNG offtake in Argentina. Backlog at the end of the third quarter was $4.56 billion, the highest since we started reporting Energy Equipment as a segment. Our Subsea flexible pipe business had another exceptional quarter with solid year-over-year and sequential revenue growth. The operation also continues to improve profitability due to strong execution on projects. The business delivered record quarterly revenue and bookings with project backlog achieving an all-time high. While the business is performing exceptionally well, our team continues to identify ways to further optimize our manufacturing processes to accelerate production and improve operational efficiencies. Our Process Systems business continued its strong performance, both for offshore production and onshore gas fields with revenue growing high double digits year-over-year, finishing the quarter with record revenue and EBITDA. Offshore production market forecasts remain robust, which should continue to drive demand for gas processing and produced water treatment opportunities. Additionally, the build-out of FLNG and FSRUs is driving opportunities for our fluid and gas transfer systems like the order I previously mentioned for the Submerged Swivel and Yoke system for an FLNG project in Argentina. Our Marine and Construction business experienced a sharp increase in revenue compared to the third quarter of 2024, driven by a significant increase in progress on crane and cable projects, partially offset by lower activity related to wind turbine installation vessels. The outlook for offshore supply vessels, which provides opportunities for our subsea cranes, remains strong, and we continue to see tenders for cable lay vessels. The fixed wind market remains challenging. However, we see the potential for another award later this year or early next year with the continued need for larger new build vessels in Europe and Asia. Several countries are still planning to expand offshore wind supply, which could lead to a shortage of WTIVs around the end of the decade and therefore should drive incremental new build demand over the next few years. Revenue for our intervention and stimulation capital equipment fell double digits year-over-year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by strong and growing demand for coiled tubing and wireline equipment. This growing demand related to the development of unconventional resources in international markets and to offshore activity has led to three straight quarters of bookings growth and trailing 12-month book-to-bill of over 100%. Revenue from drilling capital equipment decreased high single digits year-over-year due to market uncertainty and contracting gaps from some offshore drillers. Capital equipment orders improved sequentially, but the demand remained soft as offshore drilling contractors preserve capital while navigating through white space in their contract portfolio. The offshore drilling outlook appears to be improving for the second half of 2026 and beyond, as Clay mentioned, leading to a more constructive dialogue regarding opportunities to support recent and upcoming tender awards, including higher hook load capacities, crown compensators, managed pressure drilling, and BOP upgrades. Additionally, demand for automation and robotics continues to gain momentum for land and offshore rigs due to improved safety and operational efficiencies provided by our ATOM RTX robotics packages. In our drilling aftermarket business, revenues were down significantly compared to the prior year. The decrease is a result of lower spare parts bookings over the last few quarters as customers slowed spending in response to gaps in contracting activity, but we did see a mid-teens percentage increase sequentially in spares bookings, which should lead to stronger fourth-quarter revenue for the drilling aftermarket business. For the fourth quarter, we anticipate a less pronounced than usual seasonal increase in our Energy Equipment segment due to the timing of capital equipment deliveries. As a result, we expect revenue to decline 2% to 4% year-over-year with EBITDA in the range of $160 million to $180 million. Our Energy Products and Services segment generated revenue of $971 million, a 3% decrease compared to the third quarter of 2024 reflecting lower global activity levels and delayed capital equipment orders for infrastructure projects, partially offset by technology-driven share gains. EBITDA was $135 million or 13.9% of sales. Higher decrementals resulted from an unfavorable sales mix, pricing pressures in North America, and increased tariff expense. We're focused on reducing structural costs, including consolidating facilities and exiting product lines or regions that don't meet our return requirements. North America represented 57% of segment revenue and grew 7% year-over-year on higher drill pipe sales compared to a 10% decline in rig count. Segment revenue decreased 15% year-over-year in international markets due to some activity declines in the Middle East and Latin America. For the quarter, the sales mix for energy products and services was 51% services and rental, 31% capital equipment, and 18% product sales. Services and rentals revenue declined 4% year-over-year as demand for our solids control services declined in the mid-teens due to lower international activity. However, increased traction for our efficiency-enhancing technologies in North America as well as in unconventional and tight gas applications internationally helped to partially offset the impact of an 8% global rig count decline. In North America, drill bit revenue rose mid-single digits due to market share gains tied to superior performance and reliability, and we realized growing demand for our drill bits, downhole tools, and tubular coatings from the increase in gas-directed drilling, particularly in high-temperature applications in the Haynesville. Internationally, our downhole drilling motors were deployed in the first unconventional wells drilled by an independent in Bahrain and rentals of our downhole technologies increased in Argentina, supporting unconventional development. Tubular coating and inspection revenue was down modestly year-over-year with strong growth in North America coating sales, partially offset by lower demand in Latin America and the Eastern Hemisphere. Capital sales increased 5% year-over-year, supported by mid-teens percentage growth in drill pipe sales as customers replenished inventories. Drill pipe bookings reached their highest level since early 2022. However, composite pipe and tank sales declined primarily due to delays in infrastructure projects affecting the timing of orders. The strong order intake for our drill pipe and fiberglass businesses positions us well for improved capital equipment revenues in the fourth quarter. Product sales decreased in the mid-teens percentage range year-over-year with higher downhole tool sales in Asia more than offset by fewer international bulk sale deliveries. Additionally, we are seeing an increase in international customers changing their preference from purchasing to renting drill bits, more in line with predominant customer preferences in North America. Looking to the fourth quarter, we expect a modest sequential pickup in capital equipment sales from our Energy Products and Services segment to be more than offset by softer market conditions. As a result, we expect fourth-quarter segment revenue to decline 8% to 10% year-over-year with EBITDA between $120 million and $140 million. With that, I'll turn the call over to Jose.

Thank you, Rodney. NOV executed well during the third quarter in a challenging market environment. While we expect near-term activity levels to remain soft, we also believe that growing demand, natural decline rates, and a decade plus of underinvestment in exploration will drive a meaningful recovery, potentially beginning as soon as late 2026. We have a very constructive view regarding the industry's and NOV's outlook over the medium to longer term as a result of the market backdrop and how we are positioning the company. We remain sharply focused on improving operational efficiencies while positioning NOV to capitalize on key secular trends, including offshore production supplanting U.S. unconventional resources as the dominant incremental source of global oil supply, accelerating activity in international unconventional basins, natural gas becoming the fuel of choice for power generation, and the application of technology to drive efficiencies. These trends are driving actions we see from our oil and gas operator customers and are driving how we invest in and position our business. Clay highlighted that we provide many of the critical tools, equipment, and technology required to meet the growing needs of our customers. NOV has a unique but broad portfolio of solutions and serves multiple end markets that often move through cycles at different rates. The diversity in our business, along with our technology and service-driven market leadership are intentional and strategic and provide operational and financial resilience. Let me explain what I mean. In 2023 and 2024, NOV generated roughly $1 billion in adjusted EBITDA, and we expect that we'll deliver about that same amount in each of 2025 and 2026. While our earnings appear stable at the consolidated level, our mix can change meaningfully from year to year. Following the pandemic, we realized a rapid recovery in demand for shorter-cycle activity-driven products and services, particularly in North America. As a result, our Energy Products and Services segment drove our growth and contributed roughly 62% of our adjusted EBITDA in 2023. Since then, we've seen slowing activity in North America, which has been offset by growing demand for capital equipment in offshore and international markets. As a result, we expect Energy Equipment's contribution to EBITDA to rise from 38% in 2023 to approximately 55% in 2025, while Energy Products and Services EBITDA contribution moves to about 45%. While we have seen a sizable shift in the contributions from our two reporting segments, some of our businesses have realized a greater than 40% increase in their revenues and significantly higher percentage movements in EBITDA, which offset declining activity in North America. The diversity in our portfolio provides resilience during times when market cycles are out of phase as we've seen over the last decade. And when, not if cycles align, likely driven by higher commodity prices and a more sustained global upcycle, the amplitude of NOV's earnings will be materially higher even without an offshore rig new build cycle. While our business is intentionally diverse, we're extremely deliberate about how we position our portfolio and how we compete. Each of our operations leverages NOV's energy expertise-driven core competencies in engineering, material science, manufacturing, service delivery, and supply chain management. We also focus on participating in businesses where we can be market leaders and establish and advance competitive advantage often achieved by harnessing our core competencies and world-class R&D capabilities. Additionally, we focus on markets that have high barriers to entry, typically due to complex technological hurdles and the associated capital requirements. Market leadership in high barrier-to-entry markets enables scale. Scale across multiple product and technology-oriented businesses that can leverage common manufacturing, engineering, and supply chain resources further advances competitive advantage and provides resiliency during market cycles, allowing us to continue investing in innovation regardless of market conditions. You'll find market leadership across our product portfolio. We pioneered numerous technologies that helped unlock the shale revolution by enabling efficient drilling and completions of ultra-long lateral wells. As Clay noted, these technologies are now realizing accelerated adoption in emerging international unconventional markets. We've also pioneered numerous technologies that unlocked major efficiencies associated with the exploration and development of deepwater resources. Our game-changing leach PDC cutter technology dramatically increased thermal stability and wear resistance of drill bits, leading to substantially higher rates of penetration and longer run times with fewer trips. While the bulk of the industry now uses our technology, we continue to leverage our material science expertise to further advance cutter technology that drives improvements in rate of penetration and reduces costs. These advances have allowed our ReedHycalog drill bit business to gain share in many markets, including the U.S., where its revenue grew 11% year-over-year against an 8% decline in drilling activity. Another game-changing downhole technology we pioneered was our Agitator friction reduction tool, which enables operators to drill farther and faster. We continue to advance our technology to build better fit-for-purpose versions of the tools such as our Agitator ZP and our Agitator RAGE friction reduction tools. The ZP is a zero pressure drop friction reduction tool that allows customers to maintain maximum flow rates in pressure-limited drilling situations. On the opposite end of the spectrum, our Agitator RAGE leverages the high-pressure capabilities of super-spec drilling and pump packages to produce extreme levels of friction reduction for tight curves, U-turns, and ultra-long laterals in the most demanding environments. Revenue from new downhole drilling technology, which includes our latest agitator offerings, is up over 30% year-over-year, comprising almost 20% of our downhole tools business' revenue with more room to run. Even in areas where many people may not think technology plays a big role, such as in tubulars, innovation drives our market leadership. After setting the global standard for premium high-torque drill pipe with our XT connection that can handle 70% more torque and improve hydraulics with up to a 50% reduction in internal pressure loss in comparison to standard API connections, our engineers developed our Delta connection. Delta can handle 20% higher torque than the XT connection for extended length drilling applications and its proprietary design prevents galling, reducing total cost of ownership and enabling up to 50% faster makeup than other premium connections, reducing tripping time. We also recently introduced wear-resistant drill pipe to address accelerated body wear in extreme drilling environments and insulated coatings to protect against extreme well temperatures that cause premature failures of bottom hole assemblies. Additionally, we are a leader in providing subsea flexible pipe for deepwater production. We have won the Supplier of the Year award from the largest global consumer of subsea flexible pipe two years in a row as a result of our technology execution and service. We continuously advance technology that addresses our customers' most pressing needs. This quarter, we received an order for our active heated flexible riser system, which combines flexible pipe and heating technology to address flow assurance challenges in environments where heavier oils become even more viscous in cold deepwater conditions. We also offer our OptiFlex condition monitoring system that utilizes embedded fiber optics to continuously measure temperature and fatigue, and we're undergoing qualifications for what we believe is the leading contender to cost effectively mitigate CO2 stress corrosion cracking, which is a costly issue in Brazil's pre-salt fields. We've been investing in our solution for the CO2 stress corrosion cracking challenge since 2019, reflecting our commitment to invest in critical solutions for our customers throughout the cycle. I could go on all day covering the technology leadership across our product portfolio, but you probably detect the pattern here. NOV pioneers technologies that provide meaningful advancements for the industry, then we continue advancing our technologies, allowing us to maintain our competitive advantage and market leadership. While we focus on rapid innovation and continuously improve our products, R&D efforts that drive potentially revolutionary changes like our CO2 stress corrosion solution and our industry-first 20,000 psi BOP take place over longer periods of time, sometimes over a decade, an investment horizon that few in this industry have the fortitude to stomach. We continue to be relentlessly focused on several other potentially revolutionary long-term R&D initiatives and would like to highlight a couple of our ongoing efforts to digitize and automate the energy industry. Over a decade ago, we commercialized wired drill pipe that can transmit data at up to 58,000 bits per second compared to the 5 to 15 bits per second for standard mud pulse telemetry. Since our initial commercialization, we have significantly improved connection reliability, lowered costs, and built a portfolio of advanced sensors and tools that harness the capabilities of real-time broadband data transmission. Additionally, we've invested in a software stack to aggregate, visualize, and contextualize data to drive more value for our customers through better analytics, decision-making, and automation. During the third quarter, our downhole broadband solutions team helped the customer drill an important exploration well in the North Sea. Our wired drill pipe technologies enabled advanced geosteering for ultra-long horizontal sections at unprecedented speeds, reaching up to 200 meters per hour and precision, accessing significantly more reservoir than the customer previously thought possible. The operator stated that a typical exploration well might intersect a few hundred meters of reservoir, but we helped our customer drill a multilateral multi-target exploration well that exceeded 20 kilometers of reservoir exposure. This complex well drilled with leading-edge technology cost a bit more than a conventional exploration well, but it accessed a very large multiple of the amount of reservoir a conventional well would have encountered. Additionally, with the quality and quantity of data collected, we helped the customer meaningfully reduce uncertainty and accelerate their timeline from discovery to development. Lastly, I want to highlight the success we're having with drilling automation. Our NOVOS drilling automation system was designed to automate repetitive drilling activities and, more importantly, to serve as a platform that would allow multi-machine control and rig floor automation. Leveraging this platform, we developed our ATOM RTX robotic system, which we commercialized in January 2024 on a rig working for an IOC in Canada. Our ATOM RTX system completely automates the vast majority of operations without human intervention on the rig floor, significantly improving safety and drilling performance while providing high levels of consistency. We now have a total of six operational robotics packages, three on land and three offshore, and the IOC using our robotic system in Canada recently shared with us that the automated rig is their best performing rig in the region. We're hearing more and more of our customers describe our robotic system as the next top drive for the industry, which, by the way, was another revolutionary technology that NOV pioneered for the industry. Excitingly, the backlog for our ATOM RTX system is growing at a healthy clip. NOV's technology and market leadership and business diversity drive operational and financial resilience. This resilience enhances our ability to leverage our core competencies and invest through cycles to further advance our competitive advantage. But none of this would be possible without our fantastic people. NOV will play a key role in the emergence of international unconventional resource development and the coming growth of deepwater production. Our technologies from downhole tools to advanced digital solutions are developed through intensive collaboration among multidisciplinary teams and close engagement with our customers to improve the efficiencies and lower the marginal cost of energy production. Few organizations outside NOV possess the breadth of capabilities required to commercialize solutions of this complexity. The people of NOV continuously demonstrate a remarkable ability to design, manufacture, and service essential technologies for our clients. Every member of NOV plays an important role in putting customers first and making NOV better every day. And I'd like to thank our team for their dedication and their unwavering focus. With that, we'll open the call to questions.

[Operator Instructions] The first question today will be coming from the line of Jim Rollyson of Raymond James.

Nice results, with great bookings and a strong ending backlog. Clay, it seems like we might experience some slowness before realizing the positive vision you have for the future, given the record backlog. Regarding your energy equipment business, you've shown solid year-on-year growth in capital equipment this year, while aftermarket has somewhat hindered performance. Considering your backlog and its timing, do you think you can maintain steady year-over-year growth through 2026, even with a potentially softer market in the near term?

Yes, I believe that will certainly be beneficial. However, we are concerned about the overall softness in the market. Everyone in the oilfield is apprehensive about the excess OPEC barrels and the potential impact on commodity prices. This may lead to cautious spending, particularly on quicker turn items such as aftermarket and spare parts. So far, we have seen good performance in the capital equipment sector, driven largely by production-related equipment, which has increased its share of our segment revenues from under 20% to over 30%. This category has dominated our orders, with around 80% of our recent orders focused on production. Drillers remain very cautious with capital expenditures, but demand for production equipment is a significant driver. Looking ahead to 2026, we anticipate a recovery in deepwater activity later in the year, a sentiment echoed by both offshore drillers and international oil companies. Nevertheless, we expect this year's results to be moderated by a continued slowdown in activity in North America and elsewhere. However, as you mentioned, once we move into late 2026 and 2027, after addressing the additional OPEC barrels hitting the market, we believe the market for NOV is setting up for much stronger prospects.

Absolutely. And as a follow-up, just maybe sticking with EE. The other issue you've had this year is probably not what we thought nine, 12 months ago, but margins have actually been pretty strong there and kind of bounced around this 13-something to 14-plus percent. And I'm curious, as you look into '26, just on the mix of capital equipment versus aftermarket, the types of stuff like more production-related equipment, how do you think about the margin profile? Like is kind of '25 margin profile something we could see again in '26 when you throw in the tariffs and then the cost offsets that you're also doing?

Jim, this is Jose. I'll begin with this. We need to see how everything develops throughout the year. Clay provided a good overview of our expectations for 2026, but the timing always proves challenging. As you noted, we've experienced steady improvement in our backlog’s overall quantity, along with better mix, pricing, and margins. I'm confident about our capital equipment positioning heading into 2026. The key variable will be related to book and turn items, but the aftermarket segment is the more significant driver. As we sit here today, we're pleased with how that is shaping up. Rodney also mentioned in his opening comments that the outlook for recontracting much of the offshore fleet is increasingly positive. It's important to remember that once contracts are signed, there’s usually a nine to twelve-month wait before they start to activate. Once those contracts are in place, companies often reach out to us for extra spare parts to prepare their rigs for work and for potential upgrades. So, while the setup looks promising, the timing remains uncertain and will depend on how the year unfolds. Nevertheless, as Clay highlighted, we're particularly excited about the prospects for 2027. We've discussed how different cycles in our business components intersect, which can lead to a significant rise in earnings. Over the past few years, we started with North America, saw a decline, followed by a reactivation cycle in offshore rig drilling, which then tapered off. However, there's now a resurgence in offshore production-related equipment, which is currently a strong point in our portfolio. Towards the end of 2026 and into 2027, we expect to see these cycles align more closely, especially in the offshore sector. We also anticipate continued strong activity in international shale and believe North America will need to ramp up efforts to maintain steady production, if not increase slightly. I apologize for the lengthy explanation, but I genuinely believe NOV's outlook is very positive for the next couple of years.

Lisa, do we have another question? Lisa, are you there? Operator. Hello, operator? Hey, Marc, you on the line?

I wasn't hearing anything on my end either. I guess you had a really strong quarter of orders in Energy Equipment. How are you thinking about fourth quarter and beyond? Can we see clicking along at a book-to-bill of one or better from here on? Or what's the general outlook?

Marc, what I'd tell you is that orders here are always lumpy. We're always very hesitant to give too much guidance because a lot depends on some large orders. Going into the fourth quarter so far, we've got line of sight on a couple of large interesting orders. One, we feel pretty good about, another may be a longer bet. What I'd tell you is that kind of given the caution, I think, that's out there, my expectation is for the fourth quarter, orders probably will slip a little bit below 100% book-to-bill right now. But if we do land that second order, I think that may help put us over 100% book-to-bill. But my best guess right now is probably just a tad short. But I'll stress again, we've had four years of great orders. I think our backlog is up 40-something percent, 43% since 2020 and over 100% book-to-bill trailing 12 months. And obviously, Q3 is very strong at 141% book-to-bill. So we don't get too worried about one particular quarter. What's more important is the longer-term trend, and the longer-term trend for NOV for the past few years has been very solid.

Yes, it has. My other question was regarding the $65 million of other items, where there were mentions of write-downs of long-lived assets and inventory. Could you clarify how much of that was related to inventory? Additionally, how much did that contribute to margin in the third quarter, if at all? And what is the anticipated benefit moving forward?

Yes. Thanks, Marc. Our other items were really an output, as we mentioned in our last quarter earnings call, that we're going through some detailed business process reviews. We're looking at product lines, sub-product lines, business units, and facilities for high-return opportunities under a return lens. And as we've continued to go through that process over the last 90 days, we have had some facility consolidations, facility closures, and some exiting of certain sub-product lines, which, to your point, the output was some inventory charges that those inventory charges don't have any impact on margins going forward. That inventory is scrapped and does not have any margin impact going forward.

Our next question comes from the line of Arun Jayaram of JPMorgan.

Clay and team, I was wondering if you could maybe elaborate a little bit about the build-out of unconventionals that you're seeing. You mentioned Argentina, the UAE, and Saudi. Maybe you could talk a little bit about what you're seeing there. I think you highlighted increased coiled tubing and wireline types of orders, but talk about the early build-out there and perhaps other countries or regions where you're seeing unconventionals gain share.

Yes. Let me talk about that, and then I'll hand it over to Jose to talk about our demand for intervention and stimulation equipment. What I'd tell you that's most interesting to us is you've got very well-known programs in Saudi Arabia with the Jafurah field, with Vaca Muerta in Argentina, and unconventional fuels in the UAE that are being prosecuted in earnest by the oil companies that control those that are moving forward. But what's interesting to me is a number of really successful North American shale entrepreneurs now that are prospecting and looking for kind of the next basin to move to. And so there are, I think, a wave of unconventional prospecting underway in places like Algeria, Turkey, Oman, Bahrain, and Australia. And so these are really interesting technologies or transformative technologies. They have the potential to catalyze new low marginal cost sources of production. And so we're pretty excited about what that means for NOV in the future.

Yes. And Arun, just to pick up on that. So yes, there's a broad spectrum of effectively NOCs in countries that are at different stages of their development. As Clay touched on Argentina and Saudi are sort of at the more mature end of the spectrum. And then you have folks like Pakistan and Turkey that are really just starting to get started, and everybody else is somewhere in between. And this is an exciting backdrop for NOV and all of these markets tend to start in a pretty similar way. In some of these less mature, very early-stage markets, we're seeing a big pickup in demand for our coring services. As you might imagine, as people try to delineate the boundaries of what these unconventional plays look like, then you typically translate from that type of work to a little bit of probing the formations, but that quickly, assuming everything goes according to plan, that quickly moves to realizing that a lot of investment is necessary in order to make things go, and that translates into investments in infrastructure, which has been driving a lot of demand for businesses like our fiberglass business with a lot of build out of flexible pipe and rigid pipe as well to transport fluids and gas to and from locations. Also things such as chokes, manifolds, things of that nature also get gone. And that as it relates to once things get a little bit more mature, that's when we start to see a big pickup in demand for effectively more traditional service equipment, whether it's drilling equipment or intervention and stimulation-related equipment. I guess what I'll say related to intervention and stimulation equipment business in general is, obviously, that's been a pretty tough business for us over the last couple of years. Historically, that was a very much a North American-centric business. Obviously, there hasn't been a lot of demand here over the last couple of years. But what we have seen here really over the last year is steadily increasing demand from our intervention and stimulation equipment business entirely related to demand from overseas unconventionals, particularly for large diameter coiled tubing units, new wireline equipment, all the things that are really necessary in order to enter into development mode from an unconventional standpoint. And so to put things in perspective, we had a greater than slightly greater than 150% book-to-bill this quarter. But really for the last four quarters, we've seen a steadily improving book-to-bill in that business. And while we're still down quite a bit from where we were over a trailing 12-month period, we're now back to being over 100% book-to-bill for that business. So things definitely heading in the right direction and see a lot more opportunities to come.

Yes. Great. My follow-up is just wondering if you could just discuss what you're seeing in terms of FPSOs, maybe provide a context of how many FIDs did you see in 2025 and maybe thoughts on how that could progress in '26 and '27 because typically, that could include chunkier types of awards for NOV.

Yes. We've all been impacted by the oversupply situation from OPEC, which has created some caution. Consequently, as we move into 2024 and 2025, the estimates for Final Investment Decisions and the number of Floating Production Storage and Offloading units to be ordered have decreased somewhat. So far this year, three have been awarded, and there may be a few more by year-end. However, we are optimistic about late 2026 and 2027 when we expect the oil oversupply to be resolved, leading to a more promising outlook and an increase in demand.

Our next question comes from the line of Stephen Gengaro of Stifel.

I think my first question, I think it was about a year ago. It may have been a little longer, but you had talked about sort of better-priced backlog that was sort of primed to start flowing through the income statement, and we've seen some of that. And I'm just curious if you could talk a little bit about the current backlog, recent orders, and how we should think about the margin impact at a high level in '26 and maybe beyond?

Yes. So good point there, Stephen. So as you mentioned, really throughout '25, we've seen a couple of different cross currents in particular for the EE business. One, as Clay mentioned, a significant number of our bookings throughout the year have been in the offshore production space. As we have strong technological advantages there, high barriers to entry, our margin profile is able to continue to increase in addition to good operational efficiencies over the last 12 months in some of the offshore production area, which has really driven revenue and margins up in that particular area. Offsetting some of that has been a decline in some of our aftermarket business. So we mentioned during the quarter, sort of a high teens decline in our aftermarket business, and that sort of spans across the full portfolio, principally in the drilling space. I think as Jose mentioned on the question earlier, as we look into 2026, we're still able to have strong margins on what we're quoting in our offshore production equipment. And also the team is working diligently to continue to improve operational efficiencies. So that sort of strong backlog heading into '26 should be positive on the margin side. And then part of the other equation is sort of timing of when some of the rig aftermarket, some of the offshore piece happens. And we mentioned that's probably more in the second half of '26 than in the first half. So put those pieces together and put a glimpse into some of the 2026 margins.

Stephen, Rodney said it well. I'm going to add to what he went through, the fact that I think our processes and our controls around the risks of signing new contracts in terms of very thoughtfully going through how we're going to execute, how we can improve our operations, how we can make sure that the scope that we're taking on is clear and we're the right company to handle that scope, the payment terms, all of the above. I think the quality of the backlog is as high as it's ever been today. And so that's why you've seen margins continue to walk up there in energy equipment, and that's strong clear contract provisions with our customers and then just an outstanding team executing these contracts after we win them is a great combination.

Great. And my second question is more high level, and we've all been doing this a long time. And when we start hearing about U.S. production plateauing. We've been hearing that sort of theme from a couple of companies and that activity is not high enough to sustain production. Do you guys see that? And do you think that is a critical sign towards maybe getting a stabilization and ultimately recovery in U.S. land?

Yes, I want to be clear that I've been wrong about this in the past, so I'm reluctant to definitively say U.S. production has peaked. However, it is increasingly evident that growth is slowing compared to what it once was. In 2023, U.S. production increased by nearly 1 million barrels a day, but the EIA is now predicting that growth will be zero by 2026, following a steady decline. Activity levels are decreasing. While we haven't seen the significant production declines some have anticipated, this is largely due to the high efficiency with which current operations are being conducted, including longer laterals and improved completion techniques. Nonetheless, it’s becoming more apparent to many in the industry that U.S. shale, especially North American shale, is approaching a decline, as key Tier 1 locations are being depleted. This raises questions about practices like drilling horseshoe-shaped wells or considering refracs. It also leads to exploration in places like Turkey and Algeria. All these factors indicate a shift in industry behavior. The data shows that U.S. shale has been a remarkable player in the oil market, contributing significantly since 2008 with a capital investment of $1 trillion and providing a lot of oil and gas for the world. However, I think we are starting to see this basin start to decline, following the historical patterns of other basins in the oil and gas sector, and I believe it is inevitable that this technology will eventually be applied in other global basins.

Our next question comes from the line of Doug Becker of Capital One.

So EBITDA to free cash flow conversion was 95%, even with a bit of an increase in CapEx sequentially. And so it seems like some of the structural changes in working capital management are having an effect. So I wanted to get some color on what's the outlook for CapEx and free cash flow in the fourth quarter. But more importantly, just do these structural changes put a little bit more of an upside bias to free cash flow conversion as we think in 2026 and 2027.

Yes. Thanks, Doug. This is Rodney. I appreciate the highlight of the team's effort on free cash flow conversion for the quarter, 95% and as we mentioned, 53% on a year-to-date basis. So strong performance there. And that's been predicated on a couple of different points. One, strong project execution, as Clay mentioned earlier, good contractual terms, good collections. So when you look at things from a DSO perspective, overall AR, contract assets, liabilities, we've seen some good improvement there. And over the last 12 months, some good improvement on the inventory and inventory turn side of things. So that's led to where we are at right now. And working capital as a percentage of revenue for the quarter, just a touch under 28%, 27.9%. Just a couple of pieces of commentary to help on Q4. I think that working capital percent may just get a touch better, so call that in that sort of 27% to 28% range. And really, on kind of flat revenue Q3 to Q4, working capital may improve just a touch. As you mentioned, our CapEx is up just a bit year-on-year as we've had some good organic opportunities on high-return investments. So that continues to sort of flow through during Q4. And overall, feel good about 2025 sort of being in that ballpark of 55% free cash flow conversion. As we look out into '26, still early as we look at our budgets and composition of the different revenue streams. But with some of the structural improvement that we've made in working capital, I think that sort of ballpark of about 50% conversion is sustainable in the future.

Got it. Clay, I appreciate your reluctance to discuss future orders in detail due to their variability. However, there has been a lot of positive feedback regarding the intermediate-term outlook. If we anticipate a resurgence in offshore drilling around late 2026 or early 2027, could that signify a time when we start to see the book-to-bill ratio consistently above 1? Is that a reasonable perspective?

Yes. I think it is, Doug. I think that will be additive to the demand we’re seeing for production equipment. And honestly, right now, within energy equipment, it's the demand for offshore drilling equipment that's really missing. And I think that comes back in late 2026, that will be additive. And I think that's a good thing for us. I also think, again, I can't say too many times, the clearing of OPEC overhang and a more constructive commodity price outlook, I think that will help in all categories of equipment demand.

I would now like to turn the conference back to Clay Williams for closing remarks. Sir?

Thank you, operator, and thank you all for joining us this morning. The company looks forward to discussing its fourth quarter results with you in February. Operator, you may close the call.

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