Earnings Call Transcript - NOV Q3 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Third Quarter 2020 Earnings Conference Call. I would like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Blake McCarthy, Vice President of Corporate Development and Investor Relations

Welcome, everyone, to National Oilwell Varco's Third Quarter 2020 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 start, I want to remind you that some of today's comments are forward-looking statements under federal securities laws. These statements involve risks and uncertainties, and actual results may differ significantly. You should not assume these forward-looking statements will remain valid later in the quarter or year. For a detailed discussion of the key 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 will also include non-GAAP measures, with reconciliations to the nearest corresponding GAAP measures in our earnings release available on our website. For the third quarter of 2020, on a U.S. GAAP basis, NOV reported revenues of $1.38 billion and a net loss of $55 million. When we use the term EBITDA in this morning's call, we mean adjusted EBITDA as defined in our earnings release. Later in the call, we will have a question-and-answer session. Now let me turn the call over to Clay.

Clay Williams, Chairman, President and CEO

Thank you, Blake. U.S. drilling activity during the third quarter of 2020 was the lowest measured since records were started in the early 1940s, making this the worst quarter in the past 300 or so. The COVID-19 pandemic response kept a lid on air travel and business activity, which depressed global oil demand, and in turn, diminished demand for NOV's products and services. NOV's consolidated revenue declined 7% sequentially, and EBITDA fell to $71 million or 5.1% of sales during the quarter ended September 30, 2020. Although a vaccine and normalizing oil demand seem more likely than not in 2021, our customers, like us, are cutting costs and exercising extreme austerity in the near term, which led to modest orders during the third quarter. The company realized only 38% book-to-bill on a consolidated basis. Fortunately, though, we are seeing rising inquiries in our Completion & Production Solutions segment that we expect to lead to increased orders. And the Rig Technology segment already surpassed its total Q3 orders level during the first few weeks of October. New products are helping drive demand for both segments. For the past few quarters, we sought to be clear and transparent in our communications with you on what we are doing to navigate this historic downturn, namely: one, aggressively and proactively downsizing and reducing costs; two, reducing working capital and CapEx to maximize cash flows; three, maximizing liquidity; and four, continuing to invest in research and development and new products to position the company for the inevitable upturn. I'm pleased to report that we continue to exceed our targets on cost reductions. We have reduced our global facility footprint, workforce and support services, making our operations leaner and more efficient. We also continue to prune businesses that are not yielding adequate returns. We've shared a lot of data around these costs and cash flow efforts with you on past calls. On the other hand, we've talked far less about our new product investments, which we've been careful to sustain because they will form the foundation of NOV's growth going forward. At our core, what NOV does is build franchises that possess sustainable competitive advantage. Market leadership frequently lends scale advantages, a status NOV enjoys. However, market leadership also carries the responsibility of technical leadership. Our customers expect us to push the envelope on technical innovation to improve efficiencies and cash flows for their operations. Knowing this, we have sustained our investment in new technology through the downturn. And I'd like to tell you about a few new technologies we are bringing to market. Hydraulic fracture stimulation is a critical part of unconventional shale production. The shale revolution is built on fracking. The industry has been experimenting with the use of lease gas to power fleets with electricity to reduce gas flaring, carbon emissions, fleet maintenance costs and diesel expenses, which can run well over $1 million per month. Generating power on-site to run electric motors that, in turn, drive pumps instead of conventional direct drive diesel engines and transmissions can reduce mechanical complexity and maintenance costs. We've already seen this work in the drilling space, driving the evolution of drilling rigs towards AC electrification between 2005 and 2015. Throughout that period, the largest best-capitalized drilling contractors at the behest of their customers, the E&P companies, embraced this AC electrification improvement and invested in new rigs. Then something really interesting happened. They looked around when it was done, and from their space reasonably well consolidated. That's because only a handful of smart drillers could afford the price of admission to this new AC rig world, but those that made the leap clearly benefited. If you don't believe me, take a close look at Tier 1 land rig day rates between 2015 and 2019. Despite the downturn, day rates remained very healthy, strong evidence of an improved industry structure. I cite this example because much has been said of the need to roll up the pressure pumping sector across North America shale through aggressive M&A to drive consolidation. In my view, there is another capital-efficient way to drive consolidation, and that is through technology disruption. We hear from E&Ps that they increasingly prefer electric frac to conventional fracturing for environmental, safety and cost reasons. A few years ago, our Completion & Production Solutions segment began work on our ideal e-frac suite to capitalize on this market opportunity, and we brought it to market a few weeks ago. It offers reduced emissions and fuel costs for the operator and lowers total cost of ownership relative to conventional fleets by up to 40% for the pressure pumper. It does this through two means. First, it is designed to have fewer electrical connections in the industry, a feature that significantly reduces the need for highly skilled electrical labor at the well site, reduces overall wellsite congestion and safety risk, and reduces cable expenditures. Second, the ideal system is designed with significantly higher power density than its market competition. It is the only offering today with a 5,000 horsepower pump designed to fit hand in glove with the best-in-class turbine offerings, resulting in a smaller footprint and lower engine and transmission expenditures. Additionally, this is transported in 40% fewer truckloads and rigs up faster, particularly with our FracMaxx, big bore QuickLatch system and FlexConnect frac hose. It requires a smaller footprint and fewer people on site to operate. Engineered for 13.8 kV, it can accept either turbine or gas genset power, both utilizing lease gas and minimizing flaring or work offline power. It's truly power agnostic. Most importantly, though, is the reduction in total cost of ownership by up to 40% with further improvements expected from its integrated, condition-based monitoring, which will work with the predictive analytics we are actively developing. We know pressure pumpers have limited access to capital, but we also know shale producers are anxious to become more ESG friendly. A shale producer willing to sign a term contract with a pressure pumper, perhaps as short as only 2 years, could drive our first purchase order for a fleet. In the meantime, we've executed an agreement with a major U.S. pressure pumping service provider to test one of our new ideal e-frac pumpers in the field, and we expect to be testing our blender and support equipment soon as well. Additionally, we are hearing of some clever entrepreneurs exploring opportunities in the power generation side of the emerging e-frac opportunity. Stay tuned. Within our Rig Technology segment, we've discussed our growing installed base of NOVOS operating systems across both land and offshore rigs, with 72 rigs running at this morning. Operators love it for the drilling optimization algorithms it provides, but we believe they will love it even more soon. That's because we expect to commercially introduce a new robotic pipe handling system for land rigs in 2021, one that operates seamlessly within the NOVOS digital environment. We believe the growing NOVOS installed base is the digital foundation for the industry's leap forward to automate drilling. In North America, it used to be that Tier 1 rigs required greater setback, higher top drives, high-pressure mud systems and walking capability. Now the new definition of Tier 1 rigs also includes digital rig enhancements like NOVOS, SoftSpeed and KAIZEN, which are driving further efficiency and safety improvements through artificial intelligence and machine learning. Fully automated slips to slips drilling has been a vision shared by many for decades. The possibility of removing humans from the well center greatly reduces safety risk and frees up rig crews to focus on higher value-added activities. Drilling automation can raise the performance standards of experienced drilling crews by permitting them to focus on the big picture rather than on repetitive manual tasks. But here's the kicker. Our new robotic pipe handling system is very affordable. It's easily retrofittable into existing land rigs. We understand that capital is limited for drilling contractors these days, but we also know that E&P operators would strongly prefer a rig that can push-button trip, enabling the retrofit of the contractors' existing fleet at a very affordable price is a fantastic opportunity that we think will attract a lot of attention among oil companies. Rig Technologies is also seeing growing interest in its new PowerBlade power management system, which cuts diesel consumption and CO2 emissions on offshore floaters. Even though we've just introduced this new technology, our first customer in the North Sea is already looking at upgrading additional rigs to improve their competitiveness on ESG metrics in a crowded marketplace. Let me turn now to our Wellbore Technologies segment and speak to some real-world challenges our customers face as we all hurdle toward a digital utopia you've all been hearing so much about. Wells are drilled and completed and sometimes recompleted and then recompleted again, producing data for decades from many vendors and many sources. The data they generate is subject to limited or no data quality checks, is produced in multiple protocols with no standards around format. Consequently, oil and gas producers spend a significant amount of time and money cleaning, aggregating, formatting, translating and contextualizing data before any actual analysis happens. Furthermore, solutions reliant on cloud connections introduce lag problems and issues arise when remote communications are broken. And guess what, the oilfield operates in the remotest of locations; they often lack basic connectivity. Needless to say, these real-world complexities get in the way of easy real-time decision-making. Individual E&P operators who roll up their sleeves and try to develop their own solutions to these problems frequently lack sufficient expertise and scale because deployment is limited to their own operations and the cost of maintenance and upkeep is hard to justify for all but the largest operators. Plus you have this whole technological obsolescence thing. Enter Wellbore's new max suite of edge and cloud technology, which we've been quietly developing for the past 3 years. We are going to the field next month for testing and expect to be commercial in 2021. Our value proposition is simple, enable our customers to use their own data and run their own businesses with a uniform version of the truth, both in office and in the field. NOV Max, NOV's new digital ecosystem, enables them to capture, aggregate, visualize and analyze their data in real-time at high speed on the edge in their cloud or in our cloud, in their office and at the well site, one version of the truth, both at the office and the well site in real-time. Like a Bloomberg screen, our vision is to collect disparate data streams and then put them on a single screen, synced up and formatted and contextualized for easy use by the owner of the data. We are taking Max to market through Wellbore Technologies' 80-year-old MD Totco division, the leading provider of rig instrumentation services with global 24/7 support and boots on the ground throughout the oilfield. MD Totco makes sensors, both surface and downhole, which helps avoid garbage in, garbage out problems and data generation. NOV Max gathers and translates that data and can run customer-owned NOV or third-party analytics or applications at the well site or remotely while others require a middleman, NOV provides all services and solutions sensor to screen, meaning we don't just connect to the data, we build the equipment that provides the data with the largest installed base of equipment in the industry; NOV products were most likely already at the well site and in place to gather data. As the market leader in control systems, we speak machine language and can affect automation at the well site, a primary means by which customers can drive economic benefit from their data. Max is built on a new technology stack that lives at the edge, out in the field where work is done. This edge technology has to be robust, secure, connected and manageable at incredible scale. Available technologies just didn't fit the bill. So we developed Max edge to include military-grade encryption and TLS secure communication, keeping data and analytics safe. The solution handles 31 inbound industrial calls, including support for 12 kilohertz waveform vibration data on critical channels and 15 industry standard outbound protocols, including AWS IoT, Azure IoT hub and Google IoT core. I'm proud of the NOV engineers, programmers and scientists who are introducing new, better, safer and more efficient ways of developing and producing oil and gas during the worst quarter in the industry for more than 75 years. I'm also proud that NOV continues to pursue opportunities in renewable energy, building our strong position in the offshore wind and geothermal energy space. I have said many times before that we view the transition to a carbon-free future as one of the greatest economic opportunities in human history. And I think capitalism will produce the solutions required. However, I want to stress two important points that guide our decisions with respect to resource allocation. The first is that we will remain true to our oil and gas customers. We will continue to bring them new and better technologies and support their operations despite the popular narrative that the world will soon abandon oil. We respectfully disagree and recognize that oil continues to lift people out of poverty and improve all our lives. There are currently more than 1 billion motor vehicles, 39,000 aircraft and billions of dollars of construction, mining and agricultural equipment around the world, representing tens of trillions in capital investment. It all becomes worthless overnight without hydrocarbons. While renewable sources of energy will certainly grow in the mix of the energy pie at the end of the day, oil and natural gas continues to be the fuels that power the world. The second point I want to make is that all of our investments in new products and technologies, both traditional oil and gas as well as renewables, are constrained by responsibility to be good capital stewards. We only aim at markets where we believe we can carve out a clear, sustainable competitive advantage. In the long run, fundamentals always prevail. When this crazy year passes and the economic shutdown fades, the world is going to need a lot more oil and gas, and the world will need this industry to get back to work. NOV is going to be there, leaner and meaner than we've ever been to make sure it has what it needs to do so efficiently and safely. The dedicated creative service-minded NOV employees, for whom we are so very grateful, will prove once again why they are the best in the world. With that, let me turn it over to Jose.

Jose Bayardo, Senior Vice President and CFO

Thank you, Clay. NOV's consolidated revenue decreased $112 million or 7% sequentially to $1.38 billion as our businesses felt the full effect of the sharp reductions in North American drilling activity that occurred during Q2 and the continued activity declines in most international markets. EBITDA decreased only $13 million as our relentless focus on reducing structural costs and improving operational efficiencies across the organization limited decremental margins to only 12%. During the quarter, we exceeded our $700 million annualized cost savings target. While we've surpassed our goal, we have a number of cost reduction initiatives that will carry into the next few quarters, and we will continue to work to identify additional ways in which we can improve profitability and return on capital for NOV. Our efforts to improve our working capital efficiencies, while we are making great strides in a difficult environment, are part of our ongoing efforts to improve return on capital. Our success in reducing working capital, along with our capital-light business model, is allowing us to deliver best-in-class cash flow generation. During the quarter, we delivered another $323 million in cash flow from operations and $274 million in free cash flow, bringing our year-to-date cash flow from operations and free cash flow totals to $740 million and $567 million, respectively. We expect to generate an additional $100 million to $200 million in free cash flow during the fourth quarter. Our resilient cash flows have enabled us to continue to strengthen our balance sheet while making meaningful investments in new product development and growth initiatives that will drive future growth for NOV, including the offerings that Clay just described. During the third quarter, we successfully completed a tender for $217 million of our senior notes due December 2022, leaving us with only $183 million remaining outstanding on these notes, which we expect to pay off with our cash on hand prior to the maturity date. Our next maturity does not occur until December of 2029. At September 30, our net debt totaled $339 million, with $1.485 billion in cash and $1.824 billion in debt. Moving to results from operations and outlook. Our Wellbore Technologies segment generated $361 million of revenue during the third quarter, a decrease of $81 million or 18% sequentially. The decline in revenue was in line with the sequential decrease in global drilling activity and reflected a full quarter impact of the sharp reductions in North American drilling activity and continued declines in international markets. Revenue declined 28% in North America and 12% in international markets, both in line with drilling activity levels. Continued progress on cost savings initiatives partially offset the impact of lower volumes and pricing pressures, limiting decremental margins to 26%. Our ReedHycalog drill business realized a 10% sequential decrease in revenue but achieved a modest improvement in EBITDA due to cost savings and improved product mix. U.S. revenues declined 26%, meaningfully outperforming the sequential decline in U.S. drilling activity levels, a result of industry-leading technology that is allowing the business to capture market share and help customers set drilling records. COVID-19 disruptions continued to hamper activity and caused project delays in international markets, particularly in the Middle East and Africa. More recently, we're seeing countries in Latin America and Africa emerge from lockdowns, activity levels in the Middle East stabilize and North American rig counts increase off the trough established during Q2, giving us some optimism that we will realize modestly improved results for the business in the fourth quarter. Revenues in our downhole business unit fell sharply during Q3 as customers halted orders for drilling tools while they worked down existing inventories to levels better aligned with projected drilling activity. As activity begins to stabilize in international markets and improve in North America, we expect the destocking of these consumable products will be completed in relatively short order, resulting in a stabilization of this business unit's results in the fourth quarter. Our Grant Prideco drill pipe business also experienced a sharp decrease in revenues, a result of two straight quarters of limited order intake. A higher mix of larger diameter pipe deliveries and cost savings initiatives helped to limit decremental EBITDA margins. It will take time to alleviate the overhang of drill pipe from recently stacked rigs around the globe. However, we believe the tightening supply of drill pipe that we saw as recently as January of this year will shorten the time frame typically required to reestablish market equilibrium. While we are likely still a few quarters away from a strong inflection in demand, we are beginning to see pandemic-delayed international projects resume, additional opportunities for drill pipe risers emerge and drill pipe brokers and rental companies in the U.S. reengage, resulting in orders booked so far in Q4 already equaling half our Q3 total. Our Tuboscope business experienced a revenue decline of approximately 20%. The unit's U.S. and Eastern Hemisphere operations experienced particularly sharp declines in revenue as the falloff in oilfield activity and COVID-19-related shutdowns resulted in customers having more than ample quantities of finished tubulars in their possession to carry them through the quarter. With slowly improving activity levels in North America and fewer pandemic-related restrictions, we expect our Tuboscope operations will realize slight improvement in the fourth quarter. Our MD Totco business unit saw a 14% sequential decrease in revenue due to the continued activity declines in North America and the Eastern Hemisphere, which were only partially offset by improvements in Latin America. Our KAIZEN intelligent drilling optimizer, which employs artificial intelligence to help mitigate drilling dysfunction and improve performance, continues to be adopted by key customers in the North American market and now has two technical trials with large NOCs scheduled for this quarter. As Clay mentioned, MD Totco's technology portfolio is rapidly evolving, and we expect to see significant market penetration by several of these products in the near future. Our WellSite Services business unit experienced a high single-digit sequential revenue decline in the third quarter. Increased activity in the Gulf of Mexico, Trinidad and the North Sea, along with increased screen sales in the Middle East, partially offset sharp declines in Africa and the North American land market. More recently, this business unit has nabbed some sizable wins in international markets including an order for 60 Brandt shakers to upgrade 15 jackup rigs in Asia and a contract for our proprietary hot oil thermal desorption equipment to treat drilling waste in Guyana. These awards, along with improving activity levels in North America, should result in improved results during the fourth quarter. As we've said many times in the past, our Wellbore Technologies segment is the most sensitive to real-time changes in global drilling activity and also carries the highest operating leverage of our three segments. Its leadership team has moved swiftly to rightsize the organization and stabilize results in unprecedented market conditions. For the fourth quarter, we expect revenues for our Wellbore Technologies segment to improve 1% to 3% sequentially, with incremental margins in the 30% range. Our Completion & Production Solutions segment generated $601 million of revenue in the third quarter, a decrease of $10 million or 2% sequentially. Strong execution on international and offshore project backlogs mostly offset limited demand for our shorter-cycle products and aftermarket parts and services. EBITDA declined $5 million to $63 million or 10.5% of sales. Orders for the segment fell 14% to $169 million as the lockdowns and ongoing uncertainty associated with a pandemic caused customers to defer decisions on new projects. Encouragingly, we have seen a sharp increase in activity around pre-FEED studies and general tendering activity in the last few weeks. We are cautiously optimistic that order intake bottomed in Q3 and believe the actions we are seeing bode well for more meaningful improvements in 2021. Our Fiber Glass Systems business unit achieved a small sequential increase in revenue. Sizable deliveries of large diameter, high-pressure pipe in the Middle East and continued solid performance from our fuel handling business more than offset lower revenue from our marine customers who are postponing deliveries of scrubber systems. The global pandemic has caused an unexpected glut of middle distillates, usually processed into jet fuel to be used in the production of inexpensive, very low-sulfur fuel oil, making marine scrubbing systems an uneconomic investment for our customers until the historical price spread between very low sulfur and high-sulfur fuel oil returns. New orders from our Fiber Glass Systems business have not been sufficient to offset large recent shipments, leading us to expect a sequential falloff in Q4 revenues. Our Process and Flow Technologies business unit posted a 10% sequential increase in revenue due to strong project execution on offshore production-related backlog and due to the easing of COVID-19-related lockdowns, which allowed our production and midstream operations to deliver delayed shipments of reciprocating pumps and chokes into Latin America, the Middle East and Africa. While orders for our Process and Flow Technologies business remained soft in Q3, a still-solid backlog in the unit's APL turret mooring and Wellstream Processing operations should allow for additional growth in Q4. More importantly, pre-FEED studies and tendering activity have picked up, particularly for our APL operation. We believe our customers are preparing to get back to work on large projects in 2021 and expect orders to start to pick up modestly to support their plans. Our Subsea flexible pipe and XL Systems businesses each experienced sequential revenue declines as three straight quarters of customers pushing orders to the right began to affect operating results. We expect both businesses to see additional revenue declines in the fourth quarter, but tendering activity has improved modestly, giving us some optimism that bookings could improve in Q4. Our Intervention & Stimulation Equipment business saw a 9% sequential decline in revenue. Despite the uptick in North American and completion-related activity, the market remains sufficiently oversupplied, which has resulted in limited demand for new equipment and customers deferring the purchase of new spare parts by cannibalizing idle assets. As expected, sales of most consumables took another step down in Q3. However, we continue to realize increasing market adoption of our FlexConnect frac hose and demand from new coiled tubing strings improved more than 50% from the record low we experienced in Q2. More recently, we've seen a pickup in demand for coiled tubing equipment aftermarket service and repair work. And we continue to engage in a growing number of discussions with international customers regarding pressure pumping, coiled tubing and wireline equipment, driven by increasing demand from multistage fracture stimulation services in markets outside North America. For the fourth quarter of 2020, we anticipate revenue from our Completion & Production Solutions segment will decline 6% to 8%, with EBITDA margins decreasing between 200 and 400 basis points as a result of less favorable revenue mix and increasing pricing pressures. Our Rig Technologies segment generated revenues of $449 million in the third quarter, a decrease of $27 million or 6% sequentially. Third quarter revenues reflect a mid-single-digit sequential decrease in revenue from capital equipment and a 3% sequential decline in the segment's aftermarket sales. The slowing rate of revenue declines provided better visibility into the impact of the segment's efforts to reduce costs and improve operational efficiencies we're having on results, with EBITDA improving $14 million to $28 million, or 6.2% of sales. Pandemic-related logistical challenges remain as the virus continues to pop up in clusters around the globe and governments react with shutdowns and travel restrictions, but we are learning to mitigate the extra cost and disruptions to our operations and are doing everything we can to support our customers where they need us. The impact of the economic turmoil caused by COVID-19 is perhaps most apparent in the segment's Q3 bookings; already burdened by stretched balance sheets, several of our larger offshore customers made the difficult decision to enter the restructuring process during the quarter, which put a stop to new orders. Drilling contractors, in general, are doing all they can to preserve cash in this difficult market and have reduced spending accordingly. Segment realized a 23% sequential decline in capital equipment bookings, resulting in $57 million of orders and a book-to-bill of only 29%. Despite the tremendous stress our customers are under and the amount of idle drilling equipment that exists around the world today, we continue to believe that our industry-leading franchise is attractively positioned for the future as operators continue to demand the use of better technologies to drive efficiencies in their drilling operations. Even as we sit here today in an environment with record low drilling activity levels and only 6 months removed from negative oil prices, we're having dialogue with multiple customers around the world who still want to upgrade the capabilities of their drilling equipment. We still see demand for new high-spec land drilling rigs in the Middle East and in Latin America. We've had steady demand from new top drives in multiple markets in Asia, and we've recently booked orders from a U.S. drilling contractor to upgrade several of its stand transfer vehicles, iron roughnecks and top drives. This need to continuously upgrade capabilities also exists in offshore markets. Operators are demanding the latest technologies as they look to reduce their environmental footprint; think of our PowerBlade Systems. And as they seek bigger prizes found in more challenging environments, think NOV's 20,000 psi BOP stack, which recently won the World Oils award for best drilling technology. Even with the unprecedented market challenges our offshore customers are facing, they're still talking to us about major upgrades for rigs that will be reactivated in the not-too-distant future. Additionally, the segment's renewable business is beginning to see more wind turbine installation vessel projects come to fruition. As a reminder, we expect approximately a dozen of these vessels will be ordered over the next couple of years, and we remain confident in our ability to win our fair share of the project awards. While a firm recovery in the market for our traditional capital equipment business remains ways off, we believe Q3 marked the bottom for orders. And based on discussions with customers, we currently expect to achieve a book-to-bill of around 100% for the segment during the fourth quarter. We also expect Rig Technologies financial results to improve slightly compared to Q3, with revenue increasing between 1% to 3% and incremental margins in the mid-20% range.

Operator, Operator

Our first question comes from Bill Herbert with Simmons.

Bill Herbert, Analyst

Jose, so just in the category of dreaming here a little bit and contemplating life kind of returning to a semblance of normalcy. So OPEC spare capacity normalizes back to kind of the historic range, our lives normalize, demand is much closer on a global basis to pre-pandemic levels and this converging with the austerity narrative of E&P leads to a reinvestment cycle and your clients taking more steps forwards and backwards. Let's just call this for grants at a 2022 outcome. And I'm just curious, given how much inventory you've drawn down over the past few quarters, what would be your working capital intensity responding to that kind of recovery narrative? And the reason I ask the question is that at least on my numbers, your free cash flow yields, call it on a semblance of mid-cycle, are just huge, assuming that working capital is reasonably contained. So I think kind of understanding the working capital intensity from this point forward is key.

Jose Bayardo, Senior Vice President and CFO

That's a great question, Bill. The organization has been focused on improving our capital efficiency, particularly by reducing our working capital intensity across the board. We have made good progress over the past year in lowering that intensity, but there is still more work to do. This last quarter, our working capital was around 36% to 38% of our revenue run rate, which is significantly higher than past levels, and we expect to reduce it further. We've faced challenges in lowering this level, especially given the difficult quarter we experienced, which was perhaps the toughest from a revenue perspective for the oilfield. Additionally, there is a significant shift happening with our revenue streams moving from North America to international markets. In the last quarter, only 26% of our revenue came from North America. In international markets, inventory tends to reside longer in our locations, and collection times are generally longer. However, we are improving our inventory management and expect our metrics to continue to progress positively over the next year or two. In summary, while a recovery typically leads to an increase in working capital, I don’t believe it will just maintain the current metrics; rather, the metrics will improve, helping us manage future working capital needs effectively.

Bill Herbert, Analyst

So it's not just kind of better management of working capital, but it's also the revenue mix shift to international, where the inventory is stickier and thus the headroom for growth that you have with regard to your international ops is much more generous? Is that fair?

Jose Bayardo, Senior Vice President and CFO

I guess what I'd say is that just we will get better than we have been. Historically, international has been more challenging from a working capital management standpoint. And there's more opportunity for us to improve those working capital metrics.

Clay Williams, Chairman, President and CEO

I think we need to focus on the payment terms we usually deal with internationally. To address your question, Bill, it’s important to emphasize that our team has significantly improved in this area. The experience they’ve gained in working capital management during this downturn has been invaluable. The results speak for themselves; we are continuously improving. This is not just about the numbers; culture plays a big role as well.

Operator, Operator

Our next question comes from Tommy Moll with Stephens Inc.

Thomas Moll, Analyst

I wanted to start on the cost-out initiatives. It sounds like you've now exceeded the $700 million run rate target in advance of year-end, but that there could also be some additional opportunities next year. Understanding that you still need to go through the full planning process, I would ask, nonetheless, can you give us any insight on what buckets of cost you may be able to attack going forward? And is there any way to frame up the magnitude of that opportunity?

Clay Williams, Chairman, President and CEO

Yes. Fair question, Tommy. And so yes, as you pointed out and we touched on in the prepared comments, we're really pleased, not only with improvement in working capital management, but it kind of goes hand in glove with the efforts that we're undertaking across the organization just to get leaner, meaner, more efficient and just much better in terms of how we manage the business. And that's how we think about the cost savings initiatives, which, as you know, were all structural cost savings that we're pushing through the organization. Since we started this process really in Q1 of 2019, we've continued to find more opportunities and reach our targets more quickly than we generally anticipate, and that also took place this quarter really going well beyond our expectations and hitting the full year-end target. So as we sit here today, there are still more of those initiatives that are flowing through the system that will flow in, in Q4 and also through the first few quarters of 2021. And as you've astutely observed, this is a time period in which we go into our annual planning process, and that process is pretty intensive. And we tend to poke and prod a lot of different areas within the organization. And we inevitably expect to find additional opportunities to continue to refine and get more efficient as an organization. So we're not prepared at this time to put new numbers out there, but we're optimistic that there is more to get. And we will continue to do our part to get the operation properly sized with the market environment that we see over the coming quarters and years.

Thomas Moll, Analyst

Fair enough. I will stay tuned. Shifting to capital allocation and portfolio. Maybe a question for Clay. We've started to see some M&A now that the energy markets have stabilized, albeit at low levels. And a lot of folks participating today as well as yourselves have no doubt noted some peers who had divested some noncore low-margin platforms. So any update on likelihood of whether we might see something similar from you guys? And then maybe as a non-mutually exclusive alternative, what's the level of appetite as a potential buyer of assets in this environment?

Clay Williams, Chairman, President and CEO

We continue to refine our portfolio and have made several adjustments regarding businesses that were not delivering sufficient returns and did not appear to have a clear path to achieve those returns. While we are taking steps in that direction, we also have a strong history of acquiring in this sector and are actively exploring opportunities. However, we recognize the need to be better owners and identify ways to gain competitive advantages in those opportunities. The rising cost of capital in the traditional oil and gas sector is also important to note, as it likely impacts asset values. Therefore, we are being very disciplined in our approach to valuations. Over the past couple of years, especially during this challenging period, our focus has shifted more towards organic technology development. The innovative products we are working on represent a capital-efficient means to establish competitive advantages, enhance our franchises, and improve our global presence. This will benefit both our traditional oil and gas customers and the renewable sector, which reflects our recent performance trend.

Operator, Operator

Our next question comes from Kurt Hallead with RBC.

Kurt Hallead, Analyst

Clay, I wanted to maybe follow-up a little bit more in the context of your commentary around developing some of the new e-frac technology. And you've made a great analogy about how the U.S. land rig market transition from mechanical rigs to AC rigs took like a 10-year process for that to really gain full traction. As you kind of look forward from where we are now in the difficult market environment that a lot of these companies that participate in frac face, challenging cap structures and challenge to generate free cash flow. What's your thought process on how long this transition from traditional frac to e-frac may take?

Clay Williams, Chairman, President and CEO

Well, a lot of it depends on the appetite by the E&P customers of the frac companies. I think given the more challenging economic environment that we are in now versus kind of where we were in 2005, 2006 means that there's going to have to be more pull by the oil companies on this technology. And that's going to be sort of the catalyst, I think, that makes it happen. I think if the E&P companies continue to move up the curve on being more demanding around reducing their ESG impact to their frac operations that can accelerate the adoption of the technology. The pressure pumpers will figure out a way to find the capital, and if those purchase orders are backed by some sort of term structure where the pressure pumpers can see their way clear to pay back, I think the investments can be made. And so that's probably what's required. The second sort of wildcard in all of this is how the power provision ecosystem sorts itself out. There's options now in terms of how to power these frac jobs using turbines on location or using gas-powered gensets on location or using line power. And so one of the cornerstones of our development, and I think I mentioned this earlier, is that it's really power agnostic; at 13.8 kV, it accepts all of the above. And so we've tried to design as much flexibility as we can with respect to the power question.

Kurt Hallead, Analyst

That's great. And Clay, you kind of teased that a little bit earlier about the prospect of maybe a two-year contract. So I assume when you talk about things on a call like this, you have some additional insights from conversations with varying parties. So do you think that's something that could potentially come out here before year-end? Is it more likely sometime in 2021 before you can see a frac company get a contract for any fleet?

Clay Williams, Chairman, President and CEO

Look, there's a lot of interest in this technology. We've talked to a number of customers about it. We're excited about it on the one hand. On the other hand, things are pretty tough out there, Kurt, and very fluid. And so time will tell. But what I'm most pleased about is the fact that we've come to market with a really tightly integrated, thoughtful system that's a big leap forward on reducing the ESG impact of fracking operations for shale operators, which is really something the market wants. And so I think in the long run, this is going to be a very important development for the E&P companies. Can't tell you sort of precisely which quarter that starts to really roll out in a big way. But again, I want to stress a high level of interest from pressure pumpers in this.

Operator, Operator

Our next question comes from George O'Leary with Tudor, Pickering, Holt.

George O'Leary, Analyst

The global technology side has been the fastest cycle portion of your business, where you've recently reduced a lot of costs, leading to improved margins and better margin performance from quarter to quarter. Can you remind us that 26% of your overall revenue comes from North America? What is the revenue mix between North America and international markets? Additionally, are there any positive trends by product line, and are these mainly limited to North America at this time, or do you see potential growth internationally as well?

Clay Williams, Chairman, President and CEO

No, in the third quarter, the mix was 38% North America and 62% international for Wellbore Technologies. This aligns with NOV overall, indicating a larger share of international mix. Regarding positive developments, we are about 40 to 45 rigs up from the lowest point in North America since August, which is encouraging. Operators are becoming more detailed in their efforts to resume rig operations to reach a maintenance level in North America, showing progress. However, these positive signs are not exclusive to North America. As mentioned previously, we believe international markets are stabilizing. Following significant declines in Q3, we are seeing encouraging signs there as well. For example, a major operator in Vaca Muerta, Argentina, is increasing rig activity. There's optimism in Colombia, with more activity expected in the Middle East, and land programs anticipated to start. Offshore, three international oil companies plan to increase activity in West Africa, Brazil, and Guyana, and there are indications of more drilling activities in those areas. In the North Sea, increased activity may also be supported by temporary tax relief from the Norwegian government. While these positive signs are emerging, I don’t want to exaggerate them, as the market remains challenging, with oil prices hovering around the $40 range and the ongoing uncertainty related to the pandemic affecting oil demand. However, it is essential to recognize that even in a declining production scenario, there remains work to be done in the oil field—such as drilling, completion, and recompletion—to maintain these assets responsibly. The industry appeared defensive in Q3, but it is beginning to emerge from that stance, moving towards a higher level of responsible resource management that necessitates increased activity. Historically, North America tends to decline first and then rebound ahead of international markets, which typically involve longer-term projects and are more influenced by national oil companies. We are optimistic that international markets have stabilized, and we anticipate a turning point, though only time will tell.

George O'Leary, Analyst

That's very helpful. And then wind is something we're getting incremental questions about with respect to a number of services companies, but you all, in particular, pop up as we chat with clients. And just wondering if there's any way to frame the kind of market potential there over some medium-term time rise in the next 12 to 24 months and the potential size of kit that NOV could win per vessel? Just any way to think about that market, size of that market would be incredibly helpful.

Clay Williams, Chairman, President and CEO

Yes, George, I think you asked about wind. I think I heard you say about offshore wind.

George O'Leary, Analyst

Yes, yes, on the marine investment side. Yes.

Clay Williams, Chairman, President and CEO

Yes. Sure. Sure. So yes, we're very excited about this. And I think we said a quarter or two ago, I think a dozen new installation vessels for the offshore is a reasonable outlook for the next few years. We can win up to $70 million worth of kit on the larger vessels. And the vessels are getting larger. Just by way of background, what's going on in that space is that taller towers are more capital efficient. They access higher elevations; the wind blows steadier and harder at higher elevations. And so as the towers get taller, the owners of these projects get better returns. And so in recognition of that, GE, which is a major turbine provider, is coming out with a new 12-megawatt tower, I think, in 2022 and then Siemens Gamesa is coming out with a 14-megawatt tower in 2024. And these things are enormous. There are 500 feet at the hub which is the size of a 50-story building and 700 tons. And you can imagine the kind of equipment that's required to put a 50-story building out in the middle of the ocean. It's pretty massive. And the world just doesn't have a fleet to do that. And so we're very pleased with the position that we are in as a leading provider of offshore wind turbine installation equipment and look forward to continuing to participate in that market going forward.

Operator, Operator

Our next question comes from Sean Meakim with JPMorgan.

Sean Meakim, Analyst

So Clay, you all have been really focused on digital initiatives. You're enabling your hardware to work smarter, work better. One of the silver linings of the pandemic is this acceleration of customer focus and adoption of digital practices, both E&Ps and services. Could you talk a little bit about your strategy regarding value capture versus transfer? So in other words, how you expect to capture more of the value versus how much needs to be shared with customers to drive more volumes and share? I imagine this could vary quite a bit across product lines, but trying to get a sense of how you think about that key piece of creating value for NOV?

Clay Williams, Chairman, President and CEO

It's a great question. Nobody makes a purchase unless it's beneficial for both sides. Our customers need to see the value in what we're offering at the price we're charging, and we recognize that. We collaborate closely with our customers to ensure we're truly adding value to their operations. That understanding was key to our development of NOVOS, which has been well received across our global rig fleet. Recently, due to shutdowns and travel restrictions, we've noticed an increased demand for our tracker vision system. This system leverages augmented reality and real-time communications with our experts worldwide to assist customers in installing, repairing, and commissioning equipment. The pandemic has accelerated the demand for this technology in our Max suite of digital products. This focus began with honest discussions with oil and gas companies about how NOV could be of help. Regarding pricing, we need it to be beneficial for both sides, ensuring that NOV shareholders gain from our investments and the innovative ideas generated by our employees, as well as that our customers can improve their operations using our products. Therefore, we always aim for a fair distribution of economic benefits.

Sean Meakim, Analyst

I appreciate that. And I appreciate the feedback on offshore wind, too. I thought that was helpful. There are also other areas that have gotten a lot of attention outside of oil and gas or particularly after the EUs transition announcement this summer, hydrogen, in particular, has gotten a lot of attention. You guys are always in the market looking for M&A opportunities. Are you able to maybe just give us a little more view into how you see these other alternative energy channels beyond offshore wind? And where you see pathways that could make sense for NOV versus those that are more difficult to bridge from your current portfolio to these new opportunities?

Clay Williams, Chairman, President and CEO

Yes, that's a great question, Sean. To start with, the cost of capital seems to be increasing for oil and gas companies, while on the renewable side, it is significantly decreasing, with a lot of capital pursuing opportunities in that area. We have explored mergers and acquisitions and made some small investments, focusing on targeted opportunities. We're continuing to seek chances there, though the landscape is becoming more competitive. Therefore, our strategy has shifted towards fostering organic growth and leveraging our existing strengths in the renewable sector, which are substantial. I believe we have some of the smartest, most innovative engineers and scientists, and we aim to give them the freedom to explore ideas and opportunities. We are funding initiatives that present a competitive advantage. We are examining various areas, including hydrogen, but currently, other segments in renewable energy align better with our skill set and offer a clearer path to competitive advantage. I want to emphasize again that we must be responsible with our capital during this process. The funding and execution of our business plans need to generate financial returns, which can only be sustained in the long term if we have competitive advantages. This necessity guides all our actions.

Operator, Operator

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Clay Williams, Chairman, President and CEO

Jimmy, thank you. I want to let our listeners know that our friend, Loren Singletary, has elected to retire from National Oilwell Varco. And I know like us that there are many well-wishers out there. And so we thank Loren for his 22 years of service to NOV, and we wish him the best in retirement. I want to thank all of you for joining us today, and in particular, any NOV employees that are out there listening. This has been an unbelievably challenging year. But I got to tell you, your persistence, your perseverance to tune out the noise and get the job done for our customers when and where they need us has been awesome. I'm so proud and grateful for each and every one of you, and thank you all and ask that you keep it up. So we look forward to talking to you on our next call in early February. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program, and you may now disconnect.