Earnings Call Transcript - NOV Q4 2021

Operator, Operator

Good day, ladies and gentlemen and welcome to NOV Fourth Quarter 2021 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now 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 NOV's Fourth Quarter 2021 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis for the fourth quarter of 2021, NOV reported revenues of $1.52 billion and a net loss of $40 million. For the full year 2021, revenues were $5.52 billion and a net loss of $250 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay.

Clay Williams, Chairman, President and CEO

Thank you, Blake. For the fourth quarter of 2021, NOV's revenue grew 13% sequentially and 14% year-over-year. These results marked the first quarter in which our revenue has increased year-over-year since our revenues bottomed in early 2021 and our backlog bottomed in late 2020. The company continued to build its backlog, which increased for the fourth quarter in a row. Book-to-bill was 137%. For the full year 2021, NOV generated $229 million in EBITDA or 4.1% on $5.5 billion in revenue. Revenues declined 9% from the prior year at a 21% decremental EBITDA leverage year-over-year. While we are pleased with the slow but steady recovery of demand and activity in the oilfield and our continued revenue and backlog growth, we are disappointed in our low sequential operating leverage and margins in the fourth quarter. Consolidated EBITDA leverage was only 7% sequentially, nearly 20% lower than we expected at the time of our call. All three segments struggled this quarter with supply chain challenges that we did not foresee along with mix issues and COVID disruptions related to the emergence of the Omicron variant during the fourth quarter. And while we expect these to subside longer-term, we now expect supply chain headwinds to continue to persist through the first half of 2022 as our vendors continue to push out their delivery commitments to us. In addition to COVID-related charges of $11 million on projects that the Completion & Production Solutions segment is executing in Asia, our productivity and efficiency were broadly encumbered by two significant factors. First, the tightening labor market we faced in the United States was exacerbated by COVID outbreaks in certain plants during the fourth quarter. As skilled workers recuperated safely at home, their work was performed by less experienced, less efficient crews or by other skilled workers working overtime. Labor shortages led to higher product costs and scheduling headaches. We had the same issues at plants in the Middle East and elsewhere overseas, and we saw pockets of Omicron COVID affecting our field personnel in a few areas around the globe. These COVID disruptions intensified greatly with the emergence of the Omicron variant in the fourth quarter and are continuing into the first quarter of 2022. Second, our manufacturing scheduling headaches were compounded by component and raw material shortages and late deliveries from our vendors who are facing the same sort of challenges that we are. Late deliveries and short shipments of raw materials and subassemblies led to further inefficiencies, under-absorption, and higher product costs in certain areas as our creative workforce scrambled to make do with the raw materials and components that they had on hand. Indicative of supply chain inflation, all three segments saw negative purchase price variances. And where we were unable to access raw materials where possible, we substituted different, more expensive components into our bills of materials. These substitutions frequently required additional labor to conform the parts to our standards, which further increased costs. All three segments experienced this to a greater or lesser degree. Some businesses report supply chain challenges are getting a little better, but mostly these disruptions are persisting or getting more challenging in the near-term. Specifically, freight, steel, certain epoxies appear to be stabilizing. Resin prices are falling in Asia, but rising in the United States, for example. But electronic components, motors, touchscreens, certain polymers, etc., appear to be getting tighter. The reliability of raw material deliveries is frankly poor as ports and trucks shut down unexpectedly due to COVID outbreaks. Some of our industrial customers in the CAP segment are delaying purchases of fuel handling piping and industrial pumps because they can't get construction crews to do the installs or they're still missing other complementary items like electronic controllers from other vendors. Importantly, NOV continues to take extraordinary measures to get our products and equipment into the hands of our customers to support their critical operations. So despite these challenges, we were able to put up double-digit sequential sales growth across all three segments. I'm proud of the job our manufacturing team has done getting products out the door. However, we need to do a better job on pricing in anticipation of more inflation that we know is coming. As we enter 2022, we are operating in the most constrained and inflationary environment the world has seen in at least a generation where labor and materials are tight, and the money supply has ballooned across major economies due to COVID relief efforts. Even though we have been trying to push our pricing higher to defend our margins, we have been less successful so far than we need to be. On prior quarters, we've spoken of select price increases that we were able to achieve, including many double-digit moves. Nevertheless, our fourth quarter results point to the need to redouble our efforts to get to acceptable margins. We believe the margins embedded in our backlog are solid, and the future costs within our contracts are generally protected against inflation through either indexing or contracts with our vendors. However, inflation protection is never perfect. Headwinds like quadrupling of freight, higher labor costs, workforce disruptions, and vendor delays can still impact our margins on these as they did in the fourth quarter. We're fortunate in that we were able to secure sufficient backlog to carry our plants through the depths of the downturn. However, looking ahead, it is incumbent on our team to win incremental orders that improve margin and pricing to get back to an acceptable return on capital. In the near-term, pricing remains challenging for many of our products, owing to our position in the oilfield food chain. High commodity prices are leading to abundant prosperity for the E&Ps. For products that we sell directly to the E&Ps, our transactions have more room to achieve a fair split of the economic pie, meaning we are better able to move prices up. However, prosperity rolls downhill in the oilfield and it hasn't fully showed up yet with oilfield service companies who make up the majority of our customer base. As a group, most are still working through depressed pricing for their services. For example, leading-edge, super-spec land drilling rig rates for North America have only this quarter returned to the mid-$20,000 per day level seen before the pandemic lockdown. But contractors have most of their fleets contracted for the next few quarters at much lower rates. Leading-edge coiled tubing and pressure pumping rates have bounced off 2020 lows, but remained below 2019 levels. Offshore drillers are seeing day rates rising for drillships with leading-edge discussions above $300,000 per day and some closer to $400,000 per day, but most rigs remain contracted at very depressed day rates, far below levels seen a decade ago. Our customers report that things are definitely going in the right direction, but more healing is needed before oilfield service contractors can open up their pockets and spend more freely with NOV. And in the meantime, our competition in many instances remains desperate for work to cover their fixed costs. The good news for NOV is that the stage is set for prosperity to trickle down soon to our level. The world is facing a tightening supply and demand gap for energy after years of underinvestment and current global activity levels are insufficient to bridge that gap. Commodity markets are waking up to the fact that the world consumed a 1 billion-barrel inventory overhang that we generated during the lockdown of 2020 in less than 15 months. NOV is very well-positioned to benefit from investments which are required and are expected to flow in our traditional oil and gas markets over the next few years. In addition to operating in one of the most constructive commodity price environments I've seen in my career, which should lead to a multiyear upcycle, NOV has a lot of things going well. Wellbore Technologies, our earliest cycle segment and closest to the prosperity the oil companies are currently enjoying, posted its fourth quarter in a row of double-digit top-line growth propelled by the continued recovery of U.S. drilling and emerging Eastern Hemisphere activity. Given its proximity to the E&Ps in the oilfield ecosystem and its activity-driven product portfolio, Wellbore Technologies is best positioned to benefit from pricing early in an upcycle. Notwithstanding its own supply chain challenges, it has, in fact, achieved the greatest pricing gains, mostly in quick turn, high-impact items like bits, downhole tools, and rig instrumentation specified by E&Ps. Unfortunately, the fourth quarter saw some of these pricing gains offset by COVID and labor shortages in our labor-intensive tubular services businesses, higher resin and steel costs, and a lower margin mix of drill pipe than we expected. Jose will go into this more in just a moment. Owing to extensive supply lines and operations in Asia and acute raw material supply challenges across a couple of its business units. Our Completion & Production Solutions segment has been our most challenged with respect to achieving an acceptable margin. Most of its project charges stemmed from a COVID outbreak in our vendor's operation in the Southeast Asian shipyard, which led to inefficiencies, higher costs, and rework. We currently expect this project to be completed late this summer, barring further disruptions. Our Fiber Glass Systems and Subsea flexible pipe businesses also continue to fight for raw materials and are experiencing significant challenges with their respective supply chains, which will impact first quarter 2022 results. Despite these issues, customer demand is strong and rising evidenced by the $495 million of orders booked by the segment during the quarter, translating to a book-to-bill of 159%. Our internal list of expected project tenders is large, and we are optimistic that 2022 will be a strong year for CAPS orders. While most CAPS orders are E&P offshore project-related, most represent years of cost generation and negotiation undertaken during lean times to make the economics work for the E&P. We are pushing pricing and escalation where we can, but it remains challenging. So equally, we're focused on ensuring we have mitigated inflation and execution risk as much as possible. I think the outlook here is brightening as EPCs, manufacturers, and shipyards replenish their backlogs like we have been doing, and utilization rises, congestion builds and constraints emerge, urgency will also emerge among E&Ps to rush to the front of the queue, which will provide a stronger pricing backdrop for us. Finally, our Rig Technology segment also posted a solid quarter of orders. The rig's order book has been helped enormously by its strong position in renewable energy, which once again helped lift its book-to-bill north of 1 this quarter. Renewable wind energy bookings exceeded $400 million in 2021. Despite rising day rates in many categories of drilling rigs, orders for the segment's traditional iron remains low as drilling contractors repair balance sheets and continue to cannibalize units idle during the pandemic lockdown. We are hearing reports now of drilling contractors buying old land rigs on the cheap at auction solely for parts, having cannibalized all their existing idle fleets. A couple of observations around the near-term here. First, the nature of our business has pivoted from iron to Smart Iron. Interest is very high in emission reduction technologies that we've introduced, like our EcoBoost and our PowerBlade products, in our robotics automation upgrade offering which will be in the field in the second quarter. And in our digital offerings around NOVOS operating systems, coupled with IntelliServ high-speed data transmission through the drill pipe. Second, things are getting better very quickly in the offshore, particularly for drillships. The rising day rates I mentioned earlier are leading to reactivation discussions on more than a dozen stacked floating rigs. Underpinned by high oil and gas prices, the increasing likelihood of offshore project FIDs by oil companies, steadily rising land rig activity around the world, and sustained high demand for offshore wind turbine installation vessels, all point to continued growth in demand for Rig Technologies. Rig Technologies fourth quarter saw margins fall short of our expectations despite revenues landing where we expected, owing to a poor mix of aftermarket and capital equipment sales. Again, supply chain issues took a toll in operations and COVID affected some of our service hands. Despite these challenges though, we were able to complete our first land drilling rig manufactured by our new JV facility in Saudi Arabia, and we have many more to come. The state-of-the-art technology will play a key role in the Kingdom's ambitious development of unconventional gas. Given the challenges of the drilling contractor space over the past few years, which saw the majority of offshore drilling contractors go through bankruptcy reorganization, it has been difficult for the segment to raise prices. Nevertheless, drilling contractors eventually find success lifting their day rates, which will be required to overcome the higher wage and operating costs they are now facing, we are confident that our pricing will improve commensurate with the high value our smart iron will provide. Despite the supply chain challenges facing NOV and all global manufacturers currently, I remain decidedly positive about the longer term. Strong commodity prices and E&P prosperity are beginning to flow to the greater oilfield services industry, which was decimated by severe downsizing to survive these past few years. Oil and gas is still the industry that fuels all other industries. The urgency to address lack of investment in this space will grow from here. And once again, NOV and its oilfield service customers will be called upon to construct the wellbores needed to ensure the globe safe, reliable energy. NOV is emerging from the downturn with a strong balance sheet and investment-grade rating and ample financial resources, exciting new products that can retrofit our customers' oilfield assets to reduce emissions, gather critical data, automate processes, drive better safety and improve efficiency and a terrific portfolio of energy transition technologies with hundreds of millions of dollars of energy transition-related revenue. All this has been made possible by our extraordinary teams, who have had the excruciating challenge of consolidating operations by reducing from more than 1,200 facilities to just over 550 facilities and reducing our costs by billions of dollars annually to navigate one of the worst downturns ever experienced in this 163-year-old industry. We are lean and mean and ready for the challenge ahead. To the employees of NOV who have been on this journey with us, thank you for your creativity, your flexibility, and your extraordinary efforts over the past two years to take great care of our customers through all kinds of unexpected challenges. You've positioned this organization for a great run and I'm looking forward to sharing better days ahead with you. Thank you. With that, I'll turn it over to Jose.

Jose Bayardo, Senior Vice President and CFO

Thank you, Clay. NOV's consolidated revenue in the fourth quarter of 2021 was $1.52 billion, a 13% sequential increase compared to the third quarter with both North American and international revenues achieving double-digit growth. Adjusted EBITDA for the fourth quarter was $69 million or 4.5% of sales. As Clay mentioned, our fourth quarter results included $11 million in charges related to ongoing operational challenges on projects in Asian shipyards. Reported SG&A decreased $11 million sequentially due primarily to lower third-party expenses, a reduction in bad debt expense, and a small reclass between SG&A and cost of goods sold, partially offset by increasing wage rates. Looking forward, we expect the reinstatement of certain employee benefit programs and continued labor pressures will result in reported SG&A increasing modestly in 2022. Despite Q4 revenue increasing 14% over the prior year, working capital decreased $244 million during 2021 as we achieved good success turning working capital into cash and reducing working capital intensity across the organization. Through 2021, we generated $291 million in cash flow from operations, with capital expenditures totaling $201 million, resulting in $90 million cash flow. In 2022, we expect capital expenditures to total $255 million with $20 million of the capital budget dedicated to the completion of our new rig manufacturing facility in Saudi Arabia. During the fourth quarter, we reinstated our quarterly dividend at $0.05 per share, representing approximately $20 million per quarter, and we also used $41 million in cash to acquire a leading provider of managed pressure drilling equipment that is highly complementary to our existing operations. We ended the fourth quarter with net debt of $122 million comprised of $1.71 billion in debt netted against $1.59 billion in cash. Moving on to segment results. Our Wellbore Technologies segment capitalized on broad-based activity improvement and market share gains to generate $576 million in revenue during the fourth quarter, an increase of $69 million or 14% sequentially. Through share gains and the need for customers to restock depleted inventories, the segment continued to outpace the growth in global drilling activity levels. We've achieved this growth despite ongoing operational and logistical challenges. While EBITDA improved $11 million to $88 million or 15.3% of sales, the operational and logistical related challenges, along with a less favorable product mix, limited incremental margins to 16%. Our ReedHycalog drill bit business posted revenue growth in the mid-teens with strong incremental margins. The business unit realized 24% sequential revenue growth in North America, significantly outpacing drilling activity levels due to market share gains, net pricing improvements, and an increasing number of projects in the Gulf of Mexico. Revenue in international markets grew 8%, also exceeding the growth in drilling activity. ReedHycalog cutter technology leadership is allowing us to steadily gain market share in many markets, including the Middle East, an impressive feat considering we're not able to directly participate in the growing share of lump-sum turnkey projects. Our downhole business reported double-digit revenue growth resulting from strong sales across the Western Hemisphere, Asia, and the North Sea, partially offset by lower sales in the Middle East resulting from a larger delivery of drilling tools during the third quarter that did not repeat. Unfortunately, shortages of key product components and labor within certain regions led to higher costs, including overtime as our teams scramble to find substitute vendors and materials at higher costs in order to take care of our customers. We and other global manufacturers provide plenty of examples of supply chain challenges in the current environment, but I'd like to provide some color on the challenges we and others are facing with labor. One of our global business units in Wellbore Technologies has seen its revenue increase 49% year-on-year, while its labor force has only increased 2%. Some of this disparity is due to cost savings and efficiency improvements we've made within the business. However, many of our operations are simply shorthanded, resulting in cost inefficiencies, primarily in the form of wage escalation and overtime. For instance, in this case, overtime is up 109% year-over-year and in the form of operational disruptions and shutdowns, which have resulted when several machinists within a plant came down with COVID simultaneously. While these are transitory issues and our team is doing a fantastic job dealing with unprecedented challenges, we know that our sales team needs to push pricing to offset inflationary pressures and preserve the type of margin profile warranted by the value of our technology portfolio provides our customers. Our Grant Prideco drill pipe business delivered double-digit revenue growth driven by strong volumes in drill pipe sales for the U.S. land market. As anticipated, EBITDA flow-through was hampered by continued inflationary pressures and a less favorable smaller diameter land-oriented sales mix. Earlier this year, certain of our higher volume land customers recognized that extended lead times for 5.5-inch green tubes which we use to make drill pipe would not allow us to meet their near-term needs. Despite their preference for larger diameter pipes, they could not wait and place sizable orders for 4.5- and 5-inch strings which we're able to turn and deliver in Q4 and into Q1 of 2022 because we had access to those sizes of green tubes. Despite the temporary unfavorable mix shift as customers begin to better understand lead times in this new world, we're seeing a meaningful pickup in both land and offshore tendering activity for larger premium pipes. As a result, Q4 bookings improved 39% and were characterized by more favorable pricing and a greater mix of large diameter premium pipe, leaving the business well-positioned for significantly improved results as we progress through 2022. Our Tuboscope business experienced a sequential revenue increase in the high single digits with strong incremental margins, a meaningful recovery from the third quarter that was plagued by the inability to access resin for its coating operations and operational disruptions caused by hurricanes and COVID outbreaks. While performance improved considerably, labor cost and availability, along with ongoing shortages of resins remain a drag on the business unit's results. Looking ahead, we expect continued slow but steady improvements in our ability to access key raw materials and expect pricing improvements to offset inflationary pressures. Our WellSite Services business saw mid-teens revenue growth with modest incremental margins. Revenue in our North American solids control operations improved 10% with limited EBITDA flow-through, the result of a transitory decline in higher-margin offshore projects, offset by increased revenue and lower margin U.S. land-based work. International revenues increased 18% sequentially with outsized incrementals led by increasing project awards in the Middle East and Latin America. As a nascent recovery in international markets advances, we anticipate continued growth from the Middle East and an acceleration in demand from the Far East. Our M/D Totco business realized a mid-single-digit sequential improvement in revenue with solid incremental margins. Revenues from our surface sensor data acquisition systems in North America increased 15% sequentially on higher drilling activity levels, market share gains, and improved pricing. In international markets, continued growth in our eVolve Wired drill pipe optimization services was modestly offset by a decline in capital sales of surface sensor data acquisition systems, which resulted from strong shipments to the Middle East and Far East in Q3 that did not repeat and challenges procuring electrical components, which deferred deliveries into 2022. While we believe we are in the early phase of a multiyear recovery for the oilfield, we expect supply chain and inflationary challenges to continue into 2022. For our Wellbore Technologies segment, we expect increasing global activities to be partially offset by seasonal declines in certain geo markets and continued supply chain disruptions to result in sequential revenues that will range from flat to up 5% during the first quarter. We also expect Q1 margins to be in line with Q4 as inflationary costs and the resumption of our benefit programs will offset pricing gains. We expect Wellbore Technologies to return to normalized incremental margins of 35-plus percent after the first quarter. Assuming a normalization of supply chain-related challenges, we believe EBITDA margins for our Wellbore Technologies segment will move into the high teens by year-end. Our Completion & Production Solutions segment generated $549 million in revenue during the fourth quarter, an increase of $71 million or 15% sequentially. While all global capital equipment businesses are suffering from unprecedented supply chain disruptions, this segment has been disproportionately challenged due to the heavy concentration of its business taking place in Asian shipyards. After taking $12 million in charges during the third quarter, we were disappointed that our pandemic-related challenges continued into the fourth quarter and affected two additional projects. As Clay mentioned, operational shutdowns, supply chain challenges, and spiraling costs resulted in an additional $11 million in expense. Additionally, our subsea flexible pipe business struggled with the availability of certain raw materials and extraordinary freight charges that were required to meet certain deadlines. The additional expense in our Process and Flow Technologies and Subsea flexible pipe businesses limited incremental margins to 10% and EBITDA totaled $2 million for the quarter. Notwithstanding the extreme difficulties this segment encountered in 2021, the outlook for each of our businesses within Completion & Production Solutions is rapidly improving and is reflected in our bookings. The segment achieved its fourth straight quarter with a book-to-bill of above 100%. Order intake in Q4 reached the highest level since 2019 and every business unit within the segment posted a book-to-bill greater than 1. Fourth quarter orders for the segment totaled $495 million, resulting in a book-to-bill of 159%. Backlog at the end of the year was $1.3 billion, an 85% increase over year-end 2020. Our Fiber Glass business unit posted a mid-single-digit percentage sequential increase in revenue. Higher sales to midstream oil and gas markets, which recovered from near record lows and improved deliveries into the marine and offshore markets were partially offset by lower fuel handling revenue. While our backlog for fuel handling equipment is healthy, as Clay mentioned, customers are struggling to obtain peripheral equipment often sourced from Asia and cannot hire the construction crews required to provide installation, resulting in customer deferrals. We, like others, are struggling with labor challenges. Specific to our Fiber Glass business, wage inflation and three plant shutdowns, which occurred when lines couldn't be staffed after several employees contracted COVID, limited incremental margins to the low single digits. Notwithstanding the ongoing operational challenges, which we expect to ease by mid-2022, demand for our Fiber Glass products is strong. The unit posted its fourth straight quarter with a book-to-bill greater than 1, and as 2021 year-end backlog improved 184% over 2020. Our Intervention & Stimulation Equipment business achieved sequential revenue growth in the mid-teens on higher deliveries of coiled tubing equipment and improving aftermarket revenue. Incremental margins were limited by low margin sales of prior generation capital equipment and higher costs of raw materials and subcontracted components. While pricing and cash flows for our pressure pumping customers are improving, difficulties associated with staffing incremental crews and pricing that is still below what is required to achieve an appropriate return on capital are resulting in minimal capacity additions by our customers. As a result, over 80% of our pressure pumping revenues, which have more than tripled from Q4 of 2020, came from aftermarket sales in the fourth quarter. We're busy upgrading Tier 2 fleets to Tier 4 dual-fuel fleets that can utilize up to 85% natural gas. And we expect the pursuit of ESG-friendly operations, efficiency gains and the industry's existing tired fleet of equipment will lead to continued demand for such rebuilds. Coiled tubing continues to be the main driver for capital equipment sales as we continue to see strong demand from international markets for new units, support pumps, and nitrogen equipment, which helped drive a 48% sequential increase in orders for the business unit. Our Subsea flexible pipe business realized mid-single-digit sequential revenue growth as growing backlog and increasing throughput in our Brazilian operation more than offset lower volumes from our Denmark plant that resulted from significant raw material shortages that will continue into the first quarter. Bookings remained a bright spot, with orders during the fourth quarter reaching their highest levels since 2019. Our Process and Flow Technologies business posted a double-digit sequential increase in revenue. However, as previously discussed, profitability was challenged due to the ongoing operational disruptions on projects in Asia. Despite these near-term challenges, the market outlook is improving rapidly as operators become more confident in a multiyear upturn in commodity prices. We're beginning to see a greater number of the offshore project tenders that we've been tracking shake loose, resulting in orders during the fourth quarter that more than doubled our Q3 total achieving a book-to-bill exceeding 200%. For the first quarter of 2022, we anticipate that ongoing supply chain disruptions will limit our ability to capitalize on a rapidly improving backlog. As a result of acute raw material shortages, we expect financial results for our Completion & Production Solutions segment in the first quarter to remain more or less flat with Q4. The COVID-affected project that drove most of our charges in the fourth quarter and prior quarter is approximately 80% complete and should finish in the third quarter of 2022. Assuming this project and the broader global supply chain challenges normalize during the first half of 2022, we believe our Completion & Production Solutions segment should achieve a mid- to upper single-digit EBITDA margin by year-end. Our Rig Technologies segment generated revenues of $431 million in the fourth quarter, an increase of $41 million or 11% sequentially. The accelerating progress on our growing backlog of offshore wind installation vessels, increasing revenue from our rig manufacturing plant in Saudi Arabia and the seasonal improvement in service and repair work drove the sequential growth. Adjusted EBITDA declined $4 million to $21 million or 4.9% of sales, primarily due to less favorable sales mix in our aftermarket operations. The lower margin contribution from a higher volume of service and repair work was more than offset by a decrease in higher-margin sales of spare parts. Despite continued healthy order intake and a growing backlog, spare part sales declined due to growing production lead times and shipping challenges. Inflationary forces and start-up costs in Saudi Arabia also weighed down margins. Orders for the segment totaled $191 million, yielding a book-to-bill of 102%. Bookings in our marine and offshore operations remained robust with two-pedestal crane orders for floating production vessels and another order for a design license and jacking system for a wind installation vessel. During 2021, NOV booked wind installation equipment orders of more than $400 million, and we exceeded our annualized revenue run rate target of $200 million during the quarter. Of equal, if not greater importance, is that we're seeing growing interest for rig equipment. Orders for rig equipment in the second half of 2021 achieved a level almost twice the pace of what we realized in the second half of 2020. We're encouraged that the composition of the orders we are now receiving is representative of the type of bookings we would expect in the early days of a market recovery. We are seeing rising inquiries for top drives, high-torque handling equipment, and pressure control gear. Additionally, as Clay mentioned, we are realizing growing demand for our digital products and then received an order for 30 NOVOS packages from a single U.S. rig contractor. Following the installation of these packages, this contractor will have its entire active fleet outfitted with NOVOS. The underlying macro conditions for our base rig business have improved significantly over the past year. As Clay mentioned, in the U.S. land market, day rates have steadily improved and are now in the mid $20,000 a day range. While we still see a few old rigs getting parted out, the opportunity to cannibalize assets diminishes as more rigs go back to work. Customer balance sheets are beginning to improve. And while we don't expect to see near-term demand for new rigs in the U.S. land market, we're having more conversations regarding rig upgrades that provide larger setbacks and higher torque handling equipment. International land markets are also showing more signs of life. We previously stated that there is significant pent-up demand in international markets for leading-edge drilling technology, with a large disparity between the capability of an average rig in international markets and the average rig in the U.S. The improvement in commodity prices is resulting in customers reengaging in discussions regarding rig tenders in the Middle East and Far East, several of which we believe will advance this year. Similarly, in offshore markets, NOCs are beginning to respond to the markedly improved commodity price environment with renewed interest in previously deferred offshore projects. We've seen backlogs for our offshore drilling contractor customers increased 33% over the past year, and they're finally realizing improvements in day rates. Additionally, during the fourth quarter, offshore rig utilization exceeded 70% for the first time since 2015 due to a combination of slowly increasing activity levels and rig retirements. As a result of the improving dynamics, our opportunity set is shifting from small-scale projects associated with reactivating warm stacked rigs to large projects that will involve upgrading and reactivating cold-stacked rigs. Despite the near-term headwinds posed by the current supply chain turmoil, the outlook for Rig Technologies segment is improving. The combination of our growing renewables footprint and a recovery and reactivation spending for our legacy rig business should lead to solid top line growth with an improving margin profile. However, looking ahead to the first quarter for our Rig Technologies segment, typical seasonal declines and continued supply chain challenges should lead to results that are expected to be flat with the fourth quarter. Assuming pandemic-related inefficiencies ease as we move through 2022, we believe EBITDA margins for our Rig Technologies segment will move into the 10% range by year-end. Throughout 2021, the people of NOV overcame numerous obstacles to deliver critical products for our customers while continuing to make great strides in improving our operational efficiencies and advancing our portfolio of conventional, digital and renewable technologies. Although there continues to be much uncertainty in the near-term outlook and we expect pandemic induced supply chain challenges to continue to affect all global manufacturers through the first half of 2022, we are seeing dramatic improvements in the macro environment, which is setting the stage for what we believe will be a multiyear recovery for our industry and for much improved results for all the stakeholders of NOV.

Operator, Operator

We will now open the call to questions.

Arun Jayaram, Analyst

Yes, I have a quick question. Clay, you mentioned that the cannibalization of equipment in the field is progressing but may not be finished yet. Could you elaborate on that? It seems like we should soon see an inflection point both on and offshore, which would create a favorable situation for you as you are selling more razor blades. I would appreciate your thoughts on that, as well as any insights on potential rig reactivations from cold-stacked equipment this year.

Clay Williams, Chairman, President and CEO

Sure, that’s a great question, Arun. In terms of equipment cannibalization, it’s challenging for us to determine exactly how much is still pending. However, we know that after years of cutting back on spending, drilling contractors have become skilled at salvaging consumables and equipment from idled rigs, which limits their purchases from us and our competitors. We feel like we are quite far into this situation and we’ve heard anecdotal evidence, such as equipment being purchased at auction, which we thought was an interesting point to highlight in our prepared remarks, particularly on the land side. Regarding offshore, while we don’t see it reflecting in our orders for rig equipment just yet, we are encouraged by conversations with customers. We know that several E&Ps are inquiring about rig availability, particularly for floaters, and discussions are now focused on rates exceeding $300,000 per day. Several offshore drilling contractors have reached out for us to conduct engineering work and surveys on rigs to assess their needs. Additionally, IOCs now require class and OEM recertification for rigs that have been out of service for over a year, which is generating some extra business. Although this hasn’t translated into orders yet, the volume of activity and inquiries suggests that the offshore market is improving, something that has been lacking since 2014. We are optimistic about the future, especially with offshore drilling contractors emerging from bankruptcy and reorganization in 2020 and 2021. We are hopeful that the toughest challenges are behind us, and we look forward to a significantly more positive outlook as offshore rigs get reactivated.

Arun Jayaram, Analyst

Great. And just my follow-up, I don't want to dwell on this too much, but I was wondering if you could give us a little bit more thoughts on this situation in the Southeast Asian shipyards. You took $11 million charge this quarter. You're 80% done. Can you just give us a sense of what are some of the risks of additional charges? And if we wanted to take a more conservative tax over the next couple of quarters, this thing is almost done, but give us a sense of what the risk is from here.

Clay Williams, Chairman, President and CEO

Yes, that's a great question. As you know, we handle these projects on a percentage of completion basis each quarter, and we review the costs and plans as we progress. Our adjustments reflect our outlook moving forward. The charges we've experienced in recent quarters have been frustrating, but they indicate that we've had to make significant modifications to our plans as new COVID-related challenges have arisen. This project is more complex than our typical undertakings, with a larger scope for installation and commissioning. We signed the contract just before the world went into lockdown in early 2020 and began work right before that occurred. Consequently, the country where we were building the most intricate part was shut down due to COVID, forcing us to relocate to a different yard in another country, which involved different import duties and complexities. One of our suppliers for highly specified bolts declared force majeure, necessitating a switch to a new, more expensive supplier. The charges from previous quarters reflect those challenges. In the most recent quarter, as we continued finalizing the module fabrication with a new contractor, we faced setbacks when 40 out of 70 workers contracted COVID, leading to issues and rework. These recent charges encapsulate that situation. What's reflected in our financials is a realistic assessment of how to move forward. We are currently 80% complete with plans to have it in the shipyard by late Q1 and to finish installation and commissioning by summer. Current costs account for all of this. I want to emphasize that we may still encounter new challenges. From my experience in 2021, it's evident how unpredictable COVID and its effects on the supply chain and workforce can be. Therefore, there is a chance of future charges. However, I can assure you that we are dedicating significant attention to this matter. Our top team is actively working on it, facing an exceptionally challenging set of difficulties caused by COVID and its repercussions on the supply chain.

Stephen Gengaro, Analyst

Could you discuss the year-end margin guidance you provided? Considering the pricing of the work you have been winning and the strong order flow, especially in the CAP segment last quarter, how are you managing the pricing dynamics in relation to supply chain issues and cost inflation?

Clay Williams, Chairman, President and CEO

Yes, well, not as well as we need to be. That's the message on the call. We need to get out in front of this with pricing, recognizing some of this is transitory and should pass as COVID. I'm going to stop short of predicting which quarter this happens in. But others of it is broad wage inflation, and I think it's here to stay. And so I think it's incumbent on us to get back to margin expansion and do a better job of pricing into it. But look, we're very focused on this on managing through it, on pushing pricing, the steadily increasing level of demand in orders along with higher commodity prices, WTI above $90 a barrel, our oilfield service customers now starting to get pricing leverage in their business models. I think that's a better backdrop for us to push pricing in. And so our expectation is we're going to get better at that as the year progresses, and that's part of our plan.

Stephen Gengaro, Analyst

You've successfully balanced the pricing with the supply chain challenges, providing clarity on your year-end margin targets.

Clay Williams, Chairman, President and CEO

Yes, we're aware that in the near term, the initial weeks of 2022 have been impacted by Omicron and ongoing supply chain challenges. Some suppliers have indicated that they are delaying deliveries, meaning it will take longer for the supply chain to stabilize. Consequently, the pricing gains we have achieved are being offset by persistent inflation, which is factored into our plans for 2022.

Jose Bayardo, Senior Vice President and CFO

Yes, Stephen. So yes, clearly here, we provided the CapEx guidance for the year at $255 million. And obviously, we're only providing guidance for one quarter out as it pertains to revenue, but we assume some pretty healthy growth at the top line during the course of the year, which naturally starts to consume a little bit more capital through a little bit of a working capital build. However, that gets partially offset by continued progress related to our working capital metrics, made a tremendous amount of headway through the course of 2021 with our working capital optimization efforts going from a run rate of about 31% on an annualized revenue run rate down to 23%. It gets harder and harder as you go forward in time, but there's still a little bit more we can do to improve turns and as well as DSOs. So do think that working capital will be a good consumer of cash, which is a healthy thing and something that we're looking forward to. But I do think that working capital efficiency continues to improve.

Ian MacPherson, Analyst

I was interested to see the managed pressure drilling business acquisition. That seems very timely right now as you're inbounding all of these drillship reactivations. So I was wondering, if you could speak a little bit about that acquisition and also what the penetration rate of MPD is on these Seventh Gen deepwater assets and what you think the growth opportunity is for more penetration as well as the earnings opportunity on the installed base there?

Clay Williams, Chairman, President and CEO

Thank you, Ian. That's a great question, and I appreciate you highlighting its strategic importance for us. As interest grows among floating rig drilling contractors regarding their vessels and fleets, managed pressure drilling capabilities provide a way for them to set their rigs apart in a competitive market and potentially command higher day rates. There is significant interest in this as a means of enhancement. Additionally, we are holding discussions concerning crown-mounted compensators for BOPs and improving the sharing capabilities of BOPs. These are some of the improvements drilling contractors are considering. As they prepare their rigs in shipyards for drilling, it’s an ideal time to enhance their capabilities and distinguish themselves further. This is a key focus area amidst a market shift toward increased managed pressure drilling in offshore operations. Some oil companies have made it a standard requirement, with varying levels of adoption across different basins. We are witnessing a growing interest in managed pressure drilling, which influenced our decision to strategically invest in this area and integrate it into our offerings. I should also mention that combining managed pressure drilling with our IntelliServ wired drill pipe, capable of real-time pressure measurement along the mud column, along with our NOVOS operating system and dynamic well pressure modeling, creates a unique and impactful solution that can significantly enhance safety and efficiency in deepwater drilling. Overall, I believe this presents a very exciting new opportunity for us.

Ian MacPherson, Analyst

Yes. Good. And is it correct to say that it's still a minority of the deepwater rigs that have MPD now and then the opportunity is to take that to a majority of the rigs that we'll have it in next years?

Clay Williams, Chairman, President and CEO

Yes. Yes. And our goal is to put it on all of them. It's fair to say that all oilfield service providers, those involved in constructing and completing wellbores, faced significant discounts in 2020 due to downturns in both the Eastern and Western Hemispheres, and they have been working to recover since then. With the rise in commodity prices, it seems that all global participants are attempting to increase their day rates and pricing. The inflation levels observed in North America are somewhat more pronounced, and typically, North America adjusts its pricing more swiftly. Therefore, it appears we have observed more significant progress in the U.S. and Canada regarding customers being able to raise day rates and pricing. Internationally, contracts generally have longer durations, and we, along with others, are experiencing slightly less wage inflation. However, I believe that all parties will need to push for higher pricing globally, and it is reasonable to expect that they will achieve this, taking advantage of the benefits from $90-plus oil and elevated gas prices. Thus, we should expect pricing to increase in both areas.

Jose Bayardo, Senior Vice President and CFO

Yes, and I'd add that obviously, within the North American marketplace, the amount of excess capacity is much greater than what you had in the international market. There is still excess capacity in the international market, which affects both markets similarly at the lower end of the cycle. However, as we've mentioned regarding our Intervention & Stimulation Equipment business, the demand for new capital equipment that we're beginning to see in the early recovery phases is primarily from international markets. They have that need sooner and likely have the opportunity to raise prices a bit earlier as well. In North America, the focus is still on absorbing existing capacity through rebuilds, refurbishments, and reactivations, with very few serious discussions about significant new capacity additions at this time. North America is progressing, but it is just going to lag behind the international markets a bit.

Scott Gruber, Analyst

So thinking about Grant Prideco here. Should the deliveries of premium pipe at Grant Prideco start to step up in Q2 and Q3 as your access the premium pipe improves? And if that's accurate, do you think it's sufficient to drive Wellbore incrementals above normal in Q2 and Q3? I think I heard normal incrementals beyond Q1. But when Grant Prideco sales really kick in, in the past, we've seen those incrementals go above normal. So any color on kind of catching up on some premium pipe deliveries and potential impact on incrementals.

Clay Williams, Chairman, President and CEO

Yes, we expect the mix at Grant Prideco to improve significantly from Q4 into Q1 and Q2. As Jose mentioned, many of the deliveries in Q4 were not premium threads. Our deliveries of Delta premium threads increased, but API commodity threads and C50 threads in smaller diameters were more prevalent. As we head into 2022, we are gaining better access to larger green tubes for premium pipe, and the rig reactivations offshore that we discussed are leading to an increase in the availability of premium pipe. The outlook for Grant Prideco is much more promising. However, this is just one aspect of several business units within Wellbore Technology. We anticipate that things will start to improve from a mix perspective.

Scott Gruber, Analyst

Got it. And then just thinking about your year-end margin targets across the businesses, how much incremental pricing is reflected in those margin targets? Or is it really just reflecting what you've already secured in the backlog? And then in addition, we started to see steel prices actually roll here. Do the exit margins reflect any further deflation in steel price?

Jose Bayardo, Senior Vice President and CFO

Scott, it's Jose. I'll start off on this one. But I mean, really, if you sort of go through and do the math and take in the Q1 guidance that we gave and sort of map out to that year-end guidance, which I know you'll do once the call is over, you'll see that you don't have to make any sort of heroic type of assumptions related to the incrementals that are baked into that type of outlook. So certainly, anticipate pricing to improve. But the biggest obstacle that we're looking forward to getting resolved is just all the disruptions and the one-off costs that have been burdening the organization over the past few quarters.

Scott Gruber, Analyst

Got you. I guess the heart of the question was whether you are starting to see or expect some of the issues to ease so that you won't need pricing to reach those margins, or if there are ongoing issues that require pricing to get there and also normalize the incrementals.

Clay Williams, Chairman, President and CEO

Yes. I would say we're not anticipating significant deflation in our purchases. We've heard that some grades of steel are decreasing slightly and there are indications of easing freight costs here and there. However, the direction to our organization is to treat these changes as permanent and structural. We need to focus on securing prices that surpass these changes to improve our margins. In many respects, 2022 is likely to be influenced by the inflation we're experiencing, some of which may decrease, alongside the structural disruptions caused by COVID that result in one-time charges, contrasting with positive pricing movements that could enhance margins. Therefore, we're committed to maximizing our pricing potential as much as possible. As Jose mentioned in our forecast, while we are achieving pricing gains, they are at least somewhat balanced out by the impacts of inflation.

Neil Mehta, Analyst

Clay, first question is around capital returns. Is it fair to say that as you kind of work through the supply chain issues this year, we shouldn't be looking for incremental capital returns in the form of dividend or share repurchases. But as you go into 2023, have you started to frame out what the framework is for returning what could be a decent amount of free cash flow generation, ultimately as margins normalize?

Clay Williams, Chairman, President and CEO

Yes, this is something we're very focused on. We reinstated our dividend in December, having made the decision in November before Omicron presented operational challenges. This situation has been frustrating and disappointing for us. However, I am increasingly optimistic about the potential for a multiyear up cycle. We will closely monitor this as we progress through 2022 and discuss it with our Board. Over the past seven to eight years, we have consistently returned significant capital to our shareholders through dividends and share repurchases, and we recognize the importance of continuing that practice. While the near-term COVID impacts are disheartening, we are seeing positive developments in demand, an increase in orders, and a promising outlook for the oil field. Our belief in a stronger market during this up cycle continues to grow. Very good. We are above our $200 million annualized run rate presently in revenues in the wind space. And as we have said on prior calls, that's going to $400 million by year-end. And what I'd tell you is we're probably running ahead on our bookings in that space. And so that's going really, really well. We think there'll be probably a second, maybe a third Jones Act vessel sold for the U.S. market in addition to a handful of other vessels that will be ordered in 2022. That's in the fixed wind space. We also, as you know, have some offerings for the floating wind space, which is more nascent, but a big Scott wind tender was led here a few weeks ago, excited about the opportunity to participate in that. And we're talking to a number of the winners of those lease auctions about supporting their operations, along with opportunities in Asia. And in onshore, continuing to progress on what we think will be a very disruptive land win offering, which is the combination of a lower-cost steel tower that's also materially taller than existing towers. Combined with a proprietary way to erect those towers in the field. And we think that that can greatly improve the economics of land win farm developments, taking the sort of the average size turbine from 3 megawatts up to like 13, 14, 15 megawatts. And so that's very disruptive, materially better economics for the wind developers and the possibility of NOV emerging with some proprietary technology that makes that happen is super exciting. So that's win. And then as you know, we've got things going on in solar, in geothermal, and carbon capture. So a lot of opportunities that we see on the horizon for the energy transition. Thank you, Latif. As you know, we've been very aggressive on reducing costs during the past few years, focused on cash flow, liquidity and maintaining strong financial resources, that's enabled us to invest in those energy transition technologies that I mentioned along with other digital technologies and new products for the oil field. So as we enter into this multiyear up cycle that we foresee, NOV has a great position and a great portfolio to bring a lot of value to our customers' operations. So looking forward to getting through the near-term challenges and looking forward to a brighter future ahead. Thank you all for joining us today. Thanks to the employees that are listening in today, and we look forward to updating you on our first quarter results in April.

Operator, Operator

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