Loren Singletary - Vice President-Investor & Industry Relations Clay C. Williams - Chairman, President & Chief Executive Officer.

Jim D. Crandell - Cowen & Co. LLC Marshall Adkins - Raymond James & Associates, Inc. Jeff Tillery - Tudor, Pickering, Holt & Co. Securities, Inc. Kurt Hallead - RBC Capital Markets LLC Judson E. Bailey - Wells Fargo Securities LLC Sean C. Meakim - JPMorgan Securities LLC.

Good morning and welcome to the National Oilwell Varco Earnings Call. My name is Kevin, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. I will now turn the call over to Mr.

Loren Singletary, Vice President, Investor & Industry Relations. Mr. Singletary, you may begin..

Thank you, Kevin, and welcome, everyone, to the National Oilwell Varco second quarter 2015 earnings conference call. With me today is Clay Williams, President, CEO and Chairman of National Oilwell Varco.

Before we begin this discussion of National Oilwell Varco's financial results for its second quarter ended June 30, 2015, please note that some of the statements we make during this call may contain forecasts, projections and estimates including but not limited to comments about our outlook for the company's business.

These are forward-looking statements within the meaning of the Federal Securities Laws based on limited information as of today which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially.

No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business.

Further information regarding these, as well as supplemental financial information and operating information may be found within our press release or on our website at www.nov.com or in our filings with the SEC. Later on this call, we will answer your questions which we ask you to limit to two in order to permit more participation.

Now, let me turn the call over to Clay..

Configurable rig floors, low cost vessels, more highly automated land rigs, NOVOS control systems that enable third party developed apps and retrievable subsea BOP pods.

While offshore rig newbuilds demand is expected to remain low for an extended period, we believe demand for land rigs, specifically AC Tier 1 walking, electronic control, high pressure mud system capable land rigs could resume in earnest as early as late 2015 driven by several conversations we have underway in the Middle East, Latin America, and in North America.

We see the new rig technology strategy, AC-powered, electronic-controlled, high levels of automation, prevailing strategically in all rig categories, land and offshore.

So, to summarize, our second current initiative is to recognize that the industry will recover and to make sure that we have continued to invest in technology that will maximize our position in that recovery.

NOV is unique in its ability to pioneer new technologies, new business models, and capabilities to serve the industry, and we will not let this downturn distract us from our long-term vision. Our third initiative is to deploy capital into acquisition opportunities which will emerge in this downturn.

The strategies I outlined earlier can be enhanced and accelerated by combining businesses. We're actively seeking M&A opportunities. But, to be clear, we will be disciplined in our approach. We have closed three bolt-on acquisitions so far this year and have letters of intent with several more.

But thus far, we find making the bids and asks converge continues to be a challenge. As most of you know, we have a long history of building NOV through acquisitions, and we have a lot of experience in this area. That experience teaches us to be patient until it's time to be otherwise.

In preparation for potential opportunities, we expanded our revolving line of credit to $4.5 billion during the second quarter.

So, to summarize, we're reducing costs, we are continuing to invest in our long-term plans, and we are pursuing M&A opportunities to accelerate and enhance those long-term growth opportunities, all to position NOV for future growth and profitability. This could not happen without the terrific employees that make up NOV.

And I want to thank them for their hard work and leadership through this difficult time. In a challenging market, our customers need us more than ever to provide great service and technology and crisp execution, and I'm proud to be a part of the team that does that better than anybody.

Now let me touch on a couple more subjects before I turn it over to Loren. Unfortunately, in Brazil, we don't have a lot more clarity on the resolution of Sete's rig building and financing than we did last quarter.

While there have been press reports of reductions in rig building, we have not received any cancellations from our customers on the 22 floater packages for which we have binding contracts in hand to provide.

Consequently, we continue to report these contracts in our backlog and at June 30, 2015, they totaled $3.1 billion within our Rig Systems backlog. And during the second quarter, we recognized $80 million in revenue related to the shipyard where we continue to be paid. We have suspended activity in the other three shipyards.

Next, the liquidation of working capital is proceeding more slowly than we would like for a couple of reasons. We had extraordinarily large cash tax payments in the quarter related to a foreign tax matter that we reported in the first quarter.

The unwind of our Rig Systems backlog and associated customer financing will naturally soak up calculated working capital as we earn revenue against projects for which we have already been paid. Third, the negotiated delay of several rigs in the shipyard means we will hold inventory for these projects longer than we originally planned.

But as we noted on our last call, we expect the margins that we earn on this projects to benefit as a result as you saw in the second quarter. Finally, our customers have been slower to pick up their equipment given market conditions resulting in inventory remaining on our books a little longer than normal.

We remain focused on improving cash conversion and expect to make better progress over the next few quarters. We're also aggressively pursuing more repatriation of cash from overseas after good progress last year on this front. We believe the second half of 2015 will see further improvements in this area.

At this point, let me turn it over to Loren to discuss our second quarter performance and outlook in more detail.

Loren?.

Thanks, Clay. I will now discuss our segment operating results for the second quarter of 2015. NOV Rig Systems generated revenues of $1.9 billion, down 24% sequentially and 19% compared to the second quarter of 2014. Revenue out of backlog was down 24% sequentially to $1.7 billion.

We completed eight offshore drilling equipment packages during the quarter. Improved project execution and the impact of several cost reduction measures, including renegotiating vendor pricing, improved logistics and supply chain optimization, allowed for an increase to the segment margins.

Operating profit for the segment was $395 million, yielding operating margins of 20.5%, up 120 basis points from the first quarter of 2015 on improved margins on projects. Decremental leverage was 16% sequentially and 24% year-over-year, well below normal leverage for the business in the 30% to 40% range due to cost reductions.

EBITDA was $419 million or 21.7% of sales and EBITDA margins increased 140 basis points as a result of these cost-saving measures. Q1 to Q2, offshore revenue declined 18% and land revenues declined 35%. Now, let's discuss capital equipment orders and the resulting backlog for NOV Rig Systems.

In the second quarter, we received $313 million in new orders, resulting in a book-to-build of 18%, a moderate increase from Q1. We ended the quarter with a backlog of $9 billion, down 13% sequentially. Of the total $9 billion backlog, approximately 91% is offshore and 92% is destined for international markets.

As we move into the third quarter of 2015, we expect total NOV Rig Systems revenues to decline approximately 20% into the $1.5 billion to $1.6 billion range.

We expect to see revenue out of backlog slowing to the range of $1.3 billion as we will ship fewer land rigs and continue to work through deliveries of offshore rigs, which have been rescheduled for delivery later than originally planned.

We continued cost-cutting reduction initiatives to reduce overtime, to increase supply chain cost which is helped by easing congestion in the shipyards, but lower volumes are expected to lead segment operating margins to decline into the mid-to-high-teens for Q3.

Rightsizing and efficiency savings will likely be more than offset by under-absorption resulting from revenue declines.

We expect orders for offshore newbuilds to remain low but we do see a few opportunities for specialized equipment like 20,000 psi and arctic offshore rigs and jack-ups for drilling contractors to go into national oil company programs through the next 18 months or so.

On land, we are seeing rising inquiries for an international bright spots in Latin America and in the Middle East as there is growing appetite for high horsepower desert rigs suited for those regions.

We also have North American customers committed to their long-term strategies of high grading the technology of their rig fleets to Tier 1 ACs with high pressure mud systems, and we believe we will begin seeing meaningful higher land rig orders later this year.

We also expect capital equipment orders to slowly recover later in the year and into 2016 to support the ongoing rigs' continuing work. Nevertheless, we expect book-to-bill for the segment to remain below 1 for at least the next several quarters. Our NOV Rig Aftermarket segment sales declined more than we expected in the second quarter.

It generated revenues of $657 million, down 9% sequentially, and down 16% compared to the second quarter of 2014.

As Clay noted, the sharp decline in both offshore and onshore drilling activity led to sharp reductions in cash expenditures by drilling contractors, most notably, in spare part sales as customers continue to consume inventories and cannibalize equipment off stacked rigs before making any new purchases.

Customers are doing the absolute bare minimum in terms of maintenance and repair, only what's necessary to keep their fleets running. Operating profit for the segment was $145 million, resulting in operating margins of 22.1%. Margins were down 560 basis points sequentially, and 550 basis points year-over-year.

And sequential decremental leverage was an extraordinarily high 87% due to lower revenues, pricing pressure and inventory charges related to older equipment. Excluding the charges, sequential decremental leverage would have been in the mid-50s range. EBITDA was $152 million or 23.1% of sales.

Land sales were approximately 25% of the total segment revenues, very consistent with Q1. As we move into the third quarter, we believe Rig Aftermarket revenues will be roughly flat with Q2, with slight increases across most spare parts product lines and additional repair work.

This will be offset by less demand for field services and fewer manifold and expendable sales from our Mission Product line. Operating margins are expected to increase slightly from Q2 on a higher mix of spare part sales and on reduced charges.

Long term, our outlook for this segment remains very bright as the industry is high-grading its fleet of equipment with much more NOV technology within the installed base. When worldwide drilling activity recovers, drilling contractors who are currently delaying purchases will need this segment to respond quickly.

And an increase in demand, accompanied with efficiencies and cost reductions currently being implemented, will position this segment for sharp improvement. For the second quarter of 2015, Wellbore Technologies generated revenues of $956 million, down 18% sequentially and down 34% compared to second quarter of 2014 on lower global drilling activity.

Operating profit for the segment was $47 million, resulting in operating margins of 4.9%, down 570 basis points sequentially and 1,370 basis points from the second quarter of 2014.

Segment-wide cost reduction efforts in the face of falling rig counts helped mitigate some of the intense price pressure felt across the group, which helped hold sequential decrementals to 36%. Pricing appears to have stabilized across North American markets as the rig count has more or less stabilized and has ranged from low-single digits and on up.

Some international markets are continuing to receive invitations to discount as international activity has slowly declined. EBITDA in the second quarter was $146 million or 15.3% of revenue. As we've noted in the past, drilling activity tends to drive results for the segment overall.

But portions of this business are more related to production and well servicing. So, areas like tubing reclamation and line pipe coating within Tuboscope are helping offset drilling-related declines.

Looking into the third quarter of 2015, we believe Wellbore Technology revenues will be down in mid-single-digit percentage terms as backlog for drill pipe and other manufactured products from the group have declined through the second quarter.

As Clay noted earlier, our customers are destocking inventories and some of our products within Wellbore Technologies are closer to resumption of orders than others. We expect margins to decline slightly from the second quarter on mix and continued discounting in certain areas.

Nevertheless, we are also continuing to implement strategies to reduce cost while also increasing operational efficiencies around the world. And we are defending our strong market positions within the Wellbore Technologies segment by investing in R&D and innovating new technologies to position ourselves for an inevitable upturn.

NOV Completion & Production Solutions generated revenues of $873 million for the second quarter of 2015, down 8% sequentially and 23% compared to the second quarter of 2014. Operating profit for the segment was $81 million, resulting in operating margins of 9.3%, down 210 basis points sequentially and 470 basis points year-over-year.

Sequential decrementals were 36% and second quarter EBITDA for the segment was $141 million or 16.2% of sales.

Sequential sales across this segment varied widely with XL Systems and NOV flexibles posting improvements while sales of coiled tubing and pressure pumping equipment declined sharply on lower backlogs and on customers delaying pickup of equipment they ordered in prior periods.

Turning to our capital equipment orders and resulting backlog for NOV Completion & Production Solutions, the second quarter saw an order intake of $264 million and recognized $538 million of revenue out of backlog resulting in a book-to-bill of 49%, and a quarter-ending backlog of $1.2 billion, down 19% sequentially.

Orders were down 19% from the $327 million won in Q1. And of the total $1.2 billion backlog, approximately 71% is offshore and 82% is international. As we move into the third quarter of 2015, we believe revenues will be roughly flat with Q2 results. We expect revenue out of backlog to be in the range of $450 million.

Lower revenues and continued pricing pressures across the segment should offset cost reduction efforts which will result in a slight margin decline in the third quarter.

We expect the next few quarters to be challenging in the FPSO space, but we expect to continue to help NOCs and IOCs develop cost-effective solutions to improve the economics of offshore projects. Low oil prices have prompted these customers to reevaluate project scoping and seek ways to reduce cost.

The Completion & Production segment is well positioned to help. Now let's discuss our financial statements. Working down the consolidated statement of income for the second quarter 2015, you will see that gross margin declined to 22.3%, generally reflecting pricing pressure partially offset by cost reductions.

SG&A decreased 14% or $69 million sequentially due to cost reductions and was 10.7% of revenue. Other items were $17 million in the quarter due primarily to severance and facility closure cost. Equity income decreased to $7 million, and we believe that will continue to fall through the remainder of the year due to the sliding demand for OCTG.

Other expense for the quarter was $30 million which represents a $26 million delta sequentially primarily due to fewer foreign exchange losses and asset write-offs during the second quarter of 2015. The effective tax rate for the second quarter was 26.9%, down from the 37.6% rate we posted in the first quarter of 2015.

The first quarter's rate included a discrete foreign exposure which did not reoccur. The low second quarter rate reflects a much higher mix of income from low-rate foreign jurisdictions which we expect to have a smaller effect later in the year. Looking forward to Q3, we expect the tax rate to be a little higher in comparison to the second quarter.

EBITDA for the second quarter excluding other items was $627 million or 16% of sales. Turning to the balance sheet, our June 30, 2015 balance sheet employed working capital excluding cash and debt of $6.1 billion, up $343 million or 6% sequentially.

The increase was driven entirely by accrued taxes which declined $408 million in the quarter on a large cash tax payment. Other movements within working capital saw accrued liabilities and accounts payable decline, which were offset by a decrease in accounts receivable, down $548 million sequentially. Net customer financing.

The net of prepayments, progress billings and cost in excess of billings was a use of cash of $124 million in the quarter due to our declining backlog in Rig Systems.

Inventory ticked up slightly due to delays in customers picking up frac equipment and the negotiated delays in offshore rig deliveries, partially offset by inventory reductions in almost all of our business units.

For the quarter, the company generated $194 million in cash flow from operations and capital spending was $104 million, down 20% sequentially and 41% year-over-year.

In the quarter, we also made dividend payments of $178 million and spent $447 million to repurchase 8.6 million shares of NOV stock for a total of $2.6 billion in share repurchases under our current $3 billion authorization. Debt increased $60 million to $4.3 billion. And our net debt to capitalization was 9.3%.

As a result, we ended the second quarter of 2015 with a cash balance of $2.5 billion, down $480 million sequentially. Of that $2.5 billion in cash, 3% of the balance was in the U.S. as of June 30, 2015. With that, we'd like to open it up for questions..

Thank you. We will now begin the question-and-answer session. We ask that you please limit yourself to one question and one follow-up. Our first question comes from Jim Crandell with Cowen..

Hi, Jim..

Good morning, Clay and Loren.

Clay, my first question was about acquisition strategy and you've been great in terms of bolt-on acquisitions, but how is your acquisition strategy changing given the collapse of the industry? And is NOV becoming more proactive in regards to larger acquisitions?.

Yeah, I'd say generally in a cyclical downturn, and this is one of many we've been through, our view is that it becomes much more of a buyer's market. The risk, I think, in transactions tends to go down a little bit, but it can be a challenging market to get deals done because most companies don't particularly want to sell at the bottom.

And so it's a challenge making bids and the asks come together and to reach a price that all parties view as fair and move forward. So, the way we've kind of adjusted our strategy here is to increase the number of conversations that we're having, and these include both the smaller bolt-on deals that I referenced.

I think we've had three close so far this year, and we've got another half dozen letters of intent that we've entered into along with some larger transactions that we've reached out to some companies to begin to explore. So, what we're trying to do is approach this really from a portfolio standpoint. NOV is diverse in terms of what we do.

We operate through four reporting segments, 15 business units. And we have exposure to a lot of areas. So there are a lot of potential targets that are interesting that can potentially enhance our strategic positioning.

And statistically, what we want to do is stay close to the hoop across multiple conversations to be ready when the stars align and when both parties can reach a price that we can both view as fair..

Okay. Good. Okay. That's a good answer. Secondly, Clay, it would seem that most companies who've ordered offshore rig packages from you have asked to stretch out the timetables under which those would be delivered which should mean a sharper drop, I guess, in the near term but a more gentle decline as we get out into, maybe, 2018, 2019, and 2020.

Can you talk to that phenomenon and how much it might affect – what kind of a drop you're looking at maybe in the next year or two in your offshore rig package deliveries, and how you would expect decremental margins to perform in that environment?.

Well, you're kind of seeing that phenomenon unfold here in real-time, Jim, including second quarter. In our second quarter results, we had Rig Systems down 24% sequentially at 16% decremental leverage so the group's done a great job managing decrementals down. And actually, you saw a lift in their EBIT margin despite 24% lower revenues.

But the shape you're describing is exactly what we foresee. As we push those deliveries out, it sort of spreads the revenue recognition across more quarters.

As we explained on our last call, we benefit operationally because it enables us to execute these projects with our A-team and allows us to utilize our top-tier suppliers and execute the projects more systematically, less overtime, less interference between, for instance, our installation and commissioning teams and shipyard activities that are – quarter two were going on in parallel, and we're trying to schedule around and step around each other on these rigs.

So, it actually is kind of a better world to execute these projects and maximize the efficiency and returns on the projects, but the impact on the top line is really sort of baked in our guidance. So, we saw Q2 down 24%. I think for Q3, we're forecasting top line for Rig Systems to be down another 20%.

I think then we maybe start to level out a little bit and the quarter-to-quarter transitions become a little smoother, not to say that revenue would continue to decline with backlog borrowing a big influx of orders, which we don't foresee at this time. So, that's probably the most likely outcome. But that's kind of the general shape of things.

But again, I would stress we have great, experienced teams managing this business. It's not our first choice to delay things, but the silver lining on that is that we are able to execute these projects more efficiently to manage costs of these projects, and you saw evidence of that in our second quarter results we just reported..

Okay. Good. Thank you, Clay..

You bet. Thanks, Jim..

Our next question comes from Marshall Adkins with Raymond James..

Hey, guys..

Hey, Marshall..

Hey, Marshall..

It sounded, Clay, like you're somewhat optimistic about an order recovery in Rig Systems back half of this year and going into next year. We've kind of been running $250 million, $300 million a quarter.

Did I hear that right? And if so, could you give us a little more color on why you think things could improve, at least on the order side for Rig Systems?.

Yeah. A couple things. There's a lot of conversations underway around land rigs. And I think generally, our land rig customers are much more optimistic about recovering commodity prices driving higher levels of activity.

And against that, I would add it's almost unanimous now, the drilling contractors that we speak to all want to convert their fleets to AC-powered Tier 1 rigs. And they recognize we're in a cyclical downturn, it gets tough to do. They're cutting CapEx budgets. But longer term, they see, hey, this is where the market is going.

And to be relevant and to remain competitive in that market, they really need to offer the latest and greatest technologies. And it's a way for them to differentiate themselves against smaller competitors that can't afford to write a $20 million check to buy an AC Tier 1 land rig.

So, I would say that their strategic plans to upgrade their fleets are largely intact in North America. And then, we've also seen that interest in AC land rigs spread to other markets. So, the Middle East is moving hard in this direction as well, adopting new technology. Those tend to be much bigger rigs, higher horsepower, bigger ticket items.

And then, in South America, still a lot of interest in the Vaca Muerta shale in Argentina, and opportunities to add rigs there. So, generally, a higher level of optimism in a growing number of conversations with land drillers that could result in orders. I don't think it'll be a Q3 phenomenon, but Q4.

We may start to see some orders flow in around land. And then, on the offshore, I think we're going to see rising demand for offshore components going into the rigs that are working. And then, we also had some conversations going on with drilling contractors that are affiliated with national oil companies.

And these are drilling contractors that many on Wall Street, maybe, have never heard of but interested in buying more specialized rigs. Rigs that are more fit for purpose to go into specific drilling programs around the globe. So we sort of plunged into this deep freeze here through the first half of 2015.

I think midway through 2015, we're starting to have some conversations now with some customers that are sort of looking past this maybe and that gives us cause for hope that – again, this won't be a Q3 phenomenon but maybe Q4. And once we get into 2016, a little brighter outlook for orders..

Perfect. That's helpful.

A follow-up kind of unrelated, where are we on the cost reduction curve? What inning or however you want to phase it? Are we still fairly early in the game or have we gotten most of the cost reductions in place?.

Pretty well into it. It's unfolding through the year. But I would say we've got great leadership across our business units who have really rolled up their sleeves and tackled the difficult challenge of reducing costs, having been through many downturns themselves. And so, I really applaud the leadership of pushing through that.

There are additional measures to come, but I would say, I think a lot of them – perhaps most of the cost savings that we foresee are done. It also varies by business unit out there a lot. But it's well underway..

Seventh or eighth inning?.

Yeah. I'm going to stay clear of using the baseball. Other than – you're seeing I think pretty good management of decrementals on sliding revenues showing up in the income statement. So I think there's good evidence that so far we're managing this closely..

Perfect. Thanks, guys..

You bet. Thank you..

Thanks, Marshall..

Our next question comes from Jeff Tillery with Tudor, Pickering, Holt..

Good morning..

Hi, Jeff..

Morning..

Clay, as I think about the more medium-term decremental margin potential within Rig Systems, so the guidance for Q3 would imply something in that high 30%-range decrementals as we....

Right..

...think about longer-term backlog continuing to erode into 2016.

Is that a reasonable range to think about the kind of absorption issues impacting margins?.

Yeah. There's a wide range of variable margins within the products that Rig Systems sells.

You did ask about Rig Systems, right Jeff?.

Correct..

Okay. And so what we foresee in third quarter is we're kind of going to revert to what's a more normal level of operating leverage for the business ex-price pressure and some extraordinary costs, things that were done.

So, that's kind of I would say in the essence of all other factors, that business would normally move up and down somewhere in the mid 30% range and our guidance for Q3 really sort of embodies that natural operating leverage..

Okay.

And then as I think about the potential cash generated out of working capital kind of over the next two or three quarters, what order of magnitude you think is a reasonable expectation?.

We think we're going to make good progress. Our working capital has a lot of unusual moving pieces, and as I've mentioned on my comments, we were a little disappointed it went up sequentially. That was entirely due to large cash tax payments which was an extraordinary item that we had in the second quarter.

But even beyond that, we have costs in excess of billings on our balance sheet and billings in excess of cost both related to our POC projects and they're a little unusual in that they represent, in the case of billings an excess of cost, cash payments our customers have made which really work sort of like a deferred revenue concept.

So, as we've worked that down, we've already been paid the cash....

Sure..

...to be a use of cash as we execute those projects. We also have a couple other moving pieces here that I referenced in the call. Inventory was up just a little bit in Q2, which was unusual given the decline in revenues.

And that's related to the fact that as we've slowed delivery of these big offshore rigs, we can't slow our supply chain down to the degree that we would like. We are slowing it, so we've continued to take inventory in associated with those projects. We've got customer slow (47:48) picking up of equipment along the way.

And so those two things contributed to inventory rising slightly. The third may not be completely obvious, but for the last couple of quarters, we've referenced in-sourcing into our own machine shops and fabrication facilities.

And if you think about that, that actually uses working capital because you're buying raw materials for your machine shops to process, and you're also sort of paying your employees in real time as opposed to outsourcing this to a vendor that may be buying raw materials and a vendor that gets paid in kind of a normal payable cycle.

So, a lot of moving pieces in our working capital. We do know it'll come down. And I think it was predictable that the turn in working capital would be delayed a quarter or two. So, we think directionally, it's going to be coming down and become a source of cash, but I'm going to pull it short of quantifying it for you..

Okay. Thank you..

Okay..

Our next question comes from Kurt Hallead with RBC Capital Markets..

Hey. Good morning..

Hi, Kurt..

Morning..

I was curious, you bought back a chunk of stock here in the quarter, kind of in the 10% I guess was what you stated since you implemented the program; average price, $50. Now, stock price is $40.

At what point do you guys kind of maybe think about sitting tight for a little while and maybe gearing it more toward M&A?.

Yeah. Last quarter, you remember, Kurt, we said we were going to dial back the rate of share repurchases in view of M&A opportunities and we'll be watching it closely through the quarter now too, but working at that more reduced rate. I think we have about a little over $300 million left on our authorization to go.

But what we're doing is balancing the opportunities we see on the M&A landscape and other opportunities to deploy capital against what we think is a terrific company trading below book value in an extraordinary buying opportunity. So, that's sort of a judgment call, but that's the calculus we'll continue to be going through..

Great, appreciate that. And then maybe a follow-up on Rig Systems, the guidance range for some decline, a couple hundred basis points or so plus of decline in margins and, again, you're in that mode of excellent execution and delivery on the margin front in Rig Systems, kind of like you were in the prior cycle period.

So, what's the thought on the opportunity for your execution to actually deliver better-than-expected margins going forward?.

Yeah. You probably remember 2009, 2010, where – I hope they're not listening, but our Rig Systems guys are really good at under-promising and over-delivering. You saw it in this quarter, right, in the second quarter. So, just terrific execution by that team.

And so, yeah, we're guiding to sort of more normal operating leverage for the third quarter, but they're very good at finding ways to reduce cost and improve efficiency. So, frankly, I wouldn't be surprised if we do a little better than that if history is a guide. But for the time being, we'll stick with our sort of official guidance of margins down..

It's all good. All right. Thanks, Clay. Appreciate it..

You bet..

Thanks Kurt..

Our next question comes from Jud Bailey with Wells Fargo..

Thanks. Good morning..

Morning..

Morning, Jud..

Question on aftermarket. Clay, I think you indicated you believe that your aftermarket business stabilizes in the second half of the year and can potentially grow in 2016.

Is that based on an expectation that the offshore rig count stabilizes? Can that still play out if the offshore rig count continues to trend down well into 2016?.

It gets more challenging with the rig count coming down, but really the basis for it, Jud, is the fact that the installed base of NOV equipment is rising. The new rigs that are still being built, I think there's, outside of Brazil, more than 50 floaters coming into the marketplace.

The new rigs have a much higher content of high technology NOV equipment that should be more aftermarket consumptive and a better opportunity for us as compared to the old rigs that are more likely to be laid down and scrapped. So, the mix of rigs is the main basis for our optimistic outlook for rig aftermarket in the future.

It's not purely a rig count-driven phenomenon..

Okay. Thanks for that. And then my second question is just thinking about your revenue out of backlog and it's a little bit early, but looking into next year – I mean, this year, you'll be pulling less revenue out because of customer delays from Petrobras and some of your other customers.

Looking into next year, some of those delays, I'm assuming, could continue as operators or contractors push the rig deliveries out, but you'll also have more, I guess, shorter cycle business maybe flowing through.

Do you think your revenue out of backlog increases from that low 50% range, or is it more reasonable to keep it in the low 50%s or does it start to tick up with more shorter cycle businesses? How should we think that through?.

I think you laid out the factors there pretty well. It's all very fluid right now, so I'm hesitant to get too many quarters out in terms of providing guidance around that. But you're right.

The component work that should come back after opportunities to cannibalize begin to diminish for contractors, both land and offshore, as well as maybe a little more demand on the land side. Depending on how that all plays out, I think that's going to drive the revenue out of backlog and the size of our backlog..

All right. Thank you..

You bet..

Thank you..

Our next question comes from Sean Meakim with JPMorgan..

Hey. Good morning, guys..

Morning..

Hi, Sean..

So, we've heard quite a bit throughout the earnings season thus far from other parts of offshore talking about greater willingness on the part of E&Ps to reexamine how they're planning offshore projects.

You touched on this in your opening remarks, but I guess, can you give us a better sense of how much of a delta have you seen in terms of receptivity from FPSO customers in terms of cost-savings solutions? It seems like maybe it'll take a bit of time before orders come through, but are we seeing a real step change given the commodity price?.

Yeah. And I would say it's a real step change in attitude. But they're still a ways from signing purchase orders and sanctioning these projects. So, you go back a couple years ago in a $100-a-barrel world. There were problems with returns, I think, on some of the deepwater developments.

But, frankly, I think less openness or less willingness on the part of our customers to consider sort of more radical or more revolutionary sort of approaches to changing how those projects are executed. The silver lining of a $50-a-barrel world has been we're now welcomed into those conversations with those customers.

We're seeing our volume of engineering work, of feed-study type work around these projects within our FPSO group rising. And that's good, but we're not yet to the point where our oil company customers are necessarily pulling the trigger and sanctioning these projects and moving forward.

But the good news is it all starts with kind of a reengineering, retooling, rescoping of these projects. You've heard of lots of examples in the E&P world that you referenced of oil companies taking out 20%, 25% out of their development costs by kind of resetting how they're going to execute these projects.

I can only think that's probably helped in a lower-day-rate environment for rigs and a pretty hungry shipyard universe that can fabricate big steel structures for not much above cost these days. So that, I think will all help the economics of the deepwater.

But suffice it to say, huge reserves discovered in the deepwater, a lot of smart people at the oil companies now with motivation to find new and better ways to develop those fields. And I think NOV is really well-positioned to help them through.

And we're very pleased at the progress that we have in conversations with a few of those oil companies here through the last few quarters..

Right. Yeah, it all makes sense.

Just to shift gears to go back to M&A for a second, has the pending Hallibaker merger and the pending divestments changed the strategy towards M&A at all? Does the outcome there delay any other potential deals as folks wait to see what happens?.

Yeah. It's obviously a large merger. It spans a number of different subsectors in oilfield services. And so there's implications for specific spaces within the industry, specific marketplaces, specific geographies. And so, we're watching very closely how that comes together.

And so, I would tell you strategically, certainly it's shaded our thinking and what we always try to do is think out three or four moves into the chess game. So, what are the perhaps non-obvious implications of the Halliburton-Baker merger. So, yeah, it's – the short answer is yes, it's certainly shaded our strategic thinking.

And we're – but they're both customers, we wish them well and we'll see what happens..

Yeah. Fair enough. All right. Thanks, Clay..

You bet..

Thank you..

Ladies and gentlemen, this does conclude today's question-and-answer portion of the conference. I would now like to turn the call back over to Mr. Williams for closing remarks..

Great. I want to thank all of you for joining us this morning. And again, in particular, thank our employees for the terrific job that all of them do. And we look forward to updating you on our call in October. Thank you..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect..