Loren Singletary - National Oilwell Varco, Inc. Clay C. Williams - National Oilwell Varco, Inc. Jose A. Bayardo - National Oilwell Varco, Inc..

Ole H. Slorer - Morgan Stanley & Co. LLC J. Marshall Adkins - Raymond James & Associates, Inc. Bradley Philip Handler - Jefferies LLC Sean C. Meakim - JPMorgan Securities LLC Scott A. Gruber - Citigroup Global Markets, Inc. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc..

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Loren Singletary, Chief Investor & Industry Relations Officer. Sir, you may begin..

Thank you, Crystal, and welcome, everyone to National Oilwell Varco's first quarter 2017 earnings conference call. With me today are Clay Williams, President, CEO and Chairman of NOV; and Jose Bayardo, Senior Vice President and Chief Financial Officer.

Before we begin the discussion of NOV's financial results for the first quarter of 2017, please note that some of the statements we make during this call may contain forecast, 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 NOV filed 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 and operation information may be found within our press release and on our website at www.nov.com or in our filings with the SEC. On a U.S. GAAP basis, for the first quarter of 2017, NOV reported revenues of $1.74 billion and a net loss (02:06) of $122 million or $0.32 a share.

Please be aware that our use of the term EBITDA throughout the call this morning will correspond with the term adjusted EBITDA as defined in our press release. We also use other non-GAAP measures as described in our press release. 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..

one, managing what we can, namely costs; while, two, pivoting towards technologies like horizontal drilling and hydraulic fracture stimulation, which we see benefiting disproportionately in the next upturn.

Solid results in both areas enabled us to once again outrun declines in offshore markets and rig building during the first quarter to post sequential revenue improvement overall.

As global oil supply and demand rebalance and oilfield activity grinds higher, NOV is building escape velocity from the black hole the oil industry has been in since late 2014.

Oil demand has grown nearly every single year since the first commercial well was drilled in Pennsylvania in 1859, making the oil industry, in my view, the ultimate growth industry for the past 158 years.

It's fueled an unprecedented improvement in global standards of living, as people figure out that plastics and transportation fuel makes their lives a whole, whole lot better.

During each of the many down cycles this industry has endured, those of us engaged in the industry are forced to learn once again just how Darwinian this business can be, and we are forced to learn once again of the necessity of drastic reductions in our expense base.

Later during the subsequent up-cycles, the world is forced to learn once again that double-digit reductions in global E&P CapEx result in diminished supply and the world is forced to learn once again how important petroleum is to the world's economy and standard of living. That big lesson is coming.

Last year's E&P CapEx spending was just 50% of 2014 levels. Forward supply will become a challenge. The U.S. will continue to play a larger role in the supply of oil. This year it has returned to production growth, plus we've seen lots of overseas barrels stored in tankers offloaded into the U.S. market recently, two factors that led to a reported U.S.

inventory increase which in our view contributed to oil prices dipping back below $50. Nevertheless, depleting production through the other 80-plus-million barrels a day of supply and another year of growing demand, the industry's 159th, will inevitably lead to tightening.

In the meantime, our North American customers are demonstrating that their economics work even at current oil prices in many North American basins by putting rigs back to work at an astonishing rate. On average, they added 275 land rigs in the first quarter as compared to the fourth quarter of 2016, more than three rigs per day.

At year-end, NOV was generating a third of its revenue from North America. In the first quarter, that number was 37%. Offshore, we do not see empirical evidence of economics working for E&Ps yet at current oil prices.

Major project FIDs remain scarce and we're still yet to see significant tieback demand for subsea flexible pipe, and the count of offshore rigs under contract declined 3% or 15 rigs during the first quarter.

As a result, NOV's offshore-related revenues declined about 9% from the fourth quarter to the first quarter of 2017, and our overall consolidated mix of offshore revenue decreased to 43%, as land revenue grew 14% sequentially and land mix increased to 57%.

Major offshore rig building comprised less than 10% of our consolidated revenue mix in the first quarter. As we grind past the cyclical bottom, we continue to see crosscurrents within our businesses, some rising, some still falling.

However, what is very, very encouraging to us is that for the second quarter in a row we see more and more corners of our business recovering. To keep pace with demand, during the first quarter, we added a second shift to manufacture our IntelliServ wired drill pipe, as demand for NOV drilling automation utilizing wired drill pipe rises.

We added a second shift to service and reline the downhole drilling motors NOV provides to the industry to drill long horizontal wells. Our NOV Rolligon pressure pumping manufacturing service and repair facility has a Now Hiring sign in front of it.

We're supporting these major pressure pumpers' repair needs as their demand is exceeding their internal capacity. Sales of centrifugal pumps, valves, seats, rods, flow line and fluid-ends was the highest that we've seen since the fourth quarter of 2014.

And last month, we booked another order for another 75,000-horsepower hydraulic frac spread, our second major frac spread order in the quarter. After a couple of very, very rough years, we're seeing scarcity return to certain sectors of the oilfield, sectors where NOV plays an important supply role.

Strategically, we have positioned NOV within the sectors we see as most likely to face scarcity as the upcycle emerges, including horizontal drilling that is growing rapidly in unconventional basins today.

In fact, our Wellbore Technologies segment is the leading independent provider of critical tools used to drill horizontally and to geosteer wellbores to the most productive few feet within a shale reservoir, the sweet spot. 91% of U.S. rigs today are drilling directionally or horizontally compared to just 47% of active rigs a decade ago.

The sharp growth didn't surprise us. Horizontal drilling opens up much more reservoir rock to the wellbore than vertical drilling which reduces the capital cost per barrel of oil to develop and makes each well far more profitable.

Therefore, we embarked on a strategy to become the go-to provider of tools that enable horizontal drilling in anticipation of growth.

Through successive investment in acquisitions and technology, NOV steadily improved its position in the supply of drilling motors, jars, friction reduction tools, PDC bits, and more recently, rotary steerables and MWD to become a comprehensive supplier of critical horizontal drilling technologies.

Today, these comprise a little more than one-third of Wellbore Technologies' revenue mix. Importantly, we do not provide directional drilling services, only the tools that service providers need to deliver precisely-placed low tortuosity wellbores, thereby avoiding potential competitive conflicts with our directional drilling customers.

During the first quarter of 2017, Wellbore Technologies shipped nearly 13,000 downhole tools to our North American customers, a 32% sequential increase. We both lease and sell these tools, depending on the needs of our customers and we continually invest in technology to improve the life and performance of our sophisticated drilling tools.

Last quarter, NOV introduced our new Vector Series 50 bearing pack which, when coupled with our ERT power section, delivers a very short bit-to-bend length, a robust design with greater operational life and less aggressive rotation and tighter curve sections.

Last month, this new drilling motor configuration helped a very happy customer drill their fastest vertical section yet and another boosted rates of penetration nearly 20%. This strong performance is enabling us to command significant premium over our conventional drilling motors, and we're adding additional tools to help keep up with demand.

Long horizontal drilling presents new and increasing challenges with the torque and drag on the drill string. The driller relies on the weight of the drill string to press the bit into the formation.

But when pipe bends around a 90 degree curve and then extends out horizontally a mile or two to the bit, the transfer of its weight to the bit becomes very uneven, and resistance to rotating the drill string can severely limit the drilling process.

So several years ago, NOV introduced a patented tool to combat this challenge by creating an axial oscillation that reduces friction, torque and drag and enables the smooth transfer of drill string weight to the bit. The Agitator is now used on most horizontal wells today.

And during the first quarter, we introduced a new and improved tool, the Agitator HE, that provides even greater friction reduction to enable our customers to drill even longer laterals faster and more efficiently. Initial tool runs indicate 38% faster rotating ROP and 74% faster sliding ROP.

NOV's ReedHycalog bits have a long and proud history of technology advancements in the industry. In fact, every major bit manufacturer licenses our patented cutter leaching process for their own PDC bits.

After introducing new technologies to combat thermal abrasion of cutters and introducing our new Tektonic bit last year, we'll be introducing our newest line of 2, 3 and 4D cutters Ion (10:48) this quarter, which offer superior thermal and impact resistance to drive greater durability and performance.

NOV's competitive advantages within these critical tools are compelling. Cost of failure to our customers is high. Premature failure of a downhole tool results in an unplanned round-trip of the BHA, a very expensive headache. NOV's reputation as market leader's built on our extensive experience and demonstrated performance.

We benefit from manufacturing scale, from purchasing scale and from sustained investment and leading-edge robotics and manufacturing technologies that provide us a cost advantage. Drilling motors are comprised of a steel rotor encased in an elastomer stator, through which hot and abrasive drilling mud is pumped.

We leverage our considerable expertise in elastomer technology over a large revenue base. Elastomer stators wear out over time, and the motor must be relined with new elastomer. NOV's reline shops around the world perform this critical aftermarket service for our customers who own their own drilling motor fleets.

Internationally, our reline plants benefit from first-mover advantage in several key markets that may not be sufficiently large to support a second competitor. Our customers want to get their drilling motors relined and back into service as soon as possible.

And having a reline shop nearby, avoiding lengthy and expensive customs transits to export and then reimport motors to be relined gives NOV a sustainable competitive advantage in this marketplace that grows in lockstep with horizontal drilling.

Within our Completion & Production Solutions segment, NOV provides a wide variety of fluid process equipment. Nature doesn't provide a clean barrel of oil ready for the pipeline.

Production engineers must pitch in to do that to separate water, oil, gas and sand from the wellhead and then to treat each for its intended destination; production, disposal or reinjection.

Associated gas, oil water emulsions, frac fluids flowback, condensate, natural gas dehydration and hot salt-saturated corrosive formation water are just a few of the many challenges production engineers have to navigate to deliver a barrel of oil or an mcf of gas of specific quality to a pipeline system. It's been estimated that the U.S.

petroleum industry produces 7 barrels of water for every 1 barrel of oil. This industry separates a lot of chaff from wheat every day. Production challenges can change or appear quickly. When a well declines and begins to produce water, called water breakthrough, the operator must respond with new water separation capabilities at or near the wellhead.

Shale wells typically flowback frac fluids at very high rates with very high levels of solids in initial production, which declines quickly with falling water production.

As the world supply of oil shifts, as it has done with the advent of North American shale production, new regions and new types of production bring new production challenges, which require new investment and new production treatment capabilities.

It is against this market backdrop of shifting production that NOV began to invest in Process and Flow Technologies a few years ago to help our customers more efficiently produce the clean barrel of oil ready for the pipeline.

Our strategy is built on the strength of NOV's market-leading discrete components, like reciprocating pumps, production chokes, fluid separators and Moineau progressing cavity pumps, which we've been making for 85 years and which, by the way, leverage the elastomer know-how that I described earlier when I was talking about downhole motors.

In each of these areas, NOV benefited from market leadership, extensive experience, intellectual property and brand recognition. I'll add that many of these products are also sold into industrial markets which further enhances our scale advantages.

Since 2014, we've been combining these into comprehensive processing solutions for our customers and with the addition of Fjords Processing, which we acquired in late 2016, our portfolio now spans every major processing need from free-water knockouts to vapor recovery and combustion to heater treaters, to gas dehydration, to sand separation to 2, 3 and 4 phase separators.

For instance, NOV's patented sand separation technology, the Tore Trap, removes solids down to 10 microns, reducing expensive filtration costs, tank cleanups and pump wear and tear. Our patented WaterWolf technology recovers oil and solids from produced water in a single stage without expensive filters and chemicals.

We've combined these together with pumping solutions to offer a turnkey saltwater disposal system that can recover an additional 20 barrels of oil from every 10,000 barrels of saltwater, oil that was previously reinjected and lost with conventional systems.

In short, our strategy provides a simple, comprehensive solution to our customers' saltwater disposal needs that avoids complex vendor-to-vendor interface risk, while boosting oil recovery and revenue.

Our Fjords acquisition in late fourth quarter enhanced this offering with its market-leading glycol regeneration technology used to prevent hydrate formation in gas lines and its unique Electrostatic Coalescer oil water separation technology, which removes water droplets out of emulsion and reduces the need for expensive chemicals.

Through selective acquisitions, like Fjords and others, NOV has now put together the number two global provider of petroleum processing equipment and technology, unique in our capability to design and fabricate production skids in-house, end to end, that fit our customers' footprint and weight constraints and that utilize market-leading pumps and components which are also engineered and manufactured in-house through 14 NOV plants around the world.

During the first quarter, this business comprised about one-fourth of Completion & Production Solutions segment revenue. In addition to oil and gas, it sells to midstream and industrial customers and also closely supports NOV's floating production business and Fiber Glass Pipe business.

Within the group, nearly one-third of its revenues are aftermarket related, which also brings OEM competitive advantage and high switching costs. So despite the challenges of the past two years, our business leaders have continued to quietly build and position our businesses for the inevitable upturn.

The business groups I described are just two of many examples of high impact, high return businesses within the NOV portfolio. I'm optimistic about our fortunes here at NOV precisely because of the leaders and teams that comprise these businesses and the many others across NOV just like them.

There's no better organization in oilfield services than NOV, and I'm grateful to each and every one of our employees. And like you, I'm looking forward to better days ahead. With that, let me turn it over to Jose..

Thank you, Clay. To recap our first quarter results, NOV consolidated revenues were $1.74 billion, an increase of 3% from the fourth quarter of 2016. Rapidly growing activity levels in the U.S. and Canada led to an 18% increase in revenue within North America, which was partially offset by a 4% revenue decline in international markets.

EBITDA increased $3 million to $105 million or 6% of sales. The company generated 41% sequential incremental EBITDA margins, excluding the impact of gains from order deletions, which occurred in the fourth quarter. Operating loss, excluding other items, was $70 million, a $2 million improvement over the fourth quarter of 2016.

Turning to the balance sheet and cash flow, accounts receivable and inventory reductions of $105 million and $71 million, respectively, were mostly offset by similar declines in current liabilities. So working capital, excluding cash and debt, decreased only slightly.

Quarterly cash flow from operations totaled $111 million, and CapEx was limited to $42 million, providing us with $69 million in free cash flow during the first quarter. At March 31, we had a cash balance of $1.5 billion, $3.2 billion in total debt and a debt to capitalization ratio of 18.7%.

For the first quarter of 2017, our Rig Systems segment generated $393 million in revenue, down $33 million or 8% from the fourth quarter of 2016. The continued fall-off in revenue from offshore-related projects was partially offset by an $18 million sequential increase from our land rig business.

EBITDA was $33 million, a decrease of $24 million from the fourth quarter. Excluding the impact of the order deletions from the Q4 results, the segment posted EBITDA decremental margins of approximately 24%, demonstrating the effectiveness of our ongoing efforts to remove costs and improve efficiencies.

During the quarter, we booked $118 million in orders, an increase of $3 million from last quarter, and we shipped $285 million from backlog for a book-to-bill of 41% and an ending backlog of $2.3 billion. Last quarter, we mentioned that we anticipate that the land business would underpin much of the Rig Systems' future growth.

Our recent bookings continue to support that view. 50% of the segment's Q1 bookings were from land-related orders, up from 43% in Q4 of 2016. Included in our land order book were orders for 30 high-spec well servicing rigs for the U.S. market.

Several TDS-11SA Top Drives and the Stand Transfer Vehicle, which automates the most difficult and dangerous pipe-handling requirements and eliminates the need for a derrickman on top of the derrick. We also booked 16 orders for our NOVOS rig operating systems, the centerpiece of our automation offering.

The system automates common repetitive drilling activities to deliver consistent, repeatable performance and allows the driller to focus on process execution and safety.

Our recent orders highlight rising interest in NOV automation as the industry seeks to push technical limits enabled by automated processes, controlled by heuristic algorithms that leverage real-time broadband data – downhole data transmission to further optimize drilling operations.

Customer conversations around newbuild land rig opportunities in the U.S. and international markets continue to progress.

We see near-term opportunities with smaller independent contractors to add more modern rigs to their fleets, but anticipate most larger rig contractors and international players will invest in upgrades to their existing fleet's pressure, torque and automation capabilities rather than buying new until dayrates creep a bit higher, possibly by late 2017 or 2018.

We're also actively engaged with certain offshore contractor customers looking to upgrade equipment and add automation capabilities to their rig fleets to position themselves favorably for future contracts.

For the second quarter, we expect Rig Systems segment revenues to decline another 5% to 10% with revenue out of backlog falling to approximately $260 million. We anticipate decremental margins to be in the mid-20% to 30% range.

For the first quarter, Rig Aftermarket generated $321 million in revenue, down 5% sequentially and $71 million in EBITDA, down $9 million sequentially. Seasonal declines in service and repair work were in line with expectations, as was the sequential increase in spare part revenues, the first we have seen since the third quarter of 2014.

Bookings for spare parts increased for the second quarter in a row, supported by rising levels of rig activity and reactivations in West Texas and Oklahoma. Bookings for land spares were 45% above the recent cyclical low and are now approaching 50% of our total spare part bookings.

NOV is arguably the largest original equipment manufacturer for land rigs globally. So as the market shifts more to land, we are well positioned to service, repair and supply spare parts to that equipment.

Additionally, as land rigs become increasingly sophisticated and add NOV's new control systems, automation capabilities and condition-based monitoring systems, we are best suited to maintain and support them. The offshore market also continues to present growth opportunities for Rig Aftermarket.

We have now seen three successive quarters of modest improvements in offshore-related bookings, with Q1 10% above our cyclical low. We attribute the increases to our customers' uncomfortably low inventory levels and their need to ensure rigs are in optimal condition for future contracts.

We're seeing a steady improvement in near-term market conditions for land and offshore and in the mid to long-term fundamentals for the land market. As a result, we're increasingly confident that our Rig Aftermarket segment bottomed in Q1, and we expect to see steady improvement over the foreseeable future.

In Q2, we expect Rig Aftermarket revenues to increase slightly with strong incrementals. For the first quarter, our Wellbore Technologies segment generated $555 million in revenue, a 5% increase from the fourth quarter. The segment achieved 75% EBITDA flow-through, resulting in $38 million of EBITDA, an $18 million increase over Q4.

Multiple business units within the Wellbore segment grew North American revenues in excess of the 36% increase in U.S. and Canadian rig count, which speaks to the strength in demand for the technologies and services we offer.

Our Drilling & Intervention business unit saw a 38% increase in North American revenues, driven by demand for its innovative and industry-leading technologies like the downhole drilling motor Clay mentioned earlier.

When we deliver technology to our customers that enables them to drill gun-barrel straight wellbores faster and more cost-effectively, we can command premium prices, grow market share, and ultimately yield higher revenue and margins.

Our Dynamic Drilling Solutions business also delivered sequential quarter growth in North America that meaningfully exceeded the rig count – the growth in rig count.

Rapidly accelerating adoption of our drilling automation and optimization solutions and strong growth in our MWD and in well-site gas analyzer products, supplemented strong activity led growth from our core drilling and measurement offerings.

Further highlighting the rapid adoption of our drilling automation and optimization businesses is the performance of IntelliServ, which manufactures wired drill pipe used for real-time broadband data transmission. The business unit achieved its best quarter ever.

And to keep pace with rising demand, we have added a second shift at our manufacturing facility, as Clay mentioned. Lastly, while our Grant Prideco drill pipe business, as expected, posted another meaningful sequential decline, bookings increased sharply, giving us some confidence that even this later-cycle business has now reached bottom.

The business unit posted a 138% book-to-bill as demand for our new Delta connection has been robust, 5.5 inch drill pipe is becoming increasingly popular and excess North American drill pipe inventories are being consumed by the rapid increase in drilling activity.

For the second quarter, we expect Wellbore Technologies to realize another 5% to 7% top line growth, as the impact of the recovery in North America will be partially offset by headwinds in the offshore market, by international markets which are trying to regain their footing and by the impact of Canadian spring breakup.

We expect revenue growth to drive strong incrementals through the remainder of 2017, as we improve the utilization of our manufacturing facilities and claw back more pricing. For the first quarter, Completion & Production Solutions generated $648 million in revenue, an increase of 8% from the fourth quarter of 2016.

EBITDA increased $8 million to $77 million or 11.9% of sales. Persistent crosscurrents between the land and offshore businesses caused meaningful changes in segment's product mix, limiting EBITDA flow-through to 17%.

Our Intervention and Stimulation Equipment business unit revenues increased 25% on the back of demand for aftermarket service and repair work to support reactivations, pressure pumping and coiled tubing equipment, as well as the partial delivery of a large frac equipment order we booked early in the quarter.

The business unit achieved a book-to-bill in excess of 140%. And as Clay mentioned, its sales of pressure pumping consumables are approaching levels last seen in Q4 of 2014. Customers rely on NOV's aftermarket parts and components because of our attention to detail and our focus on the items that ultimately increase reliability and value.

Small things like the quality of valves make a huge difference. The technology in our Blue Thunder (27:01) valve seats leverage the same elastomer know-how that resides among our material scientists that Clay referenced to provide unprecedented wear characteristics.

Our valves outlast most of our competitors' by at least two times based on both pounds of sand and number of stages pumped. We have many examples of how our proprietary innovations improve the performance of our existing products and our ongoing R&D efforts continue to drive improvements in our offerings.

We highlighted the introduction of our condition-based motoring systems for our Intervention and Stimulation Equipment in our press release. Another upcoming differentiated innovation is our next-generation fluid end, which is now in field trials.

We believe our new design will achieve a 26% increase in flow area around suction and discharge valves, reducing cavitation and fluid-end washouts and will achieve 40% reduction in bore intersection stress for improved durability. We also believe the new design will improve ease of maintenance significantly.

Our discharge flange design allows easy access for impact and torque wrenches and incorporates a two-piece valve retainer that gives line of sight confirmation for proper alignment, a feature not currently available with other grooveless fluid ends. All these details can add up to a meaningful decrease in our customers' total cost of ownership.

In our Fiber Glass Systems business unit, we saw a fall-off in revenue as the fourth quarter's high levels of demand for fiberglass pipe equipment from E&P customers looking to exhaust their budgeted spend for the year did not carry into the first quarter.

Customers seemed to wait until late in the quarter for new budget approvals and we suspect the slight pullback in commodity prices created some additional hesitation.

Notwithstanding these concerns, the business ended the quarter with very strong bookings in excess of 140% book-to-bill, driven by orders for West Texas, South Texas and the Middle East.

Even though pricing remains somewhat challenged and input costs are increasing, our improvement in bookings are translating into increased volumes, and we are now beginning to reactivate additional product lines.

Our Process and Flow Technologies Group also experienced a slight pullback in its base business, primarily due to a decrease in offshore projects. But this was more than offset by a full quarter of contribution from the Fjords transaction completed in late Q4 of 2016.

Our offshore-oriented business units remain challenged, as E&P customers continue to direct capital towards shorter cycle projects instead of longer-cycle offshore opportunities, presenting near-term challenges for our floating production and subsea businesses. Yet even in this environment, we're able to capture some attractive opportunities.

During the first quarter, we booked significant orders from two large integrated oil companies for large diameter conductor casing to be used in projects offshore West Africa. Our local presence in the market positioned us well to secure this business.

In the second quarter, we anticipate continued growth in demand for completions related to capital equipment, consumables and aftermarket service and repair, as well as an increase in our production-related businesses serving onshore projects.

Yet, we expect this to be mostly offset by the segment's offshore-oriented businesses as they continue to suffer from deteriorating backlogs, increasingly competitive pricing and a lack of final investment decisions on major projects. As a result, we anticipate CAPS' (30:15) second quarter revenues to pick up slightly with low incrementals.

To wrap things up, NOV has posted sequential revenue growth for two quarters in a row and a sequential EBITDA growth for three quarters in a row. We now believe three out of our four operating segments have crossed the abyss of this downturn.

While offshore markets will remain challenged and international markets will likely remain fairly stagnant near term, a full-fledged recovery is underway in North America. The oilfield is a capital-intensive industry. And the excess capacity and the valuable technologies that we supply is being absorbed at a rapid pace.

As Clay said, scarcity is returning to the oilfield. After two and a half years of intense cost reductions, continued focus on efficiency improvements, and purposeful investments in products and technologies, we believe we'll benefit disproportionately through this next cycle.

The dedicated employees of NOV have this organization extremely well positioned to capitalize on a recovering market. With that, we'll open up the line to questions..

Thank you. And our first question comes from Ole Slorer from Morgan Stanley. Your line is open..

Thank you very much. And thanks for going through the numbers and the story here in great detail as always. I wonder, first of all, Clay, very impressed the way the cost reductions that you've driven through the organization and in the process of pivoting it more towards short cycle activity.

Could you talk a little bit about where you stand now in terms of right-sizing the organization within the offshore exposure?.

Thank you, Ole. Yeah, we're continuing to focus on costs. And as we described in our prepared comments, lots of crosscurrents with businesses going up and down, and generally more constructive on our outlook for land, which means that within the offshore, we're continuing to trim costs and focus on improving our efficiency.

So if you recall, nine months ago, we talked to a $400 million reduction in structural costs, which was on top of the $2-plus-billion we had achieved at that time. With regards to updating you on the progress against that, we are no well in excess of $400 million a year in structural cost savings, but we're not done yet.

So we're continuing to reduce costs, which we've closed 297 facilities. And we have another 54 there in process of closing and continue to adjust. So, still making progress. Looking forward to the day when I can report to all of you and to all of our employees that we're done. But frankly, we're not there yet. So – but really, it's a necessity.

Been a severe downturn, our business mix is shifting more towards land, as we described, and very excited this quarter, like last quarter, to see more and more growth in those areas of our business. So that's really what has us excited and enthusiastic about the future..

It's a meaningful for pivot here. But again, just one more question on the aftermarket, very impressive margins there. When it comes to offshore aftermarket, a lot of these rigs that you delivered in the last cycle and are coming up to being 10 years old, and I would imagine that there have been quite a lot of technology that's been developed.

You highlighted that you're seeing certain investments for people putting new features to their rigs to keep them competitive.

Could you talk a little bit more to that, and whether you see the aftermarket business now stabilizing?.

Yeah. A couple of things. With regards to sort of near-term opportunities in the offshore, we're seeing more offshore rig operators come to us for enhancements of those rigs to make them more competitive in a crowded marketplace. They're coming to us for replacement components or upgrade components at the request of their customers.

So oil companies recognize it's more of a buyers' market. And they're putting pressure on drilling contractors to add more pressure control capability, add more pipe-racking capabilities, Crown Mounted Compensators, things like that, in exchange we're extending contracts, for instance, so there's a few examples of that.

With regards to NOV's offering into the space, we're focused on ways to help our customers do that. So new fingerboard technologies that we're investigating now.

About five or six years ago, we began installing many more sensors into top drives, drawworks, mud pumps that we've sold over the years, which has created a foundation for us to push new big data predictive analytic products that we're bringing to the marketplace in addition to the Rigsentry BOP predictive analytics model that we discussed last quarter.

So, lots of opportunities there. On the aftermarket side, as Jose mentioned, very pleased to see now the second quarter of growing spare parts booking and a 13% sequential increase in spare parts revenues, and just feel like our customers both offshore and land really are running out of spare parts and coming to us to supply those..

Yeah. Well, impressive margins. Thank you very much. I'll hand it back..

Thanks, Ole..

Thank you..

Thank you. Our next question comes from Marshall Adkins from Raymond James. Your line is open..

Good morning, guys..

Good morning..

Yeah, thanks for the detail.

So just to stay on that theme for a minute, I assume all the closings and write-offs continue to be in the offshore side and kind of the – correlated to that is, on Rig Systems, when do we finally flush through all the waters and the stuff on Rig Systems on offshore where that bottoms, at least from the offshore perspective? I know land's getting better, but offshore, when does that finally wash out?.

Well, on the first question, I would say that we're cutting cost and reducing expenses and becoming more efficient across the entire organization. And many of our products and services are sold into both offshore and land. And so decisions we're making around rationalizing capacity are driven by the – partly driven by the outlook for offshore.

But a lot of our businesses and plants really serve both markets. With regards to when, I think you're kind of asking when does Rig Systems bottom. We're continuing to work through – we carried a very big backlog of offshore rig building into the downturn.

And we're continuing to work that down as there have been no new – basically no new orders for newbuilds in some time. I think that segment will bottom when land really starts to come back to replace that continual – that slide. And so and our outlook for land is growing more and more constructive kind of quarter-by-quarter.

So when we look out into the future, we talked last quarter about a lot of rig tenders going on in the Middle East, and we're still pursuing those. They're not moving particularly quickly, but they are moving. We've seen some other corners of the globe express interest in land rigs. We're seeing rising dayrates in North America.

Dayrates are about 15% off bottom is what we hear from our customers, in the high teens or low $20,000 a day range. And so as dayrates begin to move up, we do think land drilling contractors are going to come to us for more new rigs, for more equipment and that can help sort of offset the decline in the offshore market.

So really the short answer is it's a bit of a race between land and offshore in terms of when Rig Systems turns the corner and starts – resumes growth..

Right. That sounds like we're on track fairly soon. So one more quick one here, the eliminations side was a lot lower than it's been trending.

Is that a mix issue or is that part of the cost reduction things that's been going on? What happened with the eliminations and kind of help us with where to pin that going forward?.

Hey, Marshall, this is Jose. It's a combination of both of those factors. So essentially, as we're – we're going forward – a higher percentage of our revenues overall are third-party revenues rather than eliminations. Also, as Clay was touching on earlier, costs are continuing to come out of the equation.

The organization's doing a great job of managing that and so that's also contributing to what you're seeing in that elimination line..

Makes sense. All right. Great job, guys. Thanks..

Thanks..

Thanks..

Thank you. And our next question comes from Brad Handler from Jefferies. Your line is open..

Thanks. Good morning, guys..

Good morning..

Hi, Brad..

Could you – I guess, let's talk about sort of the sources of some of the new orders. They're very interesting.

How many customers if you – or order of magnitude are ordering the well-servicing rigs?.

We've had interest from a couple – we had – we have one customer in particular who placed a very large order in Q1, Brad..

Okay. Okay. And maybe the same question....

There is certainly a growing interest related to high-spec well servicing rigs that are sort of pushing the limits in terms of extended lateral completions..

Yeah. Yeah, we get others looking at the....

There are a number of well-servicing companies that are eyeing opportunities to expand that portion of their business..

Got it. Well, it makes sense. We're certainly seeing process of upgrading through cycles here. That makes sense. Okay. Maybe a similar question about NOVOS and IntelliServ. You obviously have one public contract driller that's doing a lot of advertising on your behalf, if you will.

But could you talk about the numbers roughly of customers that are engaging in NOVOS and ordering your system?.

Yeah. We're bidding about 75 rigs currently with NOVOS upgrades, both land and offshore. We've got – and just a little background, Brad, you're aware of this, but other listeners may not be, NOVOS offers sort of open architecture.

So we have a software developer kit that will provide anyone that would like to write an app to help optimize the performance of a rig. So oil companies are interested in optimizing the performance or using an app to define a safety envelope, for instance, that the rig – that they require the rig to operate within.

Service companies can write apps to perform their particular operation on a rig. If they want to come and cement to a casing for instance, they can write an app to help optimize that and offer that. And that's sort of a – so it's sort of a workspace operating system for rigs.

We've got six third-party entities including one major oil companies that have written apps to work on NOVOS. We've got another 16 or 18 that have secured software developer kits from us and are working on apps. So, a lot of excitement around this.

This is sort of a new thing for our industry, and in particular, really proud of the open architecture feature of this.

We really, rather than restrict this to NOV apps, we're really kind of opening it up to all the imagination and innovation that this industry has in abundance and letting others write apps to kind of optimize and improve the industry. So I think a lot of excitement, a lot of buzz.

And the other point I would bring up around NOVOS is that it also works hand-in-hand with our closed-loop automated drilling and optimization services. So, wired drill pipe with NOVOS with downhole measurement, drilling mechanics is a very, very powerful way to improve drilling operations that we're also seeing a lot of interest in..

It's great to hear. And again, that same public driller seems to be taking advantage of all the above..

Yes..

So we'll obviously get to see – we'll see demonstrations of that. Maybe a different sort of follow-up question for me. Maybe, Jose, can you tally up kind of the U.S.

land revenue picture across divisions and talk to what sort of sequential revenue improvement was (43:31)?.

Obviously, across the board, we saw the percentage of land revenue increased from 52% to 57% across the company. We saw North American revenue grow from 33% to 37%. And so really across the board, in all of our businesses, we are seeing a higher percentage of our revenue ultimately come from the land, predominantly North America land.

And I actually – was the question related to North America land or were you talking about just in general (44:15)....

No, that's – North America's fine. And I guess what I was trying to drive to in a sense was the math around how your revenues are faring relative to the rig count.

Certainly, appreciating why it wouldn't match necessarily, but trying to also get a sense of – and then, you can just share your perspective on whether you would expect it to sort of mirror rig count and mirror activity at some point sort of once you retool once spare parts are underway. I'm just – perspective on when and if it starts to mirror U.S.

activity more broadly..

Sure, sure. And I guess, the one to really focus on is our Wellbore Technologies. That has been a very good proxy for really global rig count growth over the past couple of years.

We've seen our North American – a number of our North American businesses, I touched on my prepared remarks, here this last quarter exceed the growth in North America and our respective North American land businesses due to market share gains and additional things along those lines.

The challenge that we've had within that segment is our drill pipe business, which is a much later cycle-type opportunity. But as I also touched on, we're growing more and more confident that that business has finally seen a bottom.

So I think that gives us a great deal of confidence that we'll see better responsiveness to that overall segment, more in line with North American-related activity. So very excited about where things are headed with the Wellbore Technologies segment.

CAPS (45:51), as you know, is much more of a mixed set of businesses for both land and offshore, also the preponderance of those businesses are capital equipment-related businesses.

And last quarter, we talked about that we were somewhat surprised by how quickly we're seeing demand for capital equipment come back into the marketplace as the existing equipment base is absorbed in the North American marketplace. So that too is obviously benefiting at an increasing pace related to what's happening in North America.

But as we have also talked about, particularly related to our floating production and our subsea businesses, we do have those crosscurrents with the offshore businesses..

Appreciate the crosscurrents, and I'll turn it back, but just another – do you expect – given what you're seeing in both capital equipment but then sort of spare parts drivers in North American land, do you expect that to be able sort of over the next couple quarters from a revenue perspective to keep up with activity if there's some lag? And as we think about the rig count, is that help us calibrate, or if I want to do the hydraulic fracturing, kind of activity count, does that help us calibrate you think your own revenue streams in CAPS (47:07)?.

Yeah, I think that's a fair question. And look, to-date, we have obviously been lagging as that capacity has been getting absorbed.

We talked about the growth in our ISE business and I also think that the little pullback that we saw in the commodity price here recently has caused a little bit of hesitation for certain orders that we probably would have pulled across the finish line here during the first quarter.

But if anything, what that do is just delaying the inevitable and will cause a sharper inflection when it does take place. So I think as you're aware, what typically happens is most of our customers realize that they have a need for that additional capacity all at the same time.

And that tends to happen all at once and creates a very nice backdrop for our businesses..

Right. All right. Helpful color. Thank you, guys. Turn it back..

Thanks, Brad..

Thank you. Our next question comes from Sean Meakim from JPMorgan. Your line is open..

Hey, morning..

Good morning..

Hi, Sean..

So just to follow up on some of those discussions, I was curious to hear a little more specifically I guess on the outlook for newbuild land rig orders. We're hearing some of the tenders in the Middle East maybe slipping a little bit, but there's also a lot of them out there. And I'd imagine that newbuilds are going to be a good part of that.

And then also just to hear maybe some progress on customer discussions in terms of NOVOS implementation in some of these international markets..

Yeah. On the land rig newbuild outlook, we are continuing to pursue those tenders in the Middle East. And there's been I think some – there's been a lot of public discussion about those. And just so you're aware, lots of the NOCs in the Gulf States and in The Kingdom are discussing putting more land rigs to work.

It'll be a combination of existing rigs and newbuilds. And those various tenders are moving at different rates, but it's a meaningful number of rigs. And then in the quarter, we did see demand blossoming in a couple of other regions. In our conversations with North American drilling contractors, I do think new rig building is still a ways out.

But the good news for all of them and us is that dayrates are continuing to march up and we're currently selling into that trend in terms of upgrading the torque and pressure capabilities of rigs. So adding a third mud pump, adding a fourth genset, adding hightop torque drives, top drives to those rigs.

But I think once dayrates get up into the mid-$20,000 range a day, I think that's really where you see meaningful demand for new rigs across the North American market. And as Jose just said just a moment ago, past cycles are a guide. They all seem to phone us at once seeking to put those rigs to work. So we are constructive on that outlook.

It's not next quarter or the quarter after, but I do think we're getting closer to the day and we're seeing a lot more land rig building out there. On NOVOS, we have had lots of discussions with operators overseas. We had one of the major oil companies specify NOVOS on some of their offshore drilling projects upcoming in the first quarter.

We had another specify NOVOS for an international – another international project that they are tendering that's onshore. And so I think awareness of NOVOS is growing. And it's a terrific system and very, very pleased to see it now being introduced in the field and making a difference..

That's very helpful. Thank you for that, Clay. And then just -maybe thinking about the usual topic on M&A, we've seen the industry move towards vertical integration, or at least you're seeing some of the collapsing of the different verticals that we've seen historically.

Just how does that influence your thinking? Does it influence your thinking around the appeal of services, capabilities outside of the current scope of what you offer?.

We get great franchises selling lots of sophisticated equipment to land drillers, offshore drillers, directional drillers, workover companies, wireline companies, pressure pumping companies and coiled tubing companies. I think integrating vertically to now compete with those customer groups just strikes me as a bad idea.

And I think we would lose a lot of credibility and trust with our customers. So we really don't have plans to do that. In full candor, we've looked at it. I mean, it's a – I think we have a financial obligation to evaluate different strategies like that, but I just can't get there.

I think we're better served by continuing to focus on providing great technology to enable those groups of customers to compete. That's what they have come to rely upon us for, and that's what we've been doing through the past few years. And so we have been very busy on the M&A front. We had one closing in Q1. We've had one more closing in Q2.

We have three more closing expected in Q2 – and maybe a fourth closing expected in Q2, and then a number of smaller companies under letters of intent. And so it's kind of a – it's more of a strategy of enhancing what we have in the marketplace.

And again, pivoting into those sectors we see as higher growth and more interesting sectors where we can carve out meaningful competitive advantage.

And part of the prepared comments around our downhole tool offering and then around our processing equipment offerings were to really illustrate kind of what we were doing, the combination of internal investment and technology along with acquisitions to enhance and grow those business franchises and to do a better job serving our customers and to earn an above-average rate of return.

And what that has guided us towards is very selected it – very selected, very sort of rifle-shot targeted acquisitions focused more on products, technologies, specific capabilities and the like. And I'd say, so far so good. I'm actually very, very excited about our progress and what we're doing there..

Makes sense to me. Thanks, Clay..

You bet..

Thanks, John..

Thank you. And our next question comes from Scott Gruber from Citigroup. Your line is open..

Good morning, gentlemen..

Hi, Scott..

Good morning, Scott..

Jose, we often get asked by investors how to think about where your inventories head and your ability to draw-down the excess inventories built up during the historic downturns. With the U.S.

market now in full recovery mode and the offshore markets bottoming out, how should we think about that trajectory in your days of inventory? Do you have a year-end target that you'd be able to offer even if it's a range, how should we think about it?.

Yeah, so clearly we had another draw-down on our inventory this quarter about $71 million. We still have, in our view, an overly large level of working capital across the company. The way we tend to look at working capital is as a percentage of our annualized revenue run rate.

And today, as we sit here, we're at about 56% of annualized run rate, slowly ticking down. But our historical norm is more in the sort of the 33% to 40% type range and that is our long-term target.

Certainly, not saying we're going to get there by the end of this year, it's probably more of a late 2018 type phenomenon, but we fully do expect to get back there. Specifically as it relates to inventory, I do expect to see that drawdown be a little bit more pronounced here over the next couple of quarters.

We've now had a couple of quarters of decent bookings for some of the capital equipment which just was not moving at all over the last, call it, year and a half. And so once some of those orders start shipping, we should see some better improvement on the inventory front.

But certainly, all of our working capital levers are something that we're highly motivated to improve during the course of the year..

Yeah. I think one of our challenges here has been the liquidity challenges of our customers. It's been frustrating to us internally trying to liquidate the working capital. But it really speaks to just how the stress that the whole industry has been under trying to turn all that to cash..

Well, it sounds like you're going to start really turning the corner, which is good to hear. And, Clay, a follow-up on Wellbore Technologies. It has a lot of moving parts in terms of the mix, more onshore, but also a good rate of penetration on new higher end technologies. You've also taken cost out of the business.

So we kind of think about the long-term outlook for Wellbore Technologies, if global activity continues to improve but the pace of U.S.

activity moderates a bit from here, how should we think about what a long-term normal margin is for the Wellbore Tech segment? Is 25% still achievable longer term?.

Yeah, EBITDA margins, absolutely. There are some rental tool businesses in there within Wellbore Technologies. Part of our downhole tools business I described earlier is rental, and then we have a terrific waste management, solids control franchise that also does a lot of rental.

And those businesses are very capable of generating EBITDA margins well in excess of that. So, yeah, I think once we kind of get back to normal, look to margins to go up. And we're still taking costs out of that segment as well. So our outlook with rising rig count, with costs coming out of that business is – is over the long haul is very strong..

Got it. Good to hear. Thank you..

You bet..

Thanks, Scott..

Thank you. And our last question will come from Byron Pope from Tudor. Your line is open..

Morning..

Morning, Byron..

Guys, I've got a couple of quick questions, which stems from the fact that I just don't write very fast. Bit for Rig Systems, it seemed as though this was the first quarter since really 2014 where the book and turn revenues were up sequentially.

And just thinking about the guidance for Q2 in terms of the revenue from backlog, I think I heard $260 million. And for the overall revenue guidance, down sequentially. Just seemed as though that book and turn revenue might be flattish to maybe slightly down in Q2.

So I guess, the way I was thinking about that book and turn business with land drillers starting – or continuing to upgrade rig, I would have thought that the top line progression would continue to progress there. So I was just wondering if maybe, Jose, if you could speak to the sequential dynamics for Rig Systems..

Yeah. Byron, I'm not 100% sure I heard you right as it relates to Rig Aftermarket. But just to make sure we're on the same page, we actually guided....

Rig Systems..

I understand, but you referred to Rig Aftermarket which plays into the answer. So Rig Aftermarket, we actually guided up a little bit from Q1 to Q2.

And I think you're asking a very good question because the preponderance of that book and turn revenue within Rig Systems, it really relates to the inter-company revenue that is between – mostly between Rig Systems and Rig Aftermarket. So as Rig Aftermarket improves, you should see that percentage or that number actually increase over time..

Okay, okay. That's helpful. And then with regard to Wellbore Technologies, I think you spoke to continued strong incremental margins there as we think about Q2, but the incrementals were so fantastic in Q1.

And could you help us frame in ballpark terms how you're thinking about incremental margins for Wellbore Technologies in Q2?.

Yeah. I think it's really similar incrementals as to what we saw in Q1..

Okay. That's helpful. Thanks..

Thanks..

Thank you. And I would now like to turn the conference over to Mr. Clay Williams for any closing remarks..

I appreciate everyone joining us this morning. We look forward to updating you on our second quarter results in July..

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