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

J. Marshall Adkins - Raymond James & Associates, Inc. William A. Herbert - Simmons & Company James Wicklund - Credit Suisse Securities (USA) LLC (Broker) James West - Evercore Group LLC Judson E. Bailey - Wells Fargo Securities LLC Thomas Patrick Curran - FBR Capital Markets & Co..

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Q2 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 and Industry Relations Officer. Sir, you may begin..

Welcome, everyone, to National Oilwell Varco's Second Quarter 2017 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO, and Jose Bayardo, our Senior Vice President and CFO.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the Federal Securities laws. They involve risk and uncertainty, 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.

For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the corresponding GAAP measures are in our earnings release available on our website. On a U.S.

GAAP basis, in the second quarter of 2017, NOV reported revenues of $1.76 billion and a net loss of $75 million, or $0.20 per share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session.

Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay..

composite pipe that is impervious to corrosion. In fact, we are the leading global manufacturing of composite pipe for the oilfield and a major provider of composite pipe for marine, offshore and chemical industrial markets.

Nearly 50 years ago, oilfield innovators begin to use fiberglass and composite pipes to handle produced water to avoid having to frequently replace corroded steel flowlines. Some of our earliest installations of fiberglass pipe are still in operations because they are so durable. Since then, NOV has continued to innovate.

And as pressure and temperature ratings have risen and our size range expanded, NOV's composite piping systems have steadily won share in the oilfields' most corrosive environments.

Decades ago, NOV was the first supplier to win API Certification, and today we are the leader, having installed enough fiberglass pipe in oil and gas applications to go around the world twice. And this area continues to offer great growth prospects.

Fiberglass pipe, though more expensive than steel pipe initially, has lower installation costs because it can be assembled by hand, whereas steel pipe must be welded.

And by pioneering flexible composite pipe that can be wound on a reel, our Fiberspar spoolable pipe enhanced this installation cost advantage because real pipe in 9,000-foot links can literally be plowed into the ground at a rate of many miles per day – far, far more pipe than a pipe welding crew can accomplish in the same time period.

Once in, fiberglass is a long-term solution to corrosion, whereas steel typically must be replaced or continuously treated with expensive inhibitors throughout its life. Fiberglass is also more resistant to paraffin and scale buildup that can slowly choke off steel flowlines.

In addition to flowlines, NOV also manufactures fiberglass tubing and casing for production, injection and observation wells for certain fields, and a spoolable variation is used to deploy ESPs with embedded cabling in certain applications. Our leadership position is built on technology and cost advantages.

Our proprietary methods of winding pipe enable us to achieve higher pressure ratings, up to 3,500 psi, and our epoxy technologies enable us to achieve high temperature ratings exceeding 200 degrees Fahrenheit.

In addition to flowline products for gas and oil, we also manufacture piping systems for gasoline stations, for refineries and petrochemical plants, for municipal applications and for firewater and ballast saltwater systems in marine vessels.

Through our recent acquisition of Pipex, NOV entered into the composite structures market – think platforms, tanks and handrails – which enhances NOV's offerings in offshore rigs, FPSOs and other marine vessels due to the ability of composites to reduce weight and corrosion susceptibility in marine environments.

For example, we recently executed a North Sea platform project where we ended up reducing the platform's weight by almost 700 metric tons. In the mining market, we embed structurally-reinforced epoxy resin pipe with high alumina ceramic to create a product that's both durable and corrosion-proof, even in abrasive slurries like mine tailings.

Our enhanced manufacturing and design technology, combined with our global presence and raw material advantages, again equal competitive advantage. Amid challenging offshore drilling conditions, NOV is pivoting to new markets and new opportunities.

I offer these examples to illuminate the robust portfolio of technologies NOV will bring to the next oilfield upturn. Last quarter, I talked about our Downhole Tools and our Process & Float Technologies businesses, and today NOV WellSite Services and Fiber Glass Systems.

In these, and in all of our business units, we steadily and smartly applied capital, both organically and through M&A, to build global leading franchises that are capable of generating strong through-cycle returns. It's what we do. NOV remains exceptionally well-positioned for the inevitable upturn.

Finally, before I hand it over to Jose to review the operating results for our second quarter, I want to take a moment to convey our thanks to our terrific employees. Your performance has been amazing and I'm proud of the great job you continue to do. So, thank you. Jose? [064WZK-E Jose Bayardo] Thanks, Clay.

To recap our second quarter results, NOV consolidated revenues increased by $18 million from the first quarter of 2017 to $1.76 billion. Continued growth in the U.S. and stabilizing international markets were partially offset by the seasonal Canadian spring breakup and the ongoing challenges in the offshore market.

As Clay mentioned, the organization executed extremely well, delivering a $37 million sequential EBITDA improvement, to $142 million. Looking at select line items of the P&L, SG&A decreased $13 million sequentially, as we realized meaningful cost savings from ongoing efficiency improvement initiatives.

Interest and financial costs increase by $1 million due to the release of unamortized debt issuance costs, a non-cash item associated with the termination of our prior credit facility. Under our new five-year credit facility, future amortization costs and unused commitment fees will actually decrease by $620,000 per quarter.

So, going forward, we expect interest and financial costs to return to the $24 million to $25 million a quarter range. Our GAAP tax rate was 15.9%. Excluding other items, the tax rate would have been 8.6%.

As we have previously noted, while we operate at near-breakeven income levels, relatively small changes in income by jurisdiction or discrete items can result in significant changes in our effective tax rates.

This volatility presents challenges in forecasting rates, but at this time our best estimate for the effective tax rate for the remainder of the year is 10%. Our longer-term expected tax rate remains in the 30% range.

In the second quarter, cash flow from operations was $168 million, and after deducting $43 million in capital expenditures, we netted $125 million in free cash flow. We believe our capital-light business model and strong execution will continue to drive free cash flow margins in the top quartile of the oilfield services and equipment sector.

We also invested $76 million on five technology acquisitions that were mostly focused on rounding-out our emerging directional drilling and completion tools product offerings. Our cash balance increased $51 million, to $1.53 billion, and total debt remained at $3.2 billion, with nothing outstanding on our credit facility.

During the second quarter, our Rig Systems segment generated $346 million in revenue, down $47 million or 12% sequentially. Revenue from backlog dropped to $224 million, $61 million lower than the previous quarter and $36 million below our prior guidance, as certain capital equipment deliveries slipped into the third quarter.

EBITDA was within guidance at $26 million, as strong execution by our team limited decrementals to 15%. As we downsize our Rig Systems operations, our team continues to seize every opportunity to high-grade capabilities, improve efficiencies and lower costs.

A recent facility consolidation required relocating our large rig gear cutting and grinding operation. The move would've required shipping 14 very large, old machines. Instead, we purchased and installed two cutting-edge technology machines for a capital investment that was roughly equal to the cost of moving the old machines to the new facility.

The new, more nimble equipment achieves the same throughput as the 14 old machines, with significantly reduced cycle times, maintenance cost and roofline requirements. Like us, our customers are seeking ways to improve the efficiencies of their operations, and we're here to help.

For example, we recently introduced a new 1,200-horsepower high-torque induction motor-powered top drive to deliver more torque and more power to drill extended lateral wells. And for all our customers who already own our market-leading TDS-11SA top drive, we developed an upgrade kit to provide them with the same high-torque capabilities.

Our upgrade goes beyond replacing the top drive motors and includes important modifications to the gearbox and other components to support the 50% horsepower increase.

We are also receiving increased inquiries for other products that improve our customers' key processes, including our Stand Transfer Vehicle, which automates pipe handling operations, ensures consistent tripping speeds and eliminates the most dangerous job on the rig by removing the need for a man in the derrick.

And offshore, we're seeing customers evaluate potential upgrades for future contracts, including improved lifting capacity, pipe handling systems and BOPs. We booked $124 million in new orders in the second quarter, a slight improvement from last quarter.

Land-related orders were $75 million, or 60% of the total and included one 1,500-horsepower AC Ideal Rig and the complete land equipment package that includes our NOVOS Control System as we continue supporting private North American drilling contractors' efforts to upgrade their rig fleets.

We see opportunities for continued increases in bookings, yet remain realistic on the impact lower commodity price can have on capital equipment orders. After rising approximately 15% off the bottom, gains in day rates for land rigs in North America have stalled at around $20,000 per day, leading many drillers to defer new build capital commitments.

OPEC cuts also appear to have delayed anticipated rig tenders in the Middle East. Despite a slow, grinding recovery for the land drilling market, we have averaged close to $120 million per quarter in Rig Systems orders over the past four quarters.

This order rate plus our current non-backlog revenue of another $120 million per quarter implies a recent run rate of about $240 million per quarter, or close to $1 billion per year for Rig Systems, which compares to the annualized Q2 revenues of $1.4 billion.

To be clear, I'm not guiding to $1 billion in annual revenue for Rig Systems, but I am pointing out that our numbers through the last four quarters would indicate a floor at about $1 billion per year if there is no meaningful recovery in land equipment demand. We don't think this is a realistic scenario.

The success of the shale revolution was built on drilling challenging wells efficiently, which, in turn, was built on better rig technologies. The have-nots around the globe are almost certainly going to up their game with modern rig technology, which only continues to get better.

As a result, we can just as easily envision a scenario in which slightly higher commodity prices and activity levels will drive future bookings that more than offset the gradually falling contributions made each quarter by our existing $2.2 billion in backlog, propelling annual revenues well beyond our current run rate.

Even though we expect modestly higher revenue in the third quarter, because of our stubbornly low book-to-bill, 55% this quarter, we are not calling a bottom in Rig Systems yet. For the third quarter, we expect margins to tick down slightly due to a lower-margin mix of projects that will be delivered in Q3.

During the second quarter, our Rig Aftermarket segment generated $341 million in revenue, an increase of $20 million or 6%. Higher volumes of spare part sales and improving absorption of our service and repair facilities drove 60% EBITDA incrementals for a $12 million increase in EBITDA to $83 million, or 24.3% of sales.

Q2 marked the second quarter in a row of increased spare parts revenues, primarily driven by increasing demand in North America. Service revenues also improved, with North American service rig utilization reaching the highest level in the past 18 months, supported by land rig reactivations and installations of our NOVOS Control System.

Lastly, repair revenues increased sharply, supported by growth in SPS-related work in Norway, Brazil and Africa.

Across our Aftermarket business, we're seeing elevated interest for spares, service and repair from customers nearly everywhere, as drilling contractors look to reactivate, recertify and ensure rigs are well-positioned to compete for new contracts in today's competitive market.

As noted in the press release, we recently signed a 10-year service and support agreement with Transocean for 15 drilling rigs.

The goal for both parties is to lower total cost of ownership and maximize equipment uptime by fully leveraging NOV's leading drilling technologies, global aftermarket service and repair capabilities and data-driven solutions.

Our condition monitoring solutions will help reduce unnecessary maintenance, improve equipment reliability and assist our efforts to provide more in-field certifications to eliminate downtime associated with trips to port.

Historically, the industry has maintained equipment using time-based triggers and has only recently begun migrating to more usage-based triggers with the ultimate goal of achieving symptom or condition-based maintenance.

At NOV, we are pioneering condition-based maintenance using a combination of sensor data and advanced proprietary algorithms to inform users about the health of equipment, allowing them to reduce unnecessary maintenance and improve reliability.

We can spot patterns that predict future conditions before they occur to identify looming performance issues, using data not to describe things as they are today, but to predict what they will be in the future to provide value-added, actionable feedback for our customers.

We believe we are able to develop superior predictive algorithms by merging the power of Big Data analytics with extensive data libraries and equipment expertise that is only available to us as the original equipment manufacturer.

Our Rigsentry condition-based monitoring system is one of our solutions designed to help our customers operate and maintain their equipment more effectively. And we're building similar solutions in our other capital equipment businesses by leveraging our installed base of equipment, product experts and Big Data technologies.

While the control sensors and predictive algorithms we have today create tremendous value, ultimately we intend to combine the many solutions for discrete pieces of capital equipment into one system that will help maintain, monitor and automate entire processes, such as a complete drilling operation.

Taking responsibility for the comprehensive set of equipment on our customers' rigs will provide us with the opportunity to accelerate the development of such a system.

Looking ahead to the third quarter, we expect Rig Aftermarket to continue its pace of slow, steady improvement with a couple hundred basis point increase in revenue and strong incrementals. During the second quarter, our Wellbore Technologies segment generated $614 million in revenue, an increase of $59 million or 11%. Robust U.S.

activity growth and modest improvements in many international markets, partially offset by the Canadian spring break up, increased customer demand for Wellbore Technologies' products and services. The segment delivered 47% incremental margins, resulting in a $28 million increase in EBITDA to $66 million or 10.7% of sales. Robust improvements in U.S.

land markets drove the segment's bigness in North America to 58% of total segment revenue and pushed revenue from land markets up to 82%. Many of our U.S. businesses and product lines grew well in excess of rig count and general activity improvements.

Early in a recovery, our product-oriented business tend to lag rig count growth as customers work through oversupply levels of readily available product inventories. But as we talked about last quarter, scarcity can and has returned quickly to the oilfield.

Customers are scrambling to acquire the technologies NOV provides to help them drill farther and faster, and we're seeing demand inflect for many of our valuable differentiated technologies, with nearly 30% growth in drill bits, motors, borehole enlargement equipment, agitators and rig instrumentation.

Longer laterals demand more advanced technologies, and we continue to address our customers' primary needs through innovative solutions like our Tektonic drill bits, ION cutters and our new Series 36i downhole drilling motor. The proprietary new motor provides low-amplitude oscillations that vary weight on bit by approximately 30%.

The oscillations reduce friction and stick-slip to increase rate of penetration in extended-reach drilling. During the second quarter, we signed two new drilling motor rental supply agreements with customers operating in the Permian, Anadarko and Eagle Ford Basins that total over 150 motor rentals per month.

Our Downhole Tools business is also seeing growing demand from the coil tubing market, having recently secured an order for 60 TerraMax milling systems to mill out bridge plugs on long laterals.

The order totals over 260 tools, including motors, agitators, circulation subs and through-tubing connectors, making it our largest through-tubing tools order in North America since 2012. As customers bring rigs back into service to drill increasingly complex wells, they're demanding better instrumentation and data acquisition equipment.

We believe our MD Totco business has the most recognized name in the industry for top-tier instrumentation and data acquisition systems, and our customers seem to agree, as growth in this business exceeded the sequential growth in rig count.

Elsewhere, our growing Directional Drilling Tools business and our drilling optimization and automation products and services realized worldwide growth of almost 16%, led by several key product sales from our directional drilling tool product line and continued market adoption of our eVolve closed-loop drilling automation and optimization services.

The growing demand for our eVolve services drove another record quarter for our IntelliServ business unit, which provides wired drill pipe and related technologies that enable our automation projects by delivering real-time, broadband downhole data to our control systems.

Our Drill-Pipe business rebounded more sharply than anticipated on improving volumes, with second quarter bookings growing another 11% above first quarter levels for a book-to-bill of approximately 120%, driven by demand for our recently introduced Delta drill-pipe connection. Year-to-date, we've sold 500,000 feet of pipe with Delta connections.

Four major operators are making substantial use of the pipe, and they have validated the connection's enhanced mechanical performance and improved total cost of ownership.

The technology has performed exceptionally well on North America land and offshore operations, and we anticipate Delta connections will be used internationally for the first time by the end of the third quarter. The improved activity in our Drill-Pipe business also helps boost our U.S. Pipe-Coating operations.

For the third quarter, we expect segment revenue will increase another 8% to 10%. Increasing demand across the segment allows us to reactivate idle machinery and add second and third shifts, significantly improving absorption across many of our North American manufacturing and service facilities.

While it's still early, we also see more meaningful opportunities for price improvements across the segment, giving us more confidence that we should be able to sustain strong incremental margins through the remainder of the year.

During the second quarter, our Completion & Production Solutions segment generated $652 million in revenue, a $4 million sequential increase. Improvements in land-oriented operations were mostly offset by declines in offshore businesses. EBITDA increased by $21 million to $98 million, or 15% of sales.

Better-than-anticipated execution on offshore projects, FX benefits and our cost savings initiatives drove the outsized incrementals. On the order front, nearly all of our business units secured orders well in excess of 100% book-to-bill. Total segment bookings were $501 million for an overall book-to-bill of 127%.

The benefit NOV's completion offerings received from the ongoing North American market recovery is amplified by favorable secular trends that drive higher capital and service intensity.

The growth in enhanced completion techniques, for example, requires more pressure pumping equipment for the increasing number of higher-volume stages, more coiled tubing equipment to mill out plugs used to separate frac zones and more wireline equipment needed to perforate each stage.

For the second quarter in a row, our Intervention and Stimulation Equipment business unit achieved a book-to-bill of approximately 140%. Included in the order book was a total of 107,500 horsepower of pressure pumping equipment and orders for seven new coiled tubing units.

Beyond new capital equipment, our Intervention and Stimulation Equipment business unit continues to see growing demand in North America for refurbs and spare parts, including valves, seats and flow iron, as increasing pressures and higher rates of abrasive proppants pumped downhole cause increased wear on even the most reliable equipment and consumables.

On the production side, our Process and Flow Technologies business unit achieved a book-to-bill above 1 based on rising demand for production chokes, LACT units, wellhead separators and other processing equipment.

Additionally, efficiency improvements resulting from the integration of our Fjords transaction contributed to 85% incremental margins on a modest revenue increase.

Our Fiber Glass Systems business unit continues to realize solid bookings and revenue growth supported by spoolable pipe demand in the Middle East and U.S., partially offset by declining demand for the more offshore-oriented Southeast Asian market.

As anticipated, we saw an aggregate net sequential decline in revenue from our three offshore production-related businesses, which include our subsea flexible pipe, large-diameter conductor pipe connections and floating production systems business units.

However, all three operations achieved better than anticipated profitability on exceptional execution, cost savings and foreign exchange benefits. All three business units also booked orders well in excess of 100% book-to-bill.

We received an order for a subsea soft yoke system for a floating storage regasification unit in Brazil, our first significant order for our Floating Production Systems business unit in 18 months.

Our XL Systems business unit also won a multimillion-dollar order for our fatigue-resistant Viper conductor casing, which is ideally suited for extreme service conductor and casing applications in deepwater operations. Notwithstanding the quarter's strong bookings, the near-term outlook for our offshore-levered businesses remains challenged.

While our recent offshore orders helped partially replenish depleted backlogs, many are for long lead-time items with deliveries that extend into 2018, limiting their impact on near-term revenues. As a result, we expect our offshore production-oriented businesses to take another step down in the third quarter.

On land, strong activity levels and pent-up demand following two years of limited investment in capital equipment support the remaining business units within our CAP segment.

However, the recent dip in commodity prices to the low $40 level noticeably reduced customers' sense of urgency related to large capital equipment orders, creating uncertainty for the pace of future order intake.

In the third quarter, we anticipate a 300 basis points to 500 basis point improvement in revenue, with margins declining between 100 basis points to 200 basis points due to less favorable mix and FX benefits that we do not expect to repeat.

For NOV, the second quarter was about exceptional execution and realizing efficiency improvements from investments we've made in our operations over the past few years.

While oil prices continue to linger under $50 per barrel, causing a wary mindset among our customers, we remain extremely encouraged by the ongoing depletion of excess equipment in all markets around the world, pent-up demand for more efficient modern equipment in international markets and the way our people have positioned this organization for the future.

With that, we'll open it up to questions..

Thank you, Jose. Ladies and gentlemen, we are now open for questions. Our first question is from Marshall Adkins of Raymond James. Your line is open..

Clay, as tempted as I am to ask about your proprietary elliptical shale shaker G-force control technology....

Feel free..

...I think just to keep my sanity here and knowing I wouldn't understand half of it, I'm going to focus on your Completions & Production segment. Phenomenal margins there. Jose, you briefly went through kind of how you got there. But I'd like to get a little more color on what's going on there. It sounds like your growth in the U.S.

Completions is offsetting the declines in offshore Production. But more specifically, I'd like to know where are there shortages in the U.S. Completion side? What product lines we've heard about, niche product lines, where you're just out of different stuff? Can you help us understand the landscape on the U.S.

Completions side?.

You bet. The portion of the Completions & Production Solutions business that's seen the highest levels of activity really is centered on the pressure pumping equipment space right now. So a lot of demand for frac equipment, for coiled tubing, for all of the consumables that go along with that, so valves and seats and so forth.

And you've heard from I think a number of pressure pumpers so far through this reporting cycle of all of the reactivations that are underway there. So we're seeing repair services and the like, really strong levels of demand. We went through our fiberglass flowline and pipe offering there.

We're also seeing really strong demand in that area as well, along with strong demand for production equipment in our Process & Flow Technologies group, things like production chokes and other items that we sell there, both across North America as well as places like the Middle East.

But, yes, our offshore offering that makes up the rest of our Completions & Production Solutions group has been under pressure with low levels of FIDs and so forth. And so that's where we're really seeing the most pressure. I'm very pleased with the pickup in margins this quarter.

And, as Jose mentioned in his prepared remarks, a lot of it had to do with exceptional execution on certain offshore projects within that group..

Are we out of certain things on the U.S.

side? Are there exceptionally long lead times for products right now?.

Yeah, like I said, we are pretty busy on the pressure pumping equipment. But I would say we're able to deliver new frac equipment, for instance, in a quarter and a half, maybe two quarters. So we're able to get components so far to go into the fabrication of that equipment.

What I'd tell you is that in terms of the scarcity that we refer to, really we're seeing that most acutely, though, actually Wellbore Technologies group, and specifically around Downhole Tools and bits, downhole drilling motors, drill bits. The equipment that we supply there is seeing a high level of demand.

Rig Instrumentation Systems, our MD Totco unit that Jose referenced, the Solids Control business that I talked about in my prepared remarks. Again, we're seeing a lot of customers burning through existing inventories. The good thing for us is that over 900 rigs running in North America – or in the U.S.

right now are consuming a lot of that at a much higher rate than the 350 or so that we bottomed out at last year. And so the rate of consumption has stepped up and that means they have less opportunities to cannibalize inventories and consumables of off idled rigs and have burned through inventories.

And so we're starting to see a resumption of demand..

Great. That's helpful color. Thank you, all..

You bet. Thanks, Marshall..

Thank you. Our next question is from Bill Herbert, Simmons & Company. Your line is open..

Thank you. Good morning. Clay, just trying to reconcile your comments with regard to frac and Jose's earlier comments with regard to the downward flurry in oil prices diminishing the sense of urgency with regard to capital equipment items.

Are you making the distinction between large horsepower orders, for example, that you got in Q4 and Q1, 75, 75, and 107.5, something like that, in Q2, versus consumables?.

Yeah. Yeah, what I'd say is although we continue to have conversations with a number of customers around new frac spread additions, and I would add new land drilling rigs, the urgency is a bit diminished over the past six weeks, eight weeks with lower oil prices. They're still going on, so we're still having these conversations.

We're probably talking to a half a dozen different pressure pumpers, for instance, around new frac spread additions, but the urgency has slowed down a bit.

In contrast, on the smaller quicker-turn items, the consumables, the repair services, the reactivation-related things that we're doing within the pressure pumping space and the rig upgrade and repair services that we're offering in the land drilling space, those continue to be really, really strong..

Okay. Great..

Does that makes sense?.

Yeah. Yeah, it sure does. Thanks. And then with regard to Wellbore, you guys have been extolling the scarcity theme for a while. And Jose went through a long list of items that generated over 30% sequential growth in the quarter.

I'm curious as to whether, one, in the event that activity flattens out here, although oil prices seem to be moving higher, but in the event activity flattens out, how much runway do you have for continued lead lag outperformance on the Wellbore consumables? And then moreover, can you talk about drill-pipe as well, please?.

Hey, Bill. It's Jose. Yeah, it's a good question. And one of the things I was trying to get to in some of my prepared remarks is to help folks understand that there is a bit of lead time and backlog that gets built into even the quick-turn portions of our business. So that's kind of what I was getting at.

Related to the business taking a little while to ramp up as that excess capacity in the market gets absorbed, but then things snapped back pretty quickly. And our ability to turn serviceable items as well as provide new product, the time period in which we do that has extended quite a bit.

And so even with a flattening to potentially a slight downturn in the rig count environment, we expect a good period of time in which we could actually continue to see revenues for those types of products and services continue up and to the right.

And also, as we've talked about before, with improving efficiencies, more footage drilled per day, that also is a great driver for us. Probably the last thing I'll mention on that as well is, for our business, it doesn't necessarily take a dramatic pick-up in activity for our business to get better.

We saw some glimmers of hope in the international markets. As two-and-a-half plus years of this downturn have gone on, the stuff that we've had out in the marketplace is slowly getting consumed.

Those inventories are diminished and depleted and folks have to step back to the table and start ordering more of our products, even at very low activity rates. So we're seeing some positive signs that give us some optimism in some sustainability of those businesses even in a flattening rig count environment.

Specific to drill-pipe, we were pretty pleased with the rebound that we saw this quarter in demand for the pipe. We expected last quarter coming into the second quarter that we would slowly start rebuilding a pretty depleted backlog.

I think our bookings were better than we anticipated as were volumes through the system and, quite frankly, the performance of our team in terms of not only just getting things through the system but basically creating a lot of operating leverage on that increased volume. So all-in, pretty pleased with the way things shook out..

Yeah, two quarters in a row of book-to-bill north of 1 for drill pipe. The other thing I would add, too, is that we store a fair amount of our customers' inventory. We've seen that tick down about 15% to 20% of the past six months, nine months. So things are going the right way there..

Very good. Thanks, guys..

You bet..

Thank you. Our next question is from Jim Wicklund of Credit Suisse. Your line is open..

Good morning, guys..

Jim..

We had discussed in previous quarters that Rig Systems may have bottomed as long as there aren't delays in commissioning and launching new deepwater rigs. And this quarter, there seem to be some delays.

Can you talk about how is this one off? Is it systematic? It would appear that the oil price weakness of the last couple of months has probably put deepwater back another year.

Can you talk about the outlook for the rig commissionings and getting those done so we can finally see Rig Systems bottom sometime in the near future?.

Yeah, I think things are stabilizing there, Jim. To be clear, we haven't called bottom on Rig Systems, nor did we do that this quarter. We did call for a slight uptick in revenue on our guidance going into Q3.

But when it comes to our offshore construction projects, offshore rig construction projects, we did have a couple things move to the right again. But I would say so far so good.

It feels like things are more stable than they were, let's say, this time last year and we're kind of achieving more of something maybe closer to kind of a smoother or more stable level of work on Rig Systems. What's I think most encouraging to me about the outlook for Rig really is our land offering.

We saw our land Rig orders rise to 60% of total orders in the quarter. And so although we're still struggling with a book-to-bill significantly below 1, we do think a recovery and demand for land rigs is out there. We've got conversations going on with operators in North America, with operators elsewhere around the globe.

They're all looking at Midland, Texas, seeing the extraordinary drilling gains that are happening with super-spec rigs out there. And so I think that will be the engine that fuels future demand for Rig Systems..

Okay. That's helpful. I appreciate that. And, Marshall's question, talking about what's in short supply and we've heard the perforating guns and you mentioned your downhole motors. But it seems to me, and talk about shortage of people and everybody thinks about field people, but we're hearing that machinists in Houston are exceptionally hard to find.

Somebody who can operate a CNC machine. And that would seem to be your strength and bailiwick. And I'm just wondering if there is a shortage of people in that category, one we don't pay attention to all the time, and the implications of it..

Yeah, don't think it's an acute shortage. We're fortunate in that we have, as you know, lots of different manufacturing businesses. And as we've talked about some of those businesses are trending up and some are trending up sharply now and others going down. So we have the opportunity to redeploy resources towards our businesses that are growing.

So I think NOV's probably unique in our footprint and scope within manufacturing, which gives us more flexibility to navigate labor shortages that arise from time to time in our space..

Okay. Guys, thank you very much..

Thank you..

Thanks, Jim..

Thank you. Our next question is from James West of Evercore ISI. Your line is open..

Hey. Good morning, guys..

Good morning, James..

Thanks for the detail in the prepared comments. I'm very glad Lydia just sent the comments out to everybody so I could read them about five times to figure out everything you said. You guys were talking very fast there..

We're prepared to answer questions on high G-force elliptical shakers, by the way..

Perfect. So my first question on elliptical shakers. Clay, what you said about inventories on offshore rigs caught my attention because we're not nearly as negative as I think as most people are on the offshore markets. I know you guys aren't calling bottom on rig tech orders and things like that.

But it seems to me we've seen a large number or at least a better number of FIDs for big offshore projects so far this year. We've seen actually a rig that was smart stacked is going to go back to work, so we're actually seeing some rigs that have been laid up.

And have these rig companies, in your opinion, because most of these guys haven't spent money in years I mean on anything, and they've cannibalized assets and that's hurt your Aftermarket business.

Have they gone too far? And do you see just outside of just a pickup and a little bit of pickup and demand here for the rigs driving some Aftermarket, do you see some restocking that needs to go on?.

Absolutely. And, by the way, offshore hadn't gone to zero, right? So in the second quarter we just reported, 40% of our orders were related to the offshore. We're seeing customers upgrade certain rigs around lifting capacity, around pipe handling and racking capacity and capabilities, and that's helpful.

Obviously, the oil and gas companies have the leverage in this kind of market, and so they're becoming a little more vocal in pushing some of those drillers to upgrade rigs before, for instance, they'll roll over contracts. And so that's constructive.

But, you're right, James, both categories, jack-ups and floaters, both categories of rigs have seen a very small recent uptick in activity. We're hearing from our customers more conversations that they're having with their customers around tenders and the like.

And, frankly, with all the costs we've taken out of our business, relatively small improvements in activity I think are going to drive really outsized performance in rigs. So, I want to be clear, we're not calling for a sharp increase in offshore activity and we remain very, very cautious in this space given all that's going on.

But as you correctly point out, yeah, there's a few green shoots out there that are interesting..

Sure. Okay. Great. That's what I expected. And I do want to ask about your shaker business, your Solids Control business.

I'm probably not going to get too technical here, but as I think about it, we're adding additional mud pumps to onshore rigs, which is, obviously, necessary for the additional loads of mud going into the wells, which then, of course, hits the shakers as the mud comes out. And that's causing more damage, more needs for shakers and screens, et cetera.

To me, is that a linear type of demand driver? Or does that actually go exponential with just the higher pressures and then the size of the wells?.

Well, the size of the wells go up by 2 Pi, right?.

Right..

So, for every foot of well, you're creating 2 Pi r more circumference and more volume of cuttings that you're drilling up. And so it presents a challenge on the rig, which is driving demand for a third and sometimes a fourth shale shaker.

So there's a lot of implications coming out of the way wells are drilled now with longer laterals and larger diameter and more hydraulics on location. And one of them is around the management of drill cuttings that come out of those wells.

And so really the purpose of all that was to highlight NOV's exposure to that trend of technologies we bring to that space..

Okay. Great. Thanks, Clay. Thanks, Jose..

You bet. Thanks, James..

Thank you. Our next question is from Jud Bailey of Wells Fargo. Your line is open..

Thank you. Good morning..

Hi, Jud..

A lot of good discussion today over Wellbore, and you guys have given a lot of helpful detail in terms of directionally how some of the product lines are moving. I was wondering if it'd be possible to maybe help us think about the sizing of some of these different businesses. Things have moved so much in the last couple of years.

You highlighted Solids Control. I think you said about a fifth of Wellbore revenue.

Would it be possible to get some other kind of sizing for some of the other business lines within Wellbore as we – kind of what they were in the second quarter?.

Yeah, I tell you what, we're going to probably continue on what we've been doing in the last two calls, which is to highlight a couple of really interesting businesses, one in each of our Wellbore Technologies and Completions & Production Solutions groups, largely because I think a lot of investors out there, they're very familiar with Rig Systems and Rig Aftermarket, but less familiar with Wellbore Technologies and CAPS.

And so as we kind of tick through those, we'll provide a little more mix information. The other thing, too, Jud, I would stress is that mix between these product lines and mix across these segments changes period-to-period as well. So I think we prefer to do it that way..

Okay, that's fair. Just thought I'd ask. Just transitioning over to Rig Systems. Jose, if I could follow up on your commentary regarding I guess $1 billion in revenue for Rig Systems.

I know you said and stressed that wasn't guidance, but I just want to understand a little bit better the context of how you're thinking about the scenario in which that would be an outcome, I guess.

Is it just nothing else from offshore-related activity and just what you're seeing on the land side these days? I just want to understand that a little bit better..

Right.

Really, effectively what we're getting at is what's pretty close to the darkest view imaginable on our part, which is, look, we're right at a point in the cycle where demand remains very, very low, although interest is picking up, conversations are picking up and our bookings have increased slightly, but we're still at very low and, in our view, unsustainably low levels of demand right at the moment.

And so really what we wanted to provide is just some really, really simple math to say that, in the current environment, if we stay here forever, that Rig Systems is effectively a $1 billion a year business.

So that's basically the roughly $120 million to $125 million a quarter that we've been booking here over the last couple of quarters, plus our own internal demand, plus the other little bit of revenue that doesn't really pass through to backlog, which is a pretty small amount. So that basically gets you to about $1 billion a year.

But as I stressed and continue to stress a very deep dark scenario. Obviously, folks have to come back, maintain the rigs that are operating. Just by doing that we think there's more opportunities for capital sales growth. And also we do see a good number of new build opportunities that are not too far out on the horizon.

So we're much more optimistic about the future than that dire scenario..

Yeah, this is probably the most common question we've been getting for two-plus years from investors is where does Rig Systems bottom and what does it look like. And it's worth noting that that analysis is based on looking back over the preceding four quarters, which includes the lowest rig count scene in the United States in 70 years.

So it's a pretty bleak market. But there's sort of, we think, a floor that's in those numbers. We just wanted to – again, we don't think we'll fall to that level, but that would be a worst-case scenario..

Okay. That's helpful. Thank you.

I may be pushing my luck here, but if you were to actually, say, generate $1 billion in revenue, would you venture a guess as to what the margin level could be if it was that kind of level?.

I would tell you that look back at where that business was in 2014 and see how far it's fallen and see the fact that it did 7.5% EBITDA margins this past quarter. And that team is remarkably talented when it comes to squeezing profitability out of a smaller revenue base. So I certainly would not bet against them.

They will get as much profit out of that whatever revenue base we have in Rig as any management team on the planet..

Okay. Great. Thank you. I'll turn it back..

Thank you. Our last question is from Thomas Curran of FBR Capital Markets. Your line is open..

Thanks for squeezing me in, guys..

Hi, Tom..

So for Rig Systems, shifting from such a bleak potential take on it to a possible bright spot, in the U.S.

land drilling rig market, as the secular two-one rig construction boom matures and your predictive analytics capabilities advance, are you considering or already pursuing any commercial models on the Aftermarket side to further entrench yourself with customers? Is there an opportunity for the type of long-term service and support agreement you just inked with Transocean or some other form of total cost of ownership approach?.

Yeah, I absolutely think there is. Maybe a little trickier for our onshore customers. They tend to be a little scrappier and a little more comfortable doing their own maintenance and things. But I think as we continue to pioneer predictive analytics, which we are very successful at.

We're on 17 offshore rigs today and have 20 or so instances of where we've warned customers in advance of issues they needed to take care of when it was opportune. So, I mean, this is really a powerful technology.

That coupled with things that we're doing in closed-loop automated drilling using machine learning algorithms to better drill, I'm actually very, very excited about really upping our offering into the land space and getting closer with our customers there and doing more to help them manage their fleets. To me, it just makes a lot of sense.

I think drilling, being a contract driller, requires being great at managing logistics and drilling operations and talented workforces that can focus on drilling efficiently on behalf of their customers. Whereas as an OEM, I think NOV is very well-positioned to help them manage their fleets and maintain their fleets and so forth.

So, yeah, I'm pretty excited about that actually..

And, Clay, remind us, do you currently manufacture and sell Walking Systems as a stand-alone branded product line? And, if not, is that in offering you'd like to expand into at some point?.

Yeah, we offer Walking Systems. In fact, we're seeing decent levels of demand for that, I would say Walking Systems plus a third mud pump plus a fourth generator set plus a high-torque package. Jose reference the ability to upgrade top drives.

That really transforms a Tier 1 AC rig to one of these super-spec rigs that are winning a 15% and in some instances 20% premium on day rates. So, yes, we do..

Okay. And then last one for me. You know, shifting to the frac spread manufacturing and capital equipment market.

Following Forum's acquisition of J-Mac, and now Kirby's pending merger with Stewart & Stevenson, would you expect further consolidation in that arena? And how do you think about how the WISE Group and Rolligon are positioned? Is there anything else you might want to add in response to what those competitors have done?.

We have a great offering there we're very pleased with. I think our more recent focus has been around enhancing the technology embedded in what we do. And actually, I'm glad you asked the question, Tom, because just last quarter we introduced a condition-based monitoring system the frac spreads.

And, in fact, one of our North American customers put that in place for their customer. And their customer, which is a large independent, monitored frac jobs over the course of a couple months, and was very pleased. They monitored those remotely and was very pleased with the reduction in instances of stuck pipe and things like that.

So our focus really continues to be around a differentiated offering, a high-tech offering that earns good returns on capital deployed there..

All right. Thanks for the answers, Clay..

Thanks, Tom..

I think that....

Sorry, Vince. Go ahead..

I'm just handing it back to Mr. Williams for closing remarks..

Great. Thanks very much. I appreciate everyone turning in this morning and we look forward to reporting our third quarter results in October. Thanks to everyone..

Ladies and gentlemen, thanks for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day..