Loren Singletary - National Oilwell Varco, Inc. Clay C. Williams - National Oilwell Varco, Inc. Jose A. Bayardo - National Oilwell Varco, Inc. Kurt Hallead - RBC Capital Markets LLC.

Bill Herbert - Simmons & Company Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc. Ole H. Slorer - Morgan Stanley & Co. LLC.

Good morning, and welcome to the National Oilwell Varco 3Q 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 call, Mr. Loren Singletary, Chief Investor and Industry Relations Officer. Sir, you may begin..

Welcome, everyone, to National Oilwell Varco's third 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, 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.

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

GAAP basis, in the third quarter of 2017, National Oilwell Varco reported revenues of $1.84 billion and a net loss of $26 million or $0.07 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 on 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 it over to Clay..

Thank you, Loren. In the third quarter of 2017, NOV generated $1.84 billion in revenue, an increase of 4% sequentially and 11% year-over-year.

Adjusted EBITDA of $167 million improved $25 million sequentially, representing 33% operating leverage and adjusted EBITDA improved $99 million year-over-year, representing 52% operating leverage from the prior year. This was our fifth quarter in a row of rising EBITDA.

Improving market conditions in North America and the Middle East since last year, together with the cost reductions we've executed, have driven our profitability improvements. However, the industry hit yet another headwind this summer, as oil prices began to decline in April and remained persistently weak in the third quarter.

As a result since peaking at 958 rigs in late July, the U.S. rig count began a shallow decline to 913, which puts us back where we were in the U.S. in May of this year. Rig reactivations have slowed and many of our drilling contractor customers are, once again, curtailing spending with our rig group.

NOV overcame this by putting up strong top line growth in Wellbore Technologies, which rose 13% sequentially, owing to solid demand for downhole drilling technologies globally.

Completion & Production Solutions also posted strong growth, up 5% sequentially, led by demand across North America and the Middle East for frac stimulation equipment, completion tools and fiber glass pipe.

These two segments led NOV higher overall, up $76 million in revenues sequentially and resulted in our land mix increasing, once again, to 65% of consolidated sales in the third quarter. Oil prices had moved back up above $50 lately, which is timely, as our customers are launching their budgeting processes for 2018.

Nevertheless, the recovery narrative right now seems tepid and visibility into 2018 is limited. Customers seem to be waiting for sustained oil price improvement before ramping up land spending or pulling the trigger on long-awaited offshore FIDs.

In the meantime, we continue to see pockets of demand emerging with three years of underinvestment and cannibalization and, lately, rising scarcity fueling demand for certain areas like frac equipment.

Other pockets of demand arise from technologies changing the landscape and providing opportunity, think closed-loop drilling, downhole tools and completion tools. Strategically, NOV continues to pivot into these areas with smart organic investments and rifle-shot M&A.

Capital deployment at NOV is guided by our conviction that unconventional shale technologies are the most important development in energy in a generation; that gun-barrel-straight boreholes geo-steered to the sweet spots within formations, with low tortuosity, are materially more valuable to E&P companies than lesser quality attempts; and that NOV can bring proprietary tools to oilfield service companies to deliver these wellbores.

We believe that composite technologies will defeat corrosion in the oilfield, the most expensive production problem that many of you probably never think about.

We believe that big data and predictive analytics will drive efficiency and that, as the largest OEM of drilling equipment, NOV is uniquely positioned to bring automation and big data solutions to the oilfield.

We believe that as production shifts to unconventional basins, the industry will need more fluids processing technologies that NOV is well positioned to deliver. And we believe the industry will adopt a more efficient industrial model to construct the floating production facilities needed to develop the planet's immense deepwater resources.

We continue to execute our business plan around these perspectives, while reducing costs and monitoring fundamentals that are slowly but steadily improving. U.S. crude inventories have declined 23 of the past 29 weeks, pointing to steadily tightening supply.

NOV's optionality into a more vigorous recovery continues to be enhanced by our actions through the downturn. As I've done on past calls, I'd like to take a few minutes and tell you about one of the compelling businesses that reside within NOV's portfolio.

NOV Tuboscope is the world's largest provider of tubular inspection and internal tubular coating services, comprising one-quarter of Wellbore Technologies segment revenues. The oil business uses a lot of pipe. A lot of pipe.

For example, in 2017, the industry will consume about 14 million tons or about 1.3 billion feet of oil country tubular goods or OCTG pipe, casing, tubing and drill pipe. The oil and gas industry will drill and case and complete an estimated 650 million feet of borehole globally in 2017.

On average, the industry consumes about two feet of OCTG pipe for every foot of borehole it drills. As I said, that's a lot of pipe; in fact, enough to completely encircle the globe nine times. This makes the oil and gas industry an enormous consumer of steel.

There are literally hundreds of steel mills around the world that manufacture OCTG pipe of all sizes, weights and grades, to meet the demands of an industry with a voracious appetite. The industry's productivity gains in drilling are well documented; each rig is drilling more wellbores each year, and each wellbore contains longer and longer laterals.

All these gains are conspiring to drive ever-higher consumption of OCTG pipe for each operating rig each year. Consequently, steel mills that manufacture OCTG pipe have been adding capacity, mostly in North America, to meet this ravenous incremental demand.

Pipe mills generally prefer long runs of the same pipe size, since larger runs allow them to spread their high setup costs across more pipe. They frequently sell raw pipe or green tubes to pipe processors, which quench and temper them to adjust the metallurgy to desired strength and hardness.

The pipe is then sold to distributors who perform the important economic task of breaking the large heats down into smaller quantities that better fit the needs of their E&P customers.

OCTG's distributors are mostly private businesses that take speculative positions in various sizes, weights and grades of pipe where they foresee the highest future demand. Some larger E&P customers perform their own buying functions, but even these will supplement their pipe needs with occasional distributor purchases.

So, the first point I'd like to make about the OCTG world is that it is usually characterized by lots of transfers of ownership, joints of pipe flow from mills to processors to distributors to oil companies.

And I would add that there exists a robust market for used pipe as well, distributors that purchase used pipe from one oil company to sell to another. The second point I'd like to make is that pipe defects are not uncommon. The manufacturing process can result in cracks, voids, inclusions and mill scale.

Pipe can be damaged in handling and accidentally deformed to be oval. Used pipe may suffer from corrosion and pitting. All of these can affect the pressure rating and future performance of the pipe. The third point I'd like to make is that pipe failure in the oilfield is a serious matter. It's always expensive and frequently dangerous.

Fishing jobs are costly, and if unsuccessful, the operator may lose the well completely. Around 80 years ago, NOV's Tuboscope business recognized the need to bring better quality assurance to the oilfield pipe world, adapting military technology used to inspect cannon barrels.

Today, we use sophisticated physics, including magnetic flux leakage, eddy current, and ultrasonic technology, to provide critical quality assurance for oil country tubulars.

And every time a new joint of pipe is born, or processed, or sold to a distributor, or sold to an oil company, or pulled out of an existing well and rerun or resold, there is an opportunity for NOV Tuboscope to inspect the pipe to assure its new owner that it is fit- for-purpose.

And with enough joints to go around the world nine times in 2017, that is a terrific business. It is essentially a tolling business, wherein NOV Tuboscope is the Good Housekeeping Seal of Approval for pipe transactions. A single joint of OCTG pipe may be inspected several times through its life.

We provide this critical service in steel mills, in the pipe processor's operations, in the pipe yards of our oil company and distributor customers, on the rigs that run the pipe and pull the pipe, and in our own network of pipe inspection yards. Our network of pipe yards is, we believe, the largest in the world.

NOV operates 75 pipe yards, which offer pipe storage as a service, which cover more than 2.5 square miles over 1,600 acres. Let me say that again, we operate 75 yards totaling more than 1,600 acres, and today we're in possession of 88 million feet of OCTG pipe, over 2.5 million joints or 3.5 weeks of global forward supply.

I mentioned earlier that pipe can be damaged in transport. It's heavy and it's expensive to load on a truck and move. And that means that possession of OCTG pipe within our yards is effectively a competitive advantage, because additional services can be performed on the pipe by NOV without having to ship it by truck, reducing risk and cost.

Consequently, we steadily expanded our services beyond warehousing and inventory tracking to include services like thread repair, bucking on couplings, application of external coatings, straightening, belling for our proprietary Zap-Lok flowline installation method, installation of fiberglass TK Liners, and installation of our Thru-Kote sleeves to combat corrosion, just to name a few services.

We also hardband drill pipe, we repair tool joints, and we install RFID chips to provide full lifecycle management. Our TracID system captures complete drill pipe history, including ownership, usage and service. One particular pipe service has grown through the past several decades to become a tremendous NOV franchise.

Years ago, NOV Tuboscope pioneered a proprietary method of applying thermoset plastic coatings to the inner surface of OCTG, something we do at 15 facilities globally, to combat corrosion and to improve hydraulic performance of the pipe.

One major oil company reported it achieved 25% higher flow rates from its Gulf of Mexico wells by running internally coated tubulars. I would add that the cost of failure of internal coatings is high.

Thousands of feet of peeling thermoset plastic can easily clog up a well and necessitate an expensive workover, if the application process is not performed well. As the oldest and largest applicator of internal OCTG coatings, NOV Tuboscope, again, is the most trusted name in this business.

There are very few joints of pipe in the oilfield that NOV's Tuboscope unit does not touch at some point, and as drilling efficiencies continue to rise, the amount of pipe consumed by each drilling rig also rises every year; in fact, it's up about 50% over the past five years.

This 80-year-old business unit, which derives 84% of its revenue from land markets, provides yet another example of how Wellbore Technologies benefits from footage drilled much more than rig count.

Turning to NOV's Completion & Production Solutions segment, we're benefiting from rising demand for frac stimulation equipment in North America and the Middle East, as completion intensity in unconventional reservoirs continues to rise.

NOV's intervention and stimulation equipment business unit has witnessed rising demand for the capital equipment, consumables, and aftermarket service and repair that it provides to oilfield pressure pumpers, coiled tubing operators and wireline operators.

It is the largest business unit within Completion & Production Solutions, accounting for about 30% of the segment's revenues. Completion intensity of unconventional wells continues to move up and to the right.

Laterals are getting longer, stage counts are increasing, pressures and proppant loadings per stage continue to rise, and completions now represent 65% or more of average North American well costs.

The pressure pumpers who execute these frac jobs, our customers, are putting more abrasives and more horsepower into the ground than ever before, and executing more stages per day, which makes this endeavor highly capital-intensive and highly consumptive of frac iron.

More stages require more coiled tubing equipment to mill out plugs used to separate the stages. And more stages require more wireline equipment to deploy plugs and perforating guns downhole.

NOV is a leading provider of all the equipment used to execute these completions, particularly the higher-valued technologies and complex process equipment, like hydration units, chemical additive systems, blenders and control systems.

We provide data van control centers equipped with industry-leading software systems that coordinate operating results and reduce maintenance, enabling operators to control high-pressure, high-volume pumping of abrasive proppants downhole through 24 frac units simultaneously from a single control panel.

Complex, demanding operations like this require high reliability, which is why we developed bonded Blue Thunder valves for frac units that last 50% longer than competitor products in the most demanding frac jobs.

Our new stainless steel Patriot fluid ends target triple the life of conventional fluid ends, with design improvements that make them easier to service. Coiled tubing is a continuous length of steel tubing, typically around 2 inches in diameter and up to 30,000 feet in length, which is wound on a reel as we manufacture it.

It is used to perform arthroscopic surgery in the oilfield, with the capability to enter existing, even flowing wells, and traverse long laterals to perform completion and well remediation operations, like setting plugs, perforating, pumping acid, or even pumping frac jobs.

NOV is the leading provider of coiled tubing hardware and consumables, dating back to the 1970s. We provide coiled tubing units, control systems, pressure control devices, and coiled tubing itself, which is a consumable that must be replaced regularly.

We've delivered over 1,500 NOV Hydra Rig-manufactured units in service today, and many more injector heads as well. Coiled tubing is the only industrial application of steel that pushes steel past its plastic deformation limits, while demanding it continue to hold pressure and weight. But there is a limit to the capabilities of steel.

Every round trip downhole takes coiled tubing through six plastic deformation cycles. Operators must track the number of cycles each coiled tubing string has been subjected to so that it does not exceed its limits, and thus fail.

NOV's Cerberus software system has been the industry standard in coiled tubing monitoring for this purpose for over 20 years. These operating constraints dictate that coiled tubing strings be retired and replaced every two to three months under normal pressure and utilization.

As a leading provider of these coiled tubing strings, NOV recently introduced QT-1400, the highest strength coiled tubing in the world, with a threefold increase in overpull capability, lighter weight, and thinner wall, enabling people to reach farther in plug-and-perf and intervention operations.

We are also the largest manufacturer of coiled tubing BOP stacks through our Texas Oil Tools name, offering our customers the capability to monitor remotely and in real time, the status of their coiled tubing blowout preventer rams.

We provide real-time condition monitoring of coiled tubing operations designed to identify equipment failures before they occur, including pumps, filters, engines, hydraulic systems, lubrication systems and specific bearings within rotating machinery. The system's alarms that can be configured with remote alerts sent via text message.

Additionally, E&P operators and service company experts can monitor control panels remotely, to follow in real time the progress of high-risk jobs. One independent reports that they have avoided incidences of stuck pipe by utilizing this system, which they now use routinely.

In addition to frac spreads and coiled tubing units, intervention and stimulation equipment business is a leading provider of nitrogen equipment, with over 1,000 nitrogen units in the field. It is a leading provider of snubbing units, with over 150 snubbing units in the field.

We are a global leader in design and manufacture of wireline products for slickline and e-line applications, including critical pressure control equipment like wireline lubricators. In fact, our Elmar brand has delivered more than 60,000 feet of lightweight wireline lubricator used to control pressure.

With our enormous installed base of operating equipment, NOV is uniquely positioned to provide aftermarket service and repair as the OEM, and we have invested steadily in this opportunity. Everything we make in this area is experiencing higher wear and tear.

For instance, coiled tubing injector heads typically undergo a major overhaul at 10 million running feet. Five years ago, this would be two to three years of normal service. Today, our customers are hitting the 10 million running feet mark in a year, tripling the frequency of coiled tubing unit overhauls.

With trained technicians in more than 40 locations across 14 countries, we have what our customers need, when they need it, and where they need it, precisely what our customers expect from NOV. Today, aftermarket services and spares account for about 40% of the intervention and stimulation equipment business unit sales.

Here, as in every other business at NOV, we deliver field-proven solutions that maximize efficiency, improve service and value, and increase our customer's bottom line. Tuboscope, and intervention and stimulation equipment are two more terrific businesses within the NOV portfolio that are global market leaders that the oilfield relies on.

Both provide mission-critical equipment and services to our customers' global operations. Both benefit from sustainable competitive advantage through scale and scope and technology and installed base. Before I turn it over to Jose, I'd like to thank NOV's incredible employees.

You may have noticed that we did not call out any impact from Hurricane Harvey in our third quarter results, despite being based in Houston with nearly 100 facilities on the Gulf Coast area that was affected by the storm. Company facilities endured, for the most part, pretty minimal damage. Unfortunately, many of our employees were not so lucky.

Fully 20% of our workforce live in the areas affected by the storm and 600 NOV employees were displaced from their homes by floodwaters. Our thoughts and prayers remain with them and their families as they put their lives back together.

I am particularly proud of the hundreds of fellow NOV employees who pitched in to help their co-workers, families and friends and neighbors by rescuing those trapped by high water by serving meals, by volunteering in shelters, and by pulling wet carpet and sheetrock out of nearly 140 employee homes.

You worked very hard to take care of both our co-workers as well as our customers through this period. I've always said that NOV is a special place and it has never been more apparent than it has been in recent weeks. You folks are awesome, and all of you have my heartfelt gratitude.

Jose?.

Thanks, Clay. To recap our third quarter results, NOV consolidated revenues increased by $76 million from the second quarter of 2017 to $1.84 billion.

Strong demand for our technologies, products and services from our short-cycle land businesses in North America, along with growing demand in the Middle East drove our top line growth, more than offsetting continued challenges in the offshore market and other international land markets that remain stagnant.

During the third quarter, land-related revenues were 65% of total company and North America supplied 43% of sales. EBITDA improved $25 million to $167 million.

For the first time in two years, we achieved at least breakeven operating profit for each of our reporting segments, but reported a consolidated operating loss of $7 million after accounting for corporate costs. We anticipate we will have positive operating income in the fourth quarter. A few items worth noting related to the consolidated P&L.

SG&A has ticked down another $1 million sequentially. Interest income increased $7 million due to an interest payment received from a favorable ruling related to a long-disputed tax assessment. Other expense increased $4 million due to FX. And our tax rate came in at 10% as expected.

Also of note, for the first time in quite a while, we reported no one-off other items, as restructuring initiatives reached at least a temporary pause.

In the third quarter, cash flow from operations was $232 million, and after deducting $42 million in capital expenditures we netted $190 million in free cash flow, giving us free cash flow margin of 10.4%. While we believe our free cash flow margin remains in the top quartile for the OFS&E space, we know we can do better.

We're refocusing our efforts and taking actions to improve our management of working capital. We expect improvements in our cash conversion cycle, combined with our capital-light business model, will help ensure we remain at or near the top of the pack in free cash flow, and will ultimately help us improve our return on capital employed.

Our cash balance increased to $192 million to $1.72 billion at September 30, 2017, and total debt remained at $3.2 billion with nothing outstanding on our credit facility. As a result, our net debt decreased to $1.49 billion.

During the fourth quarter, we plan to pay off a $500 million senior note that will reach its maturity on December 1, 2017 using cash on hand.

The overarching macro commentary for our rig business is that the commodity price pullback that began late in the second quarter, which saw oil prices fall into the low to mid-40s, and ensuing activity declines, caused our drilling contractor customers to retrench and stop spending on all, but the most essential of items.

The result for us was deferred deliveries and a sharper-than-anticipated falloff in orders for new equipment, re-activation services, and spare parts. During the third quarter, our Rig Systems segment generated $330 million in revenue, down $16 million or 5% sequentially. EBITDA increased by $2 million to $28 million.

As disclosed in our press release, we agreed with a customer to cancel two jackup drilling equipment package orders in exchange for firm commitments to continue forward with several other jackup packages the customer has under contract, retention of down payments, and other consideration.

The agreement resulted in the deletion of approximately $100 million from the segment's backlog and a small gain that, along with outstanding efforts by our team to continue removing costs and improving efficiencies, contributed to the segment's sequential EBITDA improvement.

Bookings were limited to $84 million in the third quarter, as customers deferred several anticipated orders, including a large subsea BOP stack, into the fourth quarter and beyond. Among the orders received were several rig upgrade packages, five top drives, several high-spec well service rigs, and pressure control equipment.

We're encouraged by the continuation of robust dialogue with our customers regarding rig upgrades to improve the positioning of their marketed fleets and heavy quoting activity.

However, we expect conversion of quotes to POs to remain very slow as tenders push to the right and as customers postpone decisions to upgrade until they have better visibility into contract opportunities that are slow to emerge in a near $50 oil price environment.

Despite our low bookings in the third quarter, we remain steadfast in our belief that $1 billion in annual revenue represents a draconian scenario floor for this business, and that the current level of order intake is incapable of supporting the large installed base of NOV rig equipment actively deployed around the world.

We are optimistic that bookings will return to the $100-plus million range in the fourth quarter. We also expect revenue out of backlog to pick up $40 million to $50 million as items that pushed out in the third quarter will be shipped in Q4.

Margins should decrease by approximately 150 basis points due to a lower-margin mix of backlog deliveries and the non-recurring nature of the benefit received from contract terminations. During the third quarter, our Rig Aftermarket segment generated $311 million in revenue, a decrease of $30 million or 9% from the second quarter of 2017.

As I mentioned earlier, activity associated with rig reactivations and upgrades fell more sharply than we anticipated because of deteriorating macro conditions. The resulting decline in spare parts sales and falloff in our service-related revenue drove 47% EBITDA decrementals for a $14 million decrease in EBITDA to $69 million or 22.2% of sales.

Notwithstanding the overall sequential decline, demand for certain expendables for the U.S. land market continued to grow throughout the quarter, particularly demand for our pump expendables which reached its highest level since 2014. Additionally, we did see a 40% increase in the number of special purpose surveys.

However, customers continue to reduce the scope and resulting spend of most projects as they seek to limit spending only to what is absolutely necessary.

Recent improvements in spare part bookings give us some confidence that fourth quarter Rig Aftermarket results should be in line with third quarter, and we expect this segment will return to a slow, steady pace of improvement in 2018 as customer inventories of spare parts are depleted, opportunities to cannibalize parts diminish, and visibility into longer-term activity levels improve.

During the third quarter, our Wellbore Technologies segment generated $693 million in revenue, an increase of $79 million or 13%. Adjusted EBITDA increased $28 million to $94 million, or 13.6% of sales.

North America and the Middle East led segment growth, and we also realized meaningful top line improvements in every major region of the world outside of Asia. We believe our growth in this segment continues to outpace global activity levels for three primary reasons.

First, after nearly three years spent depleting equipment inventories purchased in a period of much higher activity levels, customers need to replenish their supply of the critical technologies NOV provides to help them drill farther and faster.

Second, faster drill times result in much more aggressive consumption of the equipment we provide, and product demand increases with each additional foot drilled per day. And third, the rapid adoption of our latest drilling technologies is driving market share gains around the world.

We see compelling evidence in virtually all of our business units within our Wellbore Technologies segment that supports our belief, and I want to give a few examples this morning.

In our downhole tools business unit, which designs, manufactures and sells downhole motors and other critical drilling tools, we experienced 24% sequential revenue growth in the U.S. as there appears to be an insatiable demand for additional motors and tools as scarcity builds despite a plateauing rig count.

Also supporting our outsized growth in our downholes business are our new products and technologies that directly contribute to our customers' ability to increase their rate of penetration and lateral lengths.

Tools like our new AgitatorHE, which provides greater friction reduction than our standard Agitator tool to help drill long laterals more easily, is driving significant improvements in drilling results for our customers.

In West Texas, for example, customer drilled their fastest and longest 83/4-inch section in Reagan County, realizing rate of penetration improvements of 74% while sliding and 38% while rotating, allowing them to drill at an average rate 79 feet per hour faster than a direct offset, which used a standard Agitator.

In Colorado, the AgitatorHE allowed another customer to drill with 22% less weight on bit and an 18% decrease in pressure drop versus the standard Agitator, significantly increasing rate of penetration and reducing wear on the bottomhole assembly and other drilling equipment.

As a result of the rapid growth in demand for motors and drilling tools, we've added third shifts to many of our North American manufacturing and service facilities, and we are even starting to add a fourth shift in certain facilities until we're able to catch up with the recent pickup in demand.

Within our ReedHycalog business, we're also realizing rapid market adoption from our recently introduced products and technologies.

Our recently established directional drilling tools platform also realized outsized growth in Q3, as we secured multiple orders in key international markets for our Tolteq mud-pulse measurement-while-drilling tools and our Vector series rotary steerable systems.

Our customized drill bits outfitted with industry-leading shaped cutter technology continue to set field records around the world, resulting in share gains in key markets.

Our new Chainsaw bit design features 3D cutters on the bit's primary blades that pre-fracture the formation, making it easier for the cylindrical cutters on the secondary blades to shear off the remaining rock, boosting the bit's rate of penetration. After successfully trialing the Chainsaw design in the U.S.

last quarter, we took the technology international, where we're already setting field records in the Middle East. And our eVolve drilling automation products and services are delivering significant improvements in drilling efficiencies and gaining more traction with customers around the world.

We've helped customers realize drill time improvements of up to 50% and are delivering an unsurpassed level of insight into downhole conditions that lead to significant improvements in the predictability and consistency of drilling operations. Lastly, within our drill pipe business, we saw revenue grow 17% sequentially.

Growth that is certainly driven by depleted inventories in our customers' possession after several years of underinvestment in this critical product, and growth that is compounded by significant increases in drilling intensity as drill strings require higher-torque connections when pushed harder around 90-degree bends and through ever-increasing lateral wellbore lengths.

Yet, our industry-leading technology has driven much of the recent growth we've seen in this business. We designed our Delta premium drill-pipe connections to improve drilling times and reduce total cost of ownership.

The thread design requires significantly fewer turns from stab to makeup than comparable connections and requires no stabbing guides, making it significantly easier to handle on a rig.

The faster makeup of the connection is partially accomplished by deeper stabbing, meaning there are more threads engaged at the time two joints come together, which minimizes damage by more evenly distributing stresses on the connection.

After a few quarters of use in the fields of North America, the Middle East and deepwater Gulf of Mexico, we're pleased to confirm our claims of lower cost of ownership as we've seen re-cut rates of less than 1% after our initial runs on this connection versus an average rate of 10% to 20% for our prior generation, market-leading connections.

Even with the recent growth in our drill pipe business, we suspect there is pent-up demand in the system that continues to build with each passing day.

In our Tuboscope pipe yards that Clay described earlier, we've seen customer-owned drill pipe inventory decrease by approximately 17% year-to-date, supporting our view that existing inventories will eventually need to be replenished in a material way.

Though we believe customers have mostly exhausted their 2017 budgets and expect lighter bookings and flat revenues through year-end, market dynamics appear to be setting the stage for an inflection in demand during 2018.

Across our Wellbore Technologies segment, we expect to continue realizing growth that outpaces the broader market in the fourth quarter for the same three reasons I mentioned earlier; the depletion of NOV products and technologies in customer inventories, secular trends driving increased drilling intensity, and accelerating adoption of our latest technologies.

Specifically, we expect to realize 300 basis points to 500 basis points of top line growth with stronger incremental margins than we saw in the third quarter. Our Completion & Production Solutions segment generated $682 million in revenue during the third quarter, an increase of 5% or $30 million sequentially.

Robust completions activity in North America and the Middle East drove strong demand for our intervention and stimulation equipment, fiber glass systems, completion tools, and process and flow technologies business units, partially offset by declines in our offshore-oriented operations.

In line with expectations, EBITDA margins decreased 80 basis points to 14.2% due to less favorable mix and FX benefits realized in the second quarter which, as anticipated, did not repeat.

Specifically, our subsea flexible pipe, floating production and conductor pipe connection businesses posted lower margins sequentially in the face of continued offshore challenges. The segment booked $463 million in new orders during the third quarter for a 119% book-to-bill.

Almost all business units achieved book-to-bills at or near 100%, and we ended the quarter with a total backlog of $974 million. Favorable secular trends support increasing growth in our land-oriented businesses within the segment and we expect will continue to do so in the future.

Rising well counts, longer laterals, growing number of frac stages, and enhanced completion technologies meaningfully increase service intensity and the strain placed on completion equipment. The primary beneficiary of the secular trends in this segment is our intervention and stimulation equipment business unit.

The business unit achieved a book-to-bill of approximately 154%, which, as Clay mentioned, marks the fourth consecutive quarter where order intake exceeded 100% book-to-bill.

Increasing service intensity combined with our customers' year-end rush to procure new pressure pumping equipment before Tier 4 emission standards come into effect more than offset cautiousness surrounding capital equipment commitments in the sub-$50 oil price environment.

This quarter, we booked two complete 50,000-horsepower frac spreads, plus an additional 37,500 horsepower of individual pump units, bringing our year-to-date total pressure pumping equipment orders above 400,000 horsepower.

We also booked two coiled tubing units and a number of discrete pieces of pressure pumping support equipment, including blenders, hydration units and liquid additive systems. Additionally, we received customer commitments for extensive pressure pumping refurbishment programs, bringing our committed refurbishments to over 100 pumping units.

Our fiber glass systems business unit continues to see considerable demand from Middle Eastern markets. We booked our largest order ever of Fiberspar spoolable composite pipe in the Middle East. Customers there increasingly seek corrosion-free, lightweight, easy-to-install products for gathering and injection infrastructure systems.

We anticipate regional demand for composite solutions will continue, which is why we're building a fiberglass plant in Saudi Arabia, where we expect to be up and running by mid-2018. Our completion tools business unit also experienced significant wins in the Middle East during the third quarter.

We successfully qualified and used our i-Frac CEM ball-drop-activated multistage frac sleeves and Burst Port System to help our customers successfully complete the toe section in a record-setting long string completion. Our completion tools unit also notched a few key wins in the Middle East for its recently introduced liner hanger systems.

The Middle East is also a strong source for growth for our process and flow technologies business, specifically for production chokes, water management, separation, and early production equipment. In the U.S., the business unit also continues to see growing demand for production chokes and processing equipment, which includes water treatment systems.

In the third quarter, we secured our largest value order ever for a saltwater disposal facility and we sold two of our WaterWolf Dynamic Oil Recovery systems. Our WaterWolf system recovers oil and removes suspended solids from produced water in a single stage of treatment using hydrocyclone technology that replaces using chemicals, filters or tanks.

The system significantly improves oil recovery and reduces waste, improving economics for our customer, yet another example of how we help our customers lower their marginal cost per barrel. Outside of bright spots in the U.S. and Middle East, demand remains muted.

Because of low commodity price, large capital equipment purchases have been yet to manifest in most international markets and offshore. For the fourth quarter, we expect bookings will taper off as most of our customers' 2017 budgets are exhausted.

The opportunity to secure Tier 2 pressure pumping equipment has passed, and commodity price outlook remains uncertain. After several quarters in a row of strong bookings, this segment is well positioned to realize mid-single digit percent revenue growth in the fourth quarter.

However, we expect business mix shifts and lower margins from our offshore-related businesses to push EBITDA margins down around 50 basis points. We're incredibly proud of the organization's tenacity, having delivered five quarters in a row of improving results amidst challenging market conditions.

While headwinds will persist in a $50 world, we believe the eventual collision between shrinking global oil inventories, steadily improving demand, underinvestment by the industry, and favorable secular trends will drive step-change improvements in our businesses.

Until that happens, the talented and dedicated teams at NOV will remain laser-focused on making the most of each market opportunity, squeezing out every possible efficiency improvement, investing in compelling solutions for our customers, and enhancing the position of our operations in the markets that will matter most in the future.

With that, we'll open the call to questions..

Our first question comes from Bill Herbert with Simmons & Company..

Good morning. Thanks..

Good morning. Hi, Bill..

Yeah. Hey. A question with regard to the frac booking outlook. If I just heard you correctly, you're waxing a little bit cautious with regard to the continuation of the strength that we've seen year-to-date, yet that was the same refrain we heard on the Q2 call and Q3 ended up being a very strong bookings quarter.

So, apart from the dynamics quarter-on-quarter, I also want to understand if you guys, with regard to your discussions with frac service providers, envision an inflection higher with regard to the refurbishment wave and rebuild wave due to the wear and tear on the fleet..

Yeah. Hey, Bill. It's Jose. Fair questions. I think throughout the course of the year, we have been pleasantly surprised by our bookings related to pressure pumping equipment. We've certainly gotten our fair share and the market has been more buoyant than probably we anticipated coming into the year.

However, as I pointed out, a couple of dynamics at play.

First of all, little bit of uncertainty continues to linger in the market and now that we're – sort of during the budgeting cycle for pretty much all companies in the industry, things are getting a little bit more quiet as 2017 budgets are mostly exhausted and people are really starting to think more about 2018.

Also, the dynamic that I touched on related to a little bit of a pull-forward effect from folks trying to capitalize on a great opportunity to get equipment at a little bit of a lower cost in 2017 than what they will be able to get that same equipment for in 2018 as those Tier 4 emission requirements come into play.

But the outlook for 2018 and beyond, I think, is pretty promising due to some of the secular trends of what we're talking about as well as what you touched on. The equipment is definitely getting chewed up much more quickly.

Folks, quite frankly, even though there was a little bit of a pull-forward associated to the Tier 2 emission – Tier 4 emission requirements, folks are still trying to do everything they can to not commit large amounts of dollars for capital equipment programs, so they're only doing it when they have to.

And so that sets the stage for an equally strong, if not better outlook for 2018 and beyond..

Yeah. And I would real quickly add, I think the mix towards zipper fracs is increasing and driving more 24-hour operations, which means the consumption of frac equipment continues to rise..

Okay. Thank you. And then with regard to Wellbore, could you comment a little bit with regard to the sequential incrementals in Q3, super strong revenues, all the trends that you extolled were extremely favorable, but the incrementals were just a bit weaker in light of the narrative that you extolled and witnessed..

Yeah..

And then last one for me, just very quickly, Clay, you stoically chose not to quantify Harvey, but if you don't want to address the financial impact, which businesses could have been impacted the most from a dislocation standpoint and a disruption standpoint in Q2? And should that set up for a decent snap-back with regard to those incrementals in the afflicted businesses?.

This is highly anecdotal. I'm not going to quantify it for you, but we did have anecdotal examples from all the segments around impacts.

But I know, for instance, within the Completion & Production Solutions group, we had some of our pump businesses had trouble getting components shipped in to the Houston area for assembly and then also had trouble getting finished goods shipped out.

What helped us a bit, Bill, was the fact that this hurricane hit over Labor Day, so we still had sort of 30 days left in the quarter to recover. And so I don't – I wouldn't plan on a big sort of snap-back out of Hurricane Harvey. With regards to Wellbore Technologies, again, really strong quarter.

What we saw in North America though with the flattening and then subsequent decline of the rig count, the sort of plateauing, I guess, of activity, was that we felt a little bit of a slowdown in pricing momentum in some of our business units.

For instance, some of our WellSite service businesses after getting pretty good pricing improvements through the first half of the year saw that sort of break over a bit across North America. And so that limited incrementals out of that business unit.

We saw really good sequential improvement in drill pipe revenues, but we're also continuing to see the mix shift from offshore to land and so incrementals in drill pipe business were a little lighter. So, net-net, that added up to diminish our overall segment leverage a little below what we otherwise expected.

But I would add to the downhole technologies that Jose talked about earlier, the bits, the motors, the agitators, posted really good growth with really good incrementals overall..

Okay. Thank you..

You bet..

Our next question comes from Byron Pope with Tudor, Pickering, Holt..

Byron? Hello?.

Hello. Morning..

Morning..

Morning, Byron..

Hey, Clay, I've got a question about Wellbore Technologies and appreciate at the drivers footage drilled per day, but it's something that's tough for folks on my side to really quantify.

So, if we think about the potential for, let's say, a flattish activity environment in North America, it certainly feels as though given what you've described, the tailwind for Wellbore Technologies should be that it should continue to outpace whatever that activity level is just given what happened in Q3.

Is that a fair characterization? Just curious as to how you think about it..

Absolutely. Although we're looking forward to recovery and our resumption of growth, if we are stuck in a world for the next several quarters where, let's say, drilling activity remains flat, in Q3, we had globally 2,100 rigs running and I would tell you, I think they're being run harder than they've ever been running.

And that's tough on drill pipe, that's tough on downhole tools. You've got rig operators that are pretty good at forestalling expenditures on spares for a quarter or two, but eventually their opportunity to cannibalize, to avoid buying spare parts, visually (45:50) that comes to an end.

And so even in that world, where we all just move sideways, I think our prospects continue to improve as our customers burn through a lot of the things that we provide, scarcity of returns, as we've said many times, that we're seeing it return to certain pockets and that drives future demand for NOV both within Wellbore Technologies, but also Rig Aftermarket, Rig Systems and our other businesses..

Thanks. And then just one quick follow-up, also related to Wellbore Technologies and it's really more of a longer-term strategic question. NOV has long since been an enabler for the independent directional drillers and now you've got, I would argue, a very full suite of directional drilling tools, enablers for those independents.

As you think about the opportunity set for that business going forward, is it more skewed toward North America, or maybe some of these international dealer (46:44) markets where we don't have nearly as much visibility?.

Well, first, great question and thanks for pointing out that we are the largest provider of tools to directional drillers. But secondly, I really think it's both.

Across North America, where most directional drilling is being performed today, it's being done without the latest, greatest technologies, things like rotary steerables, and I think there's more that can be done with regards to geosteering, and so we've got some terrific new developments, great quarter this quarter for rotary steerables and MWD.

And then overseas, you've got an opportunity, I think, to help directional drillers bring some of these shale technologies that have worked so well in North America and drive more directional and horizontal drilling longer laterals.

There's a lot of interest overseas in what's gone on here in North America with regards to unconventional technologies and a real appetite to apply these technologies more vigorously to the rocks and basins on other continents. And so, I think that's going to drive future demand for what we're doing in Wellbore Technologies.

So, I feel really good about the offering of tools and equipment and technologies that we have in this space to help drive that trend forward..

Very helpful. Thanks, Clay. Appreciate it..

You bet. Thank you, Byron..

Our next question comes from Ole Slorer with Morgan Stanley..

Yeah. Thanks for that. And I think, now, Clay, I understand why you recently spent so much time talking about Tuboscope..

It's near and dear to my heart, Ole..

It came up a lot in every meeting, so yeah. This Middle East stuff seems pretty sizable.

Could you just – are you bringing out new products within Tuboscope that allow the adoption of fiberglass in a wider space than those previously kind of you thought of as application, is that it?.

Yeah. There's lots of things going on in both Tuboscope and fiber glass and those two business units work together to actually install fiberglass liners inside steel tubulars, which gives you a super high-pressure rating pipe that is also well protected from corrosion.

And as we said many times before, corrosion is a big problem in the oilfield, so that's one way those two business units are working together. But within the Middle East specifically, we noted a very large sale of flexible fiberglass pipe into Saudi Arabia this quarter.

And so, once again, here's another oilfield market that is adopting composites technology to manage corrosion challenges. Within Tuboscope, as I said, we steadily invested in new capabilities, our RFID chip to enable tracking of drill pipe tubulars, for instance, is a great example.

I didn't talk much about it this morning, but our Zap-Lok flowline installation technology, which is a mechanical flowline technology, is a real leap forward in terms of speed and efficiency with which flowlines can be installed.

And so we really continue to enhance and invest in the technologies across all of our business units, Tuboscope, fiber glass as well as all the other ones that are here at NOV..

So, when you look into next year and you think about the drivers of your revenues in Wellbore and Completion, both of which now are incidentally larger than your combined Rig Systems and Aftermarket.

So, I mean, an impressive pivot to your company, I must say, but how do you think about the general recovery and just replacement of worn out equipment relative to the drive from new product lines?.

Well, it's really interesting. There's a lot of things written and analysis done around big sort of galloping advancements and the efficiencies in this industry, and a lot of it takes a toll on equipment that is provided by Wellbore Technologies and a lot of it's opening up future opportunities for Completion & Production Solutions.

And so I think we're really, really well positioned around these trends and continue to kind of turn the ship in that direction. But importantly, Ole, I would add, there's a tremendous amount of optionality that resides in our Rig Systems and Rig Aftermarket businesses as well.

Drilling contractors, both land and offshore, have been under financial pressures, that's taken a toll on our numbers. But as I said earlier, there's a limit to how much they can cannibalize.

We're coming out with new technologies around equipment monitoring that will make that drilling equipment more efficient, new models on total cost of ownership that we put in place with some of our offshore customers, some rig upgrade opportunities.

So, really across the board, we've used this downturn, I think, to enhance our offerings into what we think are going to be the most attractive and interesting markets in the next upturn, and I think the company is really well positioned for that upturn..

Yeah. Now, I have a good news for you, Brandt just got a six handle on it and we've seen a bunch of contracts, particularly in jackups, I mean, up a lot over the past six months and we're starting to see contracts, although lousy day rates, but see contracts, nevertheless, for deepwater.

So, this strikes me that in light of that, at least your Aftermarket business line right now seems to be artificially low.

Can you tell us a little bit about at least the conversations you're having? And what you're seeing on a sort of three to six-month view?.

Yeah. Ole, I know you know a lot of drilling contractors and you know they're very good at tapping the brakes when oil prices tick down or they face a little more headwind in the marketplace. Q3, I think, reflects what we were seeing in Q2, which is oil prices wandering down, this sort of flattering of the rig count, a little more dire outlook.

And so what we saw in the quarter was slowdown on spare purchases and on service around both land and offshore, but a lot of slower level of reactivations onshore North America. What we didn't see was a slowdown at all of repair work and which goes directly into ongoing drilling programs and so that remained steady.

We'll see how Q4 unfolds, but I guess the good news is very late in the quarter, we did see a modest improvement in spares bookings. So, that's caused some encouragement, but nevertheless I'll stick with Jose's earlier guidance, I think we're looking for a kind of a flattish Rig Aftermarket at this point going from Q3 to Q4..

Okay. Well, thank you for that..

You bet. Thank you..

Our next question comes from Kurt Hallead with RBC..

Hey, good morning..

Morning..

Good morning, Kurt..

Hi.

So, you know what's great about you, Clay, is that every quarter, right, we really get a MBA in oilfield services business and I've started a book and when I'm done with this business, I'll share it with you, so you could publish it, how does that sound?.

Good. Thank you, Kurt, look forward to reading it..

Anyway.

So, just one quick housekeeping item and maybe kind of a little bit longer-term question is that, so Jose, on the sequential dynamics for the Rig Systems business, you gave us a couple of different components, not quite sure how that would map out, say, on a sequential revenue change basis, right? So, you gave us revenue out of backlog and you kind of gave us bookings, not quite sure how that backs into kind of the expected growth rate in the fourth quarter Rig Systems..

Yeah. I think you can expect the revenue that's not out of backlog to remain flat..

Okay. All right, appreciate that. That's great. So, Clay, the dynamics that are at play, it looks like in the U.S. land drilling market is a push for the U.S. land drillers to become much more vertically integrated into the directional drilling process. Obviously, you guys have always been enablers of varying industries to buy more stuff.

So, even with oil prices hovering around $50, the push-forwards for the land drillers to get more efficient, I would think, would bode well for incremental spend by these companies on this vertical integration. So, you guys have done a great job packaging offshore rig stuff together and packaging land rig.

How do you see this entire – how do you see this playing out in its entirety?.

First, it's a great question, Kurt, and I think a great opportunity for NOV and I think you're right. You've seen some really interesting strategic moves lately, things like Patterson acquiring MS, getting into the directional drilling space. H&P and others, Precision making moves in that direction.

We view that with a very high level of interest because these are customers we already have who potentially we can provide additional technologies and products and equipment to let them expand their businesses, expand the services that they offer.

I think, more importantly, though, really expand the value that they're bringing to the oil and gas companies. One of the observations that we've shared with these land drillers and others is that the oil and gas companies really are aiming at something that's slightly different than they used to aim at when I first got into the business.

So, if you look at drilling, a generation ago it tended to be vertical, we tended to have drilling contractors for (56:57) rig zone location and drill as quickly as they could to total depth to drill a low-cost borehole.

If you fast forward to today, the land drilling that's underway really is aiming at something slightly different which is now a closely geo-steered well that lands in the sweet spot in the formations that doesn't have a lot of porpoising, doesn't have a lot of tortuosity, it's really a gun-barrel-straight wellbore and ultimately that's a higher value wellbore to the oil and gas companies.

I think it's within the capability of the land drilling contractors to move more into the directional space and deliver that higher value-added wellbore and NOV is here to help. And so a great opportunity for us.

We're pioneering technologies to enable both directional drillers as well as traditional contract drillers to do that, and I think it's a very interesting time..

Okay. And then maybe just one follow-up sticking to the land drilling theme, you talked about some things getting pushed and maybe some of the land drillers tapping the brakes.

As you look out initially into 2018, what's the best guess on how many rigs, legacy AC rigs, you think could ultimately be upgraded to the super-spec capability?.

Well, I'm going to – what I'd say is there's a clear desire that's evident in the marketplace for super-spec capabilities. AC rigs that are pad capable, have walking features, have high pressure mud systems, have a third mud pump, a fourth genset, more solids control capabilities and that's being expressed in the day rate structure.

So, I think this industry is going to continue to evolve in that direction and so I won't hazard a guess on the number, but I think this fleet that's being employed across North America continues to evolve and we're here to help.

And the other point I'd make, Kurt, is overseas, I think if you compare the fleets across North America versus the land fleets in other regions around the globe, it's a really stark contrast in terms of capabilities and technology.

So, I think sort of one of the next new opportunities for NOV's Rig Systems group is to upgrade those overseas rigs and then another great opportunity for our Rig Aftermarket group is to bring our new NOVOS control system across all these rigs.

We have a fantastic capability in terms of bringing machine automation and third-party developed apps and whole new ways of drilling through this NOVOS control system that we're pretty fired up about. So, again, a difficult quarter in the third quarter, but looking forward, I think, a bright future for our rig business..

Hey, thanks, Clay. Appreciate it..

You bet. Thank you, Kurt..

Ladies and gentlemen, this does conclude the Q&A portion of today's conference. I'd like to turn the call over to Clay for closing comments..

Thank you, Kevin. I think when I reflect back on the third quarter, very instructive for our shareholders to observe that really strong growth in our Wellbore Technologies group, and Completion & Production Solutions group was really able to overcome a difficult quarter for our rig businesses and decline in demand for equipment spare parts.

Second point I would make is that this was really accomplished through meaningful wins in new technologies that we've been investing in for the past three years, so rotary steerables and MWD and completion tools and things like that really are driving higher demand.

And then, number three, that was really also helped by the fact that scarcity is returning to the oilfield and these pockets of demands that are emerging, NOV is capitalizing on. So, thank you all for joining us and we look forward to reporting our fourth quarter results in early 2018..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..