Loren Singletary - Chief Investor & Industry Relations Officer Clay Williams - Chairman, President & CEO Jose Bayardo - Senior VP & CFO.

James West - Evercore ISI James Wicklund - Credit Suisse Bill Herbert - Simmons & Company Sean Meakim - JP Morgan Marshall Adkins - Raymond James Marc Bianchi - Cowen.

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Second Quarter 2018 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. [Operator Instructions]. As a reminder, this conference is being 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 2018 earnings conference call. With me today are Clay Williams, our Chairman, President, and Chief Executive Officer; and Jose Bayardo, our Senior Vice President and Chief Financial Officer.

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 nearest corresponding GAAP measures are in our earnings release available on our website.

On a US GAAP basis, for the second quarter of 2018, NOV reported revenues of $2.1 billion and a net income of $24 million or $0.06 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..

Thank you, Loren. This morning I am pleased to report that National Oilwell Varco posted solid results in the second quarter of 2018, with revenues increasing 17% sequentially to $2.1 billion. EBITDA was $226 million, representing 21% incremental leverage to our first quarter 2018 results.

On the whole, we continue our steady march out of the worst oilfield downturn of a generation, and I am very proud of the fight that our employees have demonstrated as we’ve navigated this ordeal. NOV has emerged with a great team focused on producing great results for our customers and our shareholders alike.

All three business segments performed well during the second quarter. In fact, all three posted double-digit revenue growth sequentially, with each segment benefiting from stronger second quarter demand in most major international markets.

Canada was the exception, declining 16% on a consolidated basis due to its seasonal breakup and road travel bans, which occur every year during the spring thaw.

All three segments also posted solid sequential top-line growth in the United States, with the company continuing to gain share in key products and services in the most active unconventional shale basins.

Specifically, Wellbore Technologies posted brisk growth in bits, MWD tools, downhole drilling tools, and solids control technologies which we’ve invested in and introduced through the downturn. Drill pipe sales increases were helped by our new Delta premium connection, and we expect to Delta drill pipe sales to double this year.

Completion & Production Solutions achieved higher pressure pumping and wireline equipment sales, both here and abroad, along with higher sales of fiberglass tubulars and process and flow equipment.

Rig Technologies finalized the creation of our joint venture with Saudi Aramco during the quarter, which brought in an order for 50 land rigs for the Kingdom. This was the largest land rig order ever placed. The Rig Technologies segment also sold three drilling rigs into the Vaca Muerta unconventional shale play in Argentina.

After steadily declining through 2015, ‘16 and ‘17, we are pleased to see Rig Technologies backlog being replenished, back to $3.5 billion, its highest level since the fourth quarter of 2015. During the second quarter of 2018, we saw inflationary headwinds building, particularly in the United States.

Labor costs are rising in many markets, not just Midland, Texas, due to very low unemployment levels across the country. We are managing higher steel costs arising from tariffs as best we can, with most, but not all, business units reporting that they are able to pass at least a portion of higher costs on to our customers.

Other commodities we buy are also seeing cost increases. Resin for our fiberglass pipe products, for instance, has risen 61% since the beginning of the year. All these factors can take a toll on our incrementals and our margins.

However, our ability to recapture cost increases through pricing appears to be improving, as oil prices remain high, and as macro-driven winds continue to shift slowly to our backs.

We believe that 3.5 years of E&P underinvestment; depletion-driven well declines; strengthening, synchronized global economic growth; and geopolitical flashbang events are all conspiring to drive the world-wide excess production capacity cushion down, and oil prices up.

Our oilfield service customers who comprise about 70% of our revenues -- revenue base are very good at postponing maintenance and cannibalizing equipment and keeping it all together with duct tape and bailing wire, through at least the first part of a downturn. But, as we’ve said since the beginning, they can only do that for so long.

So we are not surprised to see higher demand for spare parts for rigs, to see more orders for conductor pipe connections, to see higher demand for tubular coating and inspection services, to see more offshore special-purpose surveys or SPSs.

Embedded in this demand mosaic are indications increasingly clearer that the E&P industry is getting back to playing offense in a $70 per barrel world. The growth that we are seeing in international markets points to E&P’s around the world stretching and warming up and readying themselves to get back in this game. This includes the offshore.

Strong second quarter demand for conductor pipe connections for the offshore, for instance, is a good leading indicator of more offshore wells to be drilled in future quarters.

Although still mostly focused on smaller tie-back opportunities and brownfield developments, our rising levels of quotation and tendering activities for flexible pipe, processing skids and FPSO equipment are beginning to address more medium and large scale opportunities, consistent with industry forecasts for more offshore FIDs in 2018.

We are excited about the prospect of bringing new and better ways of producing oil and gas from deepwater basins to the next upturn, technologies that we continued to hone and develop throughout the downturn that will further reduce our customers’ cost per barrel.

In the offshore drilling rig space, we are quoting pipe handling, hookload and motion compensation upgrades to enable rigs to stand out in a crowded field of competitors.

Rising SPS project volumes indicate contractors are gearing up for more bidding activity, although we had an urgent phone call to come fix equipment following a failed Do-It-Yourself project by a customer attempting to perform their own overhaul. Since you are not the OEM, please do not try this at home.

Predictive analytics and new total cost of ownership aftermarket models represent new and growing opportunities for NOV that we are pioneering with our customers. We are in the process of installing NOVOS, our exciting, new drilling rig operating system, on the first offshore rig, with several more installations planned for customers in queue.

We have over 40 land and offshore rigs either installed or slated to be installed and interest in this technology is keen. Several third parties including major oil companies are developing apps to drive rig efficiency through this transformative, open-platform NOV operating system, which will add to an already robust and growing app library.

The apps permitted by NOVOS, together with multi-machine control, will continue to transform the job of the driller from rig-driver to process manager. This will unleash the individual driller’s experience and judgment on more important big picture rig processes than tedious manipulation of tools and tongs.

NOVOS is empowering drillers to do their very best work. Technology and best practices never cease evolving in the E&P jungle.

The current downturn is demonstrating that low oil prices merely prompt brilliant minds in this industry to think harder, and these brilliant E&P minds have steadily lowered the marginal cost to develop and produce oil and gas from conventional basins, unconventional basins, and offshore basins.

NOV has been a leader in all these basins, as we have designed, built, tested and iterated new technologies to help drive this evolution. We are well positioned for the upturn, which creeps a little closer every day. The Middle East continues to be an area of great interest for us.

NOV will bring key technologies needed to efficiently exploit the vast resources of this region.

NOCs there remain keenly focused on the potential of shale technologies developed in North America, specifically extended reach drilling of long horizontal laterals and multi-stage hydraulic fracture stimulation and completion, to drive better efficiency and productivity.

The region is in need of upgrading its rig fleet and pressure pumping capabilities to achieve these results, which can be further enhanced with new capabilities like higher levels of automation enabled by our NOVOS control system. Likewise, the Vaca Muerta in Argentina will also benefit from better drilling and completion equipment and technologies.

Long, precisely placed horizontal laterals and hydraulic fracture stimulations will continue to be employed globally, and will continue to transform the oil and gas industry for decades to come.

To our employees who are listening, I want to offer my thanks and congratulations on the outstanding work that you do every day to take care of our customers. Loren, Jose, and I appreciate everything that you do. I’ll turn it over now to Jose to provide more operational color.

Jose?.

Thank you, Clay. To recap the quarter, NOV consolidated revenue was $2.11 billion, an increase of 17% or $311 million sequentially. EBITDA improved $66 million to $226 million, or 10.7% of sales. Operating profit was $52 million, or 2.5% of sales and we posted net income of $24 million or $0.06 per share.

Looking at a couple notable items on the P&L, SG&A increased $15 million sequentially, primarily due to higher incentive compensation and labor costs. Other expense fell $44 million, due to the losses associated with FX and certain assets in Q1 that did not repeat in the second quarter.

Cash flow from operations was $239 million and capital expenditures totaled $63 million. Last quarter, we mentioned that we felt the M&A environment remained constructive and we were optimistic about closing several acquisitions. During the second quarter, we completed four strategic transactions for total consideration of $244 million.

While our M&A pipeline is not as robust today as it was last quarter, we continue to see interesting possibilities in the M&A market and we remain well positioned to opportunistically pursue compelling transactions. Turning to results of our operations.

Our Wellbore Technologies segment generated $793 million in revenue in the second quarter of 2018, an increase of $82 million or 11.5%. The segment delivered 37% incremental margins, resulting in a $30 million increase in EBITDA to $133 million, or 16.8% of sales. Each business unit within the segment experienced robust growth.

Demand for our technologies that help customers more efficiently and precisely drill wells, meaningfully outpaced growth in activity levels in the US, and the Eastern Hemisphere shook off its lethargic start to the year.

Our US operational results were partially offset by the Canadian spring break-up, resulting in a 7% sequential revenue improvement in the Western Hemisphere. Significantly improved demand from the Middle East and Asia led to a 13% sequential improvement in our Eastern Hemisphere revenues.

Our Grant Prideco drill pipe business delivered a sharp sequential increase in revenue due to strong bookings in Q1. This increase was a welcome change after experiencing meaningful revenue declines over the past few quarters. More importantly, bookings remained strong in Q2 as they improved slightly from Q1.

We are seeing more demand emerging from international markets, particularly the Middle East, an area in which we are realizing growing adoption of our Delta connections.

While drill pipe market conditions are rapidly improving, the business continues to face challenges associated with low volumes, customers who remain capital constrained, and inflationary pressures that have been further compounded by tariffs.

Notwithstanding these challenges, we remain very encouraged about the potential for this business to deliver outsized growth and strong incremental margins in the mid to longer term, as we continue to see customer inventory levels decline to extraordinarily low levels.

Our ReedHycalog business saw an 11% sequential improvement in revenue during the second quarter. Comparable growth was achieved by each of our three major product families in this business unit, which include our bits, borehole, and coring products, our downhole measurement tools, and our eVolve drilling automation and optimization services.

NOV’s bits, borehole, and coring product line realized particularly strong growth in the US and in the MENA region. Our industry-leading ION shaped-cutter technologies combined with strong execution of repair and maintenance services are driving market share gains and commanding premium pricing.

We typically give our drill-bit technologies a disproportionate amount of well deserved air time during these calls, but it’s also worth highlighting that our coring and borehole enlargement offerings are well recognized by our customers for delivering compelling value to their operations.

Our dogleg reamer has become a standard part of the bottom hole assembly for several customers in Kuwait, Oman, Qatar, and Egypt due to its ability to deliver more than 50% reductions in back reaming trip-out times.

And our coring business is gaining share in the Middle East where we recently received a four year contract from a large customer covering all conventional and enhanced oil saturation coring product solutions.

In our downhole measurement tools operation, NOV’s Tolteq MWD products drove solid growth in the US, Russia, China, and Turkey, where we recently secured a large package order for our iSeries MWD products together with Vector drilling motors.

NOV’s unique ability to independently provide these products supported our customers’ efforts to establish a new directional drilling service operation in the country. Our Downhole business unit realized a 9% sequential increase in revenue with strong EBITDA flow through.

This improvement was led by 10% growth in the US and a sharp rebound in fishing tool sales and motor rentals the Middle East. We are also seeing greater adoption of our Agitator axial oscillation systems in the region due to their ability to meaningfully improve drilling efficiencies.

For example, NOV recently worked with a major service provider in the Middle East to improve performance while drilling an 8.5 inch curve section. We recommended using NOV’s AgitatorHE PLUS with our HEMIDRIL motor, which improved the service provider’s ability to drill through the curve section and extend horizontal reach setting a new field record.

Our latest motor technologies and Agitator tools are also driving better performance for our customers in the US. Using NOV’s ERT power section and our Agitator product, a major operator in the Bakken averaged 286 feet per hour while drilling a well to a target depth of 20,960 feet. The 72.8 hour spud-to-TD time set a record for the company.

Outcomes like this create our reputation for industry-leading motor performance and longevity and help us drive market share gains.

The results come from design teams that constantly challenge themselves to drive down the cost for our customers while delivering more torque and improved reliability, and from operational teams who leverage the latest manufacturing equipment and statistical process control techniques to ensure we deliver quality products to our customers.

Our WellSite Services business posted a 7% sequential increase in revenue led by growth from our solids control services in the US, Argentina, and Middle East.

We are realizing market share gains in part due to our recently introduced SABRE shaker system, which has been proven to handle 1.5 to 2 times the amount of drilling fluids compared to other high-performance shakers. SABRE also reduces oil retention on cuttings by approximately 10%, decreasing haul-off and disposal costs.

The business unit’s MD Totco operation notched key wins in West Texas and the Mid Continent, the most notable of which was a 20-rig data acquisition system conversion for a customer in West Texas. Lastly, our Tuboscope business unit delivered a 6% sequential revenue increase.

US coating operations improved 12% from increasing demand for drill pipe coating services. Our coating operations in the Middle East also saw significant growth due to the delivery of a large order of our Thru-Kote connection sleeves.

The delivery helped us set a record during the second quarter for our highest sales volume of this patented product, which protects internal pipe coatings during welding operations.

For the third quarter, we expect our Wellbore Technologies segment to again outpace global activity, which should lead to mid to upper single-digit percent top-line growth. Near-term, we expect the impact of improving absorption and pricing on margins to be tempered by inflationary forces resulting in Q3 incremental margins that are in line with Q2.

Notwithstanding near term inflationary pressures, we continue to see a multi-year time horizon in which this segment can deliver attractive top-line growth with strong incremental margins. Our Completion & Production Solutions segment generated $738 million in revenue in the second quarter, an increase of 10% or $68 million sequentially.

Robust demand for capital equipment in North America and strong operational level execution more than offset the ongoing challenges affecting our offshore focused businesses. Despite these challenges, the segment delivered 31% incremental margins, resulting in a $21 million increase in EBITDA to $94 million, or 12.7% of sales.

Shipments slightly exceeded our bookings of $398 million, providing us with a 95% book-to-bill. We also realized a $35 million FX reduction due to a 15% devaluation of the Brazilian real to the US dollar. Total segment backlog at quarter end was $955 million.

Our Intervention and Stimulation Equipment business unit posted an 18% sequential improvement in revenue.

This growth was a result of the significant increase in deliveries of pressure pumping equipment, improving demand for wireline equipment and coiled tubing, healthy contributions from the business’ new line of cementing equipment, and improving execution in our aftermarket operations.

Bookings for the business unit were in line with the first quarter, resulting in a 99% book-to-bill on substantially higher shipments. The pickup in demand for new coiled tubing equipment we saw in Q1 carried into Q2, and we also realized a sharp increase in demand for wireline equipment.

While we are seeing some trepidation in the North American market for pressure pumping equipment, bookings for support equipment remain solid, and we continue to see opportunities for pump sales to customers who need to replace aging fleets, as well as steady demand for repair and refurbishment related work.

Industry conditions are improving and driving demand for new equipment, as are the technology innovations offered by NOV. Our latest data technologies, advanced designs, and industry-leading capabilities allow our service company customers to be more effective and more efficient in pushing the boundaries on complex extended reach completions.

The market welcomed our recently introduced GoConnect technology for intervention and stimulation equipment. During the first six months of this year, one major independent oil and gas operator has leveraged 248 days of our GoConnect Asset Link data to improve operations on their completion jobs.

The data was streamed from seven different coiled tubing service companies. Recently, one of our coiled tubing service provider customers committed to equipping their entire fleet of coiled tubing units with our GoConnect data links. Our latest asset designs are also realizing strong market adoption.

We believe our new Genesis line of coiled tubing units is the industry’s most technologically advanced product offering.

A number of innovative features enable the units to safely and efficiently use the largest tubing loads possible for a market that continues to demand longer lengths of larger diameter tubing for extended reach completion operations.

Additionally, the units offer high visibility control cabins, providing a panoramic view of the wellsite as well as new electric controls with customizable displays. Since we debuted the product at the ICoTA Coiled Tubing and Well Intervention Conference, we received eight orders for the new Genesis product.

Our new DynaWinch iMaxx wireline truck is also seeing rapid uptake in the North American market. The unique design configuration offers the industry’s most expansive range of vision of the well site, providing wireline crews with significantly more visibility than any other wireline truck on the market.

The design alleviates challenges associated with poor visibility, enabling crews to operate equipment faster without compromising safety. Despite an extremely short time on the market, we’ve already sold 14 units, and demand continues to increase. Our Fiber Glass Systems business unit also realized an 18% sequential increase in revenue.

Growing inflationary challenges stemming from increasing costs of raw materials, labor constraints, and other inflationary pressures partially restrained EBITDA and flow through. However, the operation executed well as it significantly increased deliveries in the US and South America from its backlog.

After posting three quarters in a row of bookings over $100 million, orders decreased in the second quarter, but we expect bookings to return to the $100 million plus range in Q3.

This improvement will be driven by more and more domestic and international customers recognizing the long-term cost advantage of corrosion proof composite pipe in a wide array of applications.

Our Process and Flow Technologies business unit realized a 10% sequential top-line improvement as demand for reciprocating pumps and progressive cavity pumps for the US midstream market remains robust. The business unit also executed well against its Wellstream Processing backlog.

While order intake for the land-oriented production and midstream portion of this operation is strong, bookings in its offshore oriented Wellstream Processing operation remain soft, although tendering activity for large projects is high. Market fundamentals are improving, resulting in increasing tendering activity for all our offshore businesses.

However, awards continue to be delayed, and most are not likely to be issued until late 2018 or early 2019. We expect our offshore businesses to find bottom in the second half of 2018 and we believe current market dynamics are setting up an environment in which our well positioned offshore business units will see substantial improvement in 2019.

Our Floating Production business continues to struggle with the challenging offshore market, as new orders have remained scarce, even though bidding activity is high. Our Subsea Production Systems business unit saw a sequential improvement in revenue after the torsional stress related challenges faced in Q1 was resolved.

Despite the higher revenue, EBITDA declined due to its mix of offshore projects, and orders remain slow. However, supporting our optimism for an improving market outlook for the offshore is what we are seeing in our XL Systems conductor pipe connector business, which tends to be a leading indicator for offshore activity.

Our backlog is building, and Q2 marked the fifth quarter in a row in which the business unit exceeded a 100% book-to-bill.

Looking at the third quarter, we expect to see an additional 6% to 7% sequential improvement in segment revenue, with incremental margins ticking up to the mid-30% range as the rate of decline in our offshore businesses begins to moderate. Our Rig Technologies segment generated $651 million in revenue, an increase of $168 million or 35%.

Revenue out of backlog increased $123 million to $276 million, due primarily to much improved progress on the construction of offshore newbuild drilling rigs and the delivery of two land rigs in the Middle East. Aftermarket revenues increased 14% sequentially, achieving their highest levels since the fourth quarter of 2015.

EBITDA leverage was 23%, resulting in a $39 million increase in EBITDA to $84 million, or 12.9% of sales. We posted our third quarter in a row of improving bookings. Excluding the $1.8 billion order associated with our Saudi JV, we realized a 12% sequential increase in orders.

As noted in the press release, we recently agreed to terminate a long-dated drillship contract with a customer in exchange for commitments to continue forward with other projects and certain other consideration. After deducting this contract, we exited the quarter with $3.5 billion in backlog for the segment.

As Clay mentioned, in addition to the 50 rig JV commitment, we also booked three land rigs, all destined for Argentina. We see more opportunities emerging in international markets. And since quarter end, we booked an additional rig sale for the Middle East.

In the US, at $25,000 a day, land rig day rates are at levels that can support super-spec newbuilds, and we are discussing opportunities with some smaller domestic drillers. Larger contractors are more focused on upgrading their existing equipment as opposed to building rigs.

We are also seeing rising demand for higher capability well servicing rigs emerging in the US. Orders for offshore equipment improved 42% during the second quarter, primarily due to a large package of equipment for a mid-water semi, which included a subsea BOP stack and other equipment.

We continue to anticipate that demand for newbuild floaters will remain limited outside of a few potential rigs for niche markets. However, we remain very encouraged regarding the opportunity NOV has to help the industry reactivate and upgrade the existing offshore fleet.

Customer dialogue remains constructive, and we are seeing meaningful increases in projects related to reactivations and recertifications for assets preparing for future drilling campaigns. Near term, we anticipate volatility in our quarterly bookings to continue as the business hovers near cyclical lows.

We also expect margins to be pressured from our recent focus on converting inventory that has been slow to move during this prolonged downturn into cash while rewarding first-mover customers. Specifically, for the third quarter, we anticipate 1% to 3% top-line growth, with margins falling between 100 to 300 basis points.

We delivered solid results in all three segments during the second quarter due to strong execution by the many talented employees at NOV.

While there are some near term challenges associated with takeaway issues in West Texas, an offshore market that has not yet fully healed, and inflationary pressures in the US, we believe that a stronger global recovery is beginning to take hold and that NOV is exceptionally well positioned to capitalize on the market opportunities that will emerge.

With that, we’ll open it up for questions..

[Operator Instructions]. And our first question will come from the line of James West with Evercore ISI. Your line is now open. .

James?.

Please check your mute button. .

Sabrina, I hope you didn’t put him to sleep. Go to the next question. .

And our next question will come from the line of Byron Pope with Tudor, Pickering, Holt. .

Good morning guys and I’m lot awake here. .

Good, at least not like him by the way, so. Go ahead, Byron. .

I will keep my question to one and it relates to Wellbore Technologies. Clay, I trend to think of that segment as being the top-line growth drivers -- driver for you guys over the next year or so.

Could you frame where you guys are today in terms of the mix of shorter cycle and longer cycle, products and services? And the reason I asked the question is that, it seems as though you’ve got some tailwinds starting to pick up as it relates to some of the longer cycle product lines like Grant Prideco, So I’m just trying to get a feel for the relative mix today?.

Yes. Good question, Byron. About 80% of that business is shorter cycle, components that go directly into optimizing our customers drilling efforts and the remainder being longer cycle for the capital equipment like drill pipe and some shale shakers and things like that.

So, yes, it has been performing really well with the resumption of drilling activity across North America. And we’re pleased to see that, that business unit’s performance over the last several quarters really.

But what I’m most excited about within that space is there are all the technologies that we been investing in through the downturn that are specifically focused on delivering lower tortuosity wellbores that are closely geosteered into the sweet spots of the targets that the oil companies really want to aim at.

And I think we’re really now just starting to get traction of some of those technologies, I think Jose highlighted a number in the -- in his remarks that we’re pretty excited about. On the longer cycle stuff, drill pipe had a really good quarter, a bounce back in the second quarter, and good sequential growth.

And so, very pleased to see that through -- likewise through the downturn there. We’ve pioneered some new premium connections with our Delta connections, our Delta threads and that’s getting really good traction in the marketplace.

Unfortunately, though, in the second quarter, the mix shifted to be a little lower and smaller size and less -- fewer landing strains. And so, that took a little bit of hold on the incrementals here. But on the whole, very pleased with where we are in the drill pipe business within Wellbore Technologies.

And, of note, we store drill pipe for our customers next door to our manufacturing facility in Navasota, Texas and our customer owned inventory within that yard is at the lowest level we’ve seen since 2010 setting a pretty good backdrop I think the future drill pipe orders..

Thank you. And the next question will come from the line of James Wicklund with Credit Suisse. Your line is now open. Please check your mute button..

I’m sorry. Thanks, guys. Sorry. .

You’re putting everybody to sleep this morning. .

Now, a very good step up Clay from Q1, nice recovery, well done. .

Thank you. .

Within there is little down I don't think in anybody's mind that over the next couple of years as the cycle unfolds, you'll do better. You make everything that's made in the business, you make it better than most everybody else in the business and eventually we need to replenish capital and equipment.

It's more the pace that has everyone a little questioning.

But I noticed in the consensus for revenue growth for ‘19 the street has you at higher revenue growth than the other big four oilfield service companies?.

Yes..

And I'm just wondering if you kind of agree with that. And I realized that we don't have crystal balls into the back half of ‘18, so ‘19 is a little bit of a stretch.

But when you think about the spending surveys and the work you've done preliminarily and you guys are always good about thinking forward in the future, is the 15% top-line revenue growth in ‘19 higher than everybody else, achievable and likely?.

Well, Jim, we -- as a matter, I don't generally like to comment on consensus numbers and so forth and we rarely give that sort of quantitative outlook on growth. What I would tell you is as I mentioned with drill pipe as a great example here, 3.5 years of underspending across this sector.

And as we can both agree, this is a very capital consumptive sector and activities that our oilfield service customers undertake consumes a lot of capital that a resumption of buying that's meaningful and material and will drive that top-line growth at NOV, I think very realistic that that's going to be a powerful engine for our revenues in 2019 and beyond.

.

And also just to add to that, that the nature of the capital equipment business is a bit different than that of the service business as Clay is just describing there. So it’s really across all of our segments.

We think the businesses typically inflect in a different period of time and you expect service companies to inflect and often times they inflect a bit harder once they actually do inflect. .

Yes, the other thought here too Jim is, that I would add is, what's been missing for all of us and this includes NOV and as well as the big four is the offshore, and that's an important revenue and margin driver for everybody.

And although it's very early, our prepared remarks noted that we're starting to see rising levels of bidding activity and quotation activity and specific sales like conductor pipe, flexible pipe was up this quarter, signs of encouragement. And the offshore does come back in 2019, will probably all exceed growth forecasts that are out there. .

Which actually leads to my follow-up question is, deepwater coming back in ‘19, I look at Exxon's, Chevron’s, BP’s and Shell’s and wonder how much of their ‘19 budgets they’ll jam into deepwater just yet.

And so, the bids you're getting, the tenders you're getting, the conductor pipe orders that you're getting, are these -- do you think that there is going to be a resurgence in drilling and development activity overall or is this just a transition year in what's going to be a material improvement later on.

I'm just curious to know what you all think about how much deepwater can improve in ‘19? You sound very bullish. .

Well, again, I'll stress, this is very early. We're seeing indications, a lot of bidding and discussions. What's lacking so far though are FIDs are picking up, but we're not seeing as many purchase orders as we would like. So, I want to frame it realistically for kind of what we’re seeing.

Specifically with regards to our conductor pipe connectors, just about everything we sell through that product line is for the offshore. And so -- and the group that you mentioned is back to buying more of these, so that would point to more wells that they have, they have planned. So we’re really pretty excited about that.

And one of those companies that you mentioned told me about three weeks ago that their deepwater offshore portfolio now is probably more compelling economically than their unconventional portfolio. So I think it may progress on their economics. And so, we’re kind of setting up for -- I think we’re covering the offshore.

And so, that’s why we’re more optimistic about the out years..

Yes. I’ll add one more thing, Jim, it’s Jose. We’re not -- we’re optimistic that we see improvement in offshore market in 2019, but there is also an international land market out there. And if you think about our performance ….

And this I examine that, right. .

Well, it’s really just getting started, right?.

Agreed but -- and we can see that. .

Right.

And if you think about our results to-date, so really look at our segment like Wellbore Technology, we’re about 45% up from the trough in that business unit with virtually all of that improvement coming from one country called United States of America and it’s really the rest of world is just starting to wake up and a for global enterprise like NOV that helps a lot and you can see the same dynamics in our CaP segment as well.

So, we’re excited about where things are shaping up for 2019..

Okay, guys. Thank you very much. I appreciate. .

Thank you. .

Thank you. And the next question will come from the line of Bill Herbert with Simmons. Your line is now open. .

Thank you. Good morning..

Hi, Bill. .

Hey. Jose, can you provide us with at least what you have -- kind of violating Clay’s diction here in terms of providing forward guidance on revenues.

But I’m just curious with regard to your thoughts on Rig Tech revenue out of backlog, the forward patch for that for the next two to six quarters, as it were, what should we expect for the balance of the year and then what are the thoughts for 2019?.

Well, Clay is in the room so how about if I limit it to just 2018. But I’ll give you a little bit which, this numbers will become in our Q when we file a little bit later this afternoon. So if you look at the last six months of the year expectation for revenue out of backlog for Rig Tech is about $587 million.

So, as you can sort of get a sense from the guidance that we provided is a small tick up from where we were in the second quarter for Q3..

Got it. And then with regard to the Aramco contract, great win for you guys. Do you have a sense as to what that represents likely in terms of annualized revenue generation for you? I mean it’s 50 rigs.

So how many of those get out of the door on an annualized basis do you think at this juncture?.

We’ll be ramping up Bill with first rig deliveries expected 2021, maybe recognizing whole revenue on a [PFC] basis before that.

But building up to that sort of notional five rigs per year and you could do the math it’s about $36 million a rig on average, I will tell you there is a mix of different rig sizes in that between 1,500 horsepower and 2,000 horsepower. But our customers may have the option to upgrade those to larger rigs with additional revenue possible..

Okay.

And then last one from me is, you talked about a little bit in your prepared commentary but drilling activity in the Permian slacked the past two months, completions activity in June, flattened out month-over-month, clearly the sector outlook for the Permian is awesome but we’re likely ahead of speed bump here with WTI and then going to 53, who knows if it’s going lower.

Do you have thoughts with regard to how that impacts your shorter cycle businesses’ lever to the Permian?.

Yes. Certainly like everybody else here, we’re facing a little softer outlook I think over the next couple of quarters. But I don't think on a whole it’s going to be terribly material to NOV at this point.

What we expect -- our near-term outlook for our stimulation and equipment sales to pressure pumpers in the US is softening as a result of this as well. But what’s encouraging is we’re hearing from those customers kind of the same perspectives that I know you've heard as well, which is that the current level of operations consumes a lot of equipment.

And so, we’re still having conversations with lots of pressure pumpers for replacement and sort of support equipment to go in to replace pump trucks as they wear them out. .

Thank you. The next question comes from the line of Sean Meakim with JPMorgan. Your line is now open. .

So starting with the shorter cycle businesses Wellbore and CaPS, I was wondering if you could maybe talk about the cadence of how those businesses could feel impact if the completions activity gets curtailed in the Permian and to a lesser degree rig activity and by impact I mean we could see some reduction in maintenance needs, if activity slows.

But then on the other hand, we have heard from a largest pumper that there’s value in taking advantage of some work apps maybe catch up on some maintenance work.

So just curious what other razor could be for your business if and when that materializes?.

Yes, it’s hard to say but you raised something that we see there which is when things -- areas like this slow down a little bit and equipment comes back in the shop, a lot of customers will actually step up spending to get that equipment ready to go again.

And I think consensus view out there is that this takeaway capacity issue in the Permian is transient. And so, I think you’ll probably have pressure pumpers spending time kind of upgrading and maintaining that equipment and which means spending money on aftermarket parts and services with NOV.

I think you will also see activity shift to other basins as well, which will probably help mitigate the impact of the Permian. But look it’s early days out there, none of us were quite sure how this was going to unfold but we are certainly keeping a close eye on it. .

And then also thinking about just cash sources and uses. On sources, Jose, we talked about -- you mentioned a push towards liquidating inventory to a degree, incentivizing customers’ order equipment will generate some cash here near term.

Are you seeing signs of ability to maybe improve your receivables metrics? And then on uses, you mentioned the M&A pipeline maybe a bit smaller after some of the deals that you’ve done to other uses of cash, maybe owning shares, this will move up the priority list, just how you’re thinking about sources of uses I think could be helpful?.

Sure. Yes, as it relates to sources, the quarter and year-to-date has sort of played out as we expected. We needed first half would be a little softer from a cash flow generation standpoint than kind of what we’ve seen over the last couple of years but anticipate improving as we move through the course of the year.

And we started to see some lines of that improvement during the second quarter. So we saw things headed in the right direction. We had $311 million increase in revenue with a decrease in working capital, even though it was pretty modest, it's definitely heading in the right direction, and on the AR front we saw that go down about $135 million.

So things heading in the right direction. And as you can probably get a sense from the bookings and orders that we're talking about, we're seeing more and more opportunities to move some of that inventory that has been sitting on the shelves over here throughout the course of the downturn.

So definitely seeing more opportunities, definitely making more progress, but we still have quite a ways to go. So as we usually talk about our working capital metric, working capital as a percentage of annualized revenue run rate was down about 44% this quarter. We still are striving to get down into the mid-30% range by the end of next year.

So I said, heading in the right direction and think that the cash flow generation will pick up -- continue to pick up as we move through the course of the year.

As it relates to uses, so we've been very pleased with the opportunities that we've seen to-date to invest capital that we think will turn out to be investments at very high rates of return for our shareholders.

Nothing has changed from our perspective in terms of our capital allocation hierarchy and our belief that this business will generate tremendous amount of cash over the next 24 to 48 months. But our number one priority is to make high return investments for our shareholders.

As we mentioned in the prepared remarks that the pipeline isn't as robust as it was at this time last year, but we're still seeing interesting opportunities and we're optimistic about finding some good opportunities to deploy capital.

But in the event they do not emerge, the balance sheet is in great shape right now, and we're heading towards a point where we might be ourselves of being overcapitalized. And if we see that scenario playing out, we'll look to return that capital to shareholders. .

Yes. I'd add too on the M&A front. I mean we had four big closings in Q2, so a lot of good progress here. But very recently we had another opportunity to sort to reemerge that we thought it disappeared.

So there are things like that, that can pop up, that are really good application to capital, and to Jose's point, earn great returns for our shareholders and we certainly want to make sure we're taking advantage of those. .

Thank you. And the next question will come from the line of Marshall Adkins with Raymond James. Your line is now open..

Good morning, guys. All your businesses did awesome this quarter, but Rig Tech was a particular standout after -- it seems like forever of declining offshore stuff. Give us more color on that? Specifically I'm looking for -- we have a whole bunch of unfinished rigs in the shipyards.

Are we starting to see that come around? The after market you mentioned is up really nicely.

Is that going to be the driver going forward? Is it more the land stuff, you got the Saudi thing little further out? I've got several questions on how sustainable this Rig Tech recovery is? So could you give us more color on that sustainability?.

Great question, Marshall. And what I would say is if you look back over the last eight plus quarters, I think Rig Tech after declining over 80% has traced out a pretty stable business in the five to -- we just did $651 million range, so 500 -- call it $700 million range at high single-digit or double-digit -- low double-digit EBITDA margins.

And so, fantastic effort by the team over there dealing with pretty extraordinary downturn in the business.

What that business comprised of in second quarter that we just reported was nearly half aftermarket and the other half capital equipment and the resumption of progress on offshore rigs being built in Asia and yes that contribute a little bit, but it was more -- a little more broad-based in that, in the offshore, and then pretty good quarter with regards to land rigs, we shipped two to the Middle East.

And so, what you’re seeing in that business is continuing to transform itself to be more balanced between land and offshore and I think for the foreseeable future it’s likely to continue to be that. Jose, I think you mentioned in your prepared remarks that since the close of the second quarter we’ve now sold another rig in the Middle East.

And so, that’s -- it's going to continue to be a little lumpy and margins are going to continue to move around a little bit. But I think we are -- after the big downturn, I think we’re achieving stability here.

And then looking forward what’s most exciting to me about Rig Technology is the fact that these new NOVOS control systems are really creating a lot of buzz in the marketplace. And we’ve got major oil companies keenly interested in putting these to work to improve their operation.

We’ve got real commercial big data predicted analytics products that now are in their third year of being used in the field that have the masterably improved operations. And we’ve taken the next step of signing up with customers to harness the power of these things to reduce their total cost of ownership.

And so we’ve got aftermarket agreements with a couple of the offshore drillers around that. So, in terms of kind of Rig Technology, I think we found front footing. We’ve got great execution by the team there. We’ve continued to invest in the next generation of technology and I think that we’re set up for future prosperity. .

Alright. So, we’ll check the sustainability box there. Just unrelated follow-up on the Wellbore side. Jose, on the margin bump we saw, it sounds like most of that was throughput related, you’re starting to fire back up the drill pipe factories.

How much of that’s pricing? And then going forward, help us kind of weigh that, you mentioned costs are going to go up.

Should we think about this more as a throughput issue or pricing issue and how are costs going to affect that out for the next year?.

Yes. I guess we’re going say to-date through the recovery what we’ve mostly seen in terms of delivering, almost 50% incremental is off of the bottom that’s since Q2 of 2016. A majority of that comes from improved utilization and throughput offsetting all the absorption challenges we were having in the depths of the down cycle.

We’re now starting to get more and more opportunities to ratchet up pricing and actually our incremental margins for Q2 were a little lighter than what we had expected due to some of those inflationary forces coming in as well as, as Clay alluded to a little bit of mix issues with the huge bump up that we saw from our Grant Prideco drill pipe business.

So, as I mentioned in my prepared remarks, we feel really good about the ability for that business to deliver very strong incrementals over a long period of time because utilization certainly helps a lot. We’ve got that in the US now.

We’re going to start to build that in the international markets over the coming years and then we’ll still have pricing opportunity to layer across that, plus drill pipe business tends to further enhance incremental margins over the longer term. So we feel really good about where that business is headed. .

Thank you. And our next question will come from the line of Marc Bianchi with Cowen. Your line is now open. .

Thank you. Maybe to start with Jose, just a housekeeping item.

Can you give us any guidance on the unallocated expense that you're expecting here for the third quarter, it increased quite a bit in the second, I suspect that’s somewhat related to Rig Tech but curious how you’re thinking about that for the third quarter?.

Yes, you’re right. So that the revenue lines in particular tend to follow the -- our revenue associated with our rig business with all the inter-company business with our Wellbore segments and CaPS business units, selling to the rig segment primarily with some sales going opposite direction as well.

So when you see a big pick up in Rig Technologies, you’re going to typically see both those numbers pick up on the revenue as well as the EBITDA or OP side. So a little bit disproportionate pick up on the profit side due to the fact that we saw some increases associated with payroll, really what we’re talking about is incentive comp.

We obviously had a pretty rough Q1 and had to make up some loss ground on that front in Q2. So ultimately depends on how Q3 shakes out, what we're seeing right now is we expect it to be flattish overall. .

Okay, that's great. And then on completion production, you’re talking about a second half bottoming in the offshore part of the business.

Can you remind us what proportion of revenues coming from offshore right now and maybe help frame what the downside looks like between here and the bottom recognizing timing is really difficult to call on that?.

Yes. I would say on the order of 20% something in that range is probably the offshore mix. We’ve got a number of business units in there sort of sell to both land and offshore. And so, that's kind of our exposure there in that business..

Okay.

And then would you say something like 20% downside would be extreme in your view in terms of pure at the bottom and offshore?.

Yes. .

Great, okay. Thanks, guys. I will turn it back. .

By the way sorry, I think I misspoke on the last one. Our offshore mix in the second quarter I’m looking at here is 29%. So 71% land. .

That’s the question that’s being asked, that’s for the segment overall. But if you look at the pure -- the more pure play type offshore business is in that 15% to 20-ish percent range, so. .

Thank you. And this does conclude today’s question-and-answer session. I would now like to turn the conference back over to Mr. Clay Williams for closing remarks. .

Thank you, Sabrina. Appreciate everyone joining us this morning. And we look forward to hosting you when we report our third quarter results in late October. Thanks, everyone, have a great day..

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