Good day, ladies and gentlemen, and welcome to the NOV First Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin..

Welcome, everyone, to NOV's First Quarter 2021 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 risks and uncertainty, and actual results may differ materially. No one should assume 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 for the first quarter of 2021, NOV reported revenues of $1.25 billion and a net loss of $115 million. 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. [Operator Instructions].

Now let me turn the call over to Clay..

one, reducing our costs, which are down $12.6 billion since 2014, including approximately $2 billion in annual fixed cost reductions; two, improving our cash flow, which has delevered our balance sheet; and three, investing in the next-generation of technologies, both for the oilfield as well as emerging renewables opportunities.

Whether it's the next-generation of rig floor technology, like our robotic pipe handling system controlled in our NOVOS digital environment; our ideal e-frac fleet, outfitted with our QuickLatch system and FlexConnect frac host system to remove both emissions and manpower from the completion process; or NOV Max, our digital platform that brings out -- brings all the disparate data sources together for the operator to utilize as he or she sees fit.

NOV remains at the forefront of the next-generation of oilfield technology. Our push into supporting the energy transition focuses on areas where we believe we can carve out significant competitive advantages while delivering superior economic returns for our customers in wind, solar, geothermal and other emerging energy sources.

Finally, before I turn it over to Jose to go through our segments in detail, let me share some specific examples of the recovery that we believe is just getting started in the oilfield, beginning with Wellbore Technologies.

7 out of 8 Wellbore Technologies business units posted sequential growth in the first quarter, reflecting surging demand for certain products. Consequently, we began to add shifts to manufacturing, and we achieved the highest level of absorption we've seen since the first quarter of 2020.

NOV witnessed share gains for our ReedHycalog bits in West Texas and Saudi Arabia, despite increasing prices due to strong performance and rising activity. Drilling motor demand is also increasing and downhole friction reduction tools are completely sold out in certain North American markets as revenues were up more than 30% sequentially.

We pushed drilling motor pricing up double digits in some areas. North American rig instrumentation and solids control services pricing is up double digits on new work back to pre-COVID levels and poised to rise further. In our international markets, we expect our wired drill pipe jobs to increase over 25% in the second quarter.

As operators become increasingly convinced of the value of real time, high bandwidth data from the bottom of their drill strings, something that's only available through our proprietary IntelliServ Wired Drill Pipe technology.

Global OCTG demand appears to be picking up, which led to double-digit sequential growth in NOV Tuboscope's pipe inspection services worldwide.

And despite continuing day rate pressure on drilling contractors, Grant Prideco posted a book-to-bill greater than 100% as operators are requiring larger 5.5-inch drill pipe to accommodate better hydraulic performance, leading drilling contractors to purchase this pipe with our proprietary Delta premium connections.

On the whole, higher oil prices and higher rig counts, particularly in North America, placed Wellbore Technologies at the forefront of the oilfield recovery. On the other hand, Completion & Production Solutions and Rig Technology segments continue to battle through low capital equipment backlogs and stingy customer spending.

However, the CAPS segment saw its book-to-bill for new capital equipment orders above 100% for the first time since the fourth quarter of 2019, an indication of better results to come. The group's North American quick turn businesses began to see improvement.

North American production chokes backlog popped 30% and our reciprocating pump backlog grew 69% sequentially. We won another Tier 4 dual fuel fleet upgrade for a domestic pressure pumping service provider and demand for coiled tubing strings tripled from its low point in the second quarter of last year.

While we lost a large project in Alaska, we did win another large project for Brazil, and both projects are evidence that perhaps operators are moving forward with some decisions after protracted COVID-related malaise.

Rig technology sees challenging conditions for rig CapEx in the near term, but it did see double-digit growth in spare parts orders, followed by 2 record low spare parts order quarters in a row. It is also seeing rising inquiries for rig engineering around offshore drilling rig reactivations.

So while our first quarter results were terrible, I'm growing increasingly confident that results will improve significantly as the year progresses. Our spare parts, consumables and services businesses tied to activity are seeing it already, and our sales force is wasting no time repairing pricing to acceptable levels.

And healing for our capital equipment businesses always begins with rising orders, which we started to see in many businesses for the first time in 1.5 years. To NOV employees listening, I again want to thank you for your perseverance and professionalism.

You skillfully position the company to support our customers and to capitalize on opportunities to serve them better. Most importantly, through a year that has thrown a lot at our team, you've taken care of each other. I'm incredibly proud to serve with you and appreciate all that you do.

Jose, Blake and I look forward to better days with you as things improve through 2021. Now let me turn it over to Jose..

Thank you, Clay. NOV's consolidated revenue fell $78 million or 6% sequentially to $1.25 billion during the first quarter of 2021. The sequential decline was the result of ongoing austerity from our customer base, operational disruptions from severe weather and COVID-19 challenges, which continue to play global supply chains.

A simple way to summarize the quarter is that January was extremely slow, February was a frozen disaster and in March, orders began to pour in, and we made up a lot of lost ground, giving us confidence that our results will improve through the rest of the year.

Ongoing cost-out initiatives, a higher-margin revenue mix and better pricing, limited sequential decremental margins to 22%. However, we take no comfort in this performance, given that we are breakeven EBITDA, which is unacceptable in any market environment.

We continue to challenge our organization to look for new ways to drive incremental efficiencies. During Q1, we realized $52 million in annualized cost savings and identified an additional $31 million in opportunities, bringing the total we expect to achieve in 2021 to $106 million.

During the first quarter, our operations used $27 million in cash and capital expenditures totaled $49 million. It's typical for the organization to consume cash in the first quarter, and we expect to be free cash flow positive for the year.

We ended the first quarter with $1.61 billion in cash and $1.85 billion in gross debt or net debt of $244 million. Following the end of the quarter, we fully redeemed the remaining $183 million of our senior notes due in December 2022 with cash on hand.

As a result, our next bond maturity does not occur until December 2029, and interest expense should decline roughly $1 million per quarter. Moving on to our segment results. Our Wellbore Technologies segment generated $413 million in revenue during the first quarter, an increase of $40 million or 11% sequentially.

Cost cutting, improved absorption in our manufacturing plants, a more favorable sales mix and better pricing drove 55% incremental margins and a $22 million increase in EBITDA to $34 million or 8.2% of sales. Our ReedHycalog drill bit business achieved 20% revenue growth with strong improvements across the Western Hemisphere.

ReedHycalog's technology leadership is driving market share gains in most markets, and the gains helped drive modest revenue growth in the Eastern Hemisphere during a quarter in which we typically see a seasonal slowdown. Share gains, improved absorption, better pricing and cost-cutting drove incremental margins of almost 50%.

We expect our ReedHycalog business to post another solid sequential improvement in Q2, led by growing activity in the Middle East and Asia Pacific markets.

Our Downhole Tool business realized a 13% sequential improvement in revenue, led by sales growth that meaningfully outpaced the increase in drilling activity in the Western Hemisphere, partially offset by seasonal declines in the Eastern Hemisphere.

Operators working to reduce trips, maximize hydraulic flow and reduce friction are driving improved demand for our SelectShift drilling motor, fluid hammer, impulse axial pulse technology and agitator tools.

A more favorable sales mix, higher volumes, improved operational efficiencies and better pricing allowed the business to deliver 50% incremental margins during the quarter. Our WellSite Services business realized a 16% sequential increase in revenue, primarily from improving results in its solid control operations.

The business unit has steadily recaptured market share in North America from desperate competitors that have fallen out of the market over the last several quarters and is now starting to claw back pricing. Our M/D Totco business realized low single-digit revenue growth in the first quarter.

Revenue from surface sensor and data acquisition offerings in the Western Hemisphere improved in line with drilling activity but was partially offset by the seasonal falloff in capital equipment sales to the Eastern Hemisphere.

The business unit's eVolve wire drill pipe optimization services achieved record rental service revenue, and as Clay mentioned, picked up additional jobs for Q2. Our track record of improving drilling efficiencies for operators is driving an increasing rate of adoption.

However, the relatively high cost of wire drill pipe in a capital-constrained market has mostly restricted the service offering to operators that have complex wells with tight drilling parameters.

We believe our new low-cost, next-generation wire drill pipe technology could significantly expand the market and accelerate the adoption of our wired drill pipe enabled services. Our Tuboscope pipe coating and inspection business posted a 10% sequential increase in revenue.

Demand for inspection services improved globally and was particularly strong in the U.S., where piece counts from steel mills and outside processors improved 43%. Revenue from coating operations fell due to seasonal declines in the Eastern Hemisphere, which more than offset improving demand in North America.

Our Grant Prideco drill pipe business achieved a high single-digit sequential increase in revenue.

A higher proportion of large-diameter premium pipe in our sales mix drove outsized incremental margins despite meaningful costs associated with the winter storm, which included facility repairs, overtime pay and scrapping costs from power outages that occurred during sensitive heat-treating operations.

The business unit achieved a 104% book-to-bill, which should allow for another sequential improvement in Q2. 31% of our orders came from North America, the highest percentage in quite a while.

As Clay mentioned, we saw strong demand for 5.5-inch pipe driven by operators seeking greater hydraulic efficiencies consistent with the driver we're seeing for our high flow rate drilling tools at a time when there continues to be ample supplies of 4.5- and 5-inch customer-owned drill pipe in the U.S.

For our Wellbore Technologies segment, we expect activity gains in the U.S. and Latin America to moderate and activity in the Eastern Hemisphere to recover, resulting in sequential revenue growth of 8% to 10% during the second quarter.

We also expect continued improvement in the segment's cost structure and better pricing, which should allow incremental EBITDA margins near 50%. Our Completion & Production Solutions segment generated $439 million in revenue during the first quarter, a decrease of $107 million or 20% sequentially.

The sharp decline was primarily due to depleted backlogs, severe weather-related disruptions and supply chain challenges. Efforts to reduce costs and improve operational efficiencies limited decremental margins to 30% and EBITDA declined $32 million to a loss of $4 million.

Orders for the segment improved $57 million sequentially to $338 million, resulting in a book-to-bill of 127%; the segment's first book-to-bill greater than 100% since the fourth quarter of 2019. During the quarter, we began to include orders for subsurface fiberglass fuel storage tanks in our capital equipment backlog.

Excluding this addition, our book-to-bill would have been 115%. Our Fiber Glass Systems business realized a 25% sequential decline in revenue. Difficulties faced by the unit were emblematic of what we saw in most of our capital equipment businesses during the first quarter.

We anticipated absorption challenges resulting from 5 straight quarters with a book-to-bill below 1, but severe COVID-19 and weather-related disruptions also impacted operations.

COVID outbreak shut down our 2 large manufacturing facilities in Malaysia for 3 weeks, and the pandemic's impact on global supply chains resulted in shortages of epoxy resin and glass fiber, which limited manufacturing output at our facilities.

Severe winter weather further hampered operations and caused customers to defer deliveries due to transportation constraints and difficulties installing large subsurface storage tanks and frozen soil.

Despite demonstrating the near-perfect case study for Murphy's law, our team did everything within reason to protect the bottom line and was able to maintain positive EBITDA margins. While ongoing supply challenges may not be fully resolved until August, the outlook for this business seems to be improving with each passing day.

A significant pickup in orders in March for our fuel handling products allowed the unit to post a book-to-bill north of 100%.

We're also seeing demand return from marine scrubbers in Asia and fiberglass pipe in the Middle East, providing us with confidence that the business should realize steady improvement in its results throughout the remainder of 2021.

Our Intervention & Stimulation Equipment business realized a mid-single-digit sequential decline in the first quarter, its fifth straight quarter of declining revenue. Despite continued weakness in the North American market, the segment achieved its second straight quarter with a book-to-bill greater than 1.

Demand for wireline equipment, particularly in the Middle East, Europe and Africa, has been a bright spot. And while our global coiled tubing business experienced a sharp falloff in Q1, quoting activity from international markets remains healthy and improving completions activity in the U.S. is driving greater demand for consumables.

In the pressure pumping space, activity levels have increased significantly, but pricing for our customer services remain well below pre-COVID levels, forcing cannibalization and low-cost purchases of distressed equipment to sustain operations. Opportunities to cannibalize are limited.

And while equipment auctions continue, the quality of iron on the auction block is quickly deteriorating. As a result, we're seeing a significant increase in quotes, albeit off extremely low levels for new equipment. Our Q1 cementing equipment orders were double the amount we received the entire second half of 2020.

And we're also seeing increasing demand for stimulation equipment with enhanced capabilities and reduced emissions. During Q1, we booked an order to convert 16 Tier 2 frac pumps to new Tier 4 DGB dual fuel units that can run on a combination of diesel fuel and natural gas, lowering operating costs and emissions.

Additionally, we're seeing growing interest in our ideal e-frac stimulation equipment, which recently finished its first field trial where our pump completed more than 200 stages at rates up to 22 barrels per minute, nearly 3x that of a traditional 2,500 horsepower unit.

With improved bookings and growing demand for aftermarket services, we expect our Intervention & Stimulation Equipment business will realize a meaningful pickup in revenue during the second quarter.

Our XL Systems conductor pipe business experienced a sharp sequential decline in revenue during the quarter, resulting from a backlog that was depleted after 8 straight quarters with a book-to-bill of less than 1. Our team limited decremental margins to only 17%, and we achieved a 143% book-to-bill indicative of improving market conditions.

Interestingly, we've seen certain customers award work then delay deliveries, while other customers are scrambling hard with urgent orders for newly established near-term spud dates. So sentiment remains mixed, if not a little unusual, but we take the current dynamics as a net positive.

Meanwhile, competition remains fierce with desperate competitors offering pricing and payment terms that we will not match.

Fortunately, our technological and quality differentiation allows us to win a sufficient number of projects that are not entirely driven by pricing, such as the award we received associated with the industry's first 20,000-psi well development project.

Our Subsea flexible pipe business realized a low double-digit sequential revenue decline with outsized decremental margins resulting from lower volumes, a less favorable product mix and the manufacturing challenges associated with the new pipe design that Clay mentioned.

While bookings remained light, customer dialogue and order outlook has improved, particularly in Brazil, where we expect large projects to advance later this year.

However, exact timing remains somewhat uncertain as extreme COVID-19-related challenges in the country make it difficult to coordinate efforts and complete essential engineering work required to advance projects. We believe the offshore production-oriented components of our CAPS segment are at or near bottom.

On our last several calls, we've mentioned how we've been pursuing a large number of offshore production-related projects that continue to push out quarter after quarter. We finally started to see some of these projects shake loose and remain hopeful that stronger oil prices could support more FIDs through the year.

For the second quarter of 2021, we anticipate revenue from our Completion & Production Solutions segment will improve between 15% to 25% sequentially, with incremental margins in the mid-20% range. Our Rig Technologies segment generated revenues of $431 million in the first quarter, a decrease of $6 million or 1% sequentially.

A small increase in capital equipment sales related to offshore wind was more than offset by the seasonal falloff in aftermarket services. A less favorable revenue mix and weather-related disruptions resulted in a $6 million decline in EBITDA to $13 million or 3% of sales.

Orders for the segment declined $78 million sequentially to $112 million, yielding a book-to-bill of 59%; the segment's sixth quarter out of the last 7 with a book-to-bill of less than 1. Orders for rig capital equipment remained weak as drilling contractors continued to cannibalize idle equipment and minimize spend.

Despite improving activity and dialogue, there remains a distinct lack of urgency from our customers. Quotation levels increased 25% sequentially, and the conversion of quotes to orders also improved, however, only quotes for small orders converted to bookings. We aren't losing larger orders to competitors and customers are not canceling projects.

There's simply just a lack of urgency and potential orders keep sliding to the right. Ongoing waves of COVID-19 outbreaks in international markets do not inspire confidence and neither does uncertainty around the timing of when several of our offshore drilling contractor customers will exit bankruptcy.

While customers in the Middle East and Asia continue to express the need for newbuild rigs and offshore customers require meaningful upgrades for reactivations, we expect the lack of urgency will keep the book-to-bill for our traditional rig equipment business below 1x.

However, we are optimistic that a few additional quarters of stability in commodity prices and improving activity levels will do quite a bit to move projects forward. On a more positive note, we began manufacturing the first 2 rigs from our new manufacturing plant in Saudi Arabia.

Near-term revenue from these projects will help offset the expected weakness in our rig equipment order book. As a reminder, the plant has a commitment for 50 drilling rigs over the next 10 years and accounted for $1.8 billion in backlog.

We expect to deliver the first rig at the end of this year, a rig in each quarter during 2022 and 5 rigs per year beginning in 2023. In our Aftermarket business, spare part bookings increased 22%, led by demand from the Middle East and U.S. land markets as the ability to cannibalize stacked rigs has nearly run its course.

While the improvement is extremely welcome, spare part bookings are down 36% year-over-year and demand for our offshore customers was 43% lower than it was in Q1 2020.

As previously mentioned, several of our larger offshore customers are in the late stages of restructuring processes, and we currently have a large amount of their equipment sitting in the -- in our shops.

We're optimistic that once capital structures are reset and more FIDs advance, we will realize a meaningful pickup in service repair and recertification-related work. Our renewables business has a completely different field than our traditional rig business.

During the quarter, we booked an order for the design, jacking systems and crane for a European wind turbine installation vessel. Our Q1 offshore wind order intake was modest relative to the opportunities we are pursuing, which include over $400 million in potential projects that could be awarded before the end of the year.

Looking ahead to Q2, we expect growth in our renewables business, improving aftermarket activity and progress on the rigs in Saudi Arabia to offset the impact of weak orders from our rig capital equipment business, which should lead to results for our Rig Technology segment that are in line with the first quarter.

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

[Operator Instructions]. Our first question comes from the line of David Anderson with Barclays..

So I have kind of a near-term question and then a bigger picture question. I guess just starting on the Wellbore side. This is a clear standout this quarter. I was just hoping you could talk a little bit more specifically about the international side -- international land side of this business and how are you seeing this trending.

Would you be able to call it a deflection yet? I'm just wondering if you're starting to build out some capacity for your Middle East customers in advance of a ramp-up. We're hearing a lot of talk about this in the second half. If you can just kind of expand on that business a little bit, please..

You bet. You bet. Happy to, David, and appreciate the question. Yes, we're optimistic that international is now starting to go back to work in certain markets, probably most excited about Latin America and the Middle East and as well expect Russia to pick up a bit. Typically, it's low seasonally through the winter period.

But specifically, we're starting to see tenders for bulk sales of things like bits, fishing tools, downhole drilling motors, those sorts of things be let and an indication that we think a lot of national oil companies are getting ready to go back to work.

Recently saw a compilation of NOC budgets for 2021 and some pretty solid double-digit year-over-year growth rates expected. And generally, the group that was included or getting back closer to kind of where they were in 2019.

And so we think that's indicative of the oilfield in international starting to recover in the way, hopefully, that North America has. I think higher crude prices are supportive of that. And so we're optimistic that, that should continue to unfold as we progress through the summer..

All right. That's great to hear. So my other question is kind of a bigger picture topic here. I think one of the things that investors tend to underappreciate is how the skill sets on the OFS sector are really transferable into other markets. And I think as energy markets adapt service companies, at least the best ones adapt right with them.

You probably know that better than just about anybody. So I guess with this coming energy transition, I'd be really curious to know how certain product lines that you have could be repurposed or reengineered for this new type of customer emerging end markets? Offshore wind installation is a very clear example of this transferable skill set.

But where else could you see this happening at NOV?.

Yes. It's a great question. I do think that the skill sets and the technology that we employ in this space, the prosecution of large projects at scale and remote locations is very transferable to renewables in many instances. And so actually, very pleased as we started moving and exploring the renewables opportunities a few years ago here at NOV.

I was very pleased to see the overlap in skill sets and the possibilities to put those skills to work in the renewables challenges that the world faces. And so yes, you correctly point out. The wind offshore space is almost a one-for-one application of things like jacking systems, lifting, handling systems.

More specifically, we have a lot of experience, as you know well, in pipe handling and drilling operations, pipe rackers, those sorts of things that are tightly choreographed, industrial, mechanized and robotized processes in many instances.

And so our scientists are working on applying those sorts of things to the process of handling blades offshore and attaching these very long blades to the nacelle on these turbines, for instance. So that's sort of a specific example of where we think we can bring a lot of value.

Geothermal business, as you know well, is a direct application of oilfield drilling capabilities to hotspots around the globe that are -- that lend themselves to economically efficient electrical -- electricity generation.

And so we've developed more specialized products for the hot temperatures that those drilling operations encounter as well as the hard rock that they encounter. And so very pleased to put things like our fluid hammer downhole device into geothermal operations in Europe this quarter.

We've developed composite piping systems that can handle the temperature and scale challenges in geothermal. More sort of fledgling opportunities. We're the largest provider of gas dehydration, gas processing systems to traditional natural gas-producing operations.

And so our monoethylene glycol solvent-based dehydration technology is very analogous to the solvent-based CO2-stripping technologies that will be required, we think, for carbon capture and sequestration. And so we've got a team looking at opportunities there.

Just all the way around from metallurgy to composites, to mechanical systems, to permanent magnets to -- you name it. I think there's a lot of expertise that not just in OB, but frankly, the whole oilfield services industry can bring to bear on the renewables challenges..

Our next question comes from Stephen Gengaro with Stifel..

Jose, do you mind maybe talking about the free cash flow expectations for this year and how we should think about movements in working capital as we think about free cash generation?.

Sure thing, Stephen. Yes, as I mentioned in our prepared remarks, Q1 is typically a quarter in which we consume a little bit of cash due to things that happened early in the year. But we remain very confident that we will be free cash flow positive through the full year.

And so obviously, that has implications for the next 3 quarters that we will generate meaningful amounts of free cash flow. So we feel good about that even despite the fact that we are factoring in an improvement in the top line revenue through the back half of the year.

We think we've made a tremendous amount of headway related to improving the processes within our organization, tied to better management of working capital. And so we see opportunities to continue reducing the capital intensity of our business even with an improving top line.

So we finished last year with working capital as a percentage of revenue run rate in the low 30% range, popped up a little bit with the falloff -- further falloff in revenue that we had this quarter.

But as we progress through the year, we see certainly getting at least back down to that range, if not, into the upper 20s to 30-ish percent range, which should free up additional cash from our working capital..

And just as a follow-up and a follow-up to a prior question as well. When you think about alternative opportunities, and I'm specifically thinking about in the near term, the offshore wind side.

Any material incremental CapEx we should be thinking about as it pertains to those opportunities?.

That's the good news. No. It's the same plants that make jacking systems for -- offshore jack up drilling rigs, for instance, that make the jacking systems that go into these vessels, Stephen, and the same plants that make our cranes, lifting systems. And so same terrific engineering team with all their creative innovations.

And so it's a really nice fit for what we do. And so I'm really -- as challenging as it is in the drilling space, and I think Jose explained this well in his prepared remarks around what's going on in the drilling space, the wind space is really getting interesting.

And last quarter, we talked a lot about the impact of taller towers, accessing a better wind resource that blows steadier and harder. And then these larger turbines with a larger swept area and the higher loading factors and efficiencies, and that translates to better economics for the wind developers.

And so since we did our last call, what I'd say is incrementally, we're getting more enthusiastic about the prospects in this space. And I think it has a lot to do with that phenomenon. The OEMs are now offering larger 12, 13, 14-megawatt towers.

I think as the offshore project developers run those higher load factors and sort of new economics based on that, they're coming up with better results and so I think there's more projects moving towards FID for offshore wind development, and that's translating to a lot of enthusiasm in our customer base.

And so we've got customers that are looking at exercising options in this space, and we've got new customers bringing this up, asking about it. So on the whole, very excited about the opportunity to apply our oilfield skill set directly to that opportunity..

Our next question comes from the line of Chase Mulvehill with Bank of America..

I guess, first thing I wanted to touch on was just the margin progression here. Obviously, your guidance implies about 3% EBITDA margin, so a nice little uptick without any help from Rig Tech, mind you. But as we kind of move forward, I don't know if you could kind of talk about how you see margins progressing in the back half of this year.

And maybe just speaking to when you think we could actually get back to kind of double-digit EBITDA margins. And maybe there's a revenue number that you need to reach to be able to kind of get to double-digit EBITDA margins again. But just kind of want to understand the path of margins going forward and when we can get back to double digits..

Yes, Chase, it's Jose. I'll take that one. Thanks for the question, and it's a good one. But obviously, there continues to be less than perfect certainty in terms of how the market environment plays out.

We're -- you're obviously hearing from us that we're optimistic that things are heading in the right direction, and we see opportunities for a good pickup beginning in the back half of this year, with obviously some improvement in Q2.

So as we look ahead towards the exit of 2021 going into 2022, we could easily see our Wellbore Technologies business getting back to the mid-teens-type EBITDA percentage rate. And the other 2 segments being in the mid- to upper single-digit percentage range. So, hopefully, that helps a little bit.

And really, it's going to take a little bit more time for backlogs to rebuild related in our -- in both CAPS and Rig Technologies businesses to get them back into the double-digit and mid-teens-type range that we're very confident are not too terribly far away.

And the other thing I guess I'd mention related to the question about longer-term revenue targets, but I won't get specifically into that. You also have to recall the tremendous amount of cost that we've taken out of the organization really throughout the course of the downturn.

But from the beginning of 2019 through the end of '20, $700 million of structural costs. We've got another $106 million coming out in 2021. So all that means that we should be able to achieve comparable margins to what we did in the past at a much lower revenue run rate.

And most importantly, that will translate into better returns on our capital employed. So feel good about the way the company is positioned for the future, and we're looking forward to some marketing -- some market improvements to help with all the internal efforts that we've been working really hard on over the last several years here at NOV..

I appreciate the color. If I can kind of switch gears a little bit and just talk about Rig Aftermarket. During the prepared remarks, you obviously talked about the offshore drillers coming out of bankruptcy and a lot of equipment sitting in your service centers. If my math was right, in 2020, you did about $1.1 billion of Rig Aftermarket revenues.

And at the peak in 2019, you did kind of $1.4 billion.

So as these offshore drillers start coming out of bankruptcy and activity starts picking back up, how should we think about how aftermarket revenues progress over the next 2, 3 years? Do you think the $1.4 billion you did in 2019 that you'd be able to kind of get back there in the next 2, 3 years? Or do you think it's structurally a lower revenue run rate as we go forward?.

No, actually, I think, Chase, that's probably representative of something that's closer to steady state in terms of the consumption of aftermarket spare parts of repair services, those sorts of things. And so looking forward to getting back to that level.

We do think -- as Jose said in his comments, we do think that the -- many of the offshore drillers moving into bankruptcy restructuring has impacted -- significantly impacted their aftermarket purchases.

Because when you look at our decline, like our Q1 2021 bookings for spare parts, just for the aftermarket compared to the prior year quarter, was down 43%, much more than the 31% year-over-year decline in the offshore rig count. Do not think that's structural.

I think it is tied to their adviser expenditures and those sorts of things that they're going through as well as just trying to navigate the restructuring.

And so as the offshore, hopefully, gets back to work, rig count picks up, they emerge from bankruptcy with cleaner balance sheets, they're going to get back to buying spare parts the way they had in the past. The other phenomenon that we're hopeful about in that area, too, is that many of these rigs have been stacked.

In fact, many -- some have been cold stacked and reactivating those rigs is not a -- not for the faint of heart.

They cost potentially significant investments to get those rigs back and working, and our aftermarket business will be a major part of the reactivation process for many rigs that have been both cold stacked and warm stacked and hot stacked, and so we're looking forward to participating in that.

And then one other thing that we mentioned on our -- in our prepared remarks, it's probably worth reiterating is the fact that we've received increasing inquiries around -- particularly for our engineering group around potentially reactivating rigs.

So that's kind of a very, very early leading indicator that hopefully some more rigs will be going back to work in the offshore..

Our next question comes from the line of Marc Bianchi with Cowen..

Maybe building on Chase's question there about aftermarket. If I just sort of look at orders broadly in Rig Tech and in CAPS, it sounds like you're maybe more optimistic about recovery in CAPS.

But how would you characterize the kind of recurring level of orders that would be required for where the current level of oilfield activity is? So if we kind of get past this cannibalization period that might be occurring in both businesses, just not building any further rig count increase, but just to get back to normal where we are today, what would you say those types of order levels are?.

One of the things that makes making capital equipment for the oilfield is so exciting is that it's almost hyper-cyclical. It's a great question, Marc, but really one that's really hard to answer because of that cannibalization phenomenon, and it's something that we study. What I would tell you is it varies by category of equipment across the oilfield.

But our customers have sort of refined that cannibalization process skill very, very well. And it's the playbook that they go to, and it's hard to say. What we do know from prior upturns, though, is that the increase can be dramatic. And it usually goes with some pricing improvement on behalf of our customers.

So as we start to see perhaps day rates increase in various categories of equipment, and that's sort of a helpful dynamic for them to go ahead place orders with us with a much higher level of urgency.

But I would just tell you, it's very difficult to quantify kind of what the -- I think you're really asking, what's sort of the normalized level of orders in certain -- in these certain categories. On the other hand, what has sort of tied us through this downturn really is the aftermarket business. It tends to be steadier.

The consumption of spare parts and consumables and services that are part of our aftermarket business is more directly tied to activity and a little less volatile, vis-à-vis, capital equipment demand. And so that's really been sort of the base load for us.

And so that's what's made it doubly challenging as we've navigated the end of 2020 and the first part of 2021 is that spare parts orders fell off for the aftermarket, and aftermarket ticked down. That's made it doubly challenging to get through this..

Yes. Makes sense. Perhaps question -- next question is for Jose. The CAPS guidance for second quarter, the incremental margin in the mid-20s looks perhaps conservative, considering how the last couple of quarters have evolved. There was some supply chain issues that impacted first quarter.

I assume those have been resolved, but maybe that's not the case in what might be driving the lower margin. But just curious if you could provide some more color around that..

Yes, Marc, it's a fair question, but really, what it has to do with is a shift in the mix of the business. And at this point, the orders that we've taken in, and some of those businesses have been at more challenged pricing.

So near term here, a little bit of challenge related to incremental margins within the CAPS segment, but we anticipate that improving as we move through the course of the year..

To be fair, though, we are continuing to battle through some supply chain issues that are going to linger through the summer. Hopeful that they're -- we've got our teams focused on navigating through those, but I think that will be -- continue to be somewhat of a headwind here for the next couple of quarters..

Our next question comes from the line of Scott Gruber with Citigroup..

So looking at the Wellbore Tech guide, it does look like the second quarter guide is broadly on par with our expectation for spending growth by the global E&P industry.

Is it fair to assume that when you guys think about a stronger second half that when we look at Wellbore, we should be thinking about growth rates that are in excess of the underlying E&P spending growth rate? It just seems that we're on the cusp of the normal cycle beta for that segment kicking in, but I wanted to get your thoughts..

Yes. Look....

Go ahead. Go ahead, Jose..

Scott, it's another good question. And typically, with our Wellbore business, it tends to be -- it often tends to be a rig activity plus type performance.

And an environment that we're expecting over the next several quarters and really over the next couple of years, we see some additional opportunities to outpace the normal growth coming from a couple of different areas.

Clay spent some time talking about the new products that we're delivering into the market, the share gains that we've been making over the last several quarters.

Those things will continue to contribute to, hopefully, some outsized growth as well coming off of the absolute bottom of the cycle to where we're just now starting to see some select opportunities to regain pricing. And so that will further boost growth over the coming quarters..

Got you. And then just thinking about the recovery here, Wellbore picking up, accelerating off the bottom, Aftermarket business coming back. But obviously, you had some supply chain issues that were largely out of your control in fiberglass.

But just given what we're hearing across the general economy with issues cropping up as the global economy starts to snap back, are there risks outside of fiberglass of supply chain issues? Is it confined to price inflation? Are the real kind of delivery delay issues that you could face due to the supply chain? Just some more color kind of around those issues as things ramp back up? And any commentary on your ability to secure net pricing above and beyond input cost inflation?.

Yes. It's a great question, Scott, something we've been very focused on. It's been -- suffice to say, it's been a very unusual year and sort of the latest manifestation of that is what we're seeing in our supply chain. We have talked a lot about resins and fiberglass. We do think resins kind of sort themselves out in the second quarter.

And hopefully, in the third quarter, we'll sort out our supply chain challenges for fiberglass for that business. But as you can appreciate, many, if not most of our business units utilize steel.

And given the wide diversity of our product offering, we utilize a lot of different kinds of steel, so lots of different metallurgies that are sourced from various mills around the globe. And that's probably where we're seeing pricing increases and sort of supply chain challenges most acutely.

Put in perspective, some business units are seeing no change in steel prices. Others are seeing very high double-digit changes sort of sequentially. So it's kind of all over the map. And it's a function of which mills are up and running post COVID and which are still not.

Broadly speaking, I think the mills in Asia are getting back to work a little more quickly than the mills in Europe. But that's an area that we're devoting a lot of attention to, to make sure that we stay ahead of it on pricing.

I think we've had good success in our business units, putting in surcharges and those sorts of things to cover higher raw material costs that we're seeing. But I think as the economies get back to work and these mills and other raw material producers kind of get back up and running, I think the supply chain will sort itself out.

So I don't think this is a long-term problem, but rather just the next quarter or 2 that we'll have to put a lot of energy into making sure that we navigate it successfully..

Our next question comes from the line of George O'Leary with Tudor, Pickering..

Lots of focus from the investor in the sell-side community on kind of the synergy transition side of the equation.

But just curious from an inorganic growth standpoint, if you guys are looking a little bit counter to that popular view and maybe exploring some opportunities on the oil and gas side of the business given the very impressive balance sheet you guys have.

And if there aren't some more attractive from a valuation standpoint opportunities within that legacy oil and gas space?.

Yes. It's a really good question, George. The short answer is yes, we are looking but what we found is a pretty wide difference between the bid and the ask. And so we have had a couple of conversations with some folks for interesting franchises, opportunities, technologies, those sorts of things. But as we've discussed in prior quarterly calls.

I think there's, frankly, a higher level of capital efficiency and more value for money in inorganic technology and product developments. And so most of our focus has been there.

But we're transactional, we're opportunistic, and we continue to look for opportunities to enhance and grow our franchises, both in oilfield as well as renewables, and continue to look at opportunities to thoughtfully and profitably deploy capital in that direction.

But to sum it all up, we haven't had -- we haven't made an acquisition in the oilfield in quite some time now, and it's largely just because of the difference in valuations..

Okay. Great. That's very helpful. And then the commentary in the press release and during the call on IntelliServ was interesting to me. Remember, that seemed to be gaining some momentum just a few short years ago.

You spent some time with some land drillers in the U.S., in particular, that were looking at deploying it more frequently and then purchasing incremental strings. The cost reduction in 20 hours and 20 minutes seems like that could maybe reemerge as a theme.

I'm curious how dialogue is going with customers post this change and whether you think that has a better shot at making a splash in onshore markets, the U.S. or offshore markets? Just kind of how you see that playing out and what the customer feedback has been..

Yes, good question. Another good question, George. Yes, it's an area that we are excited about. It's an area that has been steadily growing and becoming a more meaningful part of our business. And we're gaining more and more traction with it. We've worked on several different projects in several different continents, as you pointed out, U.S.

land, offshore, and have recently started working for a major NOC in the Middle East on some high-profile land projects and things are going very well. Also particularly excited about the latest generation of the IntelliServ wire drill pipe that you referenced.

Technology that allows us to significantly reduce the total time to manufacture the product, and also, very importantly, significantly reduces the amount of time and effort needed to service, maintain and repair that technology out in the field.

So the incremental cost to add the wiring technology to the drill pipe has been significantly reduced, which should lower capital cost requirements in a market where capital is very, very precious, and also lower day-to-day operating costs.

So I think that, that certainly has potential to help open the doors to market opportunities where customers have been a little bit more challenged in terms of thinking the economics may or may not work for them. So more to come in that product. It's still early days, but it's ramping up pretty nicely..

This concludes today's question-and-answer session. I will now turn the call back to Mr. Clay Williams for closing remarks..

Thank you, Sarah, and thanks to everybody for joining us today. It was obviously a very challenging quarter, but we're optimistic things should get brighter as the year progresses. And reflecting on what's been accomplished by our team, just can't thank them enough.

Extraordinary reduction in our fixed cost out of our business, reduction in our working capital intensity, the strengthening of our balance sheet, all while continuing to develop new products and technologies, I think we're very well positioned. Thanks to the -- that NOV team.

And so I'm very grateful to how our employees are listening, and their colleagues have positioned the company for the recovery. So thanks to everybody for joining us today. We look forward to discussing our second quarter results with you in July. And in the meantime, please be safe. Thank you..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect..