Good day, ladies and gentlemen, and welcome to the NOV Third Quarter 2021 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 call is being recorded.

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 Third 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 security's 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 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. Reconciliation to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S.

GAAP basis for the third quarter of 2021, NOV reported revenues of 1.34 billion and a Net loss of 69 million. Our use of the terms 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..

the resourcefulness, technology, and efficiencies of the U.S. oil and gas industry, as well as large, easily accessible pools of low-cost capital in the form of both equity and debt from Wall Street.

However, poor returns on capital investments came in decreased -- increased focus by 2019 and this coupled with a widespread move to decarbonize investments by many capital providers, led to sharply higher cost of capital for the very capital-intensive oil and gas industry. Consequently, the U.S.

operator base has necessarily embraced capital discipline as its new ethos. Going forward, it stands to reason that the U.S. unconventional market will be more challenged to fulfill its role as the world's quick cycle oil supplier. Now that its constituents are more focused on returning capital to shareholders and reducing reinvestment rates.

Further, we believe rising utilization of oilfield service assets, depletion of consumables, and higher labor costs will drive up pricing by oilfield service providers.

We are hearing stories from the field of drilling contractors not willing to reactivate incremental rigs unless they can secure contracts at higher day rates, and a pressure pumper is not adding incremental crews unless they can achieve certain degree of net pricing improvement, which is required to get payback on incremental costs of equipment reactivation.

Higher well construction costs made worse by overall diminishment of efficiency as green cruise man incremental units going to work will impact returns on shale wells, which will reduce the industry's responsiveness to higher commodity prices in our view.

As economies and demand recover, OpEx spare capacity trickles back into the market and all supply-demand GAAP becomes more evident. We think the industry response will be more broad-based than just U.S. shale ramping up activity.

Much of the world's international offshore oil field equipment has been stacked and neglected for some time and will require significant investment to bring it back to working order. One of the most interesting trends that we observed in the third quarter was a rising number of inquiries around potential offshore rig reactivation's.

Despite the level of contracted offshore rigs declining sequentially. And I'll add a low level of actual offshore equipment it orders for us outside of the 20,000 PSI pressure control equipment order for trans ocean. We are being quietly asked to quote on several stacked rigs that are looking at coming back to the market.

This is being driven by high rig tenders currently being floated by NOC and others, who are also looking at higher levels of activity onshore in certain international markets.

So to sum up where the industry is now, MP operators worldwide are enjoying newfound prosperity as our existing production commands higher prices, but they will certainly pay more for constructing new wellbores and bringing on more production in the near future.

Oilfield service providers, which are NOV's primary customer base, are just now starting to claw back discounts given last year while simultaneously facing higher labor and component costs and constraints. We see them raising their prices materially over, say, the next 18 months as prosperity trickles down to this level in the food chain.

NOV's late-cycle manufacturing businesses will follow soon as prosperity continues to trickle down. As a reminder, all 3 of our segments engage in manufacturing, which blossoms a bit later in the oilfield up-cycles given the trickle-down nature of our ecosystem.

RIG Technologies has benefitted strongly from its exposure to offshore wind development, which has helped offset some of the weakness it has seen and demand for traditional drilling equipment. Completion and Production Solutions has felt the brunt of the oilfield downturn, but its recent additions to backlog point to a brighter future.

And although Wellbore Technologies manufacturer some capital equipment like drill pipe, it tends to behave more like a traditional oilfield service provider, and it is clearly recovering quickly. Throughout the downturn, NOV has continued to invest in technologies and improve efficiency, reduce labor, and optimize operations.

Whether it's through automated drilling processes, through its NOVOS operating system, accompanied by our new drill floor robotics, delivering downhole data in real-time through our wire drill pipe, or reducing the emissions profile of the completion site with our ideal e-Frac fleet, NOV's oilfield product portfolio continues to evolve to enable our customers to achieve better operational performance.

Concurrently, we're also developing offerings that will help our customers in their pursuit of a low carbon future. Our offshore wind installation vessel business won 2 packages from Cadeler, and remains on track to achieve revenue run rate of $400 million a year by Q4 of next year.

In addition, we were awarded our first feed study for a carbon capture system aboard an FPSO in Asia, utilizing our extensive gas processing expertise.

And as our other efforts in onshore and offshore wind, solar, geothermal bio-gas, and carbon capture utilization and storage continue, NOV is positioning itself as a leading technology provider to the energy transition just as it is to traditional oil and gas.

On the whole, we are increasingly confident that NOV is approaching an inflection point with the hard work our team has put in over the past several years will bear fruit in a big way. To the employees of NOV who are listening. today, thank you for your extraordinary efforts.

Your hard work, creativity, and dedication have set us up for success, and the opportunities that are coming our way. Thank you. With that, I will turn it over to Jose..

Thank you, Clay. NOV's consolidated revenue in the third quarter of 2021 was 1.34 billion, a 5% decrease compared to the second quarter. Adjusted EBITDA was 56 million or 4.2% of sales.

Excluding the credits from the rig cancellation in the second quarter, revenues were essentially flat with cost reductions more than offsetting charges taken for our project in Southeast Asia. During the third quarter, we generated 105 million from Cash flow from operations and 66 million of free Cash flow.

We ended Q3 with net debt of 36 million comprised of long-term debt of 1.70 billion in cash and cash equivalents of 1.67 billion. Moving to segment results. Our Wellbore Technologies segment generated 507 million in revenue during the third quarter. An increase of 44 million or 10% sequentially.

Revenue improved 6% in North America and 13% in international markets as the momentum of the global recovery continued to build in all major geographical regions. EBITDA improved 14 million to 77 million or 15.2% of sales, as inflationary pressures and a less favorable mix limited incremental margins to 32%.

Our ReedHycalog [Indiscernible] business posted another quarter of double-digit revenue growth, primarily driven by strong performance across the Western Hemisphere and Middle East. Our leading-edge cutter designs and [Indiscernible] continue to drive revenue growth that exceeds the rate of improving global at drilling activity.

While this business faces many of the supply chain issues faced by all global manufacturing businesses and at times has been forced to substitute higher-cost materials to meet delivery schedules, management has been successful in raising prices to offset costs with minimal customer pushback as the efficiencies gained by ReedHycalog technology more than justify higher pricing.

Our downhole tools business realized a 5% improvement in revenue during the third quarter. Top-line growth was constrained by shortages of key materials and therefore did not fully reflect the demand we are seeing for our downhole technologies, which continue to enable record-setting drilling performance.

Our agitators system was recently used to help a customer establish a new rate of penetration benchmark in Colombia and delivering a field record rate of penetration of 201 feet per hour. Our select shift downhole adjustable motor was used by large operator in the Northeast of U.S.

during a 12 well drilling campaign and drove a 30% reduction in average drill times due to the tools ability to change Ben settings downhole, saving trips out of the whole. Our Wellsite Services business posted double-digit revenue growth primarily driven by growing demand for solids control services and equipment sales in international markets.

While the business units saw improvements in all regions, the North Sea and Latin America were particularly strong in offshore job counts improved by 17% sequentially, despite the impact of hurricanes in the Gulf of Mexico during the quarter.

Recent tendering activity points to continued improvement in the outlook for our Wellsite Services business unit. Our MD Togo (ph) business realized double-digit sequential revenue growth with strong incremental margins.

Higher global drilling activity levels drove demand for sales and rentals of our surface sensor data acquisition systems and we saw a sizable pick up in revenue for more digital solutions.

We are recently awarded an additional 3-year contract from a customer in the North Sea for our Evo digital drilling optimization services, which leverage high-speed telemetry from our IntelliServ Wired Drill Pipe.

We also secured several international contracts for a well data remote drilling monitor solution, which allows operators to easily analyze well performance against offset wells, identify potential upcoming trouble spots, and oversee drilling efficiency across all wells from any location.

Looking forward, we anticipate our legacy data acquisition offering, and will continue to benefit from a rising activity levels and market share gains and we expect our digital offerings will continue to gain greater market adoption by operators looking to extract additional operational efficiencies to offset inflationary pressures.

Our Tuboscope business experienced a mid-single digit sequential increase in revenue driven by improving demand for our coating and inspection services.

While demand is strong and our backlog of inspection and coating projects has grown, revenue growth was hindered in the third quarter by operational disruptions related to Hurricanes Ida and Nicholas, and the COVID outbreak at a key coating facility.

Additionally, constrained supplies of raw materials limited our ability to capitalized on our backlog and resulted in higher costs as we were required to airfreight resin from Asia to the U.S. to meet certain customer delivery requirements.

In the fourth quarter, we expect operational challenges to subside aligning for the business unit to capitalize on its growing backlog and improved pricing to drive better results. Our Grant Prideco drill pipe business posted solid top-line growth on higher volumes.

EBITDA flow-through was restrained due to a less favorable sales mix and inflationary pressures. New orders remain solid with a notable improvement demand for larger diameter premium pipe. U.S. operators are showing an increasing preference for 5.5 inch drill pipe, which unlike smaller diameter pipe sizes, is in limited supply.

Additionally, operators are specifying specific grades of drill pipe and recent offshore rig tenders driving additional demand for premium pipe.

While fourth-quarter results will be muted by ongoing supply chain challenges and cost inflation, recent orders growing global drilling activity, and improved pricing have us increasingly optimistic regarding 2022.

For our Wellbore Technologies segment, improving global activity levels, partially offset by lingering supply chain challenges should allow for sequential revenue growth between 3% to 6% in the fourth quarter.

We expect improving absorption in our manufacturing facilities and better pricing to be partially offset by supply chain challenges and continued inflationary pressures, limiting incremental margins to around 20% in the fourth quarter. Our completion and production solutions segment generated 478 million in revenue during the third quarter.

A decrease of 19 million or 4% sequentially. EBITDA for the quarter was a loss of $5 million or 1% of sales. Orders during the third quarter were 384 million, yielding a book-to-bill of a 144% with all but one business realizing a book-to-bill greater than one.

Backlog for the segment ended at approximately $100 million higher sequentially to end the quarter at 1.1 billion. A second consecutive quarter of strong order intake along with constructive ongoing customer dialogue, gives us growing confidence in the sustainability of this higher level of orders as we head into 2022.

Our intervention and stimulation equipment business experienced a double-digit sequential decline in revenue on lower capital equipment sales. Impact to EBITDA was limited primarily due to an improved sales mix resulting from steady global aftermarket sales activity. New capital equipment orders remained light, but improved sequentially.

In North America, we're seeing higher quoting activity, particularly around dual-fuel conversions, reactivations, and rebuilds with the average size of quotes increasing as the industry is now preparing to take its last mile of inventory off the fence line.

We're also seeing more inquiries on bulk cementing and pumping equipment to support increasing drilling activity levels. Prospects for the international markets are equally, if not more compelling.

As one of our customers described on its conference call, lower spending by service companies in international markets for more than a half decade, and improving activity is resulting in tightening supply of equipment.

Although orders remain light, we're seeing growing inquiries for pressure control equipment in many regions around the world, and greater inquiries around next-generation coiled tubing equipment, particularly for the Middle East and in the former Soviet bloc countries.

Our Fiber Glass business unit saw relatively flat sequential results, as improving demand across the businesses end markets was offset by continued supplier disruptions. Global supplies of key raw materials such as resin and glass remain extremely tight, a condition we expect to extend over the next few quarters.

Additionally, while we're experiencing fewer direct effects of COVID, such as government mandated lockdowns, we're now working through derivative effects in the form of ongoing logistical challenges and even power shortages, which are occasionally shutting down our operations in China.

Despite these headwinds, the outlook for the business is strengthening, driven by increasing oil and gas activity in the Middle East, improving marine and offshore activity in Southeast Asia, and continued strong demand for our fuel handling products.

Our Process & Flow Technologies business realized a high-single-digit sequential decrease in revenue. Clay described the significant operational challenges this business faced during the quarter. And while operational challenges will linger into the fourth quarter, we remain optimistic regarding the longer-term outlook for this business.

We're seeing growing demand for chokes and pumps for gas processing equipment and for FPSO process modules. And as Clay highlighted, we anticipate additional opportunities to showcase the carbon capture usage in storage skill set we've been cultivating within this business unit.

For sub-sea flexible pipe business realized a double-digit percentage sequential increase in revenue with strong EBITDA flow-through due to solid execution and a better sales mix.

Indicative of the improving outlook for offshore activity orders improved sequentially, achieving their highest levels since 2019, resulting in a book-to-bill that exceeded a 140% for the second straight quarter. Outlook for orders remain solid and we expect to continue replenishing the businesses backlog and move prices higher.

For the fourth quarter of 2021, we anticipate our completion and production solutions segment will continue to COVID and supply chain challenges, but improved backlogs and growing aftermarket activity should allow for segment revenues improve 10% to 15% with incremental margins in the mid-30% range.

Our RIG Technologies segment generated revenues of 390 million in the third quarter.

A decrease of 97 million or 20% sequentially, excluding the 74 million in revenue recognized in the second quarter from the settlement of the offshore rig project cancellation, revenues declined to 23 million sequentially, primarily due to the timing of certain projects nearing completion during the third quarter.

Adjusting for the impact of the offshore rig project cancellation, EBITDA increased 7 million on the improved sales mix and cost savings. Orders for the segment increased to 300 million, yielding a book-to-bill of 190%.

Once again, wind installation vessel equipment orders comprised over half our bookings as we continue to establish ourselves as the most trusted provider of vessel designs, jacking systems, and heavy lift equipment to the offshore wind industry.

As Clay mentioned, we remain on track to achieve an annualized revenue run rate of $200 million by the end of this year and a run rate of approximately 400 million by the end of 2022. Additionally, we remain optimistic that the number of offshore wind installation vessel projects will continue to grow.

Rig Capital equipment orders improved for the second straight quarter, highlighted by an award for our third 20,000 PSI BOP project. Last quarter, we noted a growing sense of optimism from our offshore driller customer base, which we believe continues to build.

The global offshore rig count is trending higher and rig tendering activity is growing more active in Brazil, West Africa, the Middle East, and Southeast Asia. One of our customers recently indicated that it expects to have the entirety of its fleet under contract by the end of 2021.

A remarkable feat considering where the industry was just 12 months ago. With fleets of hot rigs approaching full utilization and operators unwilling to accept rigs that are not in near perfect condition. A number of Orca 's customers have approached us about rig recertifications, upgrades, and potential reactivation projects.

Most of the upgrade conversions have centered around BOP equipment, automation, and emissions reducing technology like our PowerBlade offering. We expect most near-term reactivations to be centered around rigs that are in relatively good shape and will only require modest overhauls.

But as we get deeper into the stack, the scope of these rig reactivation projects will grow significantly. And in turn, so will the revenue opportunity for NOV. Demand for land drilling equipment remains low, but we're seeing positive developments in land markets.

As the rig count recovers in the US, there is a clear preference for rigs that have leading edge torque, flow rate, and pressure capabilities along with larger setbacks to efficiently handle larger diameter of drill pipe.

Operators are also demanding the latest control systems and automation capabilities with interest in our NOVOS, and multi-machine controls growing stronger by the day.

The domestic rig fleet is quickly approaching full utilization of rigs meeting the desired specifications and day rates are rising, leading to increasing inquiries for land rig upgrades that will bring currently idle rigs into this ultra premium rig class.

In our aftermarket business, we realized our third straight quarter of improved spare part bookings. And based on what we've seen to-date, we expect this trend to continue into the fourth quarter. After more than a half a decade of rationed maintenance.

Spending is beginning to normalize as offshore drilling customers gained more confidence in their capital structures and business outlook. We also saw 30% sequential increase in the number of quotations by our field engineering group, predominantly driven by the customers I described earlier.

We would like help from our engineers in determining the requirements to reactivate the stacked rigs. Looking ahead, we find ourselves becoming increasingly optimistic around the prospect of improved financial results from our RIG Technologies segment in 2022 due to several specific segment tailwinds.

1, improving maintenance spend for more contract drilling customer base. 2, a growing pipeline of potential rig activation projects. 3, ramping production from our rig manufacturing operations in Saudi. And 4, an increasing rate of converting wind installation vessel backlog into revenue.

Near-term or RIG Technologies segment must contend with the same headwinds currently faced by all global manufacturers. Primarily supply chain and labor shortage issues, which will likely blunt incremental operating leverage. For the fourth quarter, we expect revenues for the segment to grow 8% to 12% with incremental margins in the mid-teens.

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

Thank you. [Operator instructions] Your first question comes from the line of Stephen Gengaro with Stifel. Your line is now open..

Thanks. Good morning, everybody..

Hi Stephen..

A couple of things, but can we start on the rig tech order side, you highlighted NOV's, and I think earlier that the two offshore wind installation vessels.

Can you talk a little bit about the market in sort of the opportunity you see there unfolding over the next couple of years?.

Yeah. In addition to those 2, we also had a jacking system for a third vessel in the third quarter that we booked, Stephen, which led to, as we said, a pretty strong level of orders for the wind installation vessels for Q3. Q4, I think, it's going to be down a little bit given our pipeline of opportunities.

But when we get into 2022, we're pretty optimistic that we'll probably be another -- I don't know, 4, 5, 6 vessels ordered, including -- likely another Jones Act vessel, qualified rig -- vessel for the U.S. market. So our outlook is pretty strong.

Underpinned by the Biden administration's announcement of its aspirational ambitions of 30 gigawatts in U.S. waters of wind power generation capability, and a continued bright outlook for further offshore installations in Europe and Asian and elsewhere. So on the whole, we're in pretty good position in that market segment..

Thanks. As we think about 2022 and I know there's a lot of moving pieces with costs and COVID disruptions still lingering, etc. How are you guys thinking about getting back to more normal incremental margins as you look at 2022 of the different segments.

Do you think we're close or do you think you still have some transition as you go through the year?.

A lot. It's a good question. A lot, in my view, depends on how we battle our way through all these supply chain challenges that we talked about. It's still a wildcard out there. But the world, we do think at some point gets back to normal, things even out, the economy's open up fully, demand for crude grows.

Under-investment in crude and natural gas over the past few years, I think sets up a really interesting backdrop. Just the situation we find ourselves in, I think, is pretty constructive with respect to how we can do in 2022 and beyond.

And then that's on the heels of a very significant cost out effort that we've had underway here for a couple of years. That's now north of $800 million, and headed closer to $900 million. And so we think the business is really, really well-positioned. to put up better margins, better profitability going forward.

So that's where we find ourselves, can't speak to how quickly that unfolds, but I think it stands to reason that the world does get back to normal. We get the COVID disruptions, economic disruptions behind us. And I think that's still a good things for NOV's future..

Is there a segment that's leading the way or not necessarily?.

Yes. Yes. Well, you're already seeing Wellbore Technologies, right? So double-digit growth, 3 quarters in a row, 15.2% EBITDA margins in Q3. And that, by the way, that's in spite of some -- its own sort of COVID, supply chain issues too, so it's sort of overcoming those.

But as you know, that's a little earlier cycle compared to Completion and Production Solutions in RIG Technology, a little less capital equipment driven. And so it's on its way.

And then with respect to the other 2, I touched on this in my prepared remarks, prosperity rolls downhill through the oilfield and it starts with high commodity prices that help restore the oil and gas producers balance sheets, and gets them back to higher levels of activity and then it shows up in the services segment.

And I think they're going to be quickly realizing higher day rates and margins. And it will flow into higher demand for capital equipment. But big picture, we're on the heels of several years here of depleting the stocks of capital equipment that perform oil Wellbore construction activities in the oilfield.

And so there's been under-investment and that equipment wears out and it's -- as utilization rises, activity rises, I think there will be a call on some of the things that NOV makes..

That's all. Thank you..

You bet. Thanks Stephen..

Your next question comes from the line of Ian Macpherson from Piper Sandler. Your line is now open..

Good morning..

Thanks. Good morning, Clay, Jose. Good morning. Clay, I know that you said that some of the offshore rigs that come out first will be relatively less coal, but I know that you never like to let a reactivation go without an up-selling opportunity on upgrades, as well. And, we know there's upgrades that could apply to the remaining U.S.

land rigs that need to come out and get to super-spec.

Could you compare and contrast what that delta of opportunity is for NOV near term? Between land rigs and offshore rigs, between a fairly minimalistic reactivation versus what you're upgrading upsell opportunity is?.

Yeah, it's hard to -- it's hard to generalize, Ian, because it depends on the specific rig. And so it's -- how long is a piece of rope question. But starting with the offshore, what we're seeing is, the oil Companies -- if rig has been stacked for more than a year off shore, the oil Company is now requiring a survey to establish class.

So the classification of society come in, they survey the rig. And that also involves the OEMS checking out equipment, so they I think oil Companies want to know that what they're contracting has the capabilities as advertised. And so we're seeing that drive more rigs into shipyard.

I think that the rigs in shipyards, it's probably up a half a dozen or so, quarter-on-quarter. And we're roped into that to provide OEM certification of equipment. The other thing that we're seeing in the offshore is more stepped-up requirements around pipe sharing capability by the BOP.

And so that typically involves adding accumulator bottle capacity to the BOP, maybe some other changes to the rams and so forth. More interest in pipe handling capability, which steps up rig efficiency, enables rig to trip -- the rig to trip -- pipe faster. And then the third big area that there is a lot of interest in is emissions reduction.

And so right now we've talked about our PowerBlade product to reduce offshore emissions on prior calls. The results of that, the first one that we've installed offshore is being actually measured for emissions reductions, right now and a lot of customers watching that closely.

And so in terms of upgrade opportunities that would go along with this rig reactivation opportunity, those categories of equipment I think are most promising and most near term. Of course every rig, again, every rig -- looking around what their capabilities are, trying to set themselves apart from a competitive field.

We'll also look at other areas to improve capabilities, but that's what we're seeing most predominantly right now as part of that re-certification process offshore. Turning to onshore; As Jose mentioned, there's a lot of interest -- rising interest from land drillers now as utilization starting to rise in sort of the highest capacity rigs.

and it ties to the phenomenon that you also referenced around demand for 5.5 inch drill pipe. So North American shale drillers are really looking more towards larger diameter 5.5 inch drill pipe for a couple of reasons, has better hydraulics, has a larger ID so you get better hydraulics going down with the mud.

And then a 5.5 inch drill pipe coupled with our Delta premium connection, enables a smaller OD tool joint and you get better hydraulics, the mud coming back up the hole unless turbulent flow will wash out. And to handle 5.5 drill pipe requires higher torque Iron roughnecks.

And so we haven't quite seen it yet, but we think there'll be a rising level of inquiries around upgrading iron roughnecks to handle the bigger pipe, to handle the higher torque that it requires along with engineering around higher setback on those rigs, so you can set back 25 thousand feet or whatever, or 5.5 inch pipe which takes a little more substructure in drill floor capability.

And so near-term, we see opportunities there. I would add to continued growth in interest in our NOVOS Operating System. Which is really -- we're really pretty jazzed about, because this is the digital operating system on NOV rigs that is going to be the foundation for rig floor robotics, which we're going to have on rigs in Q4.

And this is a cost-effective way to really get -- reduced the labor requirements on a drilling rig to get people away from well center to let them machines actually trip the pipe.

And what we found is that they can trip that number stands basically as a human crew can and do that in in a cost-effective upgrade in combination with the sort of digital operating system support for these land rigs. So pretty excited about that as well.

So on all fronts, NOV's right there with [Indiscernible] technology that we've continued to make better to the past several years and to continue to upgrade capabilities and make these rig safer and more efficient. And so we stand ready to do whatever our customers need us to do, both land and offshore..

Good stuff. Thank you, Clay.

Jose, you had a good quarter for free cash flow during the third quarter, I was just going to invite you to refresh the full-year free cash outlook if it needs to be or just leave it where it is?.

Yeah. It was a good quarter from a free cash flow standpoint. So we continue to get better and better in terms of managing working capital. No real revision to full-year cash flow. We're obviously well within the original targets that we had originally provided.

I'd say that typically Q4 tends to be our best cash flow generation quarter of the year if you look back at the last several years, and certainly hope to generate a little bit more free cash flow in Q4, but it might be a little bit different this time around.

So if you look closely at the Balance Sheet, you saw that we had good release of cash from working capital, about a 108 million, with the majority of that coming from the difference between our contract assets and contract liabilities. And if you look forward to Q4, that probably goes a little bit the other direction.

Plus if you look at the guidance that we provided and you do the math, there's a pretty sizable step-up in the top line, so it could be a little bit of a build-up in AR.

And then lastly, as we sort of went on in a great bit of detail related to the supply chain challenges that we've been having and expect to continue into Q4, we are building buffers in certain parts of our supply chain or to try to better withstand some of the potential disruptions that we see on the horizon.

It's a long way of saying that we're still optimistic in terms of future cash flow generation, not just Q4, but certainly into 2022 were getting better in terms of our working capital management. But don't expect another very large windfall of free cash flow in Q4, but overall feel fantastic about the condition of the balance Sheet..

Thank you, Jose. I'll pass it..

Your next question comes from the line of Neil Mehta from Goldman Sachs..

Hi, Neil..

Hey, good morning, guys. If I could ask a strategic question here around M&A. And the Company hasn't pursued a transaction in some time, but you're evolving the business and you're focusing on some new growth areas, including offshore wind.

Do you think you can build the business organically as you diversify or do you think there is a role for both on M&A in your strategy?.

Yeah. Great question, Neil. And to clear the record, yes, we have been engaged in M&A for consistently. We just found everything too expensive, particularly in renewables, in particularly with all the capital, with apparently very low cost of capital chasing some of these transactions.

And so yeah we feel very comfortable pursuing these opportunities organically. You step back and look at the Company's capabilities, our assets, our global footprint, our fantastic engineers that are super creative. Our deep expertise in materials, metallurgy, robotics, digital, I mean, you name it.

We think we've got the toolkit here to pursue these things organically and launch with a few steps ahead of competition in many of these areas. And so that's the plan. We have made a couple of small investments.

We've talked, in the past, about our investment in a land wind tower manufacturing technology that we're -- we've brought a lot of those skills that I just referenced to bear on helping them achieve their strategic goals, and are pretty excited about that.

And then we've also developed complementary products, and specifically a mobile -- a tower crane lifting system for that technology that we'll be bringing to market in early 2022. But yes, I'm pretty excited about it. Feel pretty good about being able to move forward organically mostly.

But nevertheless, just want to be clear, we're always looking, always looking on the acquisition side for opportunities to strengthen what we do both in the energy transition space, as well as our traditional oil and gas space, which we continue to invest in organically as well..

Well that's great Clay. Maybe you can talk about how you're seeing the offshore opportunity and quantify for us what the opportunity with the cash flow or EBITDA opportunity set would look at it as we look at your slides, you do talk about 240 gigawatts of offshore wind capacity over time by 2030.

It's a big price, but help [Indiscernible] tie that back into what it means for your model..

Offshore, specifically, we talked earlier and before about the installation vessels that are required to install these leading edge wind turbines, and they are just gigantic pieces of equipment. I mean, the 14-15 megawatt turbines, which are sort of leading edge, are 500 foot hub heights, so that's a 50 storey building.

And then blades that are 100 yards or more long, and assembling that at altitude, is a major undertaking.

So the vessel requirements has continued to rise with heights and the weights involved in installing these things, as well as the industry, installation industries, aspirational goals around making installation more efficient, taking cost out of installation, which really plays well into NOV's capabilities in terms of equipment handling, sort of time and motion studies around that process and really bring in some pretty creative minds to bear on improving that.

But the outlook remains good because we don't think industry is going to stop at 15 megawatts, I think 20 megawatts or more or probably on the horizon a few years out. And so that space looks pretty good.

And so we're glad to be a part of it, but shifting gears, there's potentially even more interesting space further out, which is in the area of Floating Wind.

And so if you think about it in Fixed Wind, you require shallow water, and we're building the tool kit in the same way we build drilling rigs, we're building these installation vessels in deepwater. The wind power generation industry is going to have to move to floating wind turbines.

And there, we've got some very clever poll designs that our GustoMSC group has developed. They've been in this -- in and around the space for 20 years. And that we think can be manufactured industrially with less steel.

Working in concert with shipyards, and just as a reminder, we've done that a lot, building 400 offshore rigs through the last 20 years. And so we work closely with most of the world's leading shipyards around the world. We think we can help them industrialize processes to make these vessels at scale.

And then NOV proprietary kit around mooring, fairleads, those sorts of things that would anchor those vessels are -- it's discrete items we could sell into that in addition to working with the shipyards to fabricate the hulls.

And the difference between that opportunity and the fixed wind opportunity as we would participate economically in each individual asset. So it's a little different and I think that makes the total addressable market in the floating wind space. In the long run far larger than the fixed run.

Does that answer your question?.

Yeah. And Clay, going back to the fixed I'm sure you talked about $400 million of annual run rate by I think it was fourth quarter of 2022.

Does that still feel like a good number? And is there an upward or downward bias to that?.

I think that's right down the middle of the fairway. I think that's it fits with the orders that we've won up through the third quarter that we just announced. And we were -- we're on that trajectory to be able to hit that by the end of 2022. As you can appreciate, Neil, these vessels take sort of several months of gestation and so forth.

We're working closely with these customers to get the s right and plan right to execute these projects. And so line of sight on that is -- it has been pretty decent. And so the $400 million guidance that we gave a couple of quarters ago kind of fits that pipeline of sales opportunities..

Alright, great color, guys. Thank you..

Thank you..

Your next question comes from the line of Marc Bianchi from Cowen. Your line is now open..

Hi, Marc..

Thank you. Hey. How are you doing guys? I wanted to start with the charge that you took on the vessel projects in the third quarter.

Just to clarify, is this a charge on a percentage of completion type project so you're recognizing all the expected higher costs for the projects here in third quarter, and we really shouldn't have any of that effect in the fourth quarter and beyond assuming things don't get any worse?.

That is correct. It's a POC project. We've roped in all of the extraordinary costs that we have encountered there. And we're fairly far along getting it done, but we still have a ways to go and just worth noting, there's still COVID challenges out there, but this is our latest Investor view on cost to get this vessel completed..

Right. Okay. So if I, sort of, exclude that from or put that back into third quarter in caps, it would look like the implied incremental is maybe in the mid-teens.

And I know there's lots of supply chain issues and so forth, but maybe you could talk to maybe what's going on in the fourth quarter that could be holding back incrementals and how you see that progressing beyond fourth quarter..

Well, first you're right. If you sort of -- except for that, then you see completion and production solutions revenue down $19 million, but EBITDA actually up three in Q3 through that math.

But looking forward to Q4, our guidance with low incrementals, frankly is just acknowledgment that the state of the global supply chain is in a place it's really never been before. And we're battling through sort of shifting constraints and challenges, and freight issues and et c. And so I'll confess.

There maybe -- there's some conservatism in Q4 that I think is appropriate, frankly, given what we just saw in Q3 and the fact that the COVID supply chain disruptions aren't going away.

I will note, in terms of color, that we've seen over the last couple of quarters; Q1 and Q2, when we're talking about COVID, it was much more around moving our workforce around the globe.

So we had service technicians across international boundaries that have to face potential quarantines to go offshore, to come back to their home countries, et cetera, et cetera. That is probably getting a little better.

But through the third quarter, what we're seeing are more the second order effects where our sub-suppliers are more disrupted by supply-chain issues. Freight is getting more challenging. Raw material constraints and allocations in some instances, that sort of thing.

So the nature of this is shifting, but it's just an uncertain time and as the world tries to get out of this pandemic, and reckon with the economic disruption that the shutdown last year and early this year cost..

Make sense. On the order outlook, I didn't quite catch, because you've got so many moving pieces within the segments that Jose was discussing.

But just if you look overall, like Rig Tech and overall caps orders, strong performance here in the last two quarters, how do you see that shaping up over the next quarter to? And how do the supply chain issues influence that? Do they hold back orders? Do they cause customers to pull orders forward because they want to get ahead of potential supply China issues? Just if you could talk through that a little bit..

Marc it's a good question. As it relates to the order outlook, as we were talking about, we feel really good about sort of the sustainability of this new level of orders that we're receiving within our order book.

And so see that continuing to build some momentum into 2022, but for -- a lot of the things that we're booking right now, particularly within our CAP segment. Our CAP segment, as you might imagine, order intake for sort of the smaller type items, i.e. pieces of completion-related equipment, are still pretty light.

And so we're talking about big chunky orders that are coming in. And if those slip or pull, one quarter, that can make a pretty big difference. But the good news is that what we're seeing right now is things are either pushing or pulling, they're not going away, right? Momentum is continuing to build for the order book.

So I'd say all-in things are gone really well, but you talked about the current supply chain dynamics. I think does add some wrinkles into the precise timing of when these things when these things come in. So there is a little bit of uncertainty that's never good for order intake. But I think some of that is starting to get resolved.

People are getting more confident, and they are cognizant of inflationary forces and the potential impact of what might take place going forward. So in some instances, customers are trying to move forward very quickly and lock in pricing and build in that type of certainty.

In other instances, and this ranges the gamut from the very large projects to small one-off orders, even that we see within our Wellbore Technologies space. Sometimes, you know, somebody asks for a bid and we quote them a price. They sit on their hands for little while and come back for an updated price and they're not happy with it.

So they may choose to wait, hoping that what we're seeing in terms of steel costs abate to a certain extent. So it's a little bit of a mixed bag, but overall heading in the right direction..

Super, thanks so much, I'll turn it back..

Thanks, Marc..

Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is now open..

Thanks for squeezing me in here.

So I guess the first thing I wanted to ask about was really just, when you think about the cost pressures that you've seen with steel costs, container rates, and just overall kind of supply chain friction, can you talk about how much of that is actually flowing through numbers in 3Q? And for example, container rates, are they flowing through at the leading edge.

I know you said you're doing some airfreight instead of that. And then HRC and steel costs and everything, like, you've seeing kind of those cost stuff a lot.

So the costs that are running through in the third quarter or are they kind of really reflective of what the costs are today? And then, you know, you talked about increasing prices and I don't know if you do in surcharges. And so when do those really start flowing through? So just trying to understand the moving pieces of those two..

Good -- good question, Chase. I'd say that it felt like freight kind of got a little worse through the quarter. Hard to say what it looks like in Q4. This won't necessarily be anecdotal. There's -- it's impossible for us to do sort of a big --.

Of course, of course..

-- studies you can appreciate. But freight wise, things are getting more backed up, more difficult to get vessels, container costs are pretty high. We certainly fell a lot in Q3, whether that's up or down, going into Q4, really hard to speculate on. I do think in the long run this does sort of dissipate and the world gets back to normal.

But here in the short run, we're kind of bearing the impact of freight. On the inflation front, as I mentioned earlier, it also felt like it's started to mount in most areas, I would say other than steel.

Steel rose a lot in Q2, it's one raw material that a couple of our business units pointed to and said they are feeling like there's a little more stability there. I know iron ore prices have moved down sharply. And on the one hand but coking coal is way up on the other hand. And -- but time will tell. But that's on the heels of some really big moves.

I mentioned 200% sort price increases on hot-rolled [Indiscernible] in play. Less than one other types of steel, but still 25%, 30% on seamless screen tubes, that sort of thing. We understand casing is up probably 25%, 30%, something like that. So big moves recently, so hopefully steel is stabilizing and we're -- the worst is behind us.

But others sort of petrochemicals that we buy resins, epoxies, you've heard us talk a lot about those things. We use them in our Fiber Glass business. We also use them in our Threat Protector business. We use them in our Tuboscope Internal lining, tubular lining coating business; and so it's affecting us in those areas too.

So just a lot happening out there. And again, I'm confident we'll get it all sorted out and get it behind us and just really proud that our folks are on top of it. They're passing this onto -- through either price increases or surcharges or a combination of both and really trying to minimize our risk exposure to inflation as best that we can..

In case maybe just a little bit more color [Indiscernible] and tag on what Clay was saying. Certainly from an overall pricing perspective in terms of our pricing for more vendors and prices our customers. It's a little bit of a mixed bag somewhat. So on some instances, we have fixed pricing for our raw materials for an extended period of time.

And so we are extremely well situated in that situation. In other instances, we have provided fixed pricing to our customers for a period of time and we may not have been perfectly matched up from a cost perspective, but as Clay mentioned, our team is managing it extremely well. So it is a mixed bag across the portfolio.

And I think Clay touched on it a little bit in his prepared remarks and then a little bit of color that might help from the impact of freight. It's really remarkable because obviously one of the benefits we, as NOV have is our size and scale and our diversified footprint that we have around the world.

And so over the last couple of quarters, there are several of our businesses that over the last several years, we have done what makes sense, right? Which is to locate a lot of our manufacturing and low cost regions around the world.

But we preserved some manufacturing within North America as part of diversifying our overall supply chain and manufacturing footprint. And what we've seen over the last quarter, or 2, or 3, is that freight costs are getting to be so excessive that the benefit of that low cost manufacturing doesn't work for us.

And so we have actually repatriated a lot of our manufacturing back to North America while we're dealing with these massive freight charges..

Yeah, yes. And good to have options in our manufacturing footprint to be able to do that to respond. So.

Yeah. Absolutely, one quick follow-up here. I didn't hear anything mentioned about the [Indiscernible] facility..

Oh, yeah..

Just kind of talk about talk about how that ramps going is [Indiscernible] looking to slow down and do less than 5 per year near term, because [Indiscernible] or they look into accelerated? So just talk about what's going on with that facility there..

No. Thank you Chase. I was just there a few weeks ago. It's going really, really well. If anything, the [Indiscernible] are accelerating, you probably have heard about their unconventional gas development aspirations along with their aspirations to develop more crude productive capacity.

And very excited about -- we're going to have the first rig commissioning going on there by the end of the year, and the second one will follow just a couple of months afterwards. Almost completely done with the facility very close, but very excited about the outlook for that region. So thank you for asking..

Okay, perfect. I will turn it over. Thanks, everybody. Thank you, guys..

Thank you. This concludes today's Q&A session. I will now turn the conference back over to Clay Williams..

Thanks, Flue (ph) and thanks to everybody for joining us today. I'm going to end again by thanking our terrific employees; for your diligence, your hard work, your creativity, and particularly, the care that you show for our customers and for each other. So thank you all for what you're doing.

And those of you listening, we look forward to speaking to you on our fourth quarter results in February. Have a good day..

This concludes this conference call. Thank you for participating. You may now disconnect..