Good day, ladies and gentlemen, and welcome to the NOV Second Quarter 202 Earnings Conference Call. [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 Second Quarter 2022 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 second quarter of 2022, NOV reported revenues of $1.73 billion, and net income of $69 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, aggressive relentless cost cutting when necessary; two, maintaining a strong balance sheet; and three, diversification, diversifying geographically, diversifying between operators and oilfield service companies, diversifying across drilling and completion activities, diversifying across oil and gas and diversifying across land and offshore.

Little goes on in the oilfield where NOV does not, in some way, participate. All our oil and gas customers are tied more or less to commodity prices, but different parts of the ecosystem respond to changes in different ways, even within oil producers who respond differently than gas producers.

For example, North American independent operators usually react quickly, both up and down to changes in oil prices, whereas national oil companies move much more deliberately. Our 3 segments respond differently at different times in the cycle as well. Our year-to-date financial results for 2022 fit the ecosystem model that I've laid out for you.

For instance, our Wellbore Technologies segment mostly provides tools to oilfield service companies tied to drilling, but it also provides goods and services like drill bits, solid controls and downhole tools that are purchased directly or at least specified by operators.

It also provides services directly to operators such as oilfield tubular inspection and coating and capital equipment to drilling contractors like drill pipe and shell shakers.

Overall, its revenues are pretty closely tied to real-time global drilling activity but its products and services purchased directly by the operator have been the first to recover, while other categories are recovering later.

On the other hand, the Completion & Production Solutions segment is tied to capital expenditures by oilfield service providers who perform well completion activities like fraccing.

As I noted earlier, prosperity is just now trickling through the oilfield ecosystem to these oilfield service customers, many of whom still face challenged balance sheets and low-priced legacy contracts. Even as balance sheet strengthens, there's a natural lag as new projects are bid to operators and orders placed by the winners.

This business blooms later in the cycle, and our expectation is that the next few years, we'll see continued growth and margin expansion as our customers recover. Separately, the CAPS segment also provides production modules and conductor and flexible pipe directly to operators, mostly for the offshore market.

These capital purchases by offshore operators are also emerging from very low activity levels. So this portion of our business should continue to grow significantly for the next few years as the offshore sector recovers.

Notably, the Completion & Production Solutions segment has now posted 6 quarters in a row of book-to-bill north of one and its backlog has more than doubled over the past 18 months. Orders point to future growth and continued margin expansion.

Finally, our Rig Technology segment is the global leader in engineering, manufacturing and supporting drilling rigs of all kinds. Drilling rigs are large investments. Drilling contractors must possess strong balance sheets, access to capital and high levels of confidence in contracts at high day rates will be available to support these investments.

This all combines to make this segment very late cycle in nature. New rigs are never added until the existing fleet is contracted at high day rates and operators seeking drilling rigs are willing to pay up to gain access to additional rigs.

Demand for new rigs evaporated through the downturn and a resumption in demand for newly constructed drilling rigs is probably a long way off in my view.

Nevertheless, NOV's market-leading status as the OEM on a very large part of the global drilling rig fleet means that we get the call for engineering and equipment to reactivate, recertify and upgrade older, frequently cannibalized rigs coming back to the market.

And aftermarket support of these rigs once they go to work, which is increasingly requiring condition-based monitoring technologies that we've developed through the downturn.

Recently announced plans to put an incremental 3 dozen or so jack-ups to work in the Arabian Gulf, resumption of drilling programs in West Africa and new rig tenders for Guyana and Brazil, all point to higher activity in the offshore and are all driving renewed interest in offshore rig reactivations and rising offshore activity should also again help the CAPS segment, too.

Importantly, through the downturn, Rig Technology's mix has shifted largely to aftermarket support of its installed base for subsistence, which accounted for 53% of its second quarter mix.

It has also benefited from its position as the leading provider of offshore wind turbine installation vessel packages, which helped offset its lower oilfield revenues through the past few years. So to recap, NOV's segments are responding at different times to the upcycle as expected.

Broadly Wellbore Technologies is the earliest of these, while Completion & Production Solutions and Rig Technologies lag. With the world's short of secure energy, the oilfield is reassembling itself and getting back to work, which will physically consume the equipment and spare parts NOV makes at an increasing rate.

Month by month, is becoming increasingly evident that the industry faces an uphill battle, having laid off skilled workers avoided maintenance expenditures during extreme economic duress our customers have been under, having cannibalized a lot of idle oilfield assets and having depleted stocks of consumables that would otherwise be available to support growing operations.

I'll acknowledge that many are of the view that we face a global recession in the near term. Recessions can reduce demand or more accurately, they usually just flatten growth in demand for oil and gas, thereby reducing prices and activity.

However, coming out of historically low levels of oilfield activity that marked the pandemic shutdown with nearly all excess OpEx back in the marketplace with the release of the SPR expected to end soon with the number of viable DUCs in North America drawn down significantly in the past few years.

And with oil and gas and product inventories low and falling, man, it's hard for me to imagine anything other than continued growth of this sector for the next several years.

Our customers still face constraints in workforce and capital that will continue to moderate their orders with NOV in the near term, but ultimately, the energy shortage must be solved. And candidly, a mild recession would somewhat ease the intense supply chain stresses presently on the oil and gas industry.

However, it plays out a key part of the solution will be more orders for NOV. This is a compelling setup for a multiyear upcycle for our company, and I'm pleased to report that we are once again up to the challenges of growth. In our world, our customers always care about one thing, but the thing changes.

In down cycles, the thing is price and upcycles, the thing is time. We are beginning to see a distinct change in our customer conversations with fewer questions around how much will it cost and many more around when can I get it.

This is to me the best evidence yet that we are in the very early innings of the part of the cycle where NOV was designed to flourish. To the employees of NOV who are listening today, thank you for all that you do. You are the best. With that, let me turn it over to Jose..

Thank you, Clay. To recap the quarter, NOV's consolidated revenue in the second quarter was $1.73 billion, a 12% sequential increase compared to the first quarter and a 22% increase compared to the second quarter of 2021. Adjusted EBITDA for the second quarter totaled $150 million or 8.7% of sales.

All 3 operating segments reported sequential revenue growth and better profitability as we realize continued improvements in oil and gas equipment market fundamentals and execution against ongoing supply chain-related challenges.

The improvement in execution comes from working diligently to better forecast demand, plan and build buffers within our inventory of raw materials and third-party source components that have less certainty in expected lead times.

Despite seeing no improvement in the average for on-time deliveries from our vendors in the second quarter, with average lead times continuing to extend the actions taken by our team increased throughput and deliveries for our customers. Of course, building buffers has a negative impact on our inventories, working capital and cash flow.

Inventory increased $151 million sequentially, which contributed to the $145 million increase in working capital. Despite the increases, our focus on working capital management over the past few years allowed us to better mitigate supply chain risk and fund revenue growth while still delivering an improvement in all primary working capital metrics.

The build in working capital, along with a $51 million tax assessment described in our press release, resulted in the use of cash flow from operations of $124 million. CapEx for the quarter was $43 million, resulting in negative free cash flow of $167 million, and we ended the second quarter with $1.72 billion in debt and $1.22 billion in cash.

Continued top line growth, supply chain challenges and the timing of payments on certain percent of completion projects will continue to be a drag on working capital for the remainder of the year. However, at this point, we expect to generate a modest amount of free cash flow in the second half of 2022. Moving on to segment results.

Our Wellbore Technologies segment generated $666 million in revenue during the second quarter, an increase of $58 million or 10% compared to the first quarter and 44% compared to the second quarter of 2021.

The segment realized revenue growth in most regions on improving global drilling activity levels, pricing gains and better execution against ongoing supply chain challenges. EBITDA flow-through was 36%, resulting in a $21 million sequential increase in EBITDA to $122 million or 18.3% of revenue.

Our ReedHycalog drill bit business posted mid-single-digit revenue growth with a 16% increase in Eastern Hemisphere revenues, partially offset by the Canadian spring breakup and customer-driven project delays in the Gulf of Mexico.

Growth in the Eastern Hemisphere was led by the Middle East and Western Africa, where we are seeing an urgency from customers and their request for extensions on contracts nearing expiration, and they are placing large orders before pricing resets under new agreements.

Our ReedHycalog products literally serve as the tip of the drill string and figuratively serve as the tip of the spear of leading indicators for the broader segment being one of our earliest cycle businesses. The actions our NOC customers are taking today are giving us growing confidence in an upcoming inflection in Eastern Hemisphere activity.

Our downhole business reported a high single-digit percentage improvement in revenue during the second quarter.

While the unit has seen robust demand for its agitators and motors, manufacturing output has been constrained over the last several quarters due to limited availability of special elastomers and certain grades of steel used in the business's high-spec products.

The team has worked hard to mitigate operational disruptions by finding and qualifying alternate sources of materials. Their efforts began to pay off in the second half of Q2 when they were able to significantly increase throughput.

Higher output in pricing led to a healthy margin improvement, which we expect will carry into the second half of the year. Our WellSite Services business reported a small sequential decrease in revenue.

Healthy growth in our core solid control operation was offset by a decline in revenues from our managed pressure drilling product line resulting from large capital equipment packages that shipped in the first quarter. Outlook for MPD remains solid, and we anticipate a strong rebound in revenues from the operation in the second half of the year.

In our solid control operation, continued efforts to reduce environmental footprint as well as significantly higher costs for barite and diesel are driving efforts to achieve higher recovery rates from cuttings, which in turn is creating greater demand for various NOV solutions.

These range from adding an additional centrifuge, which can modestly improve recovery rates, to the greater adoption of our [indiscernible] thermal desorption system, which can dramatically improve recoveries and reduce oil on cuttings to as low as 0.1%.

Outlook for our solid control and MPD operations remains strong with international and offshore focused markets preparing to increase activity. Improving demand will continue to absorb the capacity and allow us to focus on customers that place a premium on our technology differentiation and best-in-class service.

Similar to WellSite Services, our MD Totco business posted relatively flat results with solid growth in its legacy surface data acquisition system operations, offset by a transitory decrease in revenue from our eVolve wire drill pipe optimization services.

Despite the pullback in Q2 resulting from a few rigs in the North Sea completing wells and moving on to new locations, we expect eVolve revenue will return to its upward trajectory in the third quarter.

More customers are recognizing the improved drilling efficiencies, well productivity and safety benefits that our eVolve wired drill pipe services provide, which we expect will drive an increase in projects in the North Sea, Middle East and U.S. during the second half of the year.

Our Grant Prideco drill pipe business posted solid sequential revenue growth and achieved its highest order intake since 2014, with the business realizing a sharp inflection in demand for its premium pipe in the U.S. and Middle East.

Customer-owned pipe inventory levels are drawing down to uncomfortable levels while drilling activity climbs, creating a renewed sense of urgency among our customers, causing them to secure manufacturing. Our Tuboscope business delivered a sequential revenue increase in the low teens with solid incremental margins. Increased demand in the U.S.

and South America, fewer operational disruptions and higher prices drove the improved results. In addition to solid sequential growth in its inspection operations, the unit realized its third straight quarter of double-digit revenue growth in its coating operations, led by increased demand for line pipe and drill pipe coating in the U.S.

To meet growing demand and prevent lead times from blowing out, we recently reopened a mothball, the coating plant in Amelia, Louisiana that was shut down in July of 2020. Looking ahead to the second half of 2022, we expect a continuation of solid demand in the Western Hemisphere with accelerating growth in the Eastern Hemisphere.

For our Wellbore Technologies segment, we expect North American drilling activity growth rates to moderate while momentum builds in the Eastern Hemisphere, which we expect will help drive revenue growth of 4% to 7% in the third quarter.

Continued strong execution and pricing improvement should more than offset the impact of ongoing supply chain challenges and inflationary pressures, resulting in EBITDA flow-through in the mid-30% range.

Our Completion & Production Solutions segment generated revenues of $639 million in the second quarter of 2022, an increase of 21% from the first quarter. The sequential improvement was broad-based with 6 of the segments 8 business units reporting double-digit revenue growth. Adjusted EBITDA improved $22 million to $32 million or 5% of sales.

Despite a strong pickup in the shorter-cycle components of the segment's operations and improved execution, challenges within shipyard projects continue to pressure margins and limit EBITDA flow through to 20%. Book-to-bill was 132%, the sixth straight quarter of a book-to-bill greater than 1.

Quarter ending backlog increased 6% sequentially to $1.44 billion, achieving its highest level since the first quarter of 2015. While bookings for the quarter were strong, we continue to see large projects pushed to the right.

Higher commodity prices have significantly improved project economics, but shipyard suppliers and operators are all struggling with existing log jams and shipyards, uncertain lead times, higher costs and stretched workforces leading to nervous customers who are delaying FIDs.

However, confidence in the long-term sustainability of improved commodity prices is slowly improving, leading upside to this segment's future order potential. What we see in our XL Systems conductor pipe connection business contributes to our growing confidence that large project FIDs will rebound.

Demand for our XL Systems products has historically served as an early indicator of offshore drilling activity. The business unit realized a meaningful sequential improvement in revenues and a solid level of orders in Q2.

But more importantly, it saw our customer inquiries increased 14% sequentially and 24% year-over-year with the average value per inquiry up roughly 40%, both sequentially and year-over-year. Our Process and Flow Technologies business unit posted revenue growth in the low teens with EBITDA flow-through in the upper teens.

Ongoing disruptions, delays in cost overruns and shipyard projects affected our Wellstream Processing in APL operations and pressured margins for the business unit.

Nevertheless, interactions with customers remain upbeat and our engineering teams are fully consumed working on paid FEED studies, which will ensure customers are ready to move projects forward as supply chains normalize. Additionally, the unit's backlog remains strong, equal to 5.5x its revenue added backlog during the second quarter.

Our production and midstream operations began to see some relief from vendor delays, resulting in the operation generating revenue growth in the low teens with outsized incremental margins.

Improved supplier deliveries with continued healthy demand, particularly for our production chokes in the Western Hemisphere resulted in a significant pickup in sales.

Our pump and mixer operation revenue was flat with the first quarter despite the operations Shanghai manufacturing facility shutting down for the vast majority of the quarter due to COVID-19 lockdowns.

While the team's heroic efforts to meet customer demand allowed revenues to remain solid, near 0 absorption in Shanghai, higher freight costs and overtime incurred at other plants tasked with making up some of the shortfall pressured margins.

Demand for pumps and mixers remains high and the operation realized its seventh straight quarter with a book-to-bill greater than 1.

Our subsea flexible pipe business posted a solid rebound in Q2 after suffering from a 3-week shutdown in one of our 2 manufacturing plants in the first quarter caused by the inability to procure sufficient quantities of polyvinyl fluoride.

Additionally, the business unit realized its strongest order intake since 2017, with strong demand for projects in Brazil and in the Asia Pacific region.

Our Fiber Glass Systems business unit posted a sharp improvement in revenue during the second quarter, capitalizing on 6 straight quarters with a book-to-bill over 1 and overcoming many supply chain challenges that have plagued its operations over the last several quarters.

While headwinds from inflationary pressures on raw materials, labor and freight continue, proactive actions taken by the business to better insulate operations from material shortages reduced manufacturing disruptions. Outlook has also improved with all end markets now demonstrating solid recoveries.

Demand from North American oil and gas customers finally inflected higher in the second quarter, which allowed us to achieve our highest level of bookings from this market in the last 4 years.

We also began to see a recovery in the marine and offshore sector driven by the increasing spread between low and high sulfur fuels, rekindling demand for scrubbers despite our customers' appropriate reluctance to bring vessels to port while shipping rates remain elevated.

The Marine sector is also benefiting from growing demand in the wind power installation space with our operation receiving in order to provide its bond strand glass reinforced epoxy piping for use in a new wind turbine installation vessel.

Our Intervention & Stimulation Equipment business posted revenue growth in the mid-teens with solid improvements in each of the business' product lines. The unit also achieved its fourth straight quarter of improved bookings and its third straight quarter with a book-to-bill above 100%.

Demand for pressure pumping equipment, parts and service continues to evolve as service market fundamentals improve. Beginning in the fourth quarter of 2020, customers began reactivating stacked fleets with the average level of difficulty increasing through 2021 as they dug deeper into their stacks of parked equipment.

We then saw a shift towards fleet overhauls and rebuilds and are now seeing demand for new build equipment and booked orders of 62,500 horsepower of pressure pumping equipment during the second quarter.

Despite the strong orders, we expect to see a dip in pressure pumping revenues in the third quarter, resulting from the completion of large aftermarket reactivation projects in the second quarter and ongoing supply chain constraints that are extending lead times for new build deliveries.

The business unit's coiled tubing and wireline operations are also realizing growing demand from higher service activity in North America and from a growing number of international markets where customers are preparing for higher activity in the coming quarters.

We expect our Completion & Production Solutions segment's growing backlog to drive revenue growth between 1% to 5%.

While the segment will continue to face supply chain disruptions and inflationary pressures through the remainder of the year, the combination of growing demand and improved execution should drive EBITDA incremental margins into the mid-30% range in the third quarter.

Our Rig Technologies segment generated revenue [indiscernible] disruptions and inflationary pressures through the remainder of the year, the combination of growing demand and improved execution should drive EBITDA incremental margins into the mid-30% range in the third quarter.

Our Rig Technologies segment generated revenues of $462 million in the second quarter, an increase of $21 million or 5% sequentially. Top line growth was led by continued strength in the segment's aftermarket operations. Adjusted EBITDA improved $5 million to $41 million or 8.9% of sales.

New orders totaled $141 million, representing a book-to-bill of 80%. Total backlog for the segment at quarter end was $2.84 billion. Orders included the design and jacking system for another next-generation wind power installation vessel.

The rest of the order book consisted of top drives handling equipment, pumps, BOP controls and components and other miscellaneous equipment for replacements and upgrades. While this type of order book reflects a market that is still healing, there are many signs that indicate this process is accelerating.

As Clay touched on, recent public contracting data points have been very encouraging, with key offshore customers securing contracts at day rates more than 2x the average rate seen in 2020. In the U.S.

land market, average day rates in the Permian increased 33% in the last 3 months with a blended average day rate still more than 25% below leading edge rates. This means we can expect our customers' cash flows to continue improving rapidly, which is critical since access to capital remains a challenge for the industry.

Until the broader financial markets once again reward high-return investments in oil and gas equipment customers will need to self-fund their equipment needs. Fortunately, as I just mentioned, cash flow from our customer base is improving at a rapid pace.

Near term, we expect the bulk of our Rig Technologies segment's capital equipment orders to come from replacement and upgrades for their existing fleets. While rig capital equipment orders remain modest, quickly improving day rates are driving a much improved environment for our aftermarket operations.

We're seeing steadily increasing demand for reactivation, recertification, overhaul and upgrade projects in all major regions. We've also seen orders for spare parts improve over the past 6 quarters, with Q2 orders achieving pre-pandemic levels.

Supply chain constraints are still limiting our manufacturing output, resulting in backlog growth that continues to outpace our ability to get parts to our customers. While throughput and revenue from spare parts improved in the second quarter, bookings increased 9% and our backlog also increased.

Growing demand and our focus on continuing to improve our ability to secure materials and ramp manufacturing throughput is making us increasingly optimistic about the prospects for the segment to generate improved financial results in the second half of this year and gather momentum for an improved 2023.

For the third quarter, we expect revenue for our Rig Technologies segment to grow between 5% to 10% sequentially, with EBITDA flow-through in the mid-teens.

While we're pleased with the recovery in profitability in the second quarter, there remains substantial room for improvement with the upturn in our business in the very early innings of what we believe will be a multiyear recovery. What we see in each of our operating segments is in line with what we expect.

Short-cycle businesses realizing rapidly improving results initially driven by activity in North America and now shifting to the Eastern Hemisphere, shorter-cycle capital equipment business is seeing increased demand and aftermarket operations of long-cycle capital equipment businesses ramping up.

Every cycle is a little different, and this recent down cycle has been more severe than most, if not all, prior downturns. We're still facing headwinds from global supply chain challenges and investor pressure on our customers to avoid investments in their operations.

We believe these issues are creating more pent-up demand for assets that are needed to address the growing global energy supply and security challenges and will prove transitory.

While we do not expect these constraints to alleviate in 2022, we do anticipate a significant improvement in our results and expect to see demand for more of our products and technologies inflect, which should allow NOV to deliver second half 2022 EBITDA that is 45% to 55% greater than what we achieved in the first half.

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

[Operator Instructions]. Our first question comes from Stephen Gengaro with Stifel..

So Jose, you mentioned this at the end, I was curious if you could dig in a little more.

I mean when you think about what pressure pumpers are going through as far as what the E&Ps are saying and their willingness or lack of willingness to invest and/or upgrade equipment? Can you just talk about sort of the conversations that you're having with customers and how they're sort of thinking about that given what seemed to be somewhat long lead times for these items?.

Yes.

I think we're at the point where we're seeing such a rapid improvement in the pricing that is being received by our customers that they're really sort of struggling with the 2 opposing forces, right? Those being pressures to be very, very conservative from a capital standpoint and the other sort of beginning to salivate over the type of per unit economics that are coming back into the fray related to assets.

So the longer that people postpone making those types of investment decisions, the worse the supply/demand imbalance becomes, right? And so everyone is trying to figure out when the right point is to sort of step into it. They're still struggling with it.

And I think they'll continue to struggle, at least through the end of this year to be determined how that plays out next year.

But I think our primary point here is that it's just creating more pent-up demand and quite frankly, we may be a little bit biased on this, but those who pull the trigger sooner rather than later are the ones that are going to be able to recognize the most benefit from having those assets deployed in the field, and it's inevitable that more assets need to come back into the field to meet the global supply and energy security needs..

Great. And then the follow-up was really on the Wellbore side.

And maybe talk a little bit about what you're seeing on sort of the price versus cost inflation side? And how do you think -- I mean, you talked specifically about incrementals in the third quarter and how you think that impacts the margin progression as you get into 2023?.

Look, I think if you look back over the last several quarters, we have been very focused on improving our execution and also recapturing pricing that had eroded through the course of the down cycle in order to not only return pricing and normal margins to more acceptable levels but also to offset the costs associated with those operational disruptions, which were taking place due to all the supply chain-related challenges.

And so with the actions that our teams around the world are taking to better mitigate those supply chain disruptions, we're starting to see an improvement in those incremental margins, and that will continue to be in sort of fits and spurts.

But going forward, we hope to be able to deliver at least sort of a normalized incremental margin over an extended period of time. And as you recall, for our Wellbore Technologies segment, that's sort of in the mid-30-plus percent range, which is kind of where we were this quarter..

Stephen, I would add, too, we've invested in new technologies in Wellbore Technologies around things like bit cutters and downhole tools and drilling motors that I think have enabled NOV to gain share out there, the performance differences that we highlight in each of our press releases each quarter really are translating to more demand for tools that I think were putting more distance between us and our competitors on.

We're differentiating in terms of performance, and our customers are paying up for that. And so that's contributing to the strong financial results from Wellbore Technologies, too..

Our next question comes from David Anderson with Barclays..

So your results on your commentary or another clear indication of both Middle East and offshore and selecting, and we'll see substantial activity expansion in the next 12, 18 months. First of all, we've seen this, obviously, in quite some time. You guys took a ton of cost out of your operations and some of the internal changes you've made.

I'm wondering if there are certain product lines or businesses in offshore Middle East where you think you'll see the greatest operating leverage as things start to really turn up..

Yes. Right now, and this kind of fits with Jose's prepared remarks. As expected, you see the first pickup in consumables and the things like drill pipe where that are required to go back to work for these rigs.

And I think that's where we've seen the greatest sort of increase in demand and a big pickup in spares orders in rig, for instance, which isn't part of the backlog or the orders that we report, separately, but it was a really nice lift sequentially to support those rigs going back to work.

And then our drill pipe business saw orders nearly double from the offshore from Q1 to Q2, again, to support those rigs going back to work.

And so our expectation is with a number of rigs in shipyards going through reactivation, recertification processes to go to work in the offshore in places like Saudi Arabia and elsewhere our engineers are engaged with those customers, looking at their needs for equipment and so forth. And so I think that will be a little bit later.

So that's sort of the progression of demand that we foresee in offshore drilling..

And Dave, also, as you just observed, we've spent the last several years really primarily contracting the organization, but it's really not just a rightsizing effort but it was also positioning the organization for the future.

And so while we've certainly contracted the footprint to a large degree, we have actually enhanced and grown our footprint in certain markets, including the Middle East. So I feel like we're really well positioned for the way that the market will evolve. So we're well positioned for that, yes..

Yes. I feel like Middle East kind of touches all your segments. But I guess the other thing I'm kind of curious about is you talked about reactivations and tenders out there where a lot of the jack-up in the deepwater side.

I would think that the amount of potential aftermarket revenue per rig increases substantially the further we go down the stock, a lot of these rigs have been -- I would imagine they're in pretty bad shape after sitting idle for a few years.

Can you talk about how -- what that looks like over the next 12 months? I mean like in terms of what you're seeing, what can the market really do? And how does that change your revenue potential? I'm sure it expands quite a bit [indiscernible] these rigs have its back 2 years or so?.

Yes, the requirement after about 2 years, the costs go way up, and there's sort of almost a step change function in the offshore for rigs that are cold stacked for that period of time. It's really going to vary a lot by rig.

And that's why it's so important that our engineering teams engage with these customers and really get on the deck and see what they're working with, and that's underway.

But the other kind of constraint, I guess, that we're facing here in the near term, and again, something else that Jose touched on is that the offshore drillers really are -- many are emerging from restructuring. They face constrained access to capital. They're very, very, very careful about their expenditures on these rigs.

And I think that's sort of gating some of the investments. But at the end of the day, more rigs have to go back to work. We have a supply demand shortfall that has to be addressed.

We foresee rising levels of activity that's going to support more rigs being reactivated and that process will go from the easy -- cheap and easiest rigs at the beginning of the cycle to the more expensive, more challenged rigs as we progress deeper into the stack. And that's kind of how we see things playing out..

Our next question comes from David Smith with Pickering Energy Partners..

I guess one quick follow-up on that last topic, circling back to offshore demand growth, with fillers talking about 12-month lead times on the deepwater reactivation. I suspect you're involved in those conversations before we'll ever see a contract announced.

So I wanted to ask also on those reactivation candidates, especially on the deepwater side, are you seeing interest in equipment upgrades as part of the reactivation? And any color you might provide on what that opportunity can look like?.

Yes, we are. A lot of interest around achieving BSEE required BOP recertifications globally. That's sort of becoming a new standard, a lot of interest in NPD. Many markets are requiring managed pressure drilling capabilities on deepwater rigs as we go forward and put those rigs back to work.

But yes, we're definitely involved in those conversations and expect that, that's going to lead to orders for additional equipment in the future for NOV..

Great. I appreciate it. And then just circling back to the push-pull and undersupplied U.S. Lower 48 market at least undersupplied for future demand growth.

I was hoping you could share any color on what you're seeing on your potential for a pickup and private capital, maybe evaluating some growth opportunities to kind of get in front of public companies that need improving balance sheets and real term contracts to support growth..

David, this is pressure pumping you're asking about or more broadly?.

Pressure pumping, but yes, broadly works, too..

Yes. I think -- look, all public companies have a lot of pressure to be very, very careful in capital expenditures. You've seen that play out in the E&P space, where most of the incremental rigs put back to work are private operators that are picking up rigs whereas the public companies have been way more measured in their growth in activity.

And candidly, we'll see how it plays out in the oilfield services sector. I don't know this -- if this is going to be the case or not, but it wouldn't surprise me if there's some smart private capital that looks at opportunities that are emerging. We're just now kind of moving through this pricing inflection point in lots of categories of equipment.

You've had just the past couple of days, strong performance and announcements by some pressure pumpers as well as North American land drillers that point to sharply rising sort of margins per unit per day and those sorts of things that make those investments more attractive. And so we'll see how it plays out.

But ultimately, I think, what we're seeing in commodity prices translating through to oilfield service pricing is a strong price signal coming back that, look, we've got a couple of million barrel per day shortfall that has to be addressed. And capital ultimately will find its way into the space to address that in our view..

And David, I think, it's a really interesting question, not just as it pertains to the North American market. But if you think about the global market, things are emerging quickly, but what does appear is that the investors in the space this cycle are going to be a little bit different than what we saw in the prior cycle.

So there's certainly some new and emerging potential investors that are kicking around within the U.S. markets.

And overseas that's the same case as well, but also probably going to be more driven by NOCs helping to support more activity going forward as well as sort of affiliated sovereign wealth funds that are getting much more engaged in the space outside of their home territories. So things are going to look a little bit differently this time.

But at the end of the day, when the sector delivers good returns, which we are entering that phase that will draw investors and providers of capital..

That's a great point. And more specifically around that, you go back to the jack-up space in the offshore.

There's been a number of jack-up rig transactions in the last quarter or 2 that you're seeing some players emerge that are backed by sovereign wealth capital that is much more bullish and willing to put new capital into offshore drilling assets more specifically..

Yes. That's a great point. Really appreciate the color, and I'd be remiss if I didn't say congrats on the quarter and the great second half outlook..

Thank you..

Thanks, David..

Our next question comes from Marc Bianchi with Cowen..

I guess on the second half outlook there, this is the first time I can remember you guys going beyond a quarter out in terms of giving some guidance.

What's the thought process there, if there's anything in particular that caused that this quarter?.

I don't think there's anything in particular, Marc is, look, we -- obviously, we had a -- we significantly outpaced the guidance that we provided this quarter. Things are shaping up a little bit better in terms of our confidence related to our ability to execute against supply chain challenges that will continue to exist through year-end.

Blake and I know we're going to get a tremendous number of questions related to outlook a little bit further out. So we provided a very wide range but wanted to provide you at least a fair way of alternatives for how we're sort of seeing the second half. So that's it in a nutshell..

Okay. Super. And maybe back to the customer spending and refurbishing their fleets and so forth.

How much below sustaining CapEx do you think customers are generally? Is it 20%, 30%, 50% below where they need to be spending at current activity levels? And is there a big distinction as you look in North America versus rest of world?.

Yes. It's really -- it's a great question. It's really hard to answer. What I would say is this is very anecdotal, admittedly. I think it's easier for land drillers with idle rigs to cannibalize than it is for the offshore.

And so in terms of -- for a given number of rigs working, they can underspend more dramatically than the offshore because they just send a crew out to take a draw works off of a stacked rig and replace the capital as it's needed to sustain the ongoing land rigs that are working.

Whereas in the offshore, that's more expensive, far more challenging to do, putting a rig in a shipyard. So I don't -- I'm not sure that answers your question, but it's sort of some -- hopefully, some anecdotal insight into what's possible out there. What I would tell you though is all of our customers are great at not spending dollars.

They don't have to spend in a downturn. That's a skill set that they've owned over prior downturns and that they've employed enthusiastically through this downturn.

And what that gives rise to is that kind of coiled spring that Jose was talking about earlier, where I think we are moving to a period where we're going to see some catch-up expenditures here around these rig reactivations, around putting more rigs to work globally that are going to benefit NOV..

Our next question comes from Connor Lynagh with Morgan Stanley..

I wanted to just talk about caps a bit. The order intake there has actually been quite strong, but you highlighted in your comments that you're still seeing deferral of projects and things like that.

I'm wondering if you can just sort of square the 2 things and basically -- is there a certain portion of the business that's been disproportionately contributing to the orders over the past few quarters and a portion you expect to catch up going forward?.

Yes. So obviously, within our CAPS segment, we've strung together a number of quarters in a row here of really solid bookings in this last quarter. It's 132% book-to-bill, but maybe even more importantly, it's up 56% quarter-on-quarter. So everything is heading the right direction.

I think the distinction that we're trying to make in that commentary that you're referring to is that the businesses that are conducting business and Asian shipyards that have had a host of challenges and are still sort of working through debottlenecking processes are resulting in some cautiousness on the customer's part in terms of pulling the trigger on FID.

So our sense is the number and size of opportunities that we've been pursuing over the last several quarters, if not several years, certainly getting any smaller just the time horizon when they pull those triggers is getting kicked out a little bit.

I think pending resolution on those bottlenecks, getting arms around the new cost environment that they're in, all those sorts of issues. And so really, it's just almost more of a sense of optimism that there's more orders to come, particularly for those large project-intensive businesses..

Yes, that makes sense. So just sort of thinking through that, you guys have also highlighted ongoing cost to your business from delays in shipyards.

I missed if you had quantified the amount, but if you have any sort of quantification of that and I think some of the thinking around margins through the next few quarters was that those would be rolling off? Just any updated expectations on how to think about margins beyond, obviously, the third quarter or those costs, however you want to frame it?.

Yes. I think I probably can't give you any more specific guidance but progressive improvement on the margin front. Look, the last 2 quarters, we called out specific charges that we took on projects, and those were POC type project. So that pressures future margins associated with those projects.

This quarter, we didn't have anything of that magnitude, and we saw some improvement. Obviously, look at the guidance, where we're citing mid-30% incremental margins going into Q3. So things are improving. And obviously, that's on a segment that normally does not deliver incremental margins, that's quite that high.

But hopefully, we're soon to get back to a time period where we're consistently delivering the types of incremental margins that segment normally delivers, which is sort of upper 20s, lower 30% type range, but we got a little bit of a catch-up coming, I think..

Okay. And sorry, just finalizing this thought here.

So in order to get back to the sort of low to mid-teens type margins that this business was doing in, say, '17 and '18, is it shorter cycle consumable items with higher margin coming back into the mix? Is it some of these big projects starting to execute faster? What do you see as the biggest swing factors to getting back to those profitability levels?.

Yes....

Go ahead..

That's a good question, Connor. It's obviously both, right? We've got to have better execution on those larger projects. And then we need more of those short-cycle capital equipment businesses to come to life.

And hopefully, you picked up on that aspect in our prepared comments a little bit that we're starting to see a lot more of those signs of life, particularly within our fiberglass business and our Intervention and Stimulation Equipment business, right? So I think we touched on before that basically the segment consists of about 2/3 longer cycle, big project-oriented businesses and about 1/3 shorter cycle.

And that longer cycle provides that baseload that we've sort of been surviving off of over the last several quarters. the shorter-cycle components really provide the juice and more of the upside as it relates to better incrementals..

Yes. And importantly, both types of business has suffered under a lot of supply chain disruption, both -- in the short cycle, fiberglass we, -- you've heard us talk about our resins, our glass supply, allocations, et cetera, longer cycle projects are more exposed to Asian shipyard disruptions and the like.

So I think supply chain hopefully will happen over the next few quarters. I think that will go a long way towards helping us out here..

The next question comes from Arun Jayaram with JPMorgan..

Jose, I was wondering if you could give us a sense on the capital equipment side of the business. I was wondering if you can maybe characterize trends you're seeing from E&Ps versus your oil service customers.

And also maybe within oil services, give us a bit more color around call it, order trends between offshore and onshore because, Clay, as you mentioned earlier, we are starting to see some of the onshore North American service companies start to raise CapEx in frac in terms of adding incremental capacity..

Yes. Well, Arun, I know you're aware of this, but for everyone else's benefit, oilfield service companies don't necessarily want to add features that aren't directed by operators, right? So a lot that happens in our world are dictated by operators.

And so things like lower emission, e-frac fleets and the like, it's really a trend that we see in the pressure pumping side that's -- I think, will continue to be -- influence the frac fleets that we provide on the drilling side, the NPEs on land or dictating more setback capacity.

They want to move to 5.5-inch drill pipe for better hydraulics on longer laterals and -- or mud pump capacity at 7,500 psi high-pressure systems, that sort of thing. And in the offshore, I mentioned earlier, managed pressure drilling is a big push as well as BSEE sort of BOP requirement.

So those are some of the -- directionally, some of the trends that we're seeing from the E&P world that are influencing what they're requiring of our customers, the oilfield service companies out there..

Great. Great. Okay. And then just my follow-up, Clay. You guys, obviously, are a global manufacturer. I was wondering if you could give us a sense of how much manufacturing capacity does NOV have in Western Europe.

And any risk mitigation you're doing given what could be an energy crunch, unfortunately, this upcoming winter?.

Yes. We do have some manufacturing in Europe, but far, far less than we have in the United States and North America or in the Middle East or Asia. And so it's small with respect to our own footprint of manufacturing. We do, however, rely on suppliers out of Western Europe that we're watching closely and in close communication with.

And these are suppliers of castings and forgings and a few other polymers and things that we buy. And so very concerned about kind of their ability to continue to supply us as we move into the winter months, if they're constrained from a natural gas standpoint, we need to know that and prepare for that.

And so watching the situation there very, very closely..

And I'm not showing any further questions at this time. I'd like to turn the call back over to Clay for any closing remarks..

Good. Thank you, Kevin. I know this has been a busy day, so really a news day, and I appreciate you joining us this morning. We look forward to [indiscernible] I hope you have a great day. Thank you..

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