Good day, ladies and gentlemen, and welcome to the NOV Third Quarter 2022 Earnings Conference Call [Operator Instructions] As a remainder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Please go ahead, sir..

Welcome, everyone, to NOV's third 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 third quarter of 2022, NOV reported revenues of $1.89 billion and a net income of $32 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.

Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Clay..

Thank you, Blake. For the third quarter of 2022, NOV's consolidated revenues grew 9% sequentially and 41% year-over-year, with all three segments posting solid double-digit year-over-year growth.

Despite continuing supply chain friction and increased turmoil in the global economy, our teams were once again able to drive higher sequential EBITDA at 28% leverage on top line gains. The results demonstrate international offshore markets that are starting to gather momentum.

Our early cycle rig count activity-driven businesses continued to trend positively on rising volumes and pricing recovery in North America and increasingly in international and offshore markets. So far, despite fears of recessionary demand destruction, commodity prices have remained strong, which I think is appropriate.

The world faces a significant and scary energy shortfall after years of underinvestment, and our outlook is very constructive as a result. However, this constructive dynamic has not yet translated into the big uplift in capital equipment orders we expect. Our overall book-to-bill for the third quarter slipped slightly below 1, 98% to be exact.

While we saw strong orders and 116% book-to-bill in Completion & Production Solutions, Rig Technologies book-to-bill came in below 1, and our combined reported backlog for capital equipment declined, slightly less than 1%. We believe this is transitory and we expect orders to grow in coming quarters.

Let me explain why, starting with the observation that the third quarter book-to-bill is off trend for us. Helped by solid orders in renewables technologies through the past year, NOV's consolidated book-to-bill for the trailing 12 months through the third quarter has been 116%.

Our customers share our optimistic outlook, but they face some near-term constraints that are delaying capital equipment orders, especially for U.S. and European oilfield participants. First, the availability and cost of capital to the oilfield has emerged as a limitation.

Debt lending from banks and institutions and public and private equity investment capital have been greatly diminished for oil and gas, at least in the West, meaning investments for many must be funded entirely from cash flows from operations.

Cash flow for service companies is only now recovering, given pricing leverage has emerged in only the past quarter or two and mostly in North America. Second, companies in the U.S.

and Europe are highly focused on returning capital to shareholders rather than reinvesting in their businesses despite extraordinary well and project level return economics. This trend started with E&Ps and management team is incentivized on cash flow returns to shareholders and is now taking root with oilfield service companies as well.

And for the many oilfield service providers and drillers that have emerged from bankruptcy in the past year or two, they find themselves with their former debt holders as new owners who are insistent on recouping their losses in cash as quickly as possible.

Third, the misguided energy transition time frame narrative, specifically to move away from oil and gas within a few years rather than the far more realistic decade’s timeframe, has diminished the appetite for long-lived projects in some markets.

Even when there is clear line of sight to exceptional well and project returns, many struggle to pull the trigger on long-term projects. Of course, the notion that oil and gas will be obsolete in the next five to 10 years is complete nonsense. But it does make decisions on a 20-year capital project a little more anxiety ridden.

Additionally, the supply chain challenges of the past two years have eroded confidence in schedules and delivery times, injecting additional transient execution anxiety into these decisions.

Importantly, these constraints to capital investment are mostly confined in North America and European participants who historically were the fastest to react to higher commodity prices.

In contrast, the views held by NOCs and sovereign wealth funds in the Middle East, Asia, Africa and Latin America today leave participants far more financial freedom to respond to commodity price signaling.

That is why we were not surprised to see growth starting to accelerate in international markets, and frankly, would not be surprised to see it surpass North America, where, in addition to free cash flow reinvestment constraints, the market is facing some short-term ceilings on crew and equipment availability, which by the way, is translating into higher rig rates and oilfield service pricing our customers in North America have seen over the past couple of quarters.

We think incremental E&P spending in 2023 in North America will be required just to hold rig and completion activity flat. In contrast, we see the rest of the world gearing up for more activity in 2023 as OPEC invests to grow production and recapture swing producer status from the U.S.

That's not to say that there aren't challenges in international markets. The Middle East has been tough on oilfield service providers for many years as oversupply through the past decade and large competitive tenders locked many into long-term contracts at low margins pre-COVID.

However, these are steadily expiring and NOCs are calling for more and better equipment, paving the way for better oilfield service pricing leverage and returns and rising demand for better technologies. Despite concerns of recession and the near-term headwinds to higher oilfield activity, we are confident they can't last.

And when the trend breaks the other way, it's going to break hard. Oil and gas is still the industry that powers all other industries and price elasticity is low, which the world will learn once again as it moves through this recession, rarely has oil consumption fallen even during recessions.

The development of oil and gas production has always been one of the most capital-intensive industrial pursuits. Wells require highly specialized, expensive, fit-for-purpose assets and consumables to construct.

Oilfield activity is consumptive of oilfield equipment and this tiger can't change its stripes despite earnest capital pledges and adoption of capital-light business models that don't quite square with the reality of constructing wellbores.

You can cannibalize idle equipment and deplete your stores of consumables and kick the can down the road for a little while, but rigs, drill pipe, pumps, coiled tubing units, you name it, all of the things NOV makes are essential to getting the commodities out of the ground.

The installed base of equipment across the industry is being run harder and harder quarter-by-quarter and the underinvestment in maintenance and replacement equipment over several years is beginning to impact the industry's ability to respond to the price signals currently being sent by the commodities.

And while commodity prices have pulled back from the highs we saw earlier this year, I worry that this pullback is concealing a looming supply shortfall. Leading voices in both the industry and the commodity markets have been ringing alarm bells for weeks.

Global shortages of middle distillates such as diesel, gas oil and heating oil are intensifying rather than easing. For example, U.S.

distillate inventories at the beginning of this month were at the lowest level seen since the government began collecting weekly data in 1982 and European and East Asian inventories are at the lowest since the mid-2000s. U.S. crude stocks, including the strategic petroleum reserve have fallen to the lowest level since 2002, according to the EIA.

And while U.S. production has grown off recent lows, it has been less than expected. So as U.S.

supply growth continues to disappoint to the downside, even as we've drawn down half of our inventory of DUC wells, with SPR releases of 1 million barrels per day set to wind down soon with Russian oil supply in decline following sanctions with OPEC underproducing its quotas even before its recently announced cuts, with Europe poised to see more gas to oil switching this winter and with global demand generally suppressed from normalized levels due to continuing COVID restrictions in China, it feels like we, and by that, I mean mankind, are hurtling towards a catastrophe, a very painful and damaging energy crisis.

We'll look back and ask how we ended up in energy bankruptcy, two ways, gradually then suddenly to quote Hemingway's The Sun Also Rises, prepare for a hard lesson on the importance of fossil fuels to our way of life.

Throughout the downturn of the past seven years, a key question we have been asking ourselves at NOV has been when the oilfield picks up and orders resume, what will our customers need? This question has steered our R&D efforts, and I'm proud of our team's developments.

In the last super cycle, 2004 to 2014, the industry bought equipment that could develop increasingly challenging reservoirs as quickly as possible. That meant bigger, tougher and stronger equipment because operators are focused on drilling longer laterals and drilling in deeper waters.

As we look to this next up cycle, we believe our customers will place greater focus on maximizing recoveries from existing fields along with more efficient development of new fields, improving safety performance and reducing greenhouse gas emissions, all with a close eye on project capital returns.

We expect new digital technologies to shape that future. Historically, operators' wells developed only a fraction of hydrocarbons in place. Our customers who employ the world's finest reservoir engineers know that we can do better. They know where they need to place a well to maximize production.

The current industry offerings like the latest and rotary steerable technology while allowing the type of control that enables precise well placement have not enabled the downhole visibility needed for precision well placement. It's like driving a Ferrari on a highway at night and only being able to turn on your headlights once every 10 seconds.

You may have a beautiful, powerful piece of machinery, but you're simply not going to be going very fast. And if you do, you might end up off the road in a ditch. That's where NOV's newest technology comes into the equation.

Starting with our proprietary eVolve IntelliServ wired drill pipe, operators can have uninterrupted, high-speed data flowing from the bit to the surface like keeping the headlights on bright 24/7.

Uninterrupted data feeds the digital drilling solutions we developed, including the KAIZEN intelligent drilling optimizer, and NOVOS Automation, which in turn digest, visualize and interpret the data to help guide the driller to optimal well placement, reservoir development, rig efficiency and crew safety.

And customers have been pairing our NOVOS drilling system with our MPowerD managed pressure drilling offerings to allow even greater control, complete downhole pressure control in the most challenging drilling environments.

Recently, one of the world's largest oil companies tested this combined package for the first time, and it's down whole engineering department became our biggest proponent across its organization. That same operator is using NOV's new Max Edge technology to gather and contextualize real-time well data into the cloud.

Our new ideal eFrac technology, which lowers greenhouse gas emissions and operating costs for pressure pumping companies, continues to generate a lot of buzz in the industry, while our new Eco Booster and PowerBlade are doing the same for offshore drillers.

ReedHycalog's investments in drillbit technologies are enabling it to gain share in conventional oil and gas operations by lowering drilling costs and time, thereby reducing emissions associated with wellbore construction. ReedHycalog has also carved out market-leading positions in geothermal drilling with its hard rock drilling challenges.

And while we believe the transition to renewable energy will take decades, we also continue to invest in renewable energy solutions to build on our market-leading position in the supply of offshore wind installation technology.

In short, in a world faced with serious, complex and shifting energy challenges, NOV's developments in both traditional oil and gas and renewables technologies are the toolkits our customers will employ to ensure safe and reliable energy continues to lift mankind out of poverty.

We expect the combination of NOV's wired drill pipe, artificial intelligence, digital solutions, edge computing and managed pressure drilling systems to become the standard toolkit on well sites around the world, just like our top drives and drilling equipment packages are.

And just like our wind turbine installation technology has become standard kit on offshore construction vessels and just like generations of talented NOV engineers and scientists have transformed energy production through up cycles and down cycles across our 160-year history.

So for those talented engineers and scientists listening today and to all my NOV teammates, thank you for all that you do. You're simply the best. With that, I'll turn it back to Jose..

Thank you, Clay. NOV has consolidated revenue in the third quarter of 2022 was $1.89 billion, up 9% sequentially and up 41% year-over-year. All three segments posted another quarter of strong growth and improved profitability and achieved or exceeded the 2022 exit margin targets we provided at the beginning of the year.

During the third quarter, we completed the sale of our operations in Belarus and classified our Russian operations as assets held for sale, which collectively resulted in $76 million in impairment charges, most of which was related to foreign currency translation adjustment losses and which increased SG&A.

These charges were partially offset by credits related to gains on sales of previously reserved inventory, resulting in total adjustments or Other Items of $63 million. We do not expect additional charges in the fourth quarter.

Cash flow used by operations during the third quarter was $106 million, primarily due to working capital builds needed to support our rapid top line growth and to mitigate continued supply chain risks. Capital expenditures in the quarter totaled [$59 million] and we ended the third quarter with $1.73 billion in debt and $1 billion in cash.

For the fourth quarter, we expect to generate between $100 million to $200 million in free cash flow, and we expect free cash flow conversion to improve significantly in 2023. Moving on to segment results.

Our Wellbore Technologies segment generated $741 million in revenue during the third quarter, an increase of $75 million or 11% compared to the second quarter and 46% compared to the third quarter of 2021.

The segment realized its eighth straight quarter of revenue growth by capitalizing on improving global drilling activity levels and better execution against ongoing supply chain challenges.

While activity in North America may be reaching a temporary plateau, the segment continues to benefit from pent-up demand for its proprietary drilling tools, and we are now starting to see a sharp increase in demand from the Middle East as the industry prepares to ramp activity in 2023.

EBITDA flow-through was 31%, resulting in a $23 million sequential increase to $145 million or 19.6% of revenue. Compared to the third quarter of 2021, EBITDA improved $68 million, representing 29% EBITDA flow-through.

Our M/D Totco business posted solid double-digit sequential growth from both its legacy surface data acquisition system operations and its eVolve wired drill pipe optimization services despite continued challenges related to procuring specialized electronics and circuits used by the business.

Revenue from the unit surface data acquisition operations realized a strong improvement in sales into Africa and Latin America with revenue in most other major regions generally moving in line with drilling activity levels.

After a modest pullback in Q2 due to a few rigs in the North Sea completing wells and moving on to new locations, our eVolve services continue to gain greater market adoption and realized a sharp recovery in the third quarter.

In addition to new jobs in the North Sea, the business also secured two new wired drill pipe optimization projects in the Middle East, one from a major integrated oil company and another from a large national oil company as well as a project supporting drilling operations on 2 carbon sequestration wells that will be used to inject CO2 from onshore sources 100 to 200 meters below the seabed for permanent storage.

Our unique ability to pair a full downhole visibility with market-leading software analytics drives value for customers through more efficient and productive wellbores, which should make this offering a key growth driver for this business moving forward.

Our downhole business reported revenue growth in the upper teens with solid EBITDA flow-through, improved execution against supply chain-related challenges that limited the availability of special elastomers and certain grades of steel used in the business's high-spec products, allowed the unit to better meet robust demand for its proprietary tools, which drive improved drilling efficiencies for oil and gas operators.

Our ReedHycalog drill bit business posted a low double-digit sequential increase in revenue, led by strong growth in the Western Hemisphere, resulting from market share gains in the U.S., a pickup in projects in the Gulf of Mexico and the seasonal rebound of Canadian activity.

Eastern Hemisphere revenues were mostly flat with solid growth in Asia offsetting sizable Q2 shipments into Northern Africa that did not repeat and continued supply chain challenges affecting deliveries in the Middle East.

Looking ahead, we expect increasing demand from Eastern Hemisphere markets, particularly in the Middle East to drive the next leg of growth for this unit. Our wellsite services business posted mid-teens sequential revenue growth with strong incremental margins.

Revenue for the business's solid control product line was up in both Western and Eastern Hemisphere with particular strength in the offshore markets and in the Middle East.

Our new iNOVaTHERM portable solid treatment unit is beginning to gain wider adoption, winning its first offshore contract with a major operator in the North Sea off the back of a successful trial completed in the second quarter.

By enabling the disposal of drill cuttings at the well site, iNOVaTHERM enables significant reductions in transportation costs and carbon emissions.

As this business continues to see volume growth, our team is continuing to push pricing to offset continued inflationary and supply chain challenges and to garner appropriate returns for the advantages provided by NOV technology.

Our Grant Prideco drill pipe business posted relatively flat results as delayed deliveries of green tubes negatively impacted our ability to deliver on the business' backlog during the quarter. Delayed vessels, rail transportation bottlenecks and downtime in one of our vendor steel mills limited plant throughput during the quarter.

Despite the difficulties, a favorable mix from the strength in premium, large-diameter orders from international and offshore markets over the past two quarters allowed the unit to mostly offset the cost of the disruptions.

Orders remained healthy in Q3, with North American drilling contractors representing the bulk of the orders, a notable reversal from Q2 where orders primarily originated from international markets.

Additionally, the recent orders reflect a step back in 5.5-inch pipe demand, which suggests that there are a limited number of rigs equipped with the necessary high-torque packages and setbacks needed to run the larger OD pipe that most operators want.

Looking ahead to the fourth quarter, revenue is expected to improve, but flow-through will be limited due to less favorable product mix. Our Tuboscope business posted a high single-digit sequential revenue improvement with strong incremental margins.

The solid performance was led by our Coatings operations, which achieved its fourth straight quarter of double-digit growth and benefited from improved availability of key resins and polymers, building demand in the Eastern Hemisphere and a full quarter contribution from the reopening of our Amelia, Louisiana coating plant.

Our inspection operations also delivered solid results, mainly driven by strong demand for inspection and threading services in the U.S. and Latin America. Looking forward, we expect flattish results for this business in Q4 due to holidays and scheduled maintenance at certain facilities.

For our Wellbore Technologies segment, we expect building momentum in the Eastern Hemisphere and pent-up demand for our products to be partially offset by plateauing North American drilling activity, resulting in revenue growth of 2% to 6% with EBITDA flow-through in the 30% range in the fourth quarter.

Our Completion & Production Solutions segment generated revenues of $681 million in the third quarter of 2022, an increase of 7% from the second quarter and an increase of 42% compared to the third quarter of 2021. Adjusted EBITDA for the third quarter was $56 million or 8.2% of sales, an increase of $24 million from the second quarter.

The 57% EBITDA flow-through was primarily the result of much improved execution on offshore projects and the easing of supply chain constraints, which allowed for an acceleration of pent-up deliveries and, in some instances, a pull forward of planned Q4 shipments. Book-to-bill was 116%, the seventh straight quarter of a book-to-bill north of 1.

Quarter ending backlog increased to $1.48 billion, reaching its highest level since Q1 of 2015.

Despite capital constraints on our customers, sticker shock from inflation's impact on pricing, and stretched supply chain, strong orders reflect the industry's increasing need to refresh its asset base and provide us with more confidence in the outlook for the order flow in our capital equipment businesses.

Our Process and Flow Technologies business posted sequential revenue growth in the upper single digits with a strong rebound in profitability. The business unit significantly improved execution with progress accelerating as supply chains normalize and COVID restrictions ease.

Order intake for the business was soft, but we believe we will see growing confidence in market outlook, project economics and the ability for the industry to clear shipyard bottlenecks. All of which are needed to move new projects forward.

During the quarter, we saw an increase in FEED studies, which we expect to convert into new project awards in future quarters. Our XL conductor pipe connections business, which posted a book-to-bill of 187% in the third quarter, further supports our growing optimism for offshore projects.

As we've mentioned many times before, demand for conductor pipe tends to be a leading indicator of offshore activity and the business is starting to see an increase in FIDs for projects, many of which have been pushing to the right for over five years, finally advance.

We're also seeing more signs of life in our subsea flexible pipe business, which has now posted a book-to-bill greater than 100% in four of the last five quarters. During the third quarter, the business also saw a substantial improvement in its operating results and posted sequential revenue growth in the mid-teens with outsized EBITDA flow-through.

The strong result came from significant improvements in the availability of raw materials, which enabled efficient progress and early deliveries on certain projects. While supply chain challenges appear to be easing, we anticipate a slower fourth quarter as the strong results in Q3 were due in part to pulling forward work from Q4.

Despite the anticipated falloff in the fourth quarter, we expect new orders will remain strong which should set the stage for continued pricing improvement in 2023. Our pump and mixture operations also realized outsized revenue growth with solid incrementals.

The lifting of COVID lockdowns in Shanghai allowed the operation to finally ship pent-up deliveries to customers. While orders increased sequentially, the large increase in shipments prevented the business from achieving what would have been the business unit's eighth straight quarter with a book-to-bill greater than 1.

Our Intervention & Stimulation Equipment business realized a mid-single-digit sequential decrease in revenue. Last quarter, we noted that the completion of large aftermarket reactivation projects, along with the extended lead times for new build deliveries would result in a sequential decline in revenues.

However, growing demand for orders continued, marking the fourth quarter in a row of growing backlog. Bookings included 67,500 horsepower of new pressure pumping equipment, along with orders to rebuild an additional 30,000 horsepower of pumping units.

We also saw a pickup in demand for coiled tubing equipment due to rapidly tightening capacity in North America. Orders included sales of injectors, pumps, nitrogen units and other support equipment, along with the sale of the first new unit for the U.S. market that we've had in three years.

Noteworthy and somewhat unsurprisingly, the purchase of the new unit came from a private service company that didn't have to worry about public investors and had capital to invest in what should be a high-return opportunity.

Despite activity in North America that appears to be arriving at a temporary plateau and public oilfield service companies that are reluctant to spend capital, there is a pent-up need to replace and upgrade aging equipment, and we think E&P operators will reward those who provide the most efficient services by using the latest technology.

Similarly, in international markets, service providers that signed a low-rate multiyear contracts during the depths of the pandemic have been reluctant to invest in assets. However, our quoting activity improved materially in Q3 as customers prepare for upcoming tenders.

Our Fiber Glass Systems business unit posted a solid sequential revenue increase, resulting from improved deliveries into chemical and industrial markets in Southeast Asia and in Brazil and from improving demand from oil and gas markets with large shipments into Latin America and the Middle East.

This growth was partially offset by our fuel handling business, which experienced a slight falloff when compared to the record levels it saw during the second quarter. Sales into the marine and offshore markets were mostly flat, but we're now seeing a notable increase in interest for marine scrubbers.

While shipping companies were trying to capitalize on a once-in-a-lifetime market dynamic and its associated pricing, we understandably saw no demand for new scrubbers despite a large spread between low and high sulfur diesel prices due to the high opportunity cost of taking vessels out of service for shipyard modifications.

Now that shipping rates are beginning to normalize, customers are once again planning to bring vessels to port and install scrubbers so that they can capitalize on the spread in fuel prices.

Looking ahead to the fourth quarter, we expect to see a modest pullback in operational results for our fiberglass business due to several large deliveries in the third quarter that will not repeat and due to normal seasonality in our fuel handling product sales as we move into colder weather months.

For the fourth quarter, we expect growing opportunities associated with our Completion & Production Solutions segment's backlog to be mostly offset by certain projects that were pulled forward into the third quarter and supply chains that remain elongated, resulting in revenues that should be relatively flat.

We also expect a less favorable sales mix will compress EBITDA margins between 50 and 100 basis points. Our Rig Technologies segment generated revenues of $511 million in the third quarter of 2022, an increase of $49 million or 11% sequentially and an increase of 31% compared to the third quarter of 2021.

Sequential revenue growth was driven primarily by continued improvement in our aftermarket business and a higher rate of progress on offshore wind and Saudi rig projects. Adjusted EBITDA improved $11 million sequentially to $52 million or 10.2% of sales.

New orders totaled $119 million, representing a book-to-bill of 59% and total backlog for the segment at quarter end was $2.78 billion.

While the day rate environment for both land and offshore rigs continues to improve, recessionary fears, combined with the industry's memories of the past eight years has public boards and management teams reticent to make large capital equipment investments. However, we remain encouraged by what we're seeing in both the land and offshore markets.

In the U.S., extraordinary rates of change in day rates we saw during the first six months of the year slowed in the third quarter, but they continue to climb and are now pushing $40,000.

Current rates are certainly getting customers more interested in reinvesting in their existing asset bases similar to what we saw in our Intervention & Stimulation Equipment business and to what has happened in the E&P space, is not surprising to see private companies be the first movers to capitalize on the high rate of return investment opportunities associated with newbuild assets.

During the third quarter, we booked an order for a new, high-spec land rig for a private drilling contractor, who is supported by a term contract from a large West Texas operator.

In offshore markets, activity continues to climb higher with utilization of marketed drillships reaching 78%, leaving only five ultra-deepwater drillships currently drillships currently available to go to work.

Additionally, we continue to see our customers book contracts with dramatically improved pricing and extended duration compared to what we saw a year ago. We are now routinely seeing ultra-deepwater drillships commanding $400,000-plus day rates and Saudi Aramco alone has awarded 184 years' worth of contracts for jackups since August of 2021.

While the capital constraints on drilling contractors limit our capital equipment order intake, the improving environment and associated cash flows for our customers are driving a growing sense of urgency from drilling contractors to increase investments in maintenance and reactivations, which is reflected in the surge in demand we've seen within our aftermarket operations.

Our aftermarket operations posted 11% sequential growth in the third quarter. Revenue from spare parts sales increased double digit as we improved execution against continued supply chain constraints in the face of growing demand. However, the rate of order intake continues to outpace our ability to ramp our operations.

While the supply chain is slowly improving, availability and lead times for certain grades of high alloy steels, castings, plc drives and switchgear remain challenged. Nevertheless, we're continuing to ramp throughput and our customers are working with us to better plan and schedule aftermarket projects and other needs.

We posted another quarter of strong spare parts bookings, our best since the first quarter of 2020 and our current aftermarket backlog is approximately double what it was at this point last year.

Our field engineering group is continuing to see an increase in quoting activity related to reactivation and recertification projects, pressure control upgrades and enhanced automation with the heaviest concentration of inquiries coming from Brazil, Norway, the Middle East and the U.S. Gulf of Mexico.

While we did not book a wind vessel this quarter, revenue recognized from our healthy backlog continues to ramp and the outlook for this sector remains very encouraging with orders for new vessels becoming increasingly likely in the near term.

Looking ahead, market fundamentals continue to improve for our core markets, giving us confidence that our order book will improve over the next few quarters. Additionally, our current backlog for both capital equipment and aftermarket parts and services provides us with ample opportunity to grow revenue and profitability in this segment.

Specifically, for the fourth quarter, we expect revenue in Rig Technologies to grow between 5% to 10% sequentially, with incremental margins between 20% and 25%. With that, we'll now open the call to questions..

[Operator Instructions] Our first question comes from the line of Scott Gruber with Citi..

So your margins are basically now where you thought they'd be in 4Q, and I understand there's some puts and takes on 4Q. I'm trying to get a sense for where we stand on multiple fronts.

So some additional color on where you stand on resetting the price book, where you stand on seeing improvement in delivery costs and delivery timing and what you're seeing in terms of stability on input cost inflation. So just some color -- and I know these are kind of key areas you guys have been focused on over the past year.

So some additional color on these margin influencers would be great. .

Yes, Scott. It's a good question and it's a lot of things intentioned here. So over the past couple of years, we've been taking costs out of our organization, and we've been focused on pushing prices up. We had the most success in our quick turn businesses that are associated with rising drilling activity in North America.

And so that's gone in the right direction. But on the other hand, as we've talked about on prior calls and in our prepared remarks, we still face a lot of supply chain issues. So kind of a quick update on where we are on that. Broadly, things are getting better. However, I do want to say we're a long way from being normalized.

And in certain categories, we're seeing things get a little bit worse. And so things like electric motors, actuators, PLCs, a lot of electrical components. Some of those got more expensive and more difficult through the quarter; certain castings, in particular, coming out of Europe.

I think there's something like 15 steel mills in Europe that have [Audio Gap] energy situation there, putting a little pressure on some of our businesses there are the counter examples. But items like freight, freight is probably down 60% off the double where it was in 2020 and triple where it was in 2019.

And as well, we're seeing deliveries of certain items push out. And so it was sort of broad normalization underway, and ports are slowly clearing. We're still way off the mark in terms of delivery reliabilities. Costs are still elevated. We face workforce challenges as do our vendors, particularly across North America.

One of the developing items that we saw through the third quarter, some of our third-party machine shops now are running into labor shortages and machinist shortages. And so on-time delivery slipped quite a bit in Q3.

So it's -- those are the factors that are offsetting some of the price increases that we've been able to get and some of the costs that we've taken out. So I think, puts and takes in both directions around the margins..

Got you. I appreciate all the color there. And just shifting to capital return. It's a hot topic in oil services at this juncture. And we've heard several peers who've actually put guys still have a long way here to see kind of full margin recovery.

But assuming that plays out, how do you think about a capital return commitment and whether that makes sense for NOV?.

Scott, it's Jose. I'll tackle this one. Yes, it's a good question.

And certainly, sort of getting back to more normalized margins is something that we're very focused on and also just managing the tremendous amount of growth that we're currently experiencing in our business, which is a good news, bad news story, with a good news more outweighing the bad news, right? When you're drawing 10% -- roughly 10% a quarter and 40-plus percent year-over-year, provided that you weren't mismanaging your working capital prior to that, it's going to consume some working capital and use some cash flow, right? And that's sort of where we are as a later cycle business.

But we'd much rather sacrifice a little free cash flow today to have a lot more down the road. So I think we've been pretty clear about the historical cash flow generation capability of this business, which we expect to be even stronger going forward.

We've never shied away from returning capital to our shareholders, having returned almost $5 billion of capital since 2014. And we've also been pretty clear about where we need to see our leverage metrics get, which is back to the 2x or better gross debt-to-EBITDA metric.

So we're looking forward to arriving at the right place and time to where we can step up or return the capital again and things are certainly all heading in the right direction. So things look promising from that standpoint..

I appreciate that. We have to remind people that working capital is a high-class problem when it builds quickly. So we'll continue to stay updated..

[Operator Instructions] Our next question comes from the line of Marc Bianchi with Cowen..

You guys talked about an expectation for improving orders. I'm just curious, it seems like it's likely that you're going to stay above the 1x book-to-bill here in caps as we move forward.

When do you think Rig Tech could get back above 1x?.

Yes, Marc, I think I actually think Q3 is just a temporary blip and I appreciate the question because if you focus in on our rig order book for the third quarter, what really changed from the second quarter was the absence of a wind turbine installation vessel.

If you go back to the past several quarters, we pretty much had a wind turbine insulation vessel large order every quarter. And so we're engaged on building out, I think, 11 wind turbine installation vessels as a result of that growing backlog in that space. And what happened in the third quarter is we just didn't get any. So it just -- it fell off.

If you look at our sort of more traditional oilfield order book in the third quarter. It actually -- for capital equipment, which is really the only piece of it that we report, it was up for both offshore and land customers. I think Jose mentioned in his prepared remarks, we got an order for a high-spec rig from a North American operator.

And so that helped double land rig orders sequentially and triple land rig orders year-over-year. And then offshore continued to move up as well. We went up about 15% sequentially.

The point I was trying to make in my prepared remarks, though, is that even at rising levels moving up sequentially up into the right, still far less than the industry needs in order to sort of launch the major industrial effort that's required to get back to growing oil and gas production around the globe.

And so we think this is growing the right way as we, as I explained at length in my prepared remarks, the dynamics around demand for what we sell, I think, are very strong, very constructive over the next several quarters and really the next several years. And so we're excited about that.

And then to kind of round out the picture, Rig Technology capital equipment is only one of really three big ways that drilling contractors spend money with NOV. And the other two are spare parts to support their rigs as [Audio Gap].

And what we've seen, as Jose said in his prepared remarks, is sort of steadily rising demand for spare parts to support rig reactivations, rig operations. They're kind of flattish sequentially, but year-over-year, up 27% and up for both offshore and land. And then drill pipe is the third way that drilling contractors spend money with us.

And that's actually in our Wellbore Technologies segment. And again, both of those just a monster order in Q2, down a bit in Q3 [Audio Gap] still very, very strong. And in fact, Q3 was up 67% year-over-year.

So you add all that together, we are seeing rising [Audio Gap] expectation is that continues as the offshore gets back to work as drilling picks up in international markets..

Yes. Okay. Jose, I don't think I heard anything unallocated. You usually don't guide to it, but it was up quite a bit from second quarter.

How should we be thinking about that for fourth quarter?.

Yes. So from basically the elims line, moving as it normally does, a similar percentage from pre-elimination revenue and then probably looking at a couple of million dollar increase from -- at the EBITDA level with the growth..

Got it. So something like $60 million..

Maybe just shy of that. Yes..

[Operator Instructions] Our next question comes from the line of Tom Curran with Seaport..

What lead time is the CAPS division's wise unit quoting at this point for new build frac spreads? And when it comes to capital equipment sales for shale completions, what level of competition are you confronting from the secondary markets, such as auctions? How does the amount and pricing of used equipment out there compare to what you've seen at this point in prior U.S.

upcycles?.

I'll answer the second part of that question first. There's very little used equipment that's really can be refurbished economically.

And what we've seen over the past year is more and more pressure pumpers in North America are pivoting towards buying new and the longevity and sort of the overall value offered by going to new versus used, I think, is a lot stronger. .

And then the first part of your question, I think, was lead times and more -- I'd say, plus/minus one year, tier 4 engines are eight months plus in terms of deliveries is what we're looking.

And I will say, we made some true purchases of some of the key items, and so can probably deliver maybe, depending on what our customers are buying, maybe a little more quickly than our competitors out there. But on the whole, that's probably what you're looking at..

Yes. That's all consistent with the checks I've done, but I wanted to be sure I had you guys weigh in as well. And could you give us an update on your annual revenue expectations or even just potential for CCS and geothermal, respectively.

By division, it seems as if Wellbore Technologies has a product suite that spans both of those new energy segments, while CAPS has some specific offerings for CCS. And then Rig Tech has done some custom designs and systems for geothermal. Maybe just an update on each of those renewables markets. .

Yes, Tom, I think we'll hold back from providing the granularity that you're looking for. But our efforts related to energy transition opportunities are going are going very well.

And particularly as Clay touched on the backlog and the ongoing work that we have related offshore wind construction vessels, momentum continues to build there as it does related to really a number of the other initiatives that we have going on related to energy transition, including geothermal that you're asking about.

And really, we're seeing -- we saw a really rapid sequential growth going from Q2 to Q3. And I think the total company combined from a renewable standpoint was roughly $90 million or so in revenue in the third quarter at a really nice trajectory. So we're really pleased with the way that those initiatives are shaping up for the company..

Yes. And just to touch more color.

The wind installation vessel space where NOV is leader, and we've come out with new technology that we referenced in our press release is the majority of that $90 million, but we're seeing really good growth in particular around geothermal offerings and I think we mentioned in our prepared remarks, ReedHycalog has emerged as a market leader in terms of hard rock drilling that's required for geothermal, but also generating a little bit of revenue in our solar initiative and a lot of interest in CCUS technologies.

We're the leading provider of gas processing, dehydration technologies that are directly applicable to CCUS. And so we've got some FEED studies underway there. And so really across the board, very excited about all that.

And then finally, to put a bar around it, in addition to fixed wind installation vessels, there's movement on the floating wind side as well.

And there, as you move into deeper waters, it's kind of a different way that NOV can participate in those projects, with respect to helping build out the actual vessels, providing mooring systems and it's a larger kind of revenue opportunity for us.

And so we're very pleased to be participating with partners and customers in Asia and the North Sea and looking at specific floating wind opportunities that could be real needle movers in the future. So we continue to prosecute these opportunities and excited about the future and believe we have a lot of value to bring to the energy transition..

[Operator Instructions] Our next question comes from the line of David Smith with PEP Advisors..

Calling in from Pickering Energy Partners. So I didn't think I would ask a question like this for a really long time, but here it goes.

Given how much capacity Saudi is taken out of the jackup market, when I start to count the jack-ups that are going to be left, there just aren't that many that were delivered in the last 20 years that aren't already contracted.

So assuming demand continues to grow for the next year or two, I think we can get to a point where the options to satisfy incremental demand becomes either a new jackup or the reactivation of a 40-some-year-old cold stacked rig that hasn't worked in several years.

So my question is, in your view, do you think we'll see any new jackup orders in the next five years, but also -- how should we think about the opportunity for NOV on reactivations of the much older assets? I expect those might include some pretty significant capital equipment upgrades..

It's an interesting comment for sure. And listen, you're probably aware, but in Saudi Arabia, there is -- there are plans to construct new jackups. And so -- we just recently opened our joint venture with Aramco, built a rig equipment manufacturing facility there in the Kingdom. And that's to satisfy a very large land rig order.

But in addition to that, the Saudis are moving forward with a program to build out 20 jackups over a period of time. . So we're well positioned to participate in that.

And so that's one of the ways I think that the gap will be filled and that's sort of in addition to the, I think, 37 jackups that Aramco is adding in the offshore to grow their production. And so yes, we are, I think, starting to face constraints around rig availability, and that's the reason, frankly, that dayrates have moved up so sharply.

They've moved up materially for jackups, but in the floating space have roughly doubled in like a 12- to 18-month period. And so all good. Industry is going back to work and very pleased that NOV is well positioned, I think, to help our offshore customers get there..

Yes, absolutely.

I should have put an asterisk on that outside of ARO Drilling, if you think there's potential for new jackup orders in the next five years?.

Well, we're not forecasting at this point, to be clear, but the dynamics are certainly getting a lot closer to that supply-demand tipping point..

And switching to land. I have been wondering when we might see a new land rig ordered for the U.S., just given the remarkable increase in pricing. Would love to hear your outlook for additional new land rig orders in U.S., but international, if you have a few there.

And maybe anything you can give on what kind of conversations you're having?.

Yes. We follow that very closely. Just to put this in perspective, though, the day rate recoveries I just talked about in the offshore are really pretty recent. And in the land rig space, in North America, for super-spec rigs those probably front ran the offshore by a quarter or two going in the right direction.

We believe that we start to -- we're right at the edge kind of replacement economics. There's a lot of incremental day rate disclosure being made this week in earnings calls.

But as we kind of move from the high $30,000 a day range up into the $40,000 a day range for super-spec rigs, I think it starts to become the investment opportunities there for new capacity start to look pretty compelling. And so that's kind of where we are with respect to that category.

In international markets, as I mentioned, we are in the process of building out a grand total of 50 rigs in our order for Saudi Arabia. We've delivered the first two, and the third is being commissioned right now. And so we're just at the leading edge of that addition. And those are very capable high-spec rigs.

But I think that's sort of an indicator of things to come. I think international markets, in particular, have a long ways to go in stepping up their technology that they apply in drilling -- in their drilling operations. And again, NOV is well positioned to help them accomplish that.

So still ways away from kind of the new building of rigs that we saw in the prior super cycle, but certainly all signs are encouraging that we're heading in the right direction..

[Operator Instructions] Our next question comes from the line of Stephen Gengaro with Stifel..

Just curious, in the third quarter the Rig Tech margins were better than we thought. And based on the commentary you gave, they look to be increasing from here.

How should we think about Rig Tech margins as we go into 2023?.

Stephen, I think obviously it's dependent on kind of what [Audio Gap] and what the overall growth is. But I think we've repositioned the company appropriately. We've gotten the restructuring and cost savings initiatives behind us at this point.

So really, as we look at not just Rig Tech, but really all of the businesses, I think the best way to think about it is that we should start to see more of what those historical normalized incrementals have been.

And so for the rig business, historically, that's been kind of a mid-20% type incrementals; CAPS, upper 20s, lower 30s; and Wellbore, call it, somewhere between 30% and 40% incrementals.

And so I think we're approaching a place that, at least over a period of time, there's always ebbs and flows within a quarter, but over a reasonable period of time that we should be back to those normalized incrementals and hopefully all the charges and restructuring is completely behind us..

Yes. Yes. I mean normalized volumes and then in addition, rig really has been facing some headwinds related to supply chain issues as well. And so kind of continued normalization of supply chain will help a lot. So those are good tailwinds for rig margins going forward..

Okay. Great. That's helpful color. And then the other quick one and I know it's a similar question looking out past the fourth quarter. But when you think of the CAPS business, I mean, it feels like momentum is building. It feels like you're on the cusp of sort of a pretty nice acceleration in the top line.

Is that consistent with what you're seeing? And I mean do you think you could see a year or two of sort of outsized growth?.

Yes. It's going the right way. But if you look back in the last couple of years, it's been pretty challenging. For the last few quarters, we've been battling projects that we undertook in the downturn of 2020 combined with supply chain headwinds and challenges in Asian shipyards, et cetera, et cetera, et cetera.

That's all kind of -- that's clearing, but we kind of have to work those projects through our system.

Likewise, I think we need to get to a place where we're seeing more pricing leverage in some of our quicker term businesses, our stimulation equipment business, for instance, in international markets is -- still has a ways to go in terms of recovery but it's all going the right way.

And so I think that's going to be helpful for margin expansion going forward, but still a ways to go. And so, we'll see..

Thank you. There are no further questions at this time. And I would like to turn the conference back over to Mr. Clay Williams for any further remarks..

Thank you, Michelle, and thank you all for joining us this morning. We look forward to discussing our fourth quarter and year-end results with you in February. Have a terrific day. Thank you..

This concludes today's conference call. Thank you for participating. You may now disconnect..