NOV Inc. (NOV) Earnings Call Transcript & Summary

Hi. I'm David Anderson. I'm Head of U.S. Oilfield Services Research at Barclays. Today, I'd like to introduce my next guest, who is Mr. Clay Williams. He's been the CEO of NOV since 2014, previously serving as CFO since 2005 and later, he was COO. Began as [indiscernible] of Shell Oil Company in 1986, endured one of the worst oil collapses this industry has seen before he joined SCF Partners and later held various roles at Varco and Tuboscope before it merged with National Oil Well. Over the last several decades, NOV has pivoted several times, first into the deepwater rig market, later into the onshore market, is now looking towards new energy solutions, which we look forward to hearing more about from Clay's presentation today. Clay, thank you very much for joining us today.

My pleasure, Dave. Thanks. Great to see you and the team from Barclays and delighted to be able to spend some time with you and your clients this morning to share with everybody our strategic plan at NOV and how we've been executing against it. And so really looking forward to the next half hour or so as I go through that. I -- reflecting on the past few years since 2014, they've been extraordinarily challenging and have really though, given us an opportunity to reflect on our mission. As you know and those that are familiar with NOV know, our roots date back to the middle part of the 19th century when we were founded in the Pennsylvania oil field. And so we have over 150 years of helping make oil and gas operations more efficient, safer and lately, very focused on reducing emissions from conventional operations. But the last few years, we've seen emerging opportunities in renewables as the world pivots to lower carbon forms of energy. And we're very excited about this dimension as well. So broadly speaking, NOV's mission is to bring affordable, low-cost and now clean energy to the world to make lives better. We do that through a fantastic workforce of 28,000 employees that I'm very, very proud of, that are passionate about bringing great service, innovation, great ideas to our customers' operations to help make those operations more efficient, less environmentally impactful. We've worked through 573 locations in 61 countries. Last year, we did $6.1 billion in revenue and generated a little over $900 million in cash flow from operations. So in addition to that very important mission around energy for the world [Audio Gap] and value the relationship that we have with our community and the society at large, focused on better outcomes. And we recognize that we're entrusted with resources that are owned by our shareholders, our stakeholders, and we need to be good stewards of that. And so there's a lot more on ESG in our sustainability report, which we published this summer. That's available on our website at www.nov.com. So as I mentioned, this has been a very, very challenging time in the oilfield. So our basic business model was selling capital equipment to oilfield service operations and helping the oilfield go through consumables as well as providing some services. It's been a very difficult few years in this space, doubly so since 2020, when the pandemic came upon us. So what we've been very focused on through that is reducing our -- the size of our business and downsizing to really fit the available marketplace. And so the very first point that I want to leave you with today, out of 3 important points, is that we've aggressively cut cost to enhance cash flow and maintain liquidity. And so to put that in perspective, if you look back at our business, in the fourth quarter of 2014, since then, we've reduced our total expenditures by $12.6 billion annually, and over $2 billion of that was fixed cost. That was accomplished by closing 660 facilities and reducing our workforce by more than 40,000 employees. So a very heavy lift around resizing our business to fit the available opportunities, but that was important for being able to maintain strong cash flow through this period. We generated $3.7 billion in cumulative free cash flow since 2014. We've also focused on improving our processes. So when we look back at how we were doing against liquidating working capital in 2017, the pace wasn't as quite what we'd like. So we tied that important working capital metric to incentive compensations through -- beginning in 2018. And what that did is instill new levels of discipline and a better process and focus on liquidity and working capital performance, and return on capital performance that, that carries with it. We've also launched a number of initiatives around IT optimization, combining ERP systems and processes. And closing more than half of our facilities gave us the opportunity to downsize into our most efficient facilities. And so it wasn't just cost cutting, but rather getting better at everything that we do. And I would submit that here we are in 2021 and the company is probably the best it's ever been in terms of manufacturing and managing its business. This strong focus on cash flow and liquidity has enabled us to maintain a very strong balance sheet. A strong balance sheet is really important to our business model in that our customers sign up with NOV to build large pieces of equipment, which may take a couple of years to build. And then they rely on NOV as an OEM aftermarket support network and organization through decades of owning and operating that equipment. And so they want to know that their supplier is financially strong, and therefore, our investment-grade rating is very important to us, and we've been able to maintain that. At the end of the second quarter, our net debt, we -- declined to $114 million against total gross debt of about $1.6 billion. We've been able to maintain a high level of liquidity at $3.6 billion. And last quarter, we paid down our $183 million of notes due 2022, and so our next maturity is not for another 8 years. So very strong focus on cost reductions appropriately to maintain cash flow, but what's more fun are the other 2 areas that I really want to emphasize this morning, and that's investment in NOV's future in 2 areas. The first is building on our roots in the oilfield. Our customers continue to look to us to advance technologies to make their operations more efficient, more safe and reduce the environmental impact. And so despite the significant cost reductions everywhere else in the company, we continue to invest in research and development and brought new technologies to the oilfield. I'm going to spend a little time on that here in just a minute, showing you some of the things that we've done, applying new technologies. Equally exciting are the opportunities emerging in renewals. And so when we look at our skill sets, we see that we are well positioned and have a lot to bring to the considerable challenge of pivoting to lower carbon sources of energy. And so we've got a lot of really great things going on in that area. So I'm going to start with our traditional oil and gas business, starting with completions. As you're aware, fracture -- hydraulic fracture treatment stimulation operations in the oilfield are very horsepower-intensive, typically powered by diesel. High emissions, loud, big equipment, run at really high levels. And so we thought, "You know what? There's a better way to do that." And so through the downturn, we put some of our brightest engineers on redesigning a frac fleet, really starting with a blank sheet of paper, utilizing electric technology. So this is -- we're agnostic with respect to the source of electricity here. It's 13.8 kb, which can run on line power, it can run on turbines, can run on reciprocating gen sets powered by natural gas. The key thing here, though, is that we've designed a fleet that rigs up much easier, much more safely. It uses our QuickLatch systems, uses our FlexConnect flexible [ of ] hoses, has a much smaller footprint. We gather a lot of data from this fleet so that we can offer better condition-based monitoring and predictive analytics and command and control to make a frac operation work efficient. So in many ways, this is a big step forward. Very excited about this technology to improve our customers' operations. And when we've analyzed it, we see there's a potential here for up to 74% reduction in greenhouse gas emission. That carries with it a much lower fuel bill for our customers, which, as you know, is very expensive. This can run up to $1.5 million a month for diesel. That reduces the truck traffic -- trucking diesel back and forth. And for the pressure pumper customer here, much lower total cost of ownership because we're moving more volume to these high-power pumps. And that means there's less cycles, less moving parts per volume of proppant put away. So much more efficient operations, smaller pad footprint. All the way around, we think this is what the frac fleet of the future looks like. Turning to the drilling operations. We've talked in the past about our NOVOS operating system. In a lot of ways, this is the digital foundation of better drilling operations. So we've got NOVOS operating system working on about 75 rigs today and even more than that in our backlog to be installed. A lot of excitement around NOVOS generated from operators. Basically, this is an operating system that has a -- it's an open architecture that allows third parties to write applications to optimize the drilling process. And so there's about a dozen or so apps out there that can optimize repetitive processes on drilling rigs. More importantly, this is the digital foundation for a higher level of automation in the drilling process like you see here. So in the fourth quarter, we expect to bring this technology to market. These are hardened industrial robots, which offer a cost-competitive way to bring a higher level of automation to our customers' operations, and we're very excited about that. A lot of interest in that, in that a lot of our drilling contractor customers are experiencing some difficulty recruiting some of the rigs with experienced people. And so they see automation as a way to help solve that problem. So we brought this NOVOS technology to the Middle East. A large NOC there found that they cut their connection time roughly in half, increased rate of penetration by nearly 40% and decreased days to drill by 29%. And the robotic automation stands that you saw there, or arms that you saw there, we found can trip pipe as fast as a human crew at 25 stands per hour. So that's a big leap for an automation. We're excited about the prospects to upgrade land drilling operations, and make those safer and more efficient by getting those human hands off the pipe, humans back away from well center and letting robots do to the heavy lifting work around that. So at the surface, we've been able to optimize drilling processes, utilizing artificial intelligence. And so we have the capability of monitoring drilling operations of letting computers do the hard work of the human driller, which is to vary weight on bit, rotational speed and the like to find the optimal way to drill stratigraphy that is required to execute oil and gas wells. And so by analyzing -- well, allowing the computer to analyze that data and machine learning and artificial intelligence to take over, we build a digital twin of the stratigraphic model and have found that we can improve drilling operations. And so we had a customer in the Marcellus that found that they had $37,000 in savings per well, 9% reduction well-time delivery. But as we've applied this around the world, we'll see even better results than that, 20%, 25% improvements in rate of penetration. So -- but what's really interesting is all these technologies, artificial intelligence, NOVOS operating system applications, when combined with high-speed data from the bottom of the well, which we provide through our IntelliServ Network, which is a Wired Drill Pipe that we co-own with Schlumberger, really bring the impact of digital power to the fore. And so we've got a number of major oil companies very interested in this technology. We continue to see the number of jobs that we're on grow. But what it basically does is use sensors near the bit that can transmit 55,000 bits per second up to computers at the surface to really get high speed control over the rig as well as more closely monitor drilling conditions that the results were far better than anything. And so we really believe that this will become the way that drilling is executed in the future. So in the North Sea, we had a customer that -- through an 8-well project, improves their drilling by 35%. They're able to take 25 days of drilling out of their program. And most importantly, were able to reduce rig emissions by 7%. Because you think about it, if you drill faster and more efficiently, you're actually cutting your greenhouse gas emissions in so doing. So the point here is that even though we significantly reduced the size of our company to respond to a lower market demand, we've continued to invest in better ways to drill and safer ways to drill. So that leads me to the third main point I want to make this morning, which is in addition to our traditional oil and gas markets, we also see fantastic opportunities in the energy transition. And I think NOV is rare in that we have actually an established business presence in the wind space that I'm going to detail a little bit more here in just a moment, and a number of emerging opportunities in the wind space that I'm going to talk about. Before I do though, I really want to highlight the strengths that we bring to the broad challenge of the energy transition. So you think about what NOV does. We're experts at building large complex machinery. We do that in very difficult environments. We do it at scale, in remote parts of the world. And we have a lot of expertise in specific areas that are going to have to be applied here to execute a very challenging energy transition in material sciences, in metallurgy, in composite materials, power systems, robotics, the digital expertise that you saw earlier. I think all of this is going to be required to successfully execute an energy pivot that's required to move to a lower carbon world. So very excited about the opportunities of applying our expertise in these areas to the challenge. And as I mentioned, starting with wind. So I'm going to start with an important insight, which is very foundational to the wind business that I really want to communicate to you before I get into our specific business opportunities. You've heard about improving economics in renewables broadly and wind specifically and a big build-out of wind capability. So for instance, in 2021, about 70% of total investment in electrical generation capacity globally will be in renewables, and wind is the largest share of that. And so what that speaks to is the fact the economics have improved. And the reason for that is actually illustrated on this graph. You look back at the evolution of wind towers through the past 30 years, it's pretty evident. They've gotten a lot taller and they've gotten a lot bigger. That matters because as wind towers get taller, they can accommodate longer blades, and longer blades increase the swept area that the -- kind of the cross-sectional area of the wind that the tower has access to. And that grows by the square length of the blade, and it takes a taller tower to put the bigger blade up there and increase that swept area. So as you see here, the current leading-edge towers have grown significantly compared to where they were 30 years ago. In fact, that 13- to 15-megawatt tower that you see there, the hub height on it is about 500 feet. So that's as tall as a 50-story building. So we're accessing more wind energy through that larger swept area. That's pretty simple. It takes a bigger turbine to concentrate all of that energy, and that's why it's grown from more than tenfold over the past 30 years. That's one reason that the economics has gotten better is accessing more natural energy. The second is, is that it places that swept area at a higher elevation, and at higher elevations, the wind blows harder and it blows more steadily. And what that does is improve the load factor on that equipment once it's hoisted that high into the air. So here's a map of basically wind steadiness and strength at altitude from 80 meters up to 170 meters. And the percentage wind capacity factor on the right, really sort of a load factor. One of the challenges of wind is its intermittency. So it gets better at higher elevation. You get better loading on your capital asset at height and you sweep more wind energy. So hopefully, that all makes sense. The important implications that, that has for the wind space is that it requires bigger, heavier equipment to lift these tall heavier towers and to install the turbines at height, and the turbines themselves are [ happier ]. So let me zoom in on a couple of wind markets that NOV participates in, starting with the fixed wind market. So the evolution of those taller towers means that the couple of dozen vessels that previously would install wind towers offshore, frankly, aren't sufficient to lift or build a 500-foot tall tower. And so what that has done is prompted demand by NOV's customers to build vessels such as this to install those larger wind towers. So this is a wind installation vessel. It uses jackup systems. So you see a -- the legs that are jacked down there. These are very similar to rig jacking systems for jackup rigs as well as cranes handling equipment used to install the blades, which NOV has a clear leadership position in. And in fact, about 70% of the wind vessel installation fleet uses our equipment. The growth in wind towers has led to high demand for leading-edge larger vessels. There's about 5 or 6 of these today. And we foresee 2 to 3 dozen being required later on. So that's causing demand. It's really about half of our orders last quarter in Rig Technologies were in the space. That's going to help us grow our business to $200 million a year by the fourth quarter into, we think, a $350 million to $400 million run rate by the end of next year. So very excited about that. So that's fixed wind that's placed in shallow water. But a lot of countries don't have enough shallow water to power their energy needs. And so countries like Korea, Norway, Japan, are looking at floating wind options. And here, NOV, our marine engineers have designed hulls dating back 50 years or so, and so we have a lot of experience in hull design broadly, back more than 50 years, and bringing that expertise to bear starting about 10, 15 years ago to the opportunity for floating wind has enabled us to design what we think is a proprietary leading-edge hull design, which will take costs out of this, and that's the important thing. Floating wind's a little more expensive than fixed wind. And so working closely with a shipyard partner to industrialize the manufacturing process is going to be an absolute requirement to make this work. Our experience building 400 offshore rigs with most of the major shipyards around the world as well as a, for instance, shallow draft design, which opens up the number of shipyards that can fabricate these things and expertise in industrializing the supply chain around them, we think positions NOV very well for this market. By the way, the mooring systems -- and the engineering and the mooring systems for these individual floating hulls and that, among other components, NOV has the opportunity to sell into that market. So very excited about floating wind as well as fixed wind. And we think it's going to be a big market. So today, there's about 30 gigawatts of installed capacity around the world. Third-party estimates place that as much as 240 gigawatts or more by the end of the decade. So an eightfold level of growth over the next 8 years is going to require a big build-out of capabilities. If we assume a 90%, 10% split between fixed and floating, that would imply over 10,000 fixed wind turbines to install offshore and over 1,000 of the tri-hole floater designs that you saw there earlier. So a very big total addressable market for NOV is the potential. So that's the offshore wind space. I'm going to turn now to the land wind space. And the same taller tower principle applies here. Taller towers drive better economics. And so we've been working in partnership with Keystone Tower Systems for the past few years where we have investment to build out new technology. This is a proprietary spiral welding technology that you see that's being commissioned at our plant in Pampa, Texas. And we're pretty excited about that because that offers the opportunity to reduce the cost of onshore wind towers. But what's more interesting is the fact that there are constraints on the heights of onshore wind towers that are related to the transportation of the base section. So these things are built as cones. And the taller they get, the larger the base section goes. And so if you flip a base sector on its side and you try to truck it cross country to a wind farm in the middle of the country, you face a lot of overpasses, bridges, power lines, traffic lights, et cetera. And so there's sort of 100-meter, 105-meter plus/minus constraint on wind tower height to onshore that's related to the transportation of the tower sections. Well, this machine can be set up in the middle of the wind farm and actually construct wind towers on site using coiled steel through its proprietary continuous welding process and spiral welding process. And so that neatly side steps the transportation challenge on the height of wind towers. But there's another second challenge, which is the lifting mechanisms actually used to raise these towers. And coincidentally, about that same height, the 100 to 105 meters, conventional crawler cranes get a little tippy and unstable. And so our very clever crane engineers have designed this system to actually lift these taller towers. And so we can push wind towers from 100 and say 150 meters or more, and our engineers think that's very possible, then we can bring better economics to the onshore wind tower space and potentially grow the wind belt. So if you remember the -- what I showed you earlier, the map of the United States, there's a wind belt that runs right down the middle of the U.S., which is -- has the most sustained highest winds, and it runs from North Dakota to West Texas and the economics work there. Taller towers probably opened up the area that's available to land wind farm development to be economic. And so we can potentially bring wind farm development closer to places where people use electricity, which is closer to the coast and potentially grow -- significantly grow wind power onshore where it is, frankly, most cost effective. So very excited about this combination of the lifting system plus a way to make towers on site as a very disruptive technology in the land wind space and looking forward to seeing what that brings. So that's the land wind space. Other forms of renewables include geothermal drilling, where NOV and, frankly, all of oilfield services has been a major facilitator for decades. Geothermal drilling really started in the geysers in California back in the 1970s and has long relied on oilfield technology. We've seen demand for geothermal drilling grow significantly over the past 2 years or so and are investing in specific products to help facilitate that. So very hard rock drilling, very hot drilling. And that's important because the drill pipe gets pretty hot when you're drilling geothermal areas. And so the automation -- the drilling automation that you saw earlier, we think is going to be a requirement to really further industrialize geothermal drilling. Additionally, we've invested in new solar tracking capabilities and have a pretty exciting solar tracker that we're excited about to bring in to the marketplace. We're working with one of the largest solar EPC firms in the country and expect first revenue on this technology sometime next year to participate in that area. Additionally, we have other opportunities that are emerging in things like biogas. NOV has long been a supplier of mixing technologies and certain products, valves, et cetera, that go into municipal water and sewage treatment operations. What we find is some of those components go into [Audio Gap] plant that we are talking to a couple of firms in Europe about deploying. So pretty excited about that as well. So reflecting on what you saw here, we continue -- despite the downturn in the oilfield, the need to cut costs, we've continued to invest in the future to support both our traditional oil and gas customers' operations as well as renewables. And the point here is that a lot of debate about the pace, the speed at which the world transitions to a low-carbon future. The point I really want to make here is the optionality embedded in NOV -- in whatever scenario unfolds. There's a really meaningful way for NOV to participate in each of these scenarios and really sort of cover all the possible scenarios with respect to how energy is supplied in the future. And the second point I want to make is that we approach this as a business. We look for sustainable, competitive advantage in these opportunities and seek to develop them organically in a proprietary way where we can make sure that our financials and our shareholders benefit from our participation and the expertise that we bring. So just a couple of more minutes here. I want to reflect on how our 3 segments have really transformed over the past 5, 6 years. So Wellbore Technologies, as you saw earlier, applying artificial intelligence, machine learning to the drilling process. We're also working on edge computing and cloud storage products and very excited about the future for that as well. So a big transformation there with Wellbore Technologies to make drilling operations more efficient. Likewise, in Completion & Production Solutions, valves and heavy iron, we've moved to more process control with wellstream -- our Wellstream Processing and the frac fleets and completion tools that we've provided in the past, more of a digital services provider. And then -- sorry, my screen just went blank there. And then finally, rig, as I mentioned, we're a large participant in the offshore wind build-out and very excited about the prospects for that as well. So significant transformation of NOV's 3 segments to utilize better technology along the way. What hasn't changed is our capital allocation priorities. So starting with defending our balance sheet. I mentioned earlier, this is important to our business as well as maintaining our stock of capital assets and investing in better ways of executing our business plan, very important, as well as opportunistic M&A. But also, we've got a good track record of returning excess capital to the shareholders once these better capital uses are funded. And so this is really unchanged from prior presentations that we've made. So I'll wrap up here. I think we've got just a minute or 2 left, but outlook is very strong for renewables. A lot of interest in everything that we're doing. We're a major provider, in particular, of offshore wind, but we see opportunities in land, in solar, in biogas, in CCUS that drive our traditional oil and gas business, highly cyclical business. And of course, we have a later-cycle business model in the supply of capital and consumables. We continue to see disruptions in the supply chain from COVID-19. Nevertheless, we think that as the world recovers, demand for our traditional oil and gas business is going to recover along with it and we'll see growth ahead. So I'm going to end with where I started, sort of the 3 main points. Significant cost reductions executed by NOV through this multiyear downturn, nevertheless committed to our oil and gas customers and committed to executing these opportunities in renewable energy space. So Dave, that wraps up my presentation. I hope people can still hear me. I'm getting some signals back of difficult connection here.

No. We had a few technical problems here, Clay. I can hear you fine.

So just maybe just one quick question just to end. So last quarter, on your rig tech orders, more than half was dedicated to the offshore wind -- yes.

David, I'm sorry. Your volume is fading on my end. Could you speak up?

Okay. So on your rig tech orders last quarter, more than half was dedicated to wind. You just announced a couple of wins on 2 X-Class self-propelled wind turbine installation vessels. So how does your visibility look going forward. Should we expect rig tech to be mostly wind from here on out? And how is your visibility over the next 2 years in terms of the number of potential orders out there?

I really think it's going to continue to be both because we do expect a recovery in the oilfield. And we're seeing greater demand and interest from our, in particular, our offshore drilling customers looking at potentially reactivating a few rigs. So I think that the business will move up from here. I think last quarter, we reported 11% improvement in spare parts bookings for Rig Technologies. But on the other hand, you're right, there's a lot of interest by a lot of broadly offshore construction companies, even traditional drilling contractors that are looking hard at this wind opportunity and they're seeing the same trend that I described earlier. These taller towers require more capability for offshore vessels. And so when they look at where the puck is going, they see that there may be a little bit of a shortage of those things, in particular, Jones Act vessels in the United States. And so we see great opportunities in both areas and delighted that we have the opportunity to help apply our expertise that we honed in the traditional oilfield drilling space to that offshore wind tower construction space. And as you saw, it's becoming a pretty significant business for us.

Transferable skill sets, Clay, kind of moving into other industries is not -- you've done this before, now you're just doing it again. So I think we'll be watching that very close to the next few years. Clay, thank you so much, as always, for your time. I'm looking forward to do this in person next year. Yes, I'm going to say it in person next year, maybe I'm a little premature, but I'm going to say it anyways, and look forward to seeing you then.

We all do. And Dave, thanks again to you and Barclays for hosting us, and wish everybody the best.

You got it. All right, Clay, have a good day. See you.

You, too.