國民油井華高 (NOV) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your National Oilwell Varco third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Loren Singletary, Vice President of Investor and Industry Relations. Sir, you may begin.

Thank you, Esther. And welcome, everyone, to the National Oilwell Varco third-quarter 2016 earnings conference call. With me today is Clay Williams, President, CEO and Chairman of National Oilwell Varco; and Jose Bayardo, Senior Vice President and Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results for its third quarter ended on September 30, 2016, please note that some of the statements we make during this call may contain forecasts, projections and estimates including, but not limited to, comments about our outlook for the Company's business.

These are forward-looking statements within the meaning of the federal securities laws based on limited information as of today, which is subject to change. They are subject to risks and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year.

I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco filed with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information may be found within our press release, on our website at www.NOV.com or in our filings with the SEC.

Please be aware of our use of the term EBITDA throughout the call this morning will correspond with the term adjusted EBITDA as defined in our press release. We also use the other non-GAAP measures as described in the press release.

Later on in this call, we will answer your questions, which we ask you to limited to two in order to permit more participation.

Now let me turn the call over to Clay.

Thank you, Loren. During the third quarter, National Oilwell Varco began to see some improved demand in certain of our businesses, mostly North America, where the rig count grew 28% sequentially. For the first time since the downturn began, we posted top-line growth in our wellbore technologies and completion and production solutions segments.

We also saw our cost reductions begin to outpace the steep declines in revenues we've seen through the past seven quarters as three of our four segments posted a higher margins due to aggressive cost reductions.

Since the downturn began in late 2014, our revenues have declined 71%, reflecting the severe stress the oil and gas industry has been under. Our customers have slashed spending to the lowest levels possible, and the oil and gas industry has delayed or canceled future projects totaling over 7 million barrels of oil per day.

2015 saw the lowest level of new reserve discoveries globally since 1947, only about 10% of the average annual discovery volumes through the past 50 years according to Wood Mackenzie. And in 2016 the US is forecast to see the lowest number of wells drilled since 1933.

The 2.2-million-barrel-per-day decline in non-OPEC production since 2014 has been fully offset by rising OPEC production, which achieved record levels this summer along with Russian production, which achieved record levels in September. Overall, we believe OPEC to be producing at near-maximum levels, with little remaining excess capacity cushion, which has delayed the inevitable rebalancing of the world oil markets.

Nevertheless, time is on our side as OPEC faces rising challenges to grow production further and as dwindling oilfield expenditures accelerate production declines due to rest of the world.

Faced with extraordinary revenue declines and significant price discounting in all areas of our business, we have aggressively reduced costs and improved efficiency, enabling NOV to manage EBITDA decremental leverage to only 28% since the end of 2014.

We are on track to obtain $3.1 billion in annual structural contractor and workforce cost reductions by year-end thanks to the hard work of the experienced, capable management team that Jose, Loren and I are honored to serve with.

This downturn has been extraordinarily painful on them and our entire organization. They have worked hard to in-source wherever possible and to keep our plants loaded to maximize absorption. But we have nevertheless been forced to reduce our workforce 43% from peak levels and have closed or are closing 286 facilities globally.

For the seventh quarter in a row, we have made significant reductions in our cost to match available demand while also continuing to invest in emerging opportunities we see. Such as the impending acquisition of Fjords Processing from Akastor that we highlighted in our press release last night.

Fjords processing is a global leader in providing processing technology systems and services to the upstream oil and gas industry. Fjords' technology solutions include sulfate removal, oil and produced water treatment, and hydrate inhibition that efficiently address critical needs for both onshore and offshore operators. The acquisition provides complementary technology for our completions and productions solutions segment. We expect that our combined operations will leverage the collective organization's global infrastructure to reduce costs, achieve broader channels to market for the valves, pumps and composite tubulars that NOV already produces.

Additionally, we believe the capabilities obtained through the transaction will be leveraged by other business units and will benefit certain initiatives that are ongoing within NOV. We are excited about the capabilities of Fjords' processing, the capabilities that it brings our platform, and we are eager to welcome the talented employees of Fjords to NOV when the transaction closes, which we expect to occur before year-end.

As we have highlighted on prior calls, NOV's strategy is centered on the most promising areas for future production: North American shale technologies, international markets like the Middle East and Russia, and deepwater improvements. We've used this downturn thus far to position the Company for the inevitable upturn, closing four small acquisitions in the third quarter, bringing our total to nine year to date.

We foresee significant opportunities in the upturn. Precise geo-steering, directional drilling to produce longer horizontal laterals, closed-loop drilling automation and optimization, completion tools, hydraulic fracture stimulation techniques, new subsea production technologies and conditioned-based equipment monitoring will be the big winners in the next up cycle. NOV is at the forefront in each area, and our R&D investments and acquisitions are tightly focused on these promising trends.

At this point, I'll ask Jose to review our financial results with you.

Thank you, Clay, and good morning, everyone. For the third quarter of 2016, National Oilwell Varco reported a net loss of $1.36 billion, or $3.62 per fully diluted share on a US GAAP basis. Excluding other items totaling $1.09 billion, net loss for the quarter was $128 million, or $0.34 per share.

Total Company revenues for the third quarter of 2016 were $1.65 billion, down 5% from the second quarter of 2016 and down 50% from the third quarter of 2015. EBITDA was $68 million, an improvement of $43 million from the second quarter as our efforts to reduce costs and optimize our operations outpaced the decline in revenues.

Our completion in the production solutions segment generated revenues of $543 million during the third quarter of 2016, up $5 million sequentially and down $255 million compared to the third quarter of 2015. Revenues increased on the incremental sales of coiled tubing and completion-related equipment, partially offset by fewer sales of primarily offshore-oriented production equipment including offshore conductor pipe connectors and flexible pipe.

EBITDA for this segment was $43 million, or 7.9% of sales, a decrease of $14 million from the previous quarter and an $82 million decline from the prior year. The decrease in sequential EBITDA was primarily attributable to changes in revenue mix and certain inventory and receivable charges.

In the third quarter, we recognized $319 million in revenue from backlog, down $14 million from the second quarter of 2016. New orders were $184 million, down $85 million or 32% sequentially, resulting in a book-to-bill equal to 58% and a quarter-ending backlog of $812 million. Our wellbore technology segment generated $526 million in revenue during the third quarter, up 3% sequentially from $511 million and down 37% from the third quarter of 2015.

As mentioned in our press release, we are very encouraged by the performance of our short-cycle businesses within the segment as they posted sequential revenue growth of approximately 15% within the North American marketplace.

EBITDA for this segment was $26 million, an increase of $25 million from the previous quarter and down $100 million from the prior year. A strong sequential improvement in EBITDA was a result of achieving targeted cost reductions and our successful implementation of numerous process and efficiency improvement initiatives across the segment.

Our rig aftermarket segment generated $322 million of revenue during the third quarter of 2016, down 12% from $364 million in the second quarter of 2016 and down 44% from the $570 million in the third quarter of 2015. Third-quarter 2016 EBITDA for this segment was $81 million, up $8 million or 11% sequentially. EBITDA margins increased 510 basis points to 25.2% of sales.

Spare part sales, service and repairs all experienced revenue declines during the third quarter. However, sales of spare parts declined more modestly than service and repairs from Q2 to Q3. A more favorable mix along with our cost reduction efforts drove the increasing EBITDA on lower revenue.

Our rig systems segment generated revenues of $470 million during the third quarter of 2016, down 17% sequentially from $564 million and down 69% from the $1.5 billion posted in the third quarter of 2015. The revenue decline was in line with expectations as we continue to work through our backlog and bring projects to completion.

Third-quarter EBITDA for the rig systems segment was $50 million, an increase of $1 million from the second quarter of 2016. EBITDA margins increased 190 basis points to 10.6% of sales.

As we described in a fair amount of detail last quarter, we've been extremely focused on standardizing processes, optimizing structures and eliminating redundancies in our global operations. These structural changes reduced our costs and improved our efficiencies during the quarter, enabling us to slightly increase EBITDA on a 17% decrease in revenue.

During the quarter, we recognized $363 million in revenue from backlog, down 18% from the $441 million in the prior quarter as the segment continued to work down its backlog and slow the pace of delivery in the face of low order volumes and project delays.

New orders improved by $119 million sequentially, or 180%, to $185 million in the third quarter. Book-to-bill was 51%, marking the highest level achieved since the third quarter of 2014. Included in the quarter's bookings were two land rigs, one of which is a highly specialized harsh environment, extended-reach rig destined for Alaska's North Slope. The two rig sales represent the first orders for new rigs since this time last year.

Other bookings during the quarter included several top drives, pedestal cranes for FPSOs and pressure control equipment. Quarter-ending backlog was $2.76 billion. We are encouraged by the two rig orders and are optimistic regarding near-term growth opportunities in land markets.

In North America, smaller contractors are looking to add more modern rigs to their fleet. And while most larger contractors don't expect the need for new land-build orders until the second half of 2017, they are expressing strong interest in improving the pressure and torque capabilities of their existing AC rig fleets to upgraded 7,500-PSI mud systems, new top drives and iron roughnecks.

Customers in international land markets are also expressing interest in equipment upgrades as well as new-build programs, particularly in the Middle East, Russia and Latin America. While the outlook for land markets around the world appear promising, in recognition of further deterioration in the outlook for the offshore new-build market, we took a $972 million non-cash goodwill impairment charge associated with our offshore rig systems business unit during the third quarter of 2016.

The diminished outlook is based on the accelerating restructuring process in the offshore market, which is reflected in the early contract termination by operators and in the stacking and scrapping of rigs by drilling contractors.

Looking at a few select items in the P&L, interest and other financial costs decreased $5 million primarily due to the reduction in commercial paper balances as well as certain charges that occurred in the second quarter that were not expected to repeat.

Our effective tax rate excluding other items was 16.7%. As a reminder, in the current environment relatively small changes in discrete items when split between domestic and international results can have a disproportionate impact on our tax rates. In the fourth quarter, we expect the tax rate to be approximately 30%.

Turning to the balance sheet, during the quarter, as I previously mentioned, we paid off our full commercial paper balance of $110 million, leaving us with $4.5 billion of availability on our facility.

At September 30, 2016, our cash balance was $1.5 billion, total debt was $3.2 billion and our debt to capitalization ratio was 17.8%.

In summary, I think this quarter's financial results reflect the tremendous job the team at NOV has done to resize the business, cut costs and optimize our operations. While certain elements of our business are showing signs of improvement, the organization remains focused on fine-tuning our operations, developing and delivering valuable solutions for our customers, and preparing to capitalize on our market return.

With that, I'll turn the call back over to Clay.

Thank you, Jose. I'll offer some additional color and guidance for each of our segments beginning with our completion and production solutions segment, which, as Jose mentioned, saw in its book-to-bill fall to 58% due to sharply lower orders for conductor pipe connections and subsea flexible pipe. This was partly offset by higher demand for fiberglass pipe, which was up 39% sequentially, and completion equipment, which was up 47% sequentially.

International demand picked up nicely for fracture stimulation equipment and wireline units, but North American demand generally remains very low outside of some budgetary equipment quotes and some rising demand for aftermarket spares for well stimulation equipment.

We noted in the press release, our record 2 5/8 inch coiled tubing string manufactured in the third quarter. And we are seeing increasing interest in larger-diameter coiled tubing units and strings that can traverse longer laterals in North America. We also believe that international markets are keenly focused on hydraulic fracture techniques pioneered in North America. So the stage is set for more widespread application of these enabling technologies overseas in 2017.

Within our fiberglass pipe unit, we saw rising demand for flow lines in North America offsetting the lower marine offshore pipe demand in Asia. Our fiberglass flow lines offer corrosion-proof solutions for well tiebacks. And the rising level of drilling activity in West Texas, as well as continued large sales into Saudi Arabia and elsewhere in the Middle East, lifted this group's backlog 14% sequentially.

The new completion tools business we acquired in July is off to a great start, with wins in Canada and Russia, where we secured a pilot project for our Bulldog (inaudible) frac system to be run this quarter. And we believe our cemented, sliding sleeve technology and burst port system offer a superior solution for multi-stage horizontal wells. We are also advancing new ideas in completion technology that we look forward to sharing with you on future calls.

Revenues for process and flow technologies improved slightly during the third quarter, with further improvements expected in Q4, as we benefit from higher demand for artificial lift products, process equipment and production chokes. As I mentioned earlier, Fjords' processing will contribute meaningfully to this business in 2017.

Our offshore products within completion and production solutions continue to face challenging market prospects due to the very low level of offshore projects globally, a situation that we believe may improve in the second half of 2017.

While Brazil demand for subsea flexible pipe has remained comparatively strong through the downturn, orders for Brazil dipped sharply during the third quarter. Elsewhere around the globe, our flexible subsea pipe business has seen several quarters of very low demand, driving intense pricing pressures and reducing average margins within our flexible pipe backlog. Nevertheless, we continue to win smaller tieback jobs, and we expect Brazil orders to rebound this quarter, leading to modest sequential revenue gains.

We are also continuing to engineer unique floating production unit topside modules within our cooperative agreement with GE, including our unique small-field HoneyBee and MiniBee FPSO designs, which we will complete by early 2017. During the quarter, we had a customer engage us in a paid study to apply these through their field development plan in the Barents Sea.

So overall, we see some green shoots emerging for many of our products but others continuing to slide, a theme that we see across other segments as well.

Looking into the fourth quarter, we expect completion and production solutions segment to improve in the mid-single-digit percentage range at solid incrementals due to additional cost reductions.

Wellbore technologies benefited from shorter-cycle products and services in the third quarter, which comprised about 80% of this segment's revenues, with drill pipe sales making up most of the balance. Rig reactivations in North America drove higher demand for our shorter-cycle businesses like downhole drilling tools, including new bits and new drilling motors that we've introduced through the downturn, as more than 90% of the US fleet is drilling directionally and horizontally today.

Our well sites services solids control business posted excellent sequential growth and margin improvements, too, on rising demand in West Texas, where we are beginning to claw back certain pricing concessions by charging more for items like freight and mobilization.

While there are about 10 months of oil country tubular goods inventory on the ground in the US, half of this is for the offshore. So our pipe mill and processor customers got busier in the third quarter working on casing sizes that fit shale drilling, driving better results for our Tuboscope pipe inspection services.

Drill pipe margins improved significantly in the third quarter, owing to a near-record mix of premium, large-diameter pipe. However, backlogs remain very low for this business, and we expect Q4 to pay significant headwinds on a poor mix and much lower volumes.

2017 looks better for drill pipe as we start to see higher demand for 5.5-inch premium drill pipe to drill longer, larger-diameter laterals. We will be enhancing our market-leading drill pipe technology with the launch of our new Delta premium connection technology in the fourth quarter, which offers much faster make-up times, higher torques, much-reduced risk of thread dolling, improving drilling efficiencies and reducing total cost of ownership for our customers.

And our new TracID product attaches RFID chips to the pipe, enabling contractors to automatically tally pipe on trips and track pipe in inventory, including the specific history of each joint of drill pipe. We are also seeing higher demand for IntelliServ wired drill pipe, owing to growing success in using its high-speed data link to downhole instruments to improve drilling efficiency and wellbore placement.

While these advancements paint a bright future for drill pipe demand, given near-term mix and volume pressures in drill pipe, we remain cautious on our outlook for Q4.

While demand is growing in North America and we continue to see rising interest in our closed-loop drilling automation services, the segment is also seeing increasing price pressure in many of its traditional business in international markets.

For the fourth quarter, we expect wellbore technologies revenues to decline slightly, and we expect EBITDA to remain roughly flat as continued cost reductions are offset by international pricing pressures and lower drill pipe sales and margins.

Rig aftermarket posted a 12% sequential decline in revenues in the third quarter but saw improved EBITDA up by about $8 million. Part service and repair all declined the quarter partly due to the evaporation of SBS work on offshore vessels. The cost reductions in rig reactivations in West Texas as well as a higher mix of spare parts helped offset the impact from lower revenues.

The group performed its first top-dry rebuilds in our new facility in Russia during the third quarter. It is also aggressively pursuing condition-based monitoring opportunities. Our predictive failure monitoring system for subsea BOP stacks has notified our customers of potential regulator valve wear on 11 separate occasions, which enabled them to avoid unplanned lost time in drilling operations.

We are now working on similar pilot products for top drives and mud pump failures, and we believe there's a tremendous market for condition-based, predictive monitoring of equipment across the industry. Again, NOV is leading the way in bringing practical, big-data-driven enhancements to the operations of our customers.

Nevertheless, the bulk of rig aftermarket's business is spare parts sales service into our considerable installed base of equipment offshore. Given the financial stress the offshore drilling industry is enduring, rig aftermarket will continue to face near-term headwinds.

We expect the fourth quarter to see mid-single-digit revenue declines for the rig aftermarket segment and margins to compress a few hundred basis points, owing to mix between spare parts sales and repair services.

Our rig systems segment posted significantly higher sequential quarters, owing to two land rigs booked in the quarter. But demand nevertheless remains very weak, with book-to-bill at only 51%. Orders for equipment for the land market significantly outpaced offshore equipment demand in the quarter, reducing our offshore mix within our backlog to 81%.

Revenue fell 17% sequentially, but the segment managed to hold EBITDA flat at $50 million, or 10.6% of sales, due primarily to lower execution costs on offshore rig construction in Asia and cost reductions elsewhere around the world. Major offshore new-build rig construction project revenue totaled about $200 million in the quarter, about 12% of our consolidated revenue. And overall demand for offshore equipment remains very low despite a few conversations about potential new platform rigs.

Offshore drilling contractors continued to only order replacement equipment for unplanned outages or worn-out equipment they can't otherwise cannibalize from stacked rigs for access elsewhere.

Our outlook for demand for land rigs is much brighter, as we have several inquiries for new land rigs for North America and numerous tenders being let for rigs in international markets. For customers who have shrewdly observed that the upgraded rig fleet in North America had much to do with the shale revolution of the prior peak.

We believe 2017 will see meaningful resumption in demand for land equipment. As Jose mentioned, we are quoting upgrade packages for 7,500-PSI mud systems, higher torque and new NOVOS control systems required to drill longer laterals. In fact, top-drive sales in the land market picked up in the quarter due to the need for higher torque to execute longer laterals.

The financial stress offshore will continue to weigh heavily on the results for this segment. We expect the fourth-quarter revenues to decline in the mid-single-digit percentage range, but margins to fall a few hundred basis points, as we face a mix shift to lower-margin land opportunities, lower-priced and lower-margin offshore orders in our backlog, and increasingly challenging absorption loads.

So to summarize, at or near the bottom of an extraordinary down cycle, we see lots of crosscurrents. After two years of brutal declines, growth in North America land and Middle East have been a welcome relief, and we are optimistic about activity in Russia.

On the other hand, our offshore customers remain very challenged and many international markets continue to slow, exacerbating pricing pressure. Nonetheless, NOV's diverse portfolio of critical technologies and strong liquidity make it well-positioned to benefit from a recovery in all corners of the oilfield.

Before we open the call to Q&A, let me take a moment to thank our many hard-working employees of our organization. You have done a tremendous job fighting the fight, navigating exceptionally tough times and positioning the Company for a recovery. Thank you.

Esther, let's open up the call for questions from our audience.

Thank you. I just wanted to let everyone know that we do understand we are having issues with the webcast lines, and we will post prepared remarks to the website imminently.

(Operator Instructions) Ole Slorer, Morgan Stanley.

Congrats where there's some good execution in a tough market.

Thank you, Ole.

I think also the debates will be around the rig technology of the next, say, several quarters as you implement the full effect of your very substantial cost reductions and insourcing on one hand. But on the other hand, I presume there is still a lot at near-term that just can't be done, given that you have a substantial backlog that still needs to ship before I presume you can truly optimize your production infrastructure.

So could you talk a little bit about some of these two crosscurrents and how you expect them to play out over the next couple of quarters? As well as how much of the manufacturing infrastructure that's typically used for offshore that can get filled with components for onshore activity?

That's a great question, Ole. I know you are aware of this, but other listeners may not be: the same infrastructure makes top drives, iron roughnecks, pumps, all manner of equipment for both land and offshore.

What we've been doing is, since demand has been down in both areas, we've continued to shrink our capacity and reduce our infrastructure, scaling down in view of the market demand. But simultaneously, we are seeing a shift in our mix away from offshore, which really dominated our order books for the last decade-plus, to land in 2017, 2018.

And as we mentioned in our remarks, I think calls for some optimism there. Conversations are beginning. Tenders for land equipment are starting to be let. And it's very early days, but that's certainly a good and welcome relief. And that showed up in our orders in the third quarter, which grew off of some pretty low levels of orders in the preceding quarter.

So what we are facing is the shift towards the land business for kind of the next up cycle. Right now, it's very, very cost-competitive. We are having to get very aggressive. And so the margin impact is certainly not positive early on in the cycle. But as this blossoms and as we get into full recovery, we're much more optimistic. So right now, the business is executing kind of a shift in that direction.

What I would in particular highlight to you, though, we have a terrific management team that runs our rig business. They've been responding aggressively in real-time to the lower levels of demand.

In the third quarter, our business was down 82% from where we were two years ago. So considering that the business posted double-digit EBITDA margins on 18% of revenue we saw two years ago is an amazing accomplishment.

I'd like to offer more quantitative guidance around margins and rig, but, frankly, at this point in the cycle and given kind of the shift is underway, we are not able to really quantify the margins. But I do have an abundance of confidence in the ability of our team to continue reduce costs in the face of the more challenging market.

Okay. Maybe with that in mind, I can maybe ask a margin question in a different way. A number of your competitors and some of the other big service providers were talking about 800 to 1,000 rigs in North America being the new 2,000. That's kind of the activity level that they expect will take out the old highs in terms of their onshore-centric revenues and profits. How do you think about that?

You have a very large position in North America shale. What rig count do you think of as the rig count value today will take out the old revenue and margin levels?

Well, the rig count is going to depend on a lot of things: the outlook, commodity prices, et cetera, et cetera, et cetera. So not really prepared to jump out there with a number on the rig count.

I think the important trend that underlies all of this is that the shale revolution really prompted the US to be the major source of incremental growth for oil between 2011 and 2014 globally. And that was really enabled by better rig technology. You've got the vast majority of oil produced in other regions around the globe. We have a lot of customers overseas looking at the impact of better rig technology in the US.

And so as I look to sort of the next upturn, I think overseas markets are going to begin to adopt these AC rigs, higher-tier rigs. We're getting a lot of inbound interest on that.

What's interesting about NOV is we are really prepared to sort of offer the next generation of rigs. We have had great success using wired drill pipe, closed-loop automated drilling to let software machine-learning technologies drive those rigs to even higher levels of efficiency. And that's what has sparked a lot of interest and a lot of intrigue amongst our customer base, not just in North America but elsewhere around the world. So I think a lot of opportunity there.

I think a lot of opportunity even upgrading the 800 or 900 AC rigs across the North American market to be more pad-capable. As we mentioned in the prepared remarks, 7,500 PSI mud systems, higher torque packages. That's anywhere from $1 million to $4 million sort of opportunity for NAV per rig. So a meaningful opportunity to upgrade.

Okay, thanks. I'll hand it back.

Tom Curran, FBR Capital Markets.

Clay, curious -- following up on one of Ole's questions. You know, I know a lot of rig systems infrastructure can be allocated to either offshore or onshore projects. But if you were to take your total PP&E heading into this down cycle and then look at it exiting this quarter, what percentage of it roughly would you say is solely dedicated to onshore?

You know, if you think about what we have, we have fabrication operations, we have machining operations. They can -- I would say virtually all of it can be directed one place or the other. The only exceptions to that would probably be some key site facilities adjacent to a couple of our customers in Asia.

But I would say largely just about everything we do can be redirected to land versus offshore. And, for that matter, machine shops can be repurposed to make completion tools, downhole tools and other things as well. So there's a lot of that underway, Tom.

But a lot of the PP&E -- I would characterize it this way, a lot of the PP&E that we have across our system is multipurpose and can be used to manufacture really whatever the oil field needs.

Okay. And then as you have continued to make onshore infrastructure-oriented investments, could you share some color on the location and nature of that spending? As we move through the down cycle, where might we not appreciate the enhancements you have made that are onshore-directed?

Good question. And what I would tell you is a lot of focus on investment opportunities in Saudi Arabia, where we've opened new facilities and have plans to continue to do so in Russia. Both of those regions have more focus on local content. And that's -- have been two areas where we have invested.

Generally, though, if you look at our CapEx it was about $60 million this quarter. It's been working its way down. So the investments that we are making there are small and targeted to get a little more local content. But, you know, we're -- lately we've been all about reducing capacity, not adding capacity.

Sure. Understood that that's been the overall consolidated trend.

Then following up on Russia, both you and Jose highlighted positive trends there in your opening remarks. I'm curious, now that the Kostroma plant has been up and running for a while, what impact have you noticed that's had? And what role would you expect Russia to play over the course of this next up cycle? Do you expect it to become a meaningfully larger percentage of your international revenues?

It's an important market. I think it's a great market opportunity. It's a market that I think would benefit from some of the technologies that we've highlighted on the call. We cut the ribbon on our Kostroma plant -- I was there in, I think, May or June to actually kick that off.

And since then, as I mentioned, we have rebuilt a couple of top drives. I think we've done some solids control manufacturing. We are building a rig there for a customer. We are making downhole tools there. So, yes, we're off to a good start.

And Russia is moving more towards local content requirements for oilfield service companies. So it's an important market for us in a place that we expect more growth from.

Okay. Thanks, Clay. I'll get back in the queue.

(Operator Instructions) Jud Bailey, Wells Fargo.

Question, I think, for Jose. Jose, on the last-quarter call you highlighted about $40 million of cost cuts you expected to achieve over the subsequent quarters and outlined by segment what you expected to achieve in the third quarter. Could you maybe update us, how much -- how successful were you in achieving those cost cuts you outlined on the last call? And kind of where are you in achieving that $400 million run rate in annual cost savings?

Sure, Jud. Thanks for the question. As it relates to the $400 million in annualized cost savings that we talked about last quarter, with the performance that we had in Q3 it's apparent that we exceeded our expectations in terms of how much of that $400 million that we would realize in Q3.

It's not a perfect science for getting to the number, but we estimate that we captured about $240 million to $250 million of that $400 million in annualized cost savings during the third quarter. So the team has done a tremendous job not only cutting costs from the system but, as we have highlighted several times, really using that opportunity to streamline the operations and make things more efficient, translating to further margin improvement.

So more to come on that front, unfortunately, because those actions are painful. But the team is doing a tremendous job.

Okay. Thanks for that. I guess expectations on achieving the incremental $150 million or so, is that something you can wrap up in the fourth quarter, or does that stretch into the first quarter of 2017?

Yes, I think when we talked about it last quarter, our expectations were that it would take several quarters to play out. A number of the actions that we take are in jurisdictions where it just takes time to get those costs out of the system. Once you take the action, the time between taking the action and actually getting the costs out takes a considerable amount of time. So we still have a few more quarters to go on that front.

Jud, I also think in the prepared remarks I mentioned 286 facilities that we've closed or are closing. The number of facilities we are closing now is starting to flatten out a bit. But the size and impact of those closures that we've announced are getting more meaningful.

So it gets tougher quarter by quarter. But, again, just can't say enough good things about the resolve that our management teams that run these businesses have around making sure that they are continuing to adjust costs in view of a very tough marketplace.

Okay, great. And my follow-up, if I may, is I want to just follow up on wellbore. Clay, I think you mentioned that revenue would be perhaps down slightly in the fourth quarter. I was a little surprised given the growth you saw in the North American business in the third quarter. Could you maybe give a little more color perhaps on why we wouldn't see growth given US seems to be continuing to grow and international is stabilizing? Maybe you'll comment on that.

Well, we expect US to grow. What I would tell you, though, is we are continuing to suffer from international headwinds in certain markets. So international will partly offset US growth. But the big move sequentially is going to be drill pipe sales and then the coating of drill pipe within our Tuboscope unit.

They had a great quarter in Q3, as I mentioned. Excellent mix of premium pipe. But we expect Q4 -- we're entering Q4 with kind of a depleted backlog for drill pipe. So that's going to offset top-line growth.

However, I also highlighted in the opening comments a lot of cause for optimism around 2017 in terms of new technologies, larger pipe that we see demand for, wired drill pipe that we see demand for. The enhancement of drill pipe with RFID chips. There's just a lot of technology going on in that space. But that's still at least a few quarters out.

Okay, great. I'll turn it back. Thank you.

(Operator Instructions) Marshall Adkins, Raymond James.

Clay, thanks for all the detail. I know we have spent a lot of time talking about the cost-cutting. You guys have done a phenomenal job there. But given my fairly bullish outlook on the industry and oil and whatnot over the next couple of years, I'm actually more worried about your ability to respond in an upturn.

And I know this probably doesn't come up a whole lot given the last two years, but help me understand how you guys will be able to respond in an upturn. Particularly, you've had a lot of inventory drawdowns, I would presume, in the wellbore arena. If we see a big surge in demand there, if we run out of frac trucks, what's our ability for you and the industry as a whole to respond to the up cycle?

Well, first and foremost, we are really, really looking forward to solving those problems. So, looking forward to that happy day of being faced with those challenges.

I've said it many times before, and I'll repeat it, the two skill sets you have to master in oilfield services are rapid aggressive cost reductions when the market dictates, and then rapid profitable growth when the market dictates. So this is a very highly cyclical business. It swings widely. And I've seen our team do it before: responding to the upturns. And so, again, I have an abundance of confidence in the talented management team that I get to work with here in terms of responding to that day.

With regards to your inventory comment, what I would tell you is that, frankly, our inventory is -- we still have too much. And so we have ample inventory, I think, to respond to our customers' needs. And so that's not really the issue.

What the upturn will look like, the scarcest resource in every upturn pretty quickly becomes people. But I think we have a great team here at NOV. It's been very tough to reduce the size of our workforce. But, you know, we're getting down to our core team and looking forward to responding to the upturn.

I would add to, though, that responding to an upturn is not unique to NOV. Our customers face that as well. So a lot of our products and strategies really are around trying to bring technology to help them navigate the challenges as well.

So, closed-loop drilling, for instance, that I mentioned a moment ago we believe will help drilling contractors when they are called upon to put a much larger portion of their fleets back to work drilling. That sort of technology can drive a lot of efficiency and learning curve effects that would otherwise take much longer to accomplish.

And margins in an upturn? Early in the up cycle, I assume they're going to be kind of wobbly because you're still -- US is battling international -- (inaudible) rising is battling international, still falling near-term. But are you going to be able to push pricing and push margins like we normally see in an up cycle? And how do you see that playing out?

Yes, early on, we are discounting everywhere a lot of pricing pressure and trying to keep volumes to load our plants. Prior upturns -- if prior upturns are our guide, that begins to change. And as demand kind of starts to accelerate, in this industry it can really rocket quickly. We have been -- begin to use pricing to sort of manage demand versus available capacity. And so pricing leverage can be pretty stout in the industry.

I would add to that that psychologically when you have a workforce and an organization that's gone through a significant downsizing like we have, there's a hesitancy to add people. And so we all naturally try to do more with less on the upturn. And so that drives -- there's just high level of efficiency that gets put into the organization through a downturn.

So when you get the upturn, you really benefit from that.

So, again, really looking forward to that, but very, very confident we'll be able to navigate our way upwards.

One last quick one. How the hell do you move around 150,000 pounds 2 5/8 coiled tubing strength?

The biggest coiled tubing trailer you ever saw.

I don't think Ford makes a 75-ton pickup, so I was just curious about that.

If they did, you would on one.

Thanks, guys.

Kurt Hallead, RBC.

I'm also looking forward to that day when we can start talking about some really good things. So, Clay, in the context of your experience in this business and some of the changes that are going on, I'm just wanting to get a sense from you when you look out at the rig systems business, you look at the potential for the land rakes rig orders and the equipment orders and so on.

Do you think that we can continue to see an order uptake in rig systems? Or is it a viewpoint of yours that we may just kind of bounce around between where we were in the second quarter and where we are in the third quarter?

Yes, I would say the latter in the near term, Curt. We had a pretty good -- we had a better quarter for orders in the third quarter in a couple of rigs that we highlighted. We do expect to sell a rig or two in Q4, but not quite as large.

What's more encouraging to me are the tenders and the interest that we see overseas. I'm just back from the Middle East, and had a number of conversations there. A lot more happening just in the past few weeks. We have tenders going on in Latin America, elsewhere around the globe. So the conversations are starting.

But I would caution everybody, those international tenders tend to move slowly. So this is still probably at least a few quarters away. But the good news is that there's a lot of talk, there's a lot of interest in drilling capability and technologies. I think NOV is kind of the go-to source in terms of the latest, greatest next-generation rig.

Right. Then, you spent a lot of time referencing a lot of new technologies, I guess, and services and products that you guys are introducing throughout the course of the downturn. Can you give us some perspective on what you think these new businesses or technologies and products could mean in terms of percent of revenue on a go-forward basis? Like, when you think about new technologies or developments, is it 10% of potential revenue, 20% of potential revenue? How could we think about the impact from this?

Well, I'm not really prepared to give a number per se other than to once again highlight our view of the future. We think the next upturn is going to see a lot more application to shale technologies elsewhere around the globe.

And when you think about what are shale technologies, it starts with a tier 1 land rig, high-torque capability, high-torque top drive, higher level of automation and mechanization around pipe handling. It includes premium drill pipe that's able to handle higher torques and drill out laterals that extend 10,000, 15,000 feet or more. It includes PDC bits downhole drilling motors, rotary steer holds we've invested in. MWD to geo-steer those wells into the best parts of the shale, to drill smooth wellbores where you don't have later production ponding problems in areas of the wellbore that hold up solids.

It includes sliding sleeve completion technologies that we think will grow in application in the next upturn. Hydraulic fracture stimulation technologies, coiled tubing for plug-and-perf. Flow iron mixtures, blenders -- you know, okay, we make all of that and we are market leader across all of that.

So I think we're very well-positioned for an upturn that has a lot more shale technology to it. And our M&A strategy and our internal development of new products and technologies that you asked about really are targeting sort of that view of the world. And that's in addition to the FPSO in offshore steps that we've taken. Because we also see significant improvements in that arena.

So we are continuing to enhance our portfolio to develop better technology, recognizing that our customers need these technologies to improve their marginal cost-per-barrel standing. And I look forward to helping them do that.

In terms of condensing that down to a percent of revenue, not prepared to do that right now. But we are continuing to work -- focus on deploying capital into areas that we see the highest potential growth put in.

I really appreciate your thoughts on that. Thanks.

Waqar Syed, Goldman Sachs.

Thank you. My question relates to the offshore rig market and aftermarket business. Do you expect the aftermarket business as it relates to the offshore kind of bottom out in line with rig activity, floats rig activity? Or you think that it will bottom out ahead of that, or there will be a lag with activity?

Hey, Waqar, it's Jose. I'll take this one. Obviously, it's very challenging environment to really predict and forecast exactly what's going to happen with the aftermarket business. A couple of factors make that challenging. With the continuation of cancellations of contracts by operators and rigs being stacked or scrapped, that's continuing to challenge our market opportunity on that front.

Additionally, while we believe that drill contractors have really taken their spare parts inventories down to levels which are really beyond their comfort zones, we continue to be very surprised by how resilient they are and how effective they are in terms of being able to cut back their need for expenditures.

So I think for us to really be able to call bottom, the process of rebalancing the market, particularly as it relates to just stopping the decline in the overall offshore rig count, needs to come to an end. But hopefully we are not too, too terribly far away from that. And obviously our rate of decline in that business has been slowing.

So, good long-term outlook; but here near-term, still a little cautious.

Okay. Then just as a follow-up, you talked about predictive maintenance and monitoring. Are you seeing any interest from your offshore customers in adding sensors to their existing fleet of BOPs?

Yes, we are. And as I mentioned, we are monitoring subsea BOPs right now and have on 11 different occasions been -- we've notified our customers that we've seen a signal that indicates they are within two weeks probably of a regulator valve failure. And so we are achieving real operational success. We are able to avoid real unplanned lost time in those operations and so that's garnering some interest.

And then, as I also mentioned in the prepared remarks, we are now developing top drive and mud pump failure mode predictive models as well.

So we think this has a bright future. You know, the Internet of Things is coming to the oilfield, and so far I think NOV is in the lead.

Now, what kind of revenue opportunity is that incremental when you are selling, or is that in these sensors is there any meaningful opportunity for revenue? Or is it more the service model that's the opportunity? Or how should we be thinking about that from a revenue perspective?

It's both because it requires sensors be installed on the equipment as well as ongoing sort of maintenance -- or, sorry, ongoing monitoring services that we offer. So what I would tell you is that right now, it's still -- this is a product we just introduced in the second quarter, and we've got new pilot products that really aren't even commercial yet being introduced. So it's not a big deal mover just yet, but we are very optimistic about, one, the impact to NOV in the future. But also the impact on improving our customers' operations; we really think we can help them improve their rig efficiency using this technology.

Okay, great. Thank you very much.

Stephen Gengaro, Loop Capital Markets.

Two quick ones. One, on the (inaudible) charges -- can you give us some sense for D&A going forward? But also maybe talk about within rig systems, how do you think -- I mean, do you think margins can stay around 4Q levels next year or do you think you'll continue to see a little degradation on volumes?

Stephen, I'll jump in on the -- related to the DD&A question that you asked initially. And I think Clay and take the margin question on rig.

As it relates to the charges that we took, the vast, vast majority, $972 million of that, was non-cash, goodwill impairment charge that did not really include anything in the way of intangibles. So it really shouldn't have any sort of an impact to our DD&A expense. So I anticipate that would stay relatively flat here for the next several quarters.

And Stephen, I think the second part of your question was around rig systems margins into 2017. And as much as I would like to guide to double-digit EBITDA margins in 2017, I don't think that's realistic. And the reason for that is we've been benefiting from high-margin, offshore rig construction projects that were won in kind of a different era, and carried a very large backlog of that into this current downturn. And what we've been seeing is a continued mix shift that I described earlier towards land equipment that's being priced in a very aggressive way to win that war.

So there's sort of an overall margin shift underway. And, again, our team is fighting hard to reduce costs to get as high-margin as we can given that mix shift backdrop. But, realistically, I think we're probably going to see margins -- we guided down a bit for Q4, and I think that's probably closer to what we expect to see in 2017 across rig systems.

Great. Thank you. Then maybe one follow-up on the acquisition. Can you elaborate a little bit on the impact you see as we go forward from the acquisition?

Yes, the Fjords acquisition, as we mentioned, fits well within our completion and production solutions group and our process flow technology business unit within that. But very excited about it. They are about 50% land, 50% offshore fluid processing modules; a lot of specific technologies around sulfur removal units, around glycol units for gas, electrostatic coalescers. That's very additive to a number of technologies that we have and really provide a new channel to market for valves and pumps and composite pipes and other things that we already make here at NOV. So it's a great synergy.

What's interesting about Fjords too is that it's predominantly an Eastern Hemisphere business. And so we really think NOV can help open up new geographic markets to that business.

So, very excited about it. Looking forward to getting it closed in Q4. And, again, further sort of cements NOV's pivot toward things other than rig building. So, here's another investment in production-related technologies that we think have a very bright future.

Great. Thank you.

Chuck Minervino, SIG.

I just wanted to follow up on that question related to Fjords. I don't know if you can give us quantitatively at all what kind of impact back and have on your 4Q numbers or annually what kind of financials they bring to the table there. Then also, does your 4Q guidance for that completion and production segment include that coming in, or is that additive if it closes?

Hey, Chuck, it's Jose. I guess in response to that last question, as Clay mentioned in his prepared remarks, we are anticipating the transaction will close right about at year-end. So, guidance does not include any impact from that transaction. But we are very much looking forward to, as mentioned, welcoming the team from Fjords processing into the NOV family in early 2017.

As it relates to specific numbers on -- related to that operation, those numbers are available in [AgSource] public finance filings. But basically if you look at it at a trailing 12 basis, they did about $255 million in revenue. And you can look up some of the other details if you'd like, or we can follow up after the call.

Okay, thanks. Then just on the completion and production solutions segment, the order levels there. I know that your orders there will likely kind of lag some of the rig count recovery. Do you think that 3Q was the bottom there for orders? And do you expect to start seeing that turn higher here going forward?

Hard to say. What happened in Q3 was the downturn mostly in offshore-related products coming out of completion and production solutions. And that business is broad brush strokes. It's about 44%, 45% offshore revenue-related. But the backlog is much higher mix of offshore products because the offshore products tends to remain in backlog much longer than quicker-turn land things.

So, the backlog and order rate really is much more, frankly, offshore-focused than the revenue stream for completion and production solutions. Does that make sense? And while we do expect that to pick up, offshore demand to pick up in Q4 based on some specific things, we do view the offshore market as continuing to face some pretty challenging levels of demand as we enter 2017. So it's very difficult to say at this point.

Thanks a lot.

David Anderson, Barclays.

Clay, this acquisition that you have put on the processing side, is this one of the final pieces of that FPSO kit that you have put together between you and GE? Are there more of these that you still need to fill in? That's my first question on that subject.

You know, that's a really, really good question, David. What I would tell you is this fits our FPSO strategy really well, but, frankly, that's not why we did the deal. We have already a very good portfolio of production technologies related to processing -- progressing cavity pumps, some artificial lift products, separation equipment, things that we have been building out along the way. And while a portion of Fjords' business is related to FPSO, it's really driven by just kind of your bread-and-butter processing skids for land, processing skids for offshore, fixed platforms, that sort of thing. So, yes, that was sort of an adder, the fact that it does support our FPSO strategy. But that really wasn't the driver for it, honestly.

So it's a little bit more midstreamy in that business, that revenue mix?

Well, no, it's upstream but it's -- oil and gas and water are processed in all parts of the oilfield around the globe. And in fact, arguably there's more processing demand in many mature basins where you have higher water cuts, you get solids production challenges. Gas, glycol units for gas, those sorts of things.

So this is much more broad-based than FPSOs. The nice thing about it is it could can stand on its own without a lot of FPSO incremental revenue for it. And anything we when win before FPSOs, this will be additive to.

All right. So sticking on that subject, you had highlighted one of the studies you're doing there with GE on the FPSO business. We've heard from a couple of others that there's an expectation that as many as 10 big projects that people are looking out at. You could start to see maybe three, five big projects go to the second half of next year. How are you thinking about that? Are you guys involved in those discussions there? When do you think realistically you could see your first FPSO order or major feed studies along those lines?

What I highlighted in my remarks were around our small FPSO, the mini-bee, honeybee concept. And we got a paid feed study won in Q3 -- actually a pre-feed study, more accurately -- to look at the application of that technology into some specific opportunities.

The other conversations, yes, NOV sells lots of important kits into FPSOs, big and small. So, flexible pipe. We've added to our offering of subsea components with the Kongsberg acquisition, which brought a lot of connectors -- subsea connectors. And that's in addition to our Seabox water processing technology that we acquired last year.

So we do a lot in this space. You know, torque mooring systems, FPSOs and the like. So we are out there doing our best.

However, like I said earlier, the deep water faces some challenging return hurdles at $50 crude. And so we are very hopeful that these projects do move forward in 2017, but we remain -- I'm going to remain cautious in my outlook.

That's great. Thanks, Clay.

Ladies and gentlemen, this does conclude our Q&A session for today.

Great, Esther. Thank you very much. Thank you all for joining us, and we look forward to speaking to you in February.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.