國民油井華高 (NOV) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Oilwell Varko fourth-quarter and full-year 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Loren Singletary, Vice President of Investor and Industry Relations. Sir, you may begin.

Thank you, Chanelle, and welcome, everyone, to National Oilwell Varco's fourth-quarter and full-year 2016 earnings conference call. With me today are 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 fourth quarter and fiscal year ended on December 31, 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 upon limited information as of today, which is subject to change. They are subject to risk 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.

On a US GAAP basis for the fourth quarter of 2016, NOV reported revenues of $1.69 billion and a net loss of $714 million or $1.90 per share; for the full year 2016, NOV reported revenues of $7.25 billion and a net loss of $2.41 billion or $6.41 per share. Please be aware that 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 other non-GAAP measures as described in the press release. Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation.

Now let me turn the call over to Clay.

Thank you, Loren.

For the first time in two years National Oilwell Varco posted sequential improvement in revenues, which rose 3% in the fourth quarter as compared to the third quarter 2016. The Company did an excellent job driving incremental profitability on this increase, posting 74% incrementals, which lifted our adjusted EBITDA ex-charges for the second quarter in a row. Adjusted EBITDA totaled $102 million or 6% of revenues in the fourth quarter, enabled by many cost-reduction initiatives undertaken by our seasoned managers and held by rising rig counts in certain areas.

As we note in the press release, NOV achieved another important milestone in the 4th quarter in that our global sales into land markets exceeded our global sales into offshore markets for the first time since our 2005 merger. Our fourth quarter mix was roughly 52% land-related, [48% offshore] (corrected by company after the call).

Frankly I'm glad 2016 is behind us. In the fourth quarter we benefited from rising momentum in North American shale plays in particular, which we expect to accelerate. Our international markets still face headwinds for a quarter or two, and offshore markets continue to trend down, so we still have challenges ahead. Nevertheless, $50 oil has been a welcomed relief. I attribute my gray hair to the many previous downturns I have been through. 1986, 1991, 1999, 2002, and 2009: they all required difficult decisions and cost reductions, but this one has been unusually grim and painful. E&P customers cut spending two years in a row, and current CapEx is just half the level seen just two years ago. Last year global exploration discoveries were the lowest they had been since 1947. And in May of last year the US land rig count dropped to the lowest number ever recorded. The industry responded as we always do; teams have gotten smaller and facilities have been shuttered as purchase orders evaporated.

I'm not the only one here with gray hair, though; our tough seasoned leaders suffered through the same industry cycles of the past and they have executed superbly through this one. There's no better team in oil-field services and I'm grateful for each and every one of you every day. Like me, they recognize that, as hard as they are, downturns are an opportunity to become better. Great companies like NOV used downturns to re-examine how we do things and then take action to drive better efficiencies. Actions like taking cost out of manufacturing processes, actions like streamlining supply chains and collapsing cycle times so that we can deliver NOV's technologies to our customers when they need it.

Great companies like NOV use downturns to innovate, like developing the industry's first and only commercial predictive analytics tool for block preventers, Rig Sentry, to warn customers of component fatigue before failure occurs. Last year, for example, we avoided nearly a dozen expensive BOP downtime events for our customers with this exciting new technology, which we introduced in early 2016 and which we are expanding into other drilling components like top drives, draw works, and mud pumps in 2017. Great companies like NOV help E&P customers improve their economics and lower their cost per barrel in a downturn. That's why we have continued to invest in promising closed-loop drilling automation, which employs machine learning capabilities to control the drilling process, making it more efficient using "Rigs That Learn." Great companies like NOV bring new ideas to our E&P customers, like aligning with key industry partners to develop a catalog of fully costed FPSOs that reduced the time to first production to help make deepwater development more economic.

Necessity is the mother of invention. In a low oil-price world, accomplishing lower cost per barrel becomes a necessity for our customers. At great companies like NOV, invention follows. I started in an industry very different than today's. In the early 1980s almost all drilling was done vertically, with mechanical rigs or occasionally DC electric rigs using a Kelly to turn roller cone bits. Wells took months to drill. US production was declining following its peak more than a decade earlier. A generation later, we drill horizontal wells with PDC bits turned by downhole drilling motors and drill pipe turned by top drives. And we are doing it with fit-for-purpose AC rigs and massive frac spreads to execute dozens of stages.

The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet: how to improve cost per barrel. Again, a necessity to survive and again, invention followed. I credit the downturn of the 1980s with the inventions of measurement while drilling systems, logging while drilling systems, top drives, rotary steerables, horizontal drilling technology, and PEC bits, technologies that, frankly, enabled the shale revolution.

It's not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s. NOV helped lead the way. 1982 we introduced the top drive and since then, our NOV brand name has become synonymous with the technology used on most rigs worldwide. We invented breakthrough technology for fixed cutter bits used by almost every PDC bit today. We introduced coil 2D injector technology that improved the reliability of this important well completion tool. We retooled the North American land rig fleet. As a result, from 2011 to 2014 the US became the world's fastest-growing oil producer, increasing production by 4 million barrels a day. The ingenuity of our industry coming out of an extended downturn enable profitable production out of marginal rock where permeability is measured on a nanoscale.

What has happened in the US is not lost on the rest of the world. In my visits with customers elsewhere around the globe lately, I find all onshore producers seem to have the same thought, that they need to learn a lot more about shale technology. Oil production matters in many places around the world; many economies and governments rely on oil revenues to fuel economic development, peace, and prosperity. They are all suffering under low oil prices and I believe most, if not all, are thinking, ignore shale technology at your peril. But let me also clarify a bit: while the actual development of geologic shale is promising, that's not precisely what I am referring to. It is the shale technologies, specifically horizontal drilling and hydraulic fracture stimulation that matters. Because these can be used to enhance the economics of not just shales but also other tight reservoirs and even conventional reservoir rocks, rocks found in every basin globally. The opportunity in front of NOV is to bring these promising technologies to the rest of the world.

Our most accomplished E&P customers tell us that landing a long horizontal lateral in a sweet spot within a shale section, without a lot of twist and turns known as doglegs, is a key success factor. This requires modern AC rigs with lots of mud pump and pressure capacity, premium drill pipe able to handle demanding downhole conditions, downhole drilling motors, PDC bits, solids control kit, drilling waste management technologies, and MWD systems. Rotary steerable tools also have a lot of potential to reduce doglegs, which are created on every slide using conventional sub techniques that build cumulatively throughout longer laterals. These doglegs increase vibration, torque, and drag, which present future drilling and production challenges.

Sophisticated E&P customers also tell us that efficient hydraulic stimulation operations with ever higher proppant loadings and more and more stages are a key success factor. This requires reliable coil tubing units, frac spreads, pumps and treating iron that are continually being pushed to higher pressures and asked to pump greater loads of abrasive sand. It also requires more completion tools and production processing equipment. The good news for NOV shareholders is that we sell all of this kit.

The big picture here is that shale technologies are extremely consumptive of even the most reliably built equipment. Shale is insatiable; it wears out rigs and frac iron. It consumes drill pipe bits, drilling motors, frac spreads, treating iron, and a whole host of expendables like valves, seats, coil tubing, and shaker screens. It's like feeding a Labrador.

As a worldwide leader in the manufacture of all of these, I like NOV's competitive position. Prior downturns teach us that marginal cost positioning across a range of productive basins continually evolves. I am convinced that the many smart E&P engineers and scientists engaged in the offshore will continue to whittle down the cost of developing the billions of barrels of known volumes already discovered there. NOV continues to invent to improve drilling efficiencies, reduce the time to first oil, and ultimately drive compelling deepwater economics. Technologies like our Seabox injection water treatment system hold great promise to improve offshore recovery factors, and our initiatives and floating production systems can reduce the cost, risk, and time of offshore facility construction by 20% or more and accelerate first oil. After a very slow 2016, we are hopeful that the industry will begin to see many more FIDs over the next couple of years as costs are taken out of development plans.

NOV has a long and proud history of invention to improve our industry. Consider drill pipe for a moment. In the 1980s drill pipe was largely a commodity, dumb iron used to transmit torque and mud downhole. As the industry migrated towards horizontal drilling, extraordinary new demands were placed on drill pipe. It is now required to bend 90 degrees and extend thousands of feet horizontally, which places immense stress on drill pipe. NOV invented premium threads to facilitate higher torque transmission, engineered larger internal diameters to maximize hydraulic power transmission, and engineered higher slip crush strengths to handle higher axial loads. And our innovation continues. Just last quarter we introduced our newest premium connection, Delta, which makes up 25% faster without the need for stabbing guys on the rig, and reduces total cost of ownership by greatly reducing thread dolling. It is designed specifically for land operations.

Last year we began installing RFID chips in drill pipe that enabled the tracking of each individual joint, including its in-service life and its inspection history. RFID chips also enable drillers to automatically tally the pipe in and out of the hole, eliminating a time-consuming and sometimes error-prone manual process. We wired drill pipe with coaxial cables that "turn the lights on" downhole through instantaneous bidirectional transmission of downhole data at 57,000 bits per second, compared to just 10 bits per second for mud pulse telemetry for MWD and LWD. Today's drill pipe is a highly engineered drilling instrument and a far cry from yesterday's dumb iron. Individually our technologies deliver discrete value, but when combined they become more powerful still. We've now combined our high tech wired drill pipe with our new rig NOVOS operating system and downhole drilling mechanic subs to permit software applications to drive the rig on a microsecond basis, far faster than a human driller can work the brake handle. The result: "Rigs That Learn," and faster, safer drilling and better understanding of challenging downhole conditions.

Earlier I spoke to the technologies coming out of the 1980s downturn that have dramatically improved today's industry. I look at the present downturn and ask, what inventions will come out of this cycle that will transform tomorrow's industry? That is our challenge but that's also our opportunity. As NOV has navigated through a particularly painful downturn, we've done what we said we would do, controlled what we can control, reduced costs nearly $3 billion to match activity levels, retrenched to our most efficient locations while preserving our core competency and capabilities so that we continue to serve our customers' needs wherever they are in the world, land or offshore. But most importantly we have continued to invent for tomorrow's industry. At the start of this downturn, I said that, as the leading provider of technology and equipment to the critical oil and gas industry, NOV would play a key role in helping the industry drive improved economic efficiency. We stuck to this plan and executed well.

As we close an extraordinarily challenging year and begin another one with, we believe, greater promise, I'm thankful for the efforts of our employees around the world. You have risen to the challenge and I'm proud of you. Keep pushing, keep innovating, better times lie ahead. Jose?

Thank you, Clay, and good morning everyone.

For the full year 2016 NOV reported net loss of $2.41 billion or $6.41 per share on a GAAP basis. Excluding $2.08 billion in pretax and other items, net loss was $320 million or $0.84 per share. Consolidated revenues were $7.3 billion for the year, down 51% versus the prior year and adjusted EBITDA was $322 million. Full-year decremental EBITDA leverage was limited to 27% on a revenue decline of $7.5 billion. For the fourth quarter of 2016 NOV posted a net loss of $714 million or $1.90 per fully diluted share. Excluding other items, net loss for the quarter was $57 million or $0.15 per share. Other items totaled $706 million pretax, and consisted of $582 million of inventory charges and $124 million of other charges, primarily associated with severance, facility closures, and write-offs of certain assets.

Consolidated revenues were $1.7 billion in the fourth quarter, up 3% versus Q3 with three of our four reporting segments generating higher sequential revenues. Adjusted EBITDA increased $34 million or 50% to $102 million or 6% of sales. Incremental sales and sustained efforts to reduce costs and improve efficiencies contributed to the 74% incremental EBITDA margins, EBITDA leverage quarter over quarter. Operating loss excluding other items was $72 million, representing a 33% improvement over Q3. Working capital excluding cash and debt decreased $665 million sequentially to $3.9 billion at December 31, 2016. As previously noted we recorded an inventory charge of $582 million, which was the result of a comprehensive review of our inventories completed during the fourth quarter. Recent activity gains and customer conversations provided us with clear data from which we were able to determine which products across our portfolio were less likely to see demand from our customers in the future, resulting in the charge.

Excluding the impact of non-cash inventory charges, we realized $254 million in cash flow from our inventory during the quarter. One other significant change in working capital worth noting is that our net AR position increased $275 million, which is primarily attributable to a $229 million increase in tax receivables. Excluding the impact of tax receivables, net AR balances increased $46 million. For the quarter, we generated $153 million in cash flow from operations. Capital expenditures were $63 million providing us with $90 million in free cash flow. We also spent $170 million for acquisitions, including the Fjords transaction we highlighted last quarter and $19 million in dividends. In total the Company used approximate $100 million in cash, resulting in an increase in net debt to $1.8 billion.

Earlier Clay described how NOV benefits from the highly capital-intensive nature of today's oil and gas operations. I'd like to add that we also benefit from a capital-light business model relative to others in the space, which provides us with an inherent advantage to leverage a higher portion of every dollar generated into free cash flow. Full-year cash flow from operations was $960 million and capital expenditures for the year totaled $284 million. So for the full year we generated $676 million in free cash flow, defined as cash flow from operations less CapEx. Looking at free cash flow as a percent of revenue, we believe NOV posted a higher free cash flow margin than any other large cap OFS&E company in 2016.

In the fourth quarter, revenues for Rig Systems were $426 million, down 9% from the $470 million generated last quarter. EBITDA for the segment was $57 million, or 13.4% of sales, a 280 basis-point improvement from the third quarter. Excluding other items the segment earn $40 million in operating profit for a 9.4% operating margin. During the quarter, we deleted $63 million in orders from our backlog in exchange for payments negotiated with these customers. The net result was a modest unwinding of revenue and an increase in EBITDA. Excluding the impact of the order deletions, the segment achieved decremental EBITDA margins of approximately 20% as our team continues to demonstrate its ability to scale our cost structure to the needs of the marketplace.

Earlier Clay mentioned that NOV generated more revenues from land than offshore in the fourth quarter. Though our rig businesses are the two reporting segments that drive more of their revenues from offshore than land, they, too, are becoming more balanced. Offshore newbuilds increasingly represent a smaller amount of Rig Systems revenues on both a percentage and an absolute basis. In Q4 major offshore newbuilds represented approximately 9% of NOV's consolidated revenues, down from roughly 12% in Q3. Based on recent bookings and expectations for future orders we anticipate the land business will underpin much of Rig Systems' growth going forward. In the fourth quarter we booked $115 million in new orders, nearly $50 million or 44% of which were for land markets. Included in the quarter's bookings were one AC 1,500 HP land rig, 9 mobile rigs, a large crane package, an offshore drilling rig equipment upgrade and a mix of discrete capital components, including top drives, draw works, and jacking systems.

During the quarter we recognized $324 million in revenue from backlog, 11% lower than last quarter's $363 million, as we continued to work through our existing backlog while managing customer-requested product delays and low order volumes. Rig Systems book-to-bill was 35%, and year ending backlog was $2.5 billion.

In 2016, 49% of our roughly $475 million Rig Systems bookings were for land. In 2017 we think that mix could shift more sharply as land rig orders recover more rapidly than offshore. We suspect the near-term opportunities still lie with smaller independent contractors, adding more modern rigs to the fleet, and larger contractors investing in upgrades to their existing rig fleets, pressure and torque capabilities, and control systems. Customer dialogue around newbuild land rig opportunities in the US and international markets are expanding. However, we believe it will be the second half of 2017 before many of these conversations turn into orders. As Clay described earlier, the role drilling technology played in US shale development is not lost on international operators keenly interested in improving efficiencies and driving economic production for more challenging resources.

For the first quarter we expect Rig Systems segment revenues to decline 10% to 12% as the amount of revenue generated from backlog slows to about $270 million. We plan to continue our aggressive cost management, which, after adjusting for the order deletions from the fourth quarter, should lead to decremental margins comparable to what we experienced in the fourth quarter.

Our Rig Aftermarket segment generated $339 million in revenue during the fourth quarter of 2016, an increase of $17 million or 5% versus the prior quarter. EBITDA for the segment was $80 million or 23.6% of sales, down $1 million sequentially. Revenues improved sequentially due to higher than anticipated levels of service and repair work that exceeded the traditional seasonal uptick seen in these areas, partially offset by lower spare part sales and high decrementals, and unfavorable mix shift.

While spare part sales fell in Q4, a slowing rate of decline in the offshore market, and two quarters of 20%-plus increases in US land rig counts contribute to a constructive outlook for Rig Aftermarket spare parts demand, as North America rigs reactivate and go back to work. One of the first actions our drilling contractor customers took at the start of this downturn was to eliminate nearly all nonessential spending on spare parts. Many chose to consolidate inventories across their fleets, rationing out spares required for safe, efficient rig operations. Now rising levels of US land drilling activity are forcing active drilling contractors to rapidly deplete their existing stockpiles of rig spares and expendables, contributing to rising demand for spares. In fact, the fourth quarter marks the first time quarterly bookings for spares increased sequentially since the third quarter of 2014, led by land-oriented demand.

Rig Aftermarket, like Rig Systems, remains more heavily weighted to offshore than land. However, the segment is clearly pivoting more towards land to match available market demand. While prospects are improving we are not yet ready to call bottom for the segment. For the first quarter we expect revenue to fall in the mid-single digit percent range and margins to remain stable due to a more favorable mix.

For the fourth quarter of 2016, Wellbore Technologies generated $531 million in revenues, an increase of 1% sequentially. The modest sequential improvement in revenue was the result of an accelerating recovery in North America land, driving strong incremental demand for the segment's short cycle products and services, mostly offset by continuing declines in international and offshore markets and an anticipated unfavorable mix shift in our drill pipe business. EBITDA for the segment was $20 million or 3.8% of sales, down $6 million and 110 basis points from the previous quarter.

The mix shift in our drill pipe business, which drove double-digit revenue declines at high decrementals and approximately $9 million in reserves taken against aging Chinese AR balances and other items, negatively impacted segment margins. Across the segment, crosscurrents persist as continuing challenges in offshore and international markets remain, and capital equipment sales remain sparse. However, most businesses may have reached the critical escape velocity in the fourth quarter necessary to drive overall results higher. Green shoots have emerged, and in many areas business is starting to get fun again.

Within the segment we are seeing a growing number of pockets where demand is rebounding sharply. During the quarter, global piece count for new pipe inspection at mills and processors by our Tuboscope group was up 20%. Rentals of our BRANDT Solids Control and waste management equipment were up 20%. Demand for drilling fluids was up 21% and the volume of screen boxes, the consumable element of our large installed base of shale shakers, was up 37%. The increases cited here are for our global operations, so you can imagine those numbers are even greater when looking at North America alone.

Improving market conditions are beginning to create opportunities to claw back some pricing. Specifically, we are achieving some success on getting paid for trucking and standby on rental items and setting price increases on new motor and bit technologies. We are also realizing more success with our recent product introductions.

Momentum continues to build for our drilling automation and optimization products and services, where we recently secured a project in the Anadarko Basin that will use our full complement of wired downhole tools to feed real-time data to our NOVOS process automation drilling control system, the brain behind "Rigs That Learn."

We are gaining significant traction with our latest drill pipe technologies, including the Delta connections and our TracID RFID asset control system. Clay mentioned these earlier; I would like to provide some additional detail. US land drilling applications increasingly demand larger sizes, higher torque connections, and increased levels of technology. Consistent with that premise, we have already sold multiple strings of drill pipe with our new Grant Prideco Delta connection, as customers have been eager to realize the improvements the product provides for horizontal drilling operations. Many E&Ps are requiring new drill pipe strings, often larger diameter 5-1/2" drill pipe on the rigs they are putting back to work. Additionally, we installed the complete TracID system on a rig owned by a major national drilling company in the Middle East, providing them with the ability to create an accurate drill string tally in real time and calculate bending forces and fatigue development, which should result in more effective use of their pipe and a lower cost of ownership for the customer.

We're also having success leveraging NOV's global distribution capabilities by pushing our recently developed or acquired technologies into new markets. In our release we announced that our new rotating control device for managed pressure drilling we launched last quarter has already qualified for an operation in the North Sea. We also recently sold our first Tolteq iSeries measurement while drilling tools into India and Nigeria, and qualified for a tender in the Asia-Pacific region, following a successful customer demonstration running the tool in 12-1/2" inch and 8-1/2" sections of a well.

And while the word "growth" has finally reentered our vocabulary we remain focused on implementing systems and processes to streamline and optimize our operations. For example, our Tuboscope machine shop in New Iberia, Louisiana, recently installed non-touch production racks to feed the CNC lathes on production lines, reducing the manpower required and increasing the amount of tubing connections by up to 25%. This is yet another example of our business seeking smarter ways to operate that reduce our costs and improve our production efficiencies.

"Working smarter" remains critically important as we expect crosscurrents to persist. The accelerating recovery in the North American land market should allow the mostly short-cycle activity-driven businesses within the Wellbore Technology segment to more than offset continuing headwinds in offshore and certain international markets. Drill pipe in international markets should begin to recover in the second half of the year, while offshore will remain more challenged. As a result, we expect revenue to increase in the mid-single digit range with outsize increment margins, as we do not expect the AR reserves and other charges to repeat in Q1.

NOV Completion and Production Solutions generated revenues of $602 million in the fourth quarter of 2016, up $59 million or 11% sequentially. EBITDA for the segment was $69 million or 11.5% of sales, which represented a $26 million or 360 basis-point increase from the previous quarter. Nearly all business units reported double-digit percentage increases in revenue. Our Fiber Glass Systems business realized sequential revenue growth in excess of 20%, resulting from increasing global demand for Fiberspar spoolable pipe and an unexpected boost in orders from certain North American operators who wanted to exhaust their capital budgets before year end. First time we've heard this from customers in quite a while. We are also seeing distributors begin to restock these products for the first time in two years.

Our Process and Flow Technologies business continue to realize strong sales growth in pumps and chokes as well as growing demand for artificial lift technologies like progressive cavity pumps. Two weeks of contribution from our recently closed Fjords acquisition also bolstered segment revenues. Our Subsea flexible pipe business posted double-digit revenue and growth, driving strong sequential margin improvement as a result of higher throughput in our plant in Brazil.

Although Q4 revenue for our Intervention and Stimulation Equipment business was relatively flat, we are seeing indications of a faster than originally anticipated recovery for completions-related capital equipment in North America. During the quarter demand rapidly increase for certain consumables, including valves and seats, fluid ends, and flow iron. Longer laterals and bigger frac jobs are necessitating spreads to grow from 20,000 horsepower a few years ago to 40,000 horsepower or more, with beefier transmissions and higher capabilities. We are also seeing significant increases in equipment repairs and rebuilds for wireline units, nitrogen pumps, coil tubing units, frac pumps and other support equipment that is coming off the fence line and getting prepared to go back to work.

In Q4 we received orders for 12 coil tubing injectors, compared to only six injector orders through the first nine months of 2016. Customer dialogue regarding new orders of capital equipment has continued to increase and is beginning to translate into orders including the 75,000 horsepower frac spread we highlighted in our earnings release.

In Q4 new orders for the Completion Production Solutions segment were $370 million, up $186 million or 101% sequentially. Book-to-bill was 103% as we recognized $358 million in revenue from backlog, and backlog from year end was $818 million. Crosscurrents also continue in this segment due to the offshore-oriented components of the business.

We believe our Subsea plant in Brazil will remain busy through 2017 as demand for our flexible pipe has remained strong in this region. However, our remaining backlog outside of Brazil continues to shrink with only a limited number of additional projects entering the market, driving fierce competition and challenged pricing.

Our other offshore-oriented businesses within the segment face similar dynamics. Like Subsea, Floating Production and XL Systems all posted stronger sequential results in Q4, but the backlog for these offshore businesses continue to wind down, although XL systems has seen quotations rise in certain weeks. Notwithstanding the challenges we face in our offshore businesses, we expect stronger than originally anticipated recovery for completions-related equipment along with continued growth in our fiberglass and PFT businesses to drive overall segment results higher. For the first quarter of 2017, we anticipate revenues to increase a couple hundred basis points with strong incremental margins.

While we are all glad 2016 is behind us and the last two years have not been much fun, all the stakeholders of NOV should take great pride in what we have accomplished and how well-positioned we are moving into 2017.

Okay, Chanelle, we'll now open it up for questions.

Thank you.

(Operator Instructions)

As a reminder, please limit yourself to one question and one follow-up. Edward Muztafago of Societe Generale.

I was wondering if you might be able to help us think a little bit more about the countervailing forces in rig aftermarket? Clearly that business will shift more towards land as we go forward and these rigs, now that you're on these big multi-well pads with these super laterals, are really starting to tear a lot of equipment up.

How do you think about the progression of that segment through the year? Is it something you think about as structurally downward through the year? Or do you think that Rig Aftermarket makes a turn as we go through 2017 as well?

I would say based on what we're seeing right now we're optimistic. 2017, the business is flattening out. It will pick up. I think Jose mentioned in his prepared remarks, Ed, we saw about an 8% increase in bookings for spare parts through the fourth quarter.

And January had a particularly strong -- January was our strongest month since December 2015 for spares. And so that appears to be going the right direction. We did guide down a little bit in Q1 because, when we look at the numbers, we believe there is a little bit of seasonality.

In the prior three fourth quarters, we've seen service and repair pick up in Q4 and then falloff a bit in Q1. That led to a little lower guidance in Q1 due the seasonality.

But net-net, we are benefiting from reactivations of land rigs going back to work in West Texas and believe -- we've been saying for the past two years, our customers are great at cannibalizing their existing stock of spare parts and that's certainly been going on in earnest. At some point they are going to run out of opportunities to cannibalize and perhaps we are seeing some of that turn around as well. On the whole, I think that outlook for 2017 is getting brighter.

Good. It's probably not all that dissimilar to what non-capital equipment saw in 2003 over 2002, albeit it wasn't exactly a comparable segment back then.

Right.

And maybe you could help us think about Rig Systems margins a little bit. If that business stabilizes, where could we see margins in that business go to, as you kind of do some catch up with restructuring and whatnot, trying to think about that as we make the turn here at some point in 2017?

We did much better in the fourth quarter we just reported than we expected. I think Jose highlighted some benefits we had from the removal of some orders out of our backlog for which we were paid.

If you do the math, that was about $17 million or $18 million benefit for the quarter. That's the reason we exceeded. Backing all that out, we're kind of in the high single-digit double-digit range and looking for that business to level out across 2017.

Okay. That is helpful, thanks.

Thank you. Marshall Adkins, Raymond James.

Good morning, guys.

Good morning.

Jose, you went through the completion side and you mentioned a whole bunch of areas where things are improving, I want to try to understand scale wise, what's the most important?

Obviously, you had some offshore to flexible pipe stuff picking up, but I would think the biggest share of the increase there, because to me that is what stood out in this quarter, was how strong completion -- what percent was US land and frack equipment and that type of stuff versus everything else?

Thanks, Marshall. Really, as far as Q4 is concerned, we were tremendously excited about what was coming in throughout the quarter. The bookings related activity for US land market was very healthy.

We saw really significant increases related to replacement parts and components and the service and repair work in our facilities. Overall, we had a pretty flattish quarter for that business group. What really drove Q4 itself was we had every other business unit within the segment pick up quite a bit from Q3 to Q4.

Going from Q4 to Q1, there are a couple offshore oriented business units that are still seeing substantial headwinds. We talked about the backlog deteriorating, so some of those businesses we anticipate will step down a little bit from Q4 to Q1, but we are really anticipating that the Intervention and Stimulation Equipment business unit will more than offset those drops -- that business unit is really starting to gain some momentum here.

Right. So that makes sense. With the strong bookings, you had a 75,000 new horsepower in frac equipment, where do you start to run into bottlenecks in terms of getting stuff out the door? Can you triple, quadruple, the throughput there, or are we going to see bottlenecks in terms of adding capacity in the upcycle?

First of all we look forward to that opportunity. Here early on, even post our inventory adjustment, we have a healthy level of inventory in our businesses so we are able to turn quite a bit efficiently on the front part of the recovery.

Another thing to point out, you have seen the rate at which the business has contracted. This organization is very adept at scaling the operations both downward and upward. And so we're certainly looking forward to the opportunity to start taking things the other direction.

So you don't think there's going to be any kind of issue scaling it back up, since presumably here for the last year and a half we've essentially gone to zero on a lot of those completion areas?

I will say that we've talked about before on some of our prior conference calls, we have been incredibly methodical in terms of how we have consolidated our facilities, consolidated our operations to where we have not lost maximum manufacturing capacity.

There will be some things that need to happen in order to bring things back online, but again, we look forward to making that happen. Another thing I would add is that there are certainly is a benefit for customers coming into the queue sooner rather than later.

Right.

Get your orders in now (laughter).

Message received.

Ken Sill, SunTrust.

Good morning, guys.

Good morning.

Nice to hear the optimism in your voice after the last two years. I had a question, a couple of questions. I wanted to follow up on what Marshall was saying there. Nobody has ordered any pressure pumping equipment in quite some time.

And a lot of the customers have worked through their working capital, so you guys seem to be in a place where you could offer terms, are the people coming to you now? People that can finance the orders themselves? Or are you able to give these guys terms to help them get through the fact they don't have any working capital right now?

Hi, Ken, good morning, we certainly are not financing our customers. They are coming to us with healthy deposits and the ability to pay.

There are still a lot of good customers out there with clean balance sheets and ability to fund these orders, and I think they are realizing there's an opportunity to get a little bit ahead of the fray right now with getting in those orders.

We think we are a lot better at making the equipment that we are banking. There are lots of others out there that I think are providing capital.

That was just one of the issues and it was kind of a follow-up question. Was the pressure pumping order, obviously, it sounds like it was coming from an existing or repeat customer, that has been out there for a while?

Yes.

Well, okay, I have asked my two questions so I will let somebody go (laughter).

Thanks, Ken.

Brad Handler, Jefferies.

Good morning, guys.

Hi, Brad.

My first question is just vague enough to be hard to answer I suppose in a way. I suppose you have gone through some of your massive restructuring cost initiatives, bearing down, concentrating manufacturing across certain plants and all of that, and I have to imagine that just the sheer scale of it made predicting your cost savings very, very challenging.

And so I suppose perhaps now that you've been living with many of those changes, I guess I'm curious if there's any kind of revisions you can offer with respect to ultimately the cost savings or ultimately the revisions? The efficiencies you believe you may have achieved.

Brad, I think I understand what you are asking, and what I will tell you is, as you enter a downturn, obviously a lot of uncertainty. There is less visibility in the business than any of us would like. And things change quickly. There is discounting underway, so lots of things happening.

We learned a long time ago when you enter one of these downturns, you really got to focus on what you can control. What we try to do when it comes to steps to save money in the business to drive more efficiency in the business is to really focus on concrete things that we know have an impact.

Sometimes it is challenging to measure directly in the financial statements. The way we track our progress is to look at specific ledger balances globally and regionally to see evidence in subsequent periods of steps that were taken. When we talk about $3 billion in cost savings, that's what we are referring to.

In the second quarter of 2016, which we believe is our low point on EBITDA at $25 million in that quarter, we mapped out a plan to get another $400 million in annualized savings, and last quarter we reported to you that we had achieved, looking at the ledgers, a little over $250 million in annualized savings. This quarter when we looked at those same ledgers, we see another $86 million flowing through.

So there's tangible evidence of the steps that were undertaken in prior quarters showing up in the fourth quarter, and what I would tell you, in terms of an update in that subject is we have other steps underway through the first half of 2017. So we're very confident we will handily exceed our $400 million cost savings estimate we gave you in the second quarter of 2016. Does that answer your question?

Yes, I was going to highlight the $400 million and you have drawn it out there. That's perfect. A part of this was a question around your ability to be precise with it, and your ability to set goals against it. Or achieve that goal.

So I do appreciate that. To go harken back to that for my follow-up, I think the presumption was, you sort of said, we will do more if we have to. We will kind of see, how do you measure having to? Is that purely a function revenue or is it a function of uncovering that much more opportunity for efficiency?

Well first of all, we need to act on opportunities to drive efficiency in all markets, good markets and in bad. Secondly, with regards to further downsizing, given the current market headwinds, we look to order rates, the level of activity flowing through that sort of thing, to map out more near-term tactical moves to capture cost savings.

It was in my prepared marks, but probably worth saying again, we have a terrific group of managers that Jose and Loren and I are pleased to work with. They are terrific at managing these downturns and they have all been through a bunch of them.

That's the playbook. It is well-established and we know what to do. Once again, this team rolled up their sleeves as we entered the present downturn and is navigating it as well as any management team out there.

Helpful color. I will turn it back.

Thanks, Brad.

James West, Evercore ISI.

Good morning, guys.

Hi, James.

Clay, in the land rig market, the high aspect land rig market, there's a little bit of a bifurcation between ultra super-spec rigs and then you have the high spec rigs that can be upgraded. Are you having a lot of conversations at this point about upgrading some of those rigs that may not have a third mud pump or walking capabilities?

Yes, we are. So a lot of people are very focused on that particular segment in the market. Third mud pumps -- 7,500 PSI mud systems, walking systems for rigs, but we're also seeing along with that frequently demand for higher torque top drives.

Frequently all of that will require additional generator capacity, and as Jose mentioned now, we think the landmark is moving or toward larger diameter 5 1/2" drill pipe to handle these longer laterals and to put more hydraulics down hole. There's a lot of upgrading that can happen to achieve the super-spec sort of capability.

A lot of our prepared comments were what we think is sort of the next generation of rig even beyond that. Which is you take that rig and you wire that drill pipe and you let down-hole sensors drive a control system at the surface that operates customer apps that they can write to control the rig. That's the "Rig That Learns" -- the rig of the future as we see it.

Got it. With respect to the rig of the future concept, I guess it's not really a concept anymore, it is happening. How much automation and data analytics are being driven or are driving these processes on the rigs versus this last generation of rigs that we saw get built?

Well this is a whole new area, James. The industry has not used high-speed data transmission from the bit to operate the rig machinery in the past. That's really what this offers. This is a whole new breakthrough in terms of technical capabilities.

We've got, as I mentioned, 57,000 bits per second coming up with vibration, torque, weight on bits, stick slip information, all that stuff. The software takes that high-speed data stream and adjusts the machines in real-time. We actually have heuristic algorithms that are altitude seeking that sort of adjust the rig, weight on bit, strokes, et cetera, to achieve the maximum ROP, formation by formation.

The machine learns effectively how to drill stratigraphic section it is drilling in. We think that is the next big thing in drilling. We are very, very excited about this.

It sounds exciting to me. Thanks, guys.

Thanks, James.

David Anderson, Barclays Capital.

Clay, stay on the same lines of questioning, the project in the Anadarko Basin, I know you've been putting different parts of this in different areas, is the first time that you are putting it all together for a customer? Also, can you talk to me a little bit about how you're going to measure success, is it rate of penetration, is it some kind of performance metric? And is there follow-on work after that, that comes from this?

Yes. The success measurement really is time savings and cost savings for our customers. This is one more way we can reduce their cost per barrel of development. Then I would add to that, higher quality boreholes.

That initiative in conjunction with our downhole tools initiative, we are really seeking to enable our service company customers to deliver straighter boreholes, fewer dog legs and the like. Ultimately those are the wellbores that have the lowest number of production and drilling challenges.

With regards to the first part of the question, David, we have been doing this before. We have I think 2.5 million feet drilled with the close loop system thus far. What we did this past quarter, which is new, is we actually are now operating this through our new NOVOS control system.

This is a control system that we can upgrade NOV rigs with and then our closed loop automated drilling technology, the machine learning capabilities plug directly into the NOVOS operating system. This last quarter, again we've done it in the past, but this is the first quarter we've done it with all NOV new operating control systems and NOV kit throughout the rag.

This is proof of concept right now, of everything you have been working on. Now we at that point, okay now we are going to prove it?

Yes, we're beyond proof of concept, this is a commercial offering. We did the first one a few years ago. But in our view, this is kind of the next big thing in drilling.

And then while we're on that subject too, the NOVOS operating control system is unique in that it's an open architecture workspace. It's an operating system for the rig, but we will enable third parties to take a software developer kit. We have a number of oil companies and service companies now that are actually writing apps to control the rig through the NOVOS operating control system.

That's the basic architecture and is unique in the space. The way to think about it, you can have a service company show up to perform a specific operation on the rig, they can load in their proprietary app that they write, and take control the rig and execute their work in a more efficient way. So, really enabling their business model.

Likewise, we've got oil companies that are writing apps for things like safety parameters, operating parameters, they want to make sure the rigs operate within specific operations on the rig. We're pretty jazzed about this.

And then on new business, I was curious about directional drilling and measurement tools. In the release today, you talked about how you're planning to offer a full suite of equipment to customers. This has traditionally been the area for the big diversified companies, but it sounds like you're starting to see more of the packages to the land drillers.

Can you help me understand how this market is evolving or is there evolution happening in the market, do the big guys take the higher end work? And you guys can supply land over to do some of the lower end? How do you see that market evolving?

Our business model is unique in that we view ourselves as the enabler for other oil field service companies. Unlike the big four, we are not out actually pitching directional drilling jobs. We're providing the hardware, the equipment, the technology, the training to enable all directional drillers, frankly including the big four to supplement their offering to the marketplace.

It's a little different business model, we think that's the best potential for the technology we have and the best application of our capital. But clearly, the entire industry has moved more toward a lot more directional drilling, horizontal drilling is one of the two key things that made the shale revolution happen.

You have probably close to 90% of rigs drilling in North America drilling horizontally, so there's a lot more directional drilling going on and a lot more rigs onshore than offshore. Both are drilling directionally, so there's an opportunity for directional drillers in both spaces. We see that as a great growth market as more and more operators employ horizontal drilling.

And then, going back to what I referenced earlier, this high quality borehole, a borehole with fewer dog legs, you will have fewer drilling problems, less torque and drag, better production recovery factors. We're focused on helping our directional drilling customers deliver that high quality borehole. Again, pretty excited about that with new additions to our NWD offering, and the rotary steerable initiatives that we've referenced in the past and other things we can provide into the market.

Thanks, Clay.

You bet. Thanks, David.

Our last question Sean Meakim of JPMorgan.

Thanks. Good morning.

Good morning.

Clay, I'd like to stay on the NOVOS topic, the automated drilling opportunity. As you think about the long-term potential, how would you rank your opportunity set across shale, maybe international, onshore, plays like the Middle East versus offshore rigs? How would you rank those different opportunities?

Well, I think we've been very explicit, Sean, over the last couple years, the Company sees a great opportunity in the enabler role, onshore. And right now you're seeing rig count going up in West Texas and the mid-continent and the Marcellus where economics are working for the onshore.

Offshore, longer-term we're optimistic, but it has been a little more challenging near-term. The most immediate opportunity we see is this focus on onshore technology, specifically around horizontal drilling. And hydraulic fracture stimulation and completion tools, that has been the guide post we've used to deploy capital through the past couple years.

To bring a little more granularity to that, obviously these shale technologies are well-established across North America, great opportunity for us to bring things like NWD tools for greater geosteering in the shales. Overseas in my travels internationally, here recently, what I am finding is there's a tremendous amount of interest in this technology, in employing shale technology and horizontal drilling internationally.

You couple that with the move towards local content that we see in a lot of our international markets. There are a lot of regions were national oil companies would prefer to have some local service providers, and you kind of see how well our strategy articulates with what those NOC desire, because we sell all of the kit that local service providers need to provide directional drilling, that they need to provide hydraulic fracture stimulation and the like.

That's a tremendous opportunity for NOV going forward. Enabling local service companies, enhancing our more traditional customer offerings internationally, I think that's direction technology is going to go.

Okay. Fair enough. And a little bit on 2017, thinking about rig systems and the schedule or cadence of throughput through the year, could you give us a sense of how you expect that to play out? Is there a mix between onshore and offshore? How the backlog ships that we should think about as we try to model the coming year?

David -- Sean, I'm sorry. Visibility in the back half of the year is still a little bit murky. We are optimistic that a number of the conversations that we are having related to land opportunities both here in the US and in international markets will turn into bookings. Our backlog in the revenue generation will increasingly become more land oriented.

Maybe just to talk about order flow out of backlog, here for the next couple of quarters, we think it will remain relatively stable at the $270 million-ish type level that we cited earlier, and ultimately it will depend on what additional bookings really come through. The back half is still a little unclear. But we are feeling more and more optimistic about the opportunity set in front of us.

The $270 million is offshore, to be clear.

Got it. Great. Thank you.

Thank you.

Thank you, and I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Clay Williams for closing remarks.

Terrific. Chanelle, thank you. I want to thank everybody for joining us this morning, and we look forward to updating you on our next call in April. Thanks very much.

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