國民油井華高 (NOV) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Q2 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

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

Welcome, everyone, to National Oilwell Varco's Second Quarter 2017 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO, and Jose Bayardo, our Senior Vice President and CFO.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risk and uncertainty, 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. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

Our comments also include non-GAAP measures. Reconciliations to the corresponding GAAP measures are in our earnings release available on our website.

On a U.S. GAAP basis, in the second quarter of 2017, NOV reported revenues of $1.76 billion and a net loss of $75 million or $0.20 per share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.

Later in the call, we will host a question-and-answer session. (Operator Instructions) Now let me turn the call over to Clay.

Thank you, Loren. In the second quarter of 2017, NOV generated $1.76 billion in revenue and $142 million in EBITDA, a strong $37 million sequential EBITDA improvement. Much of our business continued to rise with higher oilfield activity, particularly in North America, leading our land business 7% higher sequentially in the quarter. But this was largely offset by reductions offshore (and in certain sluggish international markets like Asia and Africa) that pushed our consolidated offshore mix down to 39% and our land mix up to 61%. So, NOV continues to pivot to where the action is.

Our business unit leaders executed superbly on cost reductions and efficiency improvements. Case in point, the Rig Systems segment posted lower revenues and EBITDA, but the team there once again managed costs remarkably well as sequential decremental EBITDA margins came in at only 15%. The rest of our segments all posted improved revenues and EBITDA and margins for the second quarter.

Rig Aftermarket grew revenues meaningfully, with whopping 60% incrementals driving a 220-basis-point sequential improvement in margin. Solid second quarter top line growth marked the first real sign we've seen through the downturn that many of our customers have depleted their spare parts inventories, which points to stability and future growth for Rig Aftermarket.

Our Wellbore Technologies segment revenues improved by over 10% sequentially, with nearly 50% EBITDA incrementals driving a 390-basis-point sequential improvement in EBITDA margins. Longer, more challenging laterals drove rising demand for NOV's sophisticated technologies.

Our Completion & Production Solutions segment also achieved strong incrementals on 1% revenue growth, as cost reductions, better-than-expected performance on offshore projects and solid execution across the board drove EBITDA margins of 310 basis points sequentially.

Overall, during the second quarter, we were very pleased to see very strong execution by operations as well as solid progress on our many strategic initiatives; new products and technologies we are innovating; and 5 acquisitions closed during the second quarter. NOV continues to enhance the solutions our customers need to navigate a low commodity price world.

One such solution is solids control and waste management. We're a leading provider in this area, having steadily built our position over 20-plus years through a combination of acquisitions and investments in organic growth.

Now, Wellbore Technologies derives roughly 1/5 of its revenues from this business. Frankly, today, when it comes to solids control, we're it. If you're wondering what solids control is, let me take a minute to explain.

On a drilling rig, mud pumps push drilling fluid or mud down the drill string to the drill bit, where it exits the bit and mixes with the solid drill cuttings to form a slurry. This slurry is then pumped back up outside the drill pipe to the surface. There, NOV's specialized solids control technologies separate drill cuttings from the slurry so that clean mud is recycled and recirculated back down the drill string over and over as drilling progresses, and the separated drill solids can be disposed of safely. This is a critical process. Accumulated drill solids in mud reduce rates of penetration and cause issues like excessive torque, drag and abrasion; pack-offs and stuck pipe; and potentially lost circulation and/or lost production, all of which are expensive and most of which are very, very expensive. This makes solids control processes employed in drilling operations very, very critical.

Being the global leader in this technology means that NOV is the go-to name in the oilfield to manage these challenges. Most of you are probably familiar with industry's recent gains in reducing days required to drill wells. What this means is that the more capable higher-tech rigs we've provided are manufacturing more borehole per rig day than ever before. In fact, the super-spec land rigs in highest demand today boast a third mud pump to push more drilling fluid downhole to drill larger diameter, longer laterals, all of which combine to create more borehole volume created per rig day. More footage and larger diameter boreholes drilled each rig day means more drill cuttings volume that must be separated and managed every day on every drilling rig. NOV's Wellbore Technologies segment is generally driven by footage drilled as opposed to rig count, and our solids control business is the perfect example of this.

Good solids control begins with high-tech shale shakers, vibrating devices that separate large drill cuttings by passing the drilling fluid through a filter called a shaker screen. 20 years ago, rigs had 2 shale shakers, each equipped with 4 shaker screens, usually vibrating linearly. Today, we're adding a third, and in some cases, a fourth shale shaker to land rigs that vibrate elliptically with patented processes to control G-force that automatically adjust to the mass of cuttings received in real time. Our new shakers have increased from 4 to 6 screens on each shaker, meaning we've doubled and tripled the actual number of shaker screens on each rig from 8 to as many as 24.

Shaker screens encapsulate a tremendous amount of technology and IP to handle higher drill cuttings volumes. But they're consumed quickly, and they must be replaced nearly every week. NOV leads in this area, offering 3 of the 5 primary high-end shale shaker products that most in the oilfield turn to for solids separation. NOV is also a leading provider of other sophisticated solids control technologies, like gas busters that separate entrained gas from the mud and hydrocyclones and high-speed centrifuges that are used to remove microscopic high-density solids from drilling muds to improve their performance downhole.

Lately, deeper wells and longer laterals mean higher borehole and drilling fluid temperatures, sometimes exceeding 300 degrees Fahrenheit. Excess heat can damage drilling motors, rotary steerable systems and downhole electronic components. NOV's WellSite Services group helps drillers manage this by cooling drilling fluids before they are circulated back downhole to improve drilling performance and extend downhole tool life. We developed a fully automated land mud chiller that's essentially an on-site refrigeration system to cool drilling fluids by as much as 25%.

Drill cuttings usually comprise the biggest waste stream coming from drilling a well. Frequently, drill cuttings must be treated to remove residual oil mud before they can be disposed of. So we pioneered several technologies to accomplish this, including using heat to cook out residual oil, which we condense and recycle. Our thermal desorption units operate in 12 fixed facilities around the globe that process drill cuttings down to negligible levels of residual oil, making the cuttings environmentally acceptable for disposal.

In many areas, we apply our technology to grind and reinject these cuttings back down the wellbore. Failure to remove drilled cuttings from drilling mud can bring a rig to its knees. We have the technologies, experience and knowledge to deal with our customers' most challenging applications. And through dozens of acquisitions, experience on tens of thousands of wells and scores of patents and unique technologies over the past two decades, we have built sustainable competitive advantage in solids control. It's what we do.

Let me give you another example within our Completion & Production Solutions segment. The oil and gas business uses a lot of pipe, steel pipe, to case wells, to gather oil and gas, to inject CO2 and water. But steel pipes do not mix well with the corrosive oilfield fluids that pass through them, like sour oil and gas and produced water with high chlorides, CO2 and H2S. Untreated steel flowlines in certain fields may corrode through and begin to leak within a few months. Corrosion is one of the industry's biggest production challenges.

NOV's Fiber Glass Systems business, which comprises about 15% of our Completion & Production Solutions segment, provides a solution, composite pipe that is impervious to corrosion. In fact, we are the leading global manufacturer of composite pipe for the oilfield and a major provider of composite pipe for marine, offshore and chemical and industrial markets.

Nearly 50 years ago, oilfield innovators began to use fiberglass and composite pipes to produce -- to handle produced water to avoid having to frequently replace corroded steel flowlines. Some of our earliest installations of fiberglass pipe are still in operations because they are so durable. Since then, NOV has continued to innovate. And as pressure and temperature ratings have risen and our size range expanded, NOV's composite piping systems have steadily won share in the oilfields' most corrosive environments. Decades ago, NOV was the first supplier to win API certification. And today, we are the leader, having installed enough fiberglass pipe in oil and gas applications to go around the world twice. And this area continues to offer great growth prospects.

Fiberglass pipe, though more expensive than steel pipe initially, has lower installation costs because it can be assembled by hand, whereas steel pipe must be welded. And by pioneering flexible composite pipe that can be wound on a reel, our Fiberspar spoolable pipe enhanced this installation cost advantage, because reeled pipe in 9,000-foot lengths can literally be ploughed into the ground at a rate of many miles per day, far, far more pipe than a pipe welding crew can accomplish in the same time period. Once in, fiberglass is a long-term solution to corrosion, whereas steel typically must be replaced or continuously treated with expensive inhibitors throughout its life. Fiberglass is also more resistant to paraffin and scale buildup that can slowly choke off steel flowlines. In addition to flowlines, NOV also manufactures fiberglass tubing and casing for production, injection and observation wells for certain fields, and a spoolable variation is used to deploy ESPs with embedded cabling in certain applications.

Our leadership position has built technology and cost advantages. Our proprietary methods of winding pipe enable us to achieve higher pressure ratings, up to 3,500 psi, and our epoxy technologies enable us to achieve high temperature ratings, exceeding 200 degrees Fahrenheit. In addition to flowline products for gas and oil, we also manufacture piping systems for gasoline stations, for refineries and petrochemical plants, for municipal applications and for firewater and ballast saltwater systems in marine vessels.

Through our recent acquisition of Pipex, NOV entered into the composite structures market, think platforms, tanks and handrails, which enhances NOV's offerings in offshore rigs, FPSOs and other marine vessels due to the ability of composites to reduce weight and corrosion susceptibility in marine environments. For example, we recently executed a North Sea platform project where we ended up reducing the platform's weight by almost 700 metric tons.

In the mining market, we embed structurally reinforced epoxy resin pipe with high alumina ceramic to create a product that's both durable and corrosion proof, even in abrasive slurries like mine tailings. Our enhanced manufacturing and design technology combined with our global presence and raw material advantages again equal competitive advantage.

Amid challenging offshore drilling conditions, NOV is pivoting to new markets and new opportunities. I offer these examples to illuminate the robust portfolio of technologies NOV will bring to the next oilfield upturn.

Last quarter, I talked about our downhole tools and our Process & Flow Technologies businesses, and today, NOV WellSite Services and Fiberglass Systems. In these, and in all of our business units, we've steadily and smartly applied capital, both organically and through M&A, to build global leading franchises that are capable of generating strong through-cycle returns. It's what we do. NOV remains exceptionally well positioned for the inevitable upturn.

Finally, before I hand it over to Jose to review the operating results for our second quarter, I want to take a moment to convey our thanks to our terrific employees. Your performance has been amazing, and I'm proud of the great job you continue to do. So thank you. Jose?

Thanks, Clay. To recap our second quarter results, NOV consolidated revenues increased by $18 million from the first quarter of 2017 to $1.76 billion. Continued growth in the U.S. and stabilizing international markets were partially offset by the seasonal Canadian spring breakup and the ongoing challenges in the offshore market. As Clay mentioned, the organization executed extremely well, delivering a $37 million sequential EBITDA improvement to $142 million.

Looking at select line items of the P&L. SG&A decreased $13 million sequentially as we realized meaningful cost savings from ongoing efficiency improvement initiatives. Interest and financial costs increased by $1 million due to the release of unamortized debt issuance costs, a noncash item associated with the termination of our prior credit facility. Under our new 5-year credit facility, future amortization costs and unused commitment fees will actually decrease by $620,000 per quarter. So going forward, we expect interest and financial costs to return to the $24 million to $25 million a quarter range.

Our GAAP tax rate was 15.9%. Excluding other items, the tax rate would have been 8.6%. As we have previously noted, while we operate at near breakeven income levels, relatively small changes in income by jurisdiction or discrete items can result in significant changes in our effective tax rates. This volatility presents challenges in forecasting rates, but at this time, our best estimate for the effective tax rate for the remainder of the year is 10%. Our longer-term expected tax rate remains in the 30% range. In the second quarter, cash flow from operations was $168 million, and after deducting $43 million in capital expenditures, we netted $125 million in free cash flow. We believe our capital-light business model and strong execution will continue to drive free cash flow margins in the top quartile of the oilfield services and equipment sector.

We also invested $76 million on 5 technology acquisitions that were mostly focused on rounding out our emerging directional drilling and completion tools product offerings. Our cash balance increased $51 million to $1.53 billion. And total debt remained at $3.2 billion, with nothing outstanding on our credit facility.

During the second quarter, our Rig Systems segment generated $346 million in revenue, down $47 million or 12% sequentially. Revenue from backlog dropped to $224 million, $61 million lower than the previous quarter and $36 million below our prior guidance, as certain capital equipment deliveries slipped into the third quarter.

EBITDA was within guidance at $26 million, as strong execution by our team limited decrementals to 15%. As we downsize our Rig Systems operations, our team continues to seize every opportunity to high-grade capabilities, improve efficiencies and lower costs.

One recent facility consolidation required relocating our large rig gear cutting and grinding operation. The move would have required shipping 14 very large old machines. Instead, we purchased and installed 2 cutting-edge technology machines for a capital investment that was roughly equal to the cost of moving the old machines to the new facility. The new, more nimble equipment achieves the same throughput as the 14 old machines, with significantly reduced cycle times, maintenance costs and roofline requirements.

Like us, our customers are seeking ways to improve the efficiencies of their operations, and we're here to help. For example, we recently introduced a new 1,200-horsepower high-torque induction motor-powered top drive to deliver more torque and more power to drill extended lateral wells. And for all our customers who already own our market-leading TDS-11SA Top Drive, we developed an upgrade kit to provide them with the same high torque capabilities. Our upgrade goes beyond replacing the top drive motors and includes important modifications to the gearbox and other components to support the 50% horsepower increase.

We're also receiving increased inquiries for other products that improve our customers' key processes, including our stand transfer vehicle, which automates pipe handling operations, ensures consistent tripping speeds and eliminates the most dangerous job on the rig by removing the need for a man in the derrick. And offshore, we're seeing customers evaluate potential upgrades for future contracts, including improved lifting capacity, pipe handling systems and BOPs.

We booked $124 million in new orders in the second quarter, a slight improvement from last quarter. Land-related orders were $75 million or 60% of the total and included one 1,500-horsepower AC Ideal Rig and a complete land equipment package that includes our NOVOS control system, as we continue supporting private North American drilling contractors' efforts to upgrade their rig fleets. We see opportunities for continued modest increases in bookings, yet remain realistic on the impact lower commodity price can have on capital equipment orders. After rising approximately 15% off the bottom, gains in day rates for land rigs in North America have stalled at around $20,000 per day, leading many drillers to defer new-build capital commitments. OPEC cuts also appeared and delayed anticipated rig tenders in the Middle East.

Despite a slow, grinding recovery for the land drilling market, we've averaged close to $120 million per quarter in Rig Systems orders over the past 4 quarters. This order rate, plus our current non-backlog revenue of another $120 million per quarter, implies a recent run rate of about $240 million per quarter or close to $1 billion per year for Rig Systems, which compares to annualized Q2 revenues of $1.4 billion. To be clear, I'm NOT guiding to $1 billion in annual revenue for Rig Systems, but I AM pointing out that our numbers through the last 4 quarters would indicate a floor at about $1 billion per year, IF there is no meaningful recovery in land equipment demand.

We don't think this is a realistic scenario. The success of the shale revolution was built on drilling challenging wells efficiently, which in turn was built on better rig technologies. The "have-nots" around the globe are almost certainly going to up their game with modern rig technology, which only continues to get better. As a result, we can just as easily envision a scenario in which slightly higher commodity prices and activity levels will drive future bookings that more than offset the gradually falling contributions made each quarter by our existing $2.2 billion in backlog, propelling annual revenues well beyond our current run rate.

Even though we expect modestly higher revenue in the third quarter, because of our stubbornly low book-to-bill, 55% this quarter, we are not calling a bottom in Rig Systems yet. For the third quarter, we expect margins to tick down slightly due to a lower margin mix of projects that will be delivered in Q3.

During the second quarter, our Rig Aftermarket segment generated $341 million in revenue, an increase of $20 million or 6%. Higher volumes of spare parts sales and improving absorption of our service and repair facilities drove 60% EBITDA incrementals for a $12 million increase in EBITDA to $83 million or 24.3% of sales.

Q2 marked the second quarter in a row of increased spare parts revenues, primarily driven by increasing demand in North America. Service revenues also improved, with North American service utilization reaching the highest level in the past 18 months, supported by land rig reactivations and installations of our NOVOS control system.

Lastly, repair revenues increased sharply, supported by growth in SPS-related work in Norway, Brazil and Africa. Across our Aftermarket business, we're seeing elevated interest for spares, service and repair from customers nearly everywhere, as drilling contractors look to reactivate, recertify and ensure rigs are well positioned to compete for new contracts in today's competitive market.

As noted in the press release, we recently signed a 10-year service and support agreement with Transocean for 15 drilling rigs. The goal for both parties is to lower total cost of ownership and maximize equipment uptime by fully leveraging NOV's leading drilling technologies, global aftermarket service and repair capabilities and data-driven solutions. Our condition monitoring solutions will help reduce unnecessary maintenance, improve equipment reliability and assist our efforts to provide more in-field certifications to eliminate downtime associated with trips to port.

Historically, the industry has maintained equipment using time-based triggers and has only recently begun migrating to more usage-based triggers, with the ultimate goal of achieving symptom- or condition-based maintenance. At NOV, we are pioneering condition-based maintenance using a combination of sensor data and advanced proprietary algorithms to inform users about the health of equipment, allowing them to reduce unnecessary maintenance and improve reliability. We can spot patterns that predict future conditions before they occur to identify looming performance issues using data not to describe things as they are today, but to predict what they will be in the future to provide value-added feedback from our customers.

We believe we're able to develop superior predictive algorithms by merging the power of big data analytics with extensive data libraries and equipment expertise that is only available to us as the original equipment manufacturer.

Our Rigsentry condition-based monitoring system is one of our solutions designed to help our customers operate and maintain their equipment more effectively. And we're building similar solutions in our other capital equipment businesses by leveraging our installed base of equipment, product experts and big data technologies.

While the control sensors and predictive algorithms we have today create tremendous value, ultimately, we intend to combine the many solutions for discrete pieces of capital equipment into one system that will help maintain, monitor and automate entire processes such as a complete drilling operation. Taking responsibility for the comprehensive set of equipment on our customers' rigs will provide us with the opportunity to accelerate the development of such a system.

Looking ahead to the third quarter, we expect Rig Aftermarket to continue its pace of slow, steady improvement with a couple of 100 basis point increase in revenue and strong incrementals.

During the second quarter, our Wellbore Technologies segment generated $614 million in revenue, an increase of $59 million or 11%. Robust U.S. activity growth and modest improvements in many international markets, partially offset by the Canadian spring breakup, increased customer demand for Wellbore Technologies' products and services. The segment delivered 47% incremental margins, resulting in a $28 million increase in EBITDA to $66 million or 10.7% of sales. Robust improvements in U.S. land markets drove the segment's business in North America to 58% of total segment revenue and pushed revenue from land markets up to 82%.

Many of our U.S. businesses and product lines grew well in excess of rig count and general activity improvements. Early in a recovery, our product-oriented businesses tend to lag rig count growth as customers work through oversupplied levels of readily available product inventories. But as we talked about last quarter, scarcity can and has returned quickly to the oilfield. Customers are scrambling to acquire the technologies NOV provides to help them drill farther and faster, and we're seeing demand inflect for many of our valuable differentiated technologies, with nearly 30% growth in drill bits, motors, borehole enlargement equipment, agitators and rig instrumentation.

Longer laterals demand more advanced technologies, and we continue to address our customers' primary needs through innovative solutions like our Tektonic drill bits, Ion cutters and our new Series 36i downhole drilling motor. The proprietary new motor provides low-amplitude oscillations that vary weight on bit by approximately 30%. The oscillations reduce friction and stick-slip to increase rate of penetration in extended reach drilling.

During the second quarter, we signed 2 new drilling motor rental supply agreements with customers operating in the Permian, Anadarko and Eagle Ford basins that total over 150 motor rentals per month. Our downhole tools business is also seeing growing demand from the coiled tubing market, having recently secured an order for 60 TerraMax milling systems to mill out bridge plugs on long laterals. The order totals over 260 tools, including motors, agitators, circulation subs and through-tubing connectors, making it our largest through-tubing tools order in North America since 2012.

As customers bring rigs back into service to drill increasingly complex wells, they are demanding better instrumentation and data acquisition equipment. We believe our MD Totco business has the most recognized name in the industry for top-tier instrumentation and data acquisition systems. And our customers seem to agree as growth in this business exceeded sequential growth in rig count.

Elsewhere, our growing directional drilling tools business and our drilling optimization and automation products and services realized worldwide growth of almost 16%, led by several key product sales from our directional drilling tool product line and continued market adoption of our eVolve closed-loop drilling automation and optimization services. The growing demand for our eVolve services drove another record quarter for our IntelliServ business unit, which provides wired drill pipe and related technologies that enable our automation projects by delivering realtime broadband downhole data to our control systems.

Our drill pipe business rebounded more sharply than anticipated on improving volumes, with second quarter bookings growing another 11% above first quarter levels for a book-to-bill of approximately 120%, driven by demand for our recently introduced Delta drill pipe connection. Year-to-date, we've sold 500,000 feet of pipe with Delta connections. Four major operators are making substantial use of the pipe, and they have validated the connections' enhanced mechanical performance and improved total cost of ownership. The technology has performed exceptionally well in North America land and offshore operations, and we anticipate Delta connections will be used internationally for the first time by the end of the third quarter.

The improved activity in our drill pipe business also helps boost our U.S. pipe coating operations.

For the third quarter, we expect segment revenue will increase another 8% to 10%. Increasing demand across the segment allows us to reactivate idle machinery and add second and third shifts, significantly improving absorption across many of our North American manufacturing and service facilities. While it's still early, we also see more meaningful opportunities for price improvements across this segment, giving us more confidence that we should be able to sustain strong incremental margins through the remainder of the year.

During the second quarter, our Completion & Production Solutions segment generated $652 million in revenue, a $4 million sequential increase. Improvements in land-oriented operations were mostly offset by declines in offshore businesses. EBITDA increased by $21 million to $98 million or 15% of sales. Better-than-anticipated execution on offshore projects, FX benefits and our cost savings initiatives drove the outsized incrementals.

On the order front, nearly all of our business units secured orders well in excess of 100% book-to-bill. Total segment bookings were $501 million for an overall book-to-bill of 127%.

The benefit NOV's completion offerings receive from the ongoing North American market recovery is amplified by favorable secular trends that drive higher capital and service intensity. The growth in enhanced completion techniques, for example, requires more pressure pumping equipment for the increasing number of higher volume stages, more coiled tubing equipment to mill out plugs used to separate frac zones and more wire line equipment needed to perforate each stage.

For the second quarter in a row, our Intervention and Stimulation Equipment business unit achieved a book-to-bill of approximately 140%. Included in the order book was a total of 107,500 horsepower of pressure pumping equipment and orders for 7 new coiled tubing units. Beyond new capital equipment, our Intervention and Stimulation Equipment business unit continues to see growing demand in North America for refurbs and spare parts, including valves, seats and flow iron, as increasing pressures and higher rates of abrasive proppants pumped downhole cause increased wear on even the most reliable equipment and consumables.

On the production side, our Process and Flow Technologies business unit achieved a book-to-bill above 1, based on rising demand for production chokes, LACT units, wellhead separators and other processing equipment. Additionally, efficiency improvements resulting from the integration of our Fjords transaction contributed to 85% incremental margins on a modest revenue increase.

Our Fiber Glass Systems business unit continues to realize solid bookings and revenue growth, supported by spoolable pipe demand in the Middle East and U.S., partially offset by declining demand from the more offshore-oriented Southeast Asian market.

As anticipated, we saw an aggregate net sequential decline in revenue from our 3 offshore production-related businesses, which include our subsea flexible pipe, large-diameter conductor pipe connections and floating production systems business units. However, all 3 operations achieved better-than-anticipated profitability on exceptional execution, cost savings and foreign exchange benefits. All 3 business units also booked orders well in excess of 100% book-to-bill. We received an order for a subsea soft yoke system for a floating storage regasification unit in Brazil, our first significant order for our Floating Production Systems business unit in 18 months. Our XL Systems business unit also won a multimillion dollar order for our fatigue-resistant Viper conductor casing, which is ideally suited for extreme service conductor and casing applications in deepwater operations.

Notwithstanding the quarter's strong bookings, the near-term outlook for our offshore levered businesses remains challenged. While our recent offshore orders helped partially replenish depleted backlogs, many are for long lead-time items with deliveries that extend into 2018, limiting their impact on near-term revenues. As a result, we expect our offshore production-oriented businesses to take another step down in the third quarter.

On land, strong activity levels and pent-up demand following 2 years of limited investment in capital equipment support the remaining business units within our CAP segment. However, the recent dip in commodity prices to the low $40 level noticeably reduced customers' sense of urgency related to large capital equipment orders, creating uncertainty for the pace of future order intake.

In the third quarter, we anticipate a 300 to 500 basis point improvement in revenue, with margins declining between 100 to 200 basis points due to less favorable mix and FX benefits that we do not expect to repeat.

For NOV, the second quarter was about exceptional execution and realizing efficiency improvements from investments we've made in our operations over the past few years. While oil prices continue to linger under $50 per barrel, causing a wary mindset among our customers, we remain extremely encouraged by the ongoing depletion of excess equipment in all markets around the world, pent-up demand for more efficient modern equipment in the international markets and the way our people have positioned this organization for the future.

With that, we'll open it up to questions.

Ladies and gentlemen, we'll now open for questions. (Operator Instructions) Our first question is from Marshall Adkins of Raymond James.

Clay, as tempted as I am to ask about your proprietary elliptical shale shaker G-force control technology, I think just to keep my sanity here and knowing I wouldn't understand half of it, I want to focus on your Completion & Production segment. Phenomenal margins there. Jose, you talked about -- you briefly went through kind of how you got there. But I'd like to get a little more color on what's going on there. It sounds like your growth in U.S. completions is offsetting the declines in offshore production. But more specifically, I'd like to know where are there shortages in the U.S. completions side? What product lines -- we've heard about niche product lines where your just out of different stuff. Can you help us understand the landscape on the U.S. completions side?

You bet. The main -- the portion of the Completion & Production Solutions business that's seeing the most -- or the highest levels of activity really is centered on the pressure pumping equipment space right now, so a lot of demand for frac equipment, for coiled tubing, for all of the consumables that go along with that, so valves and seats and so forth. And you've heard from, I think, a number of pressure pumpers so far through this reporting cycle of all of the reactivations that are underway there. So we're seeing repair services and the like, really strong levels of demand. I kind of went through our fiberglass flowline and pipe offering there. We're also seeing really strong demand in that area as well, along with strong demand for production equipment in our Process and Flow Technologies group, things like production chokes and other items that we sell there, both across North America as well as places like the Middle East. But yes, our offshore offering -- that makes up the rest of our Completion & Production Solutions group has been under pressure with low levels of FIDs and so forth. And so that's where we're really seeing the most pressure. I'm very pleased with the pickup in margins this quarter. And as Jose mentioned in his prepared remarks, a lot of that had to do with exceptional execution on certain offshore projects within that group.

Are you -- are we out of certain things on the U.S. side? Are there exceptionally long lead times for certain products right now?

Yes. I mean, like I said, we're pretty busy on the pressure pumping equipment. And -- but I would say, we're able to deliver in a -- new frac equipment, for instance, in 1.5 quarters, maybe 2 quarters. So we're able to get components so far to go into the fabrication of that equipment. What I'd tell you is that in terms of the scarcity that we refer to, really, we're seeing that most acutely, though, actually in Wellbore Technologies group and specifically around downhole tools and bits. Downhole drilling motors, drill bits, the equipment that we supply there is seeing a high level of demand. Rig instrumentation systems through our MD Totco unit that Jose referenced, the solids control business that I talked about in my prepared remarks, again, we're seeing a lot of customers burning through existing inventories. The good thing for us is that over 900 rigs running in North America -- or in the U.S. -- right now are consuming a lot of that at a much higher rate than the 350 or so that we bottomed out at last year. And so the rate of consumption has stepped up, and that means that they have less opportunities to cannibalize inventories and consumables off of idled rigs and have burned through inventories. And so we're starting to see a resumption of demand.

Our next question is from Bill Herbert of Simmons & Company.

Clay, just trying to reconcile your comments with regard to frac and Jose's earlier comments with regard to the downward flurry in oil prices diminishing the sense of urgency with regard to capital equipment items, are you making the distinction between kind of large horsepower orders, for example, that you got in Q4 and Q1, 75, 75 and 107.5, something like that in Q2, versus consumables?

Yes. What I'd say is although we continue to have conversations with a number of customers around new frac spread additions -- and I would add new land drilling rigs, the urgency is a bit diminished over the past 6, 8 weeks with lower oil prices. They're still going on. So we're still having these conversations. We're probably talking to a half a dozen different pressure pumpers, for instance, around new frac spread additions. But the urgency has slowed down a bit. In contrast, on the smaller, quicker-turn items, the consumables, the repair services, the reactivation related things that we're doing within the pressure pumping space and the rig upgrade and repair services that we're offering in the land drilling space, those are -- continue to be really, really strong. Does that make sense?

Yes, it sure does. And then with regard to Wellbore, you guys have been extolling the scarcity theme here for a while. And Jose went through a long list of items that generated over 30% sequential growth in the quarter. I'm curious as to whether, one, in the event that activity flattens out here, although oil prices seem to be moving higher, but in the event activity flattens out, how much runway do you have for continued lead/lag outperformance on the wellbore consumables? And then moreover, can you talk about drill pipe as well, please.

Bill, this is Jose. Yes, it's a good question. And one of the things I was trying to get to in some of my prepared remarks is to help folks understand that there is a bit of lead time and backlog that gets built into even the quick turn portions of our business. So that's kind of what I was getting at related to the business sort of taking a little while to ramp up as that excess capacity in the market gets absorbed. But then things snap back pretty quickly, and our ability to turn serviceable items as well as provide new product, the time period in which we do that has extended quite a bit. And so even with a flattening to, potentially, a slight downturn in the rig count environment, we expect a good period of time in which we could actually continue to see revenues for those types of products and services continue up and to the right. And also, as we've talked about before, with improving efficiencies, more footage drilled per day, that also is a great driver for us. But the last thing I'll mention on that as well is, for our business, it doesn't necessarily take a dramatic pickup in activity for our business to get better. We saw some glimmers of hope in the international markets. As 2.5-plus years of this downturn have gone on, the stuff that we've had out in the marketplace is slowly getting consumed. Those inventories are diminished and depleted, and folks have to step back to the table and start ordering more of our products even at very low activity rates. So we're seeing some positive signs that give us some optimism and some sustainability of those businesses even in a flattening rig count environment.

Specific to drill pipe, we were pretty pleased with the rebound that we saw this quarter in demand for the pipe. We expected last quarter coming into the second quarter that we would slowly start rebuilding a pretty depleted backlog. I think our bookings were better than we anticipated as were volumes through the system, and quite frankly, the performance of our team in terms of not only just getting things through the system, but basically creating a lot of operating leverage on that increased volume. So all in, pretty pleased with the way things shook out.

Yes, 2 quarters in a row of book-to-bill north of 1 for drill pipe. The other thing I would add, too, is that we store a fair amount of our customers' [drill pipe] inventory. We've seen that tick down about 15% to 20% over the past 6, 9 months. So things are going the right way there.

Your next question is from Jim Wicklund of Credit Suisse.

We had discussed in previous quarters that Rig Systems may be -- may have bottomed as long as there aren't delays in commissioning and launching new deepwater rigs. And this quarter, there seemed to be some delays. Can you talk about how -- is this one-off? Is it systematic? It would appear that the oil price weakness over the last couple of months has probably put deepwater back another year. Can you talk about the outlook for rig commissionings and getting those done so we can finally see Rig Systems bottom sometime in the near future?

Yes, I think things are stabilizing there, Jim. We -- to be clear, we haven't called bottom on Rig Systems, nor did we do that this quarter. We did call for a slight uptick in revenue on our guidance in -- going into Q3. But when it comes to our offshore construction projects -- offshore rig construction projects, we did have a couple of things move to the right again. But I would say, so far, so good. It feels like things are more stable than they were, let's say, this time last year. And we're kind of achieving more of something maybe closer to a little -- kind of a smoother or more stable level of work on Rig Systems. What's I think most encouraging to me about the outlook for Rig really is our land offering. We saw our land rig orders rise to 60% of total orders in the quarter, and so, although we're still struggling with a book-to-bill significantly below 1, we do think a recovery in demand for land rigs is out there. We've got conversations going on with operators in North America, with operators elsewhere around the globe. They're all looking at Midland, Texas, seeing the extraordinary drilling gains that are happening with super-spec rigs out there. And so I think that will be the engine that fuels future demand for Rig Systems.

Okay, that's helpful. I appreciate that. And Marshall's question talking about what's in short supply and we've heard that perforating guns, and you mentioned your downhole motors. But it seems to me, and we talk about shortage of people, and everybody thinks about field people, but we're hearing that machinists in Houston are exceptionally hard to find, somebody who can operate the CNC machine. And that would seem to be your strength and bailiwick. And I'm just wondering if there is a shortage of people in that category, one we don't pay attention to all the time, and the implications of it.

Yes, I don't think it's an acute shortage. We're fortunate in that we have, as you know, lots of different manufacturing businesses. And as we've talked about, some of those businesses are trending up and some are trending up sharply now and others are going down. So we have the option, or opportunity rather, to redeploy resources towards our businesses that are growing. So I think NOV is probably unique in our footprint and scope within manufacturing, which gives us some more flexibility to navigate labor shortages that arise from time-to-time in our space.

Our next question is from James West of Evercore ISI.

So my first question, on elliptical shakers. No. But the -- Clay, something you said about inventories on offshore rigs caught my attention, because we're not nearly as negative, I think, as most people are on the offshore markets. I know you guys aren't calling bottom on your Rig [Systems] orders and things like that. But it seems to me we've seen a large number, or hopefully it's at least a better number of FIDs for big offshore projects so far this year. We've seen, actually, a rig that was smart-stacked go -- is going to go back to work. So we're actually seeing some rigs that have been laid up. Have these rig companies, in your opinion -- because most of these guys haven't spent money in years, I mean, on anything, and they've cannibalized assets, and that's hurt your Aftermarket business -- have they gone too far, or do you see just outside of just a pickup and a little bit of a pickup in demand here for the rigs driving that aftermarket, do you see some restacking -- restocking, excuse me, that needs to go on?

Absolutely. We -- and by the way, offshore hasn't gone to 0, right? So in the second quarter, we just reported 40% of our orders were related to the offshore. We're seeing customers upgrade certain rigs around lifting capacity, around pipe-handling and racking capacity and capabilities. And that's helpful. Obviously, the oil and gas companies have the leverage in this kind of market. And so they're becoming a little more vocal in pushing some of those drillers to upgrade rigs before, for instance, they'll rollover contracts. And so that's constructive. But you're right, James, both categories, jack-ups and floaters, both categories of rigs have seen a very small recent uptick in activity. We're hearing from our customers more conversations that they're having with their customers around tenders and the like. And frankly, with all the costs we've taken out of our business, relatively small improvements in activity, I think, are going to drive really outsized performance in Rig. So -- I want to be clear, we're not calling for a sharp increase in offshore activity and remain very, very cautious in this space, given all that's going on, but as you correctly point out, yes, there's a few green shoots out other that are interesting.

So -- okay, great. That's what I expected. And I do want to ask about your shaker business, your solids control business. I'm probably not going to get too technical here. But as I think about it, we're adding additional mud pumps to onshore rigs, which is obviously necessary for the additional loads of mud going into the wells, which then, of course, hits the shakers as the mud comes out. And that's causing more damage, more need for shakers and screens, et cetera. That's, to me -- is that a linear type of demand driver, or does that actually go exponential with just the higher pressures and the size of the wells?

Well, the size of the wells go up by 2 pi, right? So you're -- for every foot of well, you're creating 2 pi r more circumference and more volume of cuttings that you're drilling up. And so it presents a challenge on the rig, which is driving demand for a third and sometimes a fourth shale shaker. So this is one of the -- there's a lot of implications coming out of the way wells are drilled now, with longer laterals and larger diameter and more hydraulics on location. And one of them is around the management of drill cuttings that come out of those wells. And so, really, the purpose of all that was to highlight NOV's exposure to that trend, the technologies we bring to that space.

Our next question is from Judd Bailey of Wells Fargo.

A lot of good discussion today over Wellbore, and you guys have given a lot of helpful detail in terms of, directionally, how some of the different product lines are moving. I was wondering if it would be possible to maybe help us kind of think about the sizing of some of these different businesses. Things have moved so much in the last couple of years. You highlighted solids control, I think you said about 1/5 of Wellbore revenue. Would it be possible to get some other kind of sizing for some of the other business lines within Wellbore as we kind of -- what they were in the second quarter?

Yes. We're -- I'll tell you what, we're going to probably continue on what we've been doing the last 2 calls, which is to highlight a couple of really interesting businesses, one in each of our Wellbore Technologies and Completion & Production Solutions groups. Largely, because I think a lot of investors out there are -- they're very familiar with Rig Systems and Rig Aftermarket, but less familiar with Wellbore Technologies and CAPS. And so kind of as we kind of tick through those, we'll provide a little more mix information. The other thing, too, Jud, I would stress is that mix between these product lines and mix across these segments changes period-to-period as well. So that -- I think we'd prefer to do it that way.

Okay, that's fair. Just though I'd ask. Just transitioning over to Rig Systems. Jose, if I could follow-up on your commentary regarding, I guess, $1 billion in revenue for Rig Systems. I know you said and stressed that wasn't guidance. But I just wanted to understand a little bit better the context of how you're thinking about a scenario mix where that would be an outcome, I guess. Is it just no -- nothing else from offshore-related activity and just kind of what you're seeing on the land side these days? I just wanted to understand that a little bit better.

Right. Really, what -- effectively what we're getting at is what's pretty close to the darkest view imaginable on our part, which is, look, we're at a point in the cycle where demand remains very, very low, although interest is picking up, conversations are picking up and our bookings have increased slightly. But we're still at very low, and in our view, unsustainably low levels of demand right at the moment. And so, really, what we wanted to provide is just some really, really simple math to say that in the current environment, if we stay here forever, that Rig Systems is effectively a $1 billion a year business. So that's basically the roughly $120 million to $125 million a quarter that we've been booking here over the last couple of quarters, plus our own internal demand, plus the other little bit of revenue that doesn't really pass through backlog, which is a pretty small amount. So that basically gets it to about $1 billion a year. But as I stressed and continue to stress, a very deep, dark scenario. Obviously, folks have to come back, maintain the rigs that are operating. Just by doing that, we think there's more opportunities for capital sales growth. And also, we do see a good number of [land] new build opportunities that are not too far out on the horizon. So we're much more optimistic about the future than that dire scenario.

Yes, this is probably the most common question we've been getting for 2-plus years from investors is where does Rig Systems bottom and what does it look like. And it's worth noting that, that analysis is based on looking back over the preceding 4 quarters, which includes the lowest rig count seen in the United States in 70 years. So it's a pretty bleak market, but there's sort of a -- we think, a floor in those numbers that we just wanted to let -- again, we don't think we'll fall to that level, but that would be kind of a worst case scenario.

Okay. Well, that's helpful. I may be pushing my luck here, but if you were to actually, let's say, generate $1 billion in revenue, would you venture a guess as to what the margin level could be if it was that kind of level?

I would tell you that look back at where that business was in 2014 and see how far it's fallen and see the fact that it did 7.5% EBITDA margins this past quarter. And that team is remarkably talented when it comes to squeezing profitability out of a smaller revenue base. So I certainly would not bet against them. They will get as much profit out of that, whatever revenue base they have -- we have -- in Rig as any management team on the planet.

Our last question is from Thomas Curran of FBR Capital Markets.

So for Rig Systems, shifting from such a bleak potential take on it to a possible bright spot, in the U.S. land drilling rig market, as the secular Tier 1 rig construction boom matures and your predictive analytics capabilities advance, are you considering or already pursuing any commercial models on the aftermarket side to further entrench yourself with customers? Is there an opportunity for the type of long-term service and support agreement you just inked with Transocean or some other form of total cost of ownership approach?

Yes, I absolutely think there is. It may be a little trickier for our onshore customers. They tend to be a little scrappier and a little more comfortable doing their own maintenance and things. But I think as we continue to pioneer predictive analytics, which we are very successful at -- we're on 17 offshore rigs today with -- and have 20 or so instances of where we've warned customers in advance of issues they needed to take care of when it was opportune. So it's -- I mean, this -- is really a powerful technology. That, coupled with things that we're doing in closed-loop automated drilling using machine learning algorithms to better drill, I'm actually very, very excited about really upping our offering into the land space and getting closer with our customers there and doing more to help them manage their fleets. And to me, it just makes a lot of sense. I think drilling -- being a contract driller requires being great at managing logistics and drilling operations and talented workforces that can focus on drilling efficiently on behalf of their customers. Whereas as an OEM, I think NOV is very well-positioned to help them manage their fleets and maintain their fleets and so forth. So, yes, I'm pretty excited about that, actually.

And Clay, remind us, do you currently manufacture and sell walking systems as a stand-alone branded product line? And if not, is that an offering you'd like to expand into at some point?

Yes, we offer walking systems. And in fact, we're seeing decent levels of demand for that. I would say walking systems plus a third mud pump plus a fourth generator set plus a high-torque package Jose referenced the ability to upgrade top drives, that really sort of transforms a Tier 1 AC rig into one of these super-spec rigs that are winning a 15% and, in some instances, 20% premium on day rates. So, yes, we do.

Okay. And then last one from me. Shifting to the frac spread manufacturing and capital equipment market. Following Forum's acquisition of J-Mac and now Kirby's pending merger with Stewart & Stevenson, would you expect further consolidation in that arena? And how do you think about how [your] WISE Group and Rolligon are positioned? Is there anything else you might want to add in response to what those competitors have done?

We have a great offering there we're very pleased with. I think our more recent focus has been around enhancing the technology embedded in what we do. And actually, I'm glad you asked the question, Tom, because just last quarter, we introduced a condition monitoring system for frac spreads. And in fact, one of our North American customers put that in place for their customer. And their customer, which is a large independent, monitored frac jobs over the course of a couple of months and was very pleased. They monitored those remotely, and was very pleased by -- with the reduction in instances of stuck pipe and things like that. So that -- our focus really continues to be around a differentiated offering, a high-tech offering that earns good returns on capital deployed there.

Just handing it back to Mr. Williams for closing remarks.

Great, thanks very much. Appreciate everyone tuning in this morning, and we look forward to reporting our third quarter results in October. Thanks, everyone.

Ladies and gentlemen, thanks for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day.