國民油井華高 (NOV) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Fourth Quarter and Full Year 2017 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, Chief Investor and Industry Relations Officer. Sir, you may begin.

Welcome, everyone, to National Oilwell Varco's fourth quarter and full year 2017 earnings conference call. With me today are Clay Williams, our Chairman, President and Chief Executive Officer; and Jose Bayardo, our Senior Vice President and Chief Financial Officer.

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 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website.

On a U.S. GAAP basis for the fourth quarter of 2017, NOV reported revenues of $1.97 billion and a net loss of $14 million or $0.04 per share. For the full year 2017, NOV reported revenues of $7.3 billion and a net loss of $237 million or $0.63 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 fourth quarter of 2017, NOV generated $1.97 billion in revenue, an increase of 7% sequentially and 16% year-over-year. EBITDA of $197 million improved $30 million sequentially, and roughly doubled from the fourth quarter of 2016 to the fourth quarter 2017, which marked our sixth quarter in a row of rising EBITDA and rising EBITDA margins as we continue to pivot to land and unconventional shale technologies and benefit from cost reductions.

After 3 extraordinarily difficult years, it feels to us that the market is nearing an inflection point. Oil inventories are rapidly approaching normal levels, pushing oil prices up and facilitating the return, in our view, of a geopolitical risk premium. Industry surveys are pointing towards a modest increase in upstream CapEx, the second such year, following a cumulative 2-year drop that nearly halved global upstream CapEx. This all sets the stage for a brighter outlook for 2018.

Here's what we're seeing in the marketplace as we start the new year. Number one, it's not clear that oil companies believe higher oil prices, at least not yet. The E&P industry is under tremendous pressure to generate higher ROICs and all projects appear to look to West Texas Shale as the benchmark. I believe the consensus view is that unconventional oil from the Permian basis carries a roughly $45 breakeven and there persist fears that the oil price could revisit that level. Therefore, we think E&P price [index] against which projects around the world are being judged, including the offshore, are closer to $45 a barrel than the spot price of Brent, which is about $7 (sic) [$70] a barrel.

Number two, our customers are struggling to get bank financing. Banks and regulators all want to reduce exposure to the oil and gas industry. One critical function of commodity prices is to signal producers whether to produce more or less. If the industry, at the behest of Wall Street and due to the lack of bank financing, fails to respond to the commodity price signal by failing to produce more, well, then the commodity price will just continue to rise until somebody grows production. In short, the newfound fidelity to capital discipline and lack of bank financing will likely, in my view, result in higher oil prices on down the road.

Number three, the last 3 years have witnessed a succession of bad breaks. OPEC relinquished its traditional role of swing supplier, at least for a while. Libya and Iraq grew production meaningfully. Other large long-term projects came online. Iranian oil returned to the market. And finally, U.S. shale production continue to grow well into 2015. This all contributed to an oversupply picture that got progressively worse through the first 2 years of the downturn, but has since turned the corner and is rapidly improving.

Number four, unconventional shales continue to score well on marginal cost of supply and continue to attract a disproportionate share of incremental capital. Over the past year, the rig count in Midland has risen dramatically, while the offshore rig count has fallen. 2018 will see the U.S. break production records dating back to 1970 due to the application of horizontal drilling and hydraulic fracture stimulation to profitably unlock oil and gas from very poor quality reservoir rocks, shales and enhance profitability from conventional reservoirs.

Within a decade, this unconventional shale technology has grown to account for 5 of 6 wells spudded in the United States, and we are confident unconventional shale technology will be adopted elsewhere around the world too. In the meantime, it is against this backdrop that we are executing our strategy to pivot our portfolio of businesses to gain more exposure to unconventional shale technologies, while enhancing our considerable offshore offering.

Let me explain our strategic framework for why this is an attractive way to deploy capital. Most but not all of our businesses provide equipment that enables other oilfield service companies, drillers, well servicing companies, wireline operators, directional drillers, et cetera, to execute the well construction plans of E&P companies. These are highly technical, capital-intensive equipment consumptive enterprises. Our role is the leading worldwide designer and manufacturer of oilfield equipment with several important attributes with respect to long-term returns on capital for our shareholders.

First, in contrast to our customers, our own business model is capital-light with low fixed asset intensity. Our factories require low investment and maintenance CapEx as compared to the sales that they generate. Second, our broad portfolio of products enables us to redeploy factories and employees and other resources to areas where we see the highest demand, enabling greater efficiency. Third, our market leadership and global footprint affords us additional economies of scale in procurement, manufacturing and marketing.

Fourth, market leadership provides us with cumulative experience within a particular product area that exceeds our competitors, meaning that we are more likely to have faced and successfully navigated challenges and that we are the low risk purchasing decision for our customers. Fifth, we serve markets that tend to fragment. The oilfield is entrepreneurial, and we enable our customers to launch new enterprises that, in turn, provide new and better services to the continually evolving E&P industry. In particular, we believe the drive toward local content by many national oil companies will prompt more local startups thereby expanding the market for equipment that NOV provides. As a consequence, we avoid excessive customer concentration.

Sixth, our customers generally benefit from fleet standardization to improve their own performance, reliability and logistics. They are far more likely to standardize on equipment from the market leader, NOV, than from smaller competitors. Seventh, as market leader, we can better leverage resources and experience to introduce breakthrough technologies to address evolving industry needs. We constantly enhance our technology portfolio through a combination of internal R&D efforts and targeted M&A.

Eighth, as the largest equipment OEM in the oilfield, we have available to us unique opportunities to provide aftermarket support for the industry's largest installed base of equipment. A marketplace where switching costs are high and risky. Finally, ninth, our leading market position offers a platform through which we can introduce new digital products, control systems and predictive analytics and maintenance models based on Big Data that further enhance our returns.

Importantly, during the downturn such as present, we take a view on which oilfield technologies will benefit disproportionately in the next upturn. We think the next upturn will see more widespread application of shale technologies to new rocks, both here and abroad, hence, our focus on this area for the past 4 years. One such area is our ReedHycalog business unit within NOV's Wellbore Technologies segment, which accounts for about 20% of the segment's revenue or about 7% of consolidated revenue. ReedHycalog is the leading independent provider of downhole tools that enable horizontal drilling required for successful shale programs.

It is also at the forefront of providing optimization services based on the industry's only high-speed data telemetry system, IntelliServ Wired Drill Pipe, that unlocks the benefits of closed-loop automated drilling. With the legacy of producing drilling bits dating back to the early 20th century, ReedHycalog's breakthrough contribution such as our patented fixed cutter leaching process is used in virtually every PDC bit manufactured today and PDC bits are used to drill virtually every horizontal lateral drill today. Without this technology, cutters would fail prematurely in the punishing drilling conditions of long laterals, undercutting the economics of shale programs.

More recently, our industry-leading ION cutter is setting new records in complex horizontal drilling programs. NOV ReedHycalog is also the leading provider of other technologies that enable directional drilling service providers to deliver precisely-placed, low tortuosity wellbores, another key attribute of successful shale programs including rotary steerables and MWD tools that let smaller directional drillers compete effectively with larger players.

Importantly, we do not provide directional drilling services, rather we provide the toolbox our customers employ to build their businesses without fear of having to potentially compete with NOV in the service space. We're a safe supplier and partner that brings the advantages of scale, scope and staying power to the scrappy independent customers.

NOV ReedHycalog works closely with NOV's other units including our drilling motor business and our drill pipe business to fine-tune the system performance of NOV bottom hole assemblies. NOV ReedHycalog also works in concert with our Rig Technology segment to permit high-speed data from the bottom of the borehole to control the rig via automated software, the essence of closed-loop automated drilling.

Most importantly, it is a great example of how we steadily deploy capital within the strategic framework I described earlier to cultivate competitive advantage and drive returns over the cycle.

Turning to NOV's Completion & Production Solutions segment, I'm going to shift gears and focus on a different kind of product that represents a different strategy, one focused on improving the economics of offshore E&P operators, who are the direct customers of our Subsea Production Systems unit.

It is one of 3 offshore-focused business units within the Completion & Production Solutions segment and it accounts for about 15% of the segment's revenue currently or about 5% of consolidated NOV revenue. It develops, designs and manufactures flexible pipe and water treatment systems for Subsea production applications and enjoys considerable technical leadership and advantages, having delivered over 7,000 processed miles of flexible pipe.

Flexible pipes are highly engineered, complex multilayer structures helically wound and comprised of unbonded layers of steel and composites, which enables them to withstand the demanding pressures and tensile loads required in deepwater production, while remaining resistant to the fatigue induced by wave and tidal action.

Flexible pipes are quick and easy to lag even in congested environments because they are spooled directly off of wheel which cuts the installation time to a fraction of the time required to install conventional rigid pipe. This offers a key advantage to E&P operators because construction vessel time is very expensive. Further, project schedules can be affected by weather and other unplanned events. So reducing the installation time required reduces overall project risk.

With all of their oil and gas flowing through a flexible pipe, there's a lot riding on the performance of this technology. So our E&P customer's qualification hurdles are very strict and demanding. NOV's Subsea Production Systems unit benefits from years of R&D investment and field experience, something very difficult for new potential entrants to replicate.

While new deepwater field developments are an important end market for flexible pipe, we also sell into tiebacks and brownfield projects. The technology opens up the profitable development of deepwater fields because they can be tied back to regional hub facilities, leveraging an oil company's existing investment. And as Subsea separation and pumping technologies continue to advance, we expect these to drive further demand for flexible pipe.

NOV continues to extend its technical leads in this area including our proprietary actively heated flexible pipe and our OptiFlex condition monitoring system. This quarter, the Subsea Production System unit executed a contract to install our first proprietary Subsea seawater treatment system, the Seabox, which prepares seawater for injection. This breakthrough technology will help E&P customers achieve higher oil recoveries from deepwater fields through better reservoir pressure maintenance while eliminating the need for expensive heavy topside equipment.

The strategic framework I described earlier applies to most, but not all, of NOV's portfolio, and our Subsea Production Systems is an example of our product offering that falls into a somewhat different framework. Unlike NOV's equipment sold to service companies who do well construction work, this business sells its products directly to E&P operators and it benefits from unique set of market dynamics and competitive advantage. Importantly, the unit has performed well through the downturn and offer significant optionality to recovery in the offshore, which would be enhanced by tightness in construction vessel availability and further enhanced by continued advancement in subsea pumping and fluid separation. While we believe a robust recovery in the offshore is still some distance out, NOV is uniquely positioned to support a resumption of activity with market-leading technologies that enhance economics for our customers and enhance optionality for our investors.

Finally, before I hand it over to Jose to take you through our financial results, I'd like to take a minute to thank our employees for your excellent performance in 2017. There is no better team in the industry. We have weathered a great deal together and your talent and perseverance and grit have got us to a better place. Thank you for all your hard work and for your continued dedication to taking care of each other and our customers.

Jose?

Thank you, Clay. For the fourth quarter of 2017, NOV consolidated revenue was $1.97 billion, an increase of 7% or $134 million sequentially. Demand was strong for our short cycle consumable product offerings and customers that deferred taking delivery of capital equipment in Q3 due to oil prices that dipped into the low $40 per barrel range came back to take deliveries. Those customers, while still cautious, reinitiated inquiries and placed orders for additional capital equipment, providing us with our highest level of bookings since the third quarter of 2015.

EBITDA improved $30 million to $197 million. Looking at select line items of the P&L, SG&A decreased $14 million sequentially due primarily to lower insurance, bad debt and incentive compensation expense. In the first quarter, we expect SG&A expense to increase about $7 million due to the nonrecurrence of certain Q4 credits. Note that most of these changes in SG&A are reflected in the eliminations in corporate cost line item within our segment reconciliation tables.

Interest expense decreased slightly due primarily to the retirement of our $500 million, 1.35% senior note in December. Going forward, we expect interest expense to decrease another $1 million per quarter from fourth quarter levels. Interest income decreased in line with expectations and other expense increased $8 million primarily due to greater FX losses.

We reported a GAAP loss before income taxes of $145 million and a tax benefit of $130 million for the quarter, which includes the impact of tax reform.

The recent tax reform legislation will be a meaningful long-term benefit to NOV. In addition to enhancing our ability to move cash around the world, we expect a reduction in the U.S. rate from 35% to 21% will lower our overall long-term effective tax rate from approximately 30% to low to mid-20% range.

In the fourth quarter, cash flow from operations was very strong, totaling $321 million and after deducting $65 million in capital expenditures, we netted $256 million in free cash flow. NOV continues to be a leader in free cash flow due to our market position, focus on returns and capital-light business model.

For the full year, cash flow from operations was $832 million and capital expenditures were $192 million, providing us with $640 million free cash flow. Our ratio of free cash flow to sales was 8.8%, best-in-class for the large cap OFS&E space in 2017.

After retiring our $500 million note, total debt fell to $2.7 billion. At year-end, net debt was $1.275 billion, debt-to-cap was 16.1% and our net debt to annualized Q4 EBITDA was 1.6x.

One of our goals through this downturn has been to preserve credit metrics that support our investment-grade credit rating. This is important for us to access low cost capital to opportunistically pursue attractive opportunities and to ensure customers who trust us with purchase commitments in the tens if not hundreds of millions of dollars built over multiple years retain confidence in their counterparty.

In short, strong credit ratings are critical to our business model and strategy, and we have been successful defending our ratings by aggressively managing our cost structure and by generating solid free cash flow through the downturn.

We expect free cash flow in Q1 will decline due in part to the first meaningful incentive compensation payments we will have made in 3 years and by slightly higher capital expenditures which will increase to the $250 million range for the year. However, we believe we will continue to yield strong free cash flow later in the year, which we expect will be enhanced by improved working capital efficiency.

While we made progress in Q4, our working capital levels have remained frustratingly high through this downturn as a lack of cash and liquidity among our customers has made it challenging to turn inventory and accounts receivable into cash.

Consequently, we are heightening operational focus in this area in 2018 by further tying incentive compensation to improve capital efficiency and working capital performance.

As our cash repatriation flexibility improves with new tax law changes and our free cash flow grows with our business and our heightened efforts around working capital, we will be focused intently on optimizing capital allocation throughout 2018. As we think about allocation of capital, we, first and foremost, seek compelling organic investment opportunities, which will always provide us with the greatest risk-weighted returns if we can appropriately leverage our installed base of equipment, existing manufacturing capacity, global distribution infrastructure, digital platforms and world-class R&D facilities.

Next on the list of prioritizations is M&A, where we employ an extremely disciplined returns-focused process. We typically utilize M&A as an opportunistic yet proactive means to accelerate already defined organic growth initiatives. This means that we are always in position to have an alternate way to achieve set initiatives, significantly reducing the likelihood that we overpay for transaction.

Excess capital for which we do not have attractive reinvestment opportunities should always be considered for return to shareholders. Increasing our current dividend is one such path and reinitiating a share repurchase program is another. With a modest increase in capital expenditures in 2018 and a constructive M&A environment, we are not quite ready to increase return of capital to our shareholders right now. But depending on how our M&A initiatives play out, such actions may make sense later this year. We will continue to monitor this closely in consultation with our board as the year unfolds.

Turning back to results of operations. For the fourth quarter of 2017, our Wellbore Technologies segment generated $715 million in revenue, an increase of $22 million. EBITDA increased $13 million to $107 million or 15% of sales. Sequential EBITDA leverage was a very strong 59%, as was year-over-year leverage at 47%.

Increasing sales drove better absorption and the depletion of NOV products and customer inventories created pricing power, both of which more than offset the cost of ramping up our operations and the wage inflation that is taking place across the industry.

Our belief that this segment can continue to outpace global activity levels with strong incremental margins remains intact. The segment's 3% growth outperformed declining global rig count during the quarter and growth in much -- most every product line more than offset 9% sequential decline in revenue from our Grant Prideco drill pipe business.

After a 17% sequential improvement from the second to the third quarter, a less favorable mix and lower volumes of drill pipe contributed to the decline in the fourth quarter. Notwithstanding the falloff in Q4 revenue, bookings were better than anticipated, and we continue to see significant improvements in drill pipe supply and demand fundamentals.

Current drill pipe bookings are not yet sufficient to overcome the pace of declining stocks of inventories, but customers remain capital constrained and cautious.

However, improving activity levels and day rates were helping our customers' cash flow and balance sheets while pent-up demand continues to build. Market dynamics and our introduction of new Delta premium connections set this business up for a stronger second half of 2018 and a potentially much more exciting 2019.

Our shorter cycle consumables business, which makes up the bulk of Wellbore Technologies segment are seeing steadily improving demand. For instance, our drilling motors business realized a 14% sequential improvement from Q3 to Q4 after posting 24% growth from the second quarter to the third. Rapid adoption of our ERT power sections, which provide up to twice the power of conventional motors is contributing to the strong performance, as is pricing for our drilling motors, which has nearly returned to 2014 levels.

We're also seeing increased demand for other leading edge technologies, including our automation and optimization services. As highlighted in the press release, momentum continues to build for our eVolve services with several new jobs secured during the quarter.

We also view the purchase of 2 strings of IntelliServ Wired Drill Pipe by a major North American drilling company as validation that U.S. operators are increasingly realizing the value offered by our comprehensive suite of High Speed Telemetry data and optimization solutions. Demand around the world for our other offerings within the segment also remains healthy. At our WellSite Services business unit, we received over $30 million in contracts for drilling fluids in Argentina, where we can continue to gain share in this growing market. We also saw an increase in demand for capital equipment produced by this unit.

Receiving orders for 7-month tank systems in North America and a large order of MD Totco RigSense systems for an operator in North Africa. The RigSense rig site information system uses NOV's leading sensor, computer and data acquisition technologies to provide customers with fast, accurate rig information for drilling operations.

A market environment in which customers strive to implement better physical and digital solutions, drill ever-increasing lateral lengths more quickly at lower costs and place gun barrel straight wellbores more precisely and accurately sets the stage for compelling business opportunities within the segment.

Looking at Q1, we anticipate flattish activity levels around the world as operators begin 2018 with conservative budgets. In this environment, we expect to realize 200 to 400 basis points of sequential top line growth with strong incrementals. We expect stronger top line growth will accelerate later in the year assuming oil prices hold at current levels or better given the segment's compelling offering of short cycle products and technologies.

Our Completion & Production Solutions segment generated $690 million of revenue during the fourth quarter, an increase of $8 million sequentially. EBITDA margin decreased by 350 basis points to 10.7%. This was a good news/bad news kind of quarter for the segment. Performance of our Subsea and Process and Flow Technologies business units were a little disappointing, however, the segment delivered strong bookings of more than $500 million for the quarter. We entered 2018 with a total backlog in excess of $1 billion, a level we haven't seen since the third quarter of 2015.

Our Intervention & Stimulation Equipment business continued to experience strong growth as the pace of deliveries of new pressure pumping equipment accelerated into Q4, allowing the unit to notch an 11% sequential improvement in its top line.

As anticipated, the pull-forward effect we experienced earlier in 2017 associated with Tier 4 emission standards dampened demand for new pressure pumping equipment in Q4. However, we were very pleased to book $84 million in new orders that were heavily weighted towards coiled tubing.

Headlining the order book were 7 new coil tubing units, 10 injector heads and a myriad of coiled tubing support equipment. We also saw a growing demand for wire line equipment with 1 customer in the Middle East placing an order for 32 sets of wireline pressure control equipment. Our Process and Flow Technologies business booked close to $100 million of orders, most of which came in near the end of the quarter. While demand improved for a backlog-oriented wellstream processing project line, the timing of those bookings coupled with softer-than-anticipated demand for book-and-turn products in our production in midstream and industrial pump mix of businesses resulted in a sequential decline in Q4 revenue with large decremental margins.

Our Fiber Glass Systems business unit delivered another strong quarter of growth. Revenue increased 8% and bookings exceeded $100 million. The order book included a sizable order for large-diameter pipe to be used for a large saltwater gathering system in West Texas and additional Fiberspar pipe orders for the Middle East. Customer appreciation continues to grow for the corrosion proof, lightweight, easy-to-install composite pipe solution this business unit offers.

Our Fiber Glass operation could be the poster child for the crosscurrents we have been talking about over the past several quarters. We're seeing strong growing demand from land markets, but almost nonexistent demand from the offshore, which has our marine and offshore backlog at record low levels.

As previously announced, we encountered challenges associated with manufacturing a new product within our Subsea business unit. The issue related to a buildup of torsional stress that occurred during extended length extrusion runs, and therefore, was not caught during shorter initial test runs.

The issue resulted in a shortfall in revenue and excess costs in the fourth quarter and will also impact Q1. However, we are confident we have a solution that will get us back on track later this month. While we've had challenges related to our offshore businesses, there is some cause for optimism that we're at or very near a bottoming activity. We've seen a notable increase in inquiries, and to a lesser extent, orders in our subsea, floating production and XL Systems businesses. Each of the 3 offshore business units posted greater than 100% book-to-bills, albeit off of low levels. And all have seen a pickup in discussion surrounding tiebacks, enhanced oil recovery and to a lesser extent, greenfield developments.

Included in our orders was an award to supply several major topside package components for an FPSO redeployment in Malaysia. The project scope of work requires an integrated approach to refurbish and construct components for the FPSO.

We'll do all the fabrication at our facility in Batam, Indonesia and serve as a one-stop shop for an export gas metering skid, inlet separator module, dehydration module, export gas compressor, BOP module, triethylene glycol regeneration, flash gas compressor module, high-pressure flare knockout drum skid and all the interconnecting piping.

Our FPSO strategy has always been about selling equipment. We knew the technology we developed and we invested in our capabilities would be useful for offshore production opportunities beyond building new FPSOs. It is through these investments that we were able to secure this project, and it is through this project that we will have our best opportunity to date to demonstrate how NOV can provide better FPSO solutions.

While more optimism appears to be creeping into the system and we expect 2018 to see more offshore FIDs, we remain very cautious in our outlook for the offshore. Major operators do not yet seem to have the conviction necessary to commit large amounts of long-term capital to offshore reserves when they can make smaller, short-term bets on unconventional resources in North America. We believe near-term FIDs will be smaller in scope than typical projects launched 5 or 10 years ago.

Therefore, for the first quarter, we anticipate modest improvements in most businesses, offset by challenges that will persist through mid-Q1 in our subsea business unit, limiting sequential top line growth to 2% to 3% with a 100-basis-point improvement in margin.

As we announced in our January 19 press release, we combined our legacy Rig Systems and Rig Aftermarket reporting segments into a single segment called Rig Technologies. During the fourth quarter, our new Rig Technologies segment generated $614 million in revenue, an increase of $104 million or 20% sequentially.

EBITDA increased by $30 million to $70 million or 11.4% of sales. For those who want to compare our Q4 results to the guidance provided last quarter, we estimate that under the prior structure, we would've reported Rig Systems revenue increased $88 million to $419 million and EBITDA increased $16 million to $44 million.

Rig Aftermarket revenue increased $24 million to $336 million, and EBITDA increased by $20 million to $89 million.

In our aftermarket operations, we experienced our typical albeit stronger-than-anticipated seasonal Q4 improvement in service and repair work. Spare part sales decreased slightly, but bookings increased by 3.5% sequentially.

As noted in our press release, we were awarded additional contracts for condition-based monitoring of BOPs and risers during the fourth quarter. We continue to expand our suite of condition-based maintenance capabilities, and more customers are beginning to recognize the value offered by such services.

On the capital equipment side of the business, deliveries that were deferred by customers in Q3 due to the dip in commodities in late Q2 and into early Q3 shift in the fourth quarter with customers having a renewed sense of urgency in taking delivery of capital equipment.

Deliveries included 2 ideal land rigs for a North American drilling contractor; several well service rigs; a jacking system for an offshore wind farm support vessel and a variety of other capital equipment. In addition to strong sequential improvement in the P&L, bookings also increased considerably to $169 million from $84 million in Q3, partially due to bookings that we expected in the third quarter materializing in Q4.

Book-to-bill was 59%, the highest ratio posted since the second quarter of 2014. Significant bookings included a subsea BOP stack and meaningful orders across our marine construction and heavy lift product offerings. We were also awarded 2 FEED studies including 1 for a new platform project. Over the next few quarters, we anticipate seeing more FEED studies to evaluate the economics and feasibility of new projects as major operators appear to be more seriously evaluating new offshore developments.

However, we still see very few opportunities for newbuilds outside of potential -- outside of the potential for new mid-water harsh environment semis. Dialogue with our offshore customers continues to focus on upgrades, which include motion compensation systems, enhanced pipe handling and increased hook load capabilities. In the North American land market, capital constraints among customers and day rates below 25,000 are inhibiting newbuild orders. However, opportunity to assist customers in upgrading rigs to achieve Tier 1 super spec criteria continue.

Many contractors have worked through their rigs that are easy to upgrade to such specifications, and we're now seeing opportunities to convert and upgrade high-quality DC rigs, which present a larger per unit revenue opportunity for NOV.

As we've noted before, we believe day rates north of 25,000 per day and contracts of longer duration will be required before we see broad-based resumption of new land rig orders in North America, conditions which could arrive as early as late 2018.

In the international markets, tenders continue to push out. However, we could see one awarded as soon as late Q1 or early Q2. While fundamentals are improving and customers are increasingly more optimistic, market conditions for rig technologies will remain challenging near-term.

For the first quarter, we anticipate segment revenue will decline 10% to 12% from very strong fourth quarter results with a 100 to 300-basis-point decrease in margin.

Overall, we're expecting first quarter results to be flat to slightly down relative to the fourth quarter of 2017 as crosscurrents around the world persist. Nevertheless, with oil prices at the highest levels in 3 years, we are going increasingly optimistic about the remainder of 2018, particularly the second half. We expect our short cycle land business to continue to outpace drilling activity growth in North America. We're finally seeing more signs of activity returning to international and offshore markets that set the stage for modest improvements in these areas later in the year.

Our oilfield service customers remain capital constrained and cautious, and our oil and gas operator customers are demonstrating fiscal discipline and restraint. Understandable given the commodity price head-fakes we've all witnessed through this downturn. But the dissipation of oil inventory overhang and the lack of oilfield investment through the downturn plays this latest oil price move on firmer footing and if sustained, will bring significant healing to this battered industry in the form strong cash flows and higher activity levels as the year progresses.

Like Clay said in his initial comments, it feels to us the market is nearing an inflection point. The many talented, dedicated people at NOV have worked extraordinarily hard over the past few years to best position this organization for that inflection, and we are ready for the opportunity.

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

(Operator Instructions) Our first question comes from line of Bill Herbert with Simmons & Company.

Jose and Clay, I guess, with regard to -- first of all, with regard to Q1 on Rig Technologies, Jose, the composition of the revenue decline between revenue out of backlog and noncapital revenue, is it kind of equally split in terms of the magnitude of the decline? And then secondly, what would be your expectations for revenue out of backlog for 2018?

Sure. So as it relates to revenue out of backlog, Q4, that number was $288 million. As we're looking at Q1, we believe that number will be in the $240 million range. And for the full year 2018, we're anticipating that number will be approximately $800 million.

$800 million, got it. And -- okay, and so that answers my question, I think. My sort of follow-up subject, as were -- as opposed to question was, is there any expectation at all over the course of 2018 that Rig Tech witnesses a book-to-bill north of 1x?

That's a great question, Bill. And I think it's a possibility. I would stop short of saying it's a probability. We're most encouraged by what we're seeing and hearing from our North American land drilling contractor customers that day rates are on the move. Recent report says that they are in the low $20,000 per day range. We think sort of the magic day rate required to prompt new rig buying activity by land drillers in North America is probably $25,000, $26,000 a day. And so we're inching a little bit closer. So that gives us cause for optimism. In international markets, there have been a number of land tenders that we've spoken to off and on over the last couple of years. They slowed down last year with oil price pressures and with OPEC cuts. Some of those appear to be kind of restarting and so we see some of those hit later in 2018, that could drive incremental demand for land rigs. In the offshore, as Jose mentioned, I think, in his prepared comments, we're seeing some interest in upgrades around hook loads, motion compensation and so forth, not big. But also really surprisingly strong demand in the fourth quarter around construction vessel, pipe lay, wind farm type opportunities as well. So we're seeing some cause for hope here, but I'm going to stop short of telling you that's going to drive book-to-bill over 1 in 2018.

Our next question comes from line of David Anderson with Barclays.

Clay, I was wondering on international land [farm], probably we've been hearing a lot of chatter about market share war developing amongst integrated service providers on the pricing side. I was wondering if you can -- rig capital equipment is, of course, very different. Can you just give us some lay of the land that you see at the international land market? Are you seeing some of these same pricing pressures? Obviously, it's a very different market.

Yes, it is, and I would say the international markets, broadly speaking, have been slower to recover on pricing than we've seen in North America. And Wellbore Technologies in particular, have seen some pretty good pricing traction in a couple of its key product categories. But overseas it's been a little more competitive battle thus far. What's most encouraging to me about those international markets is that I think there is sort of growing recognition amongst NOCs and overseas oilfield service companies of the importance of technology, how it's really sort of radically transformed the oilfield here in North America. And so encouraged by conversations we've been having along the way in respect to putting more of those technologies to work in overseas oilfields.

And you touched on last quarter about you were building out some capacity in Saudi. I think it's going to take a little while to build that out. Can you talk about your capacity as you're building them in countries as it relates to the neighbors in Rowan, plans for newbuilds over there? When do you see those orders going to come through? Are you building up for that or is this what you're building out is completely different because it's more kind of a consumable downhole equipment you're building out?

Well, it's a little bit of all the above. We announced a joint venture with Saudi Aramco to manufacture drilling equipment in the Kingdom, and we're very excited about that. It's not quite complete, but we're very, very close and we expect to be sanctioning that officially and breaking ground a little bit later in 2018, but we're looking to really all the customers in the Kingdom to supply their needs as well as regionally around rigs. In addition to making drilling equipment, there is a number of other products that we already manufacture there in Saudi Arabia, including a lot of downhole tools and bits and are looking at other things that we can make closer to the end markets for those products.

Our next question comes from line of Marshall Adkins with Raymond James.

Clay, a quick one for you. You guys, like, you make everything, frac spreads, wireline, coiled tubing, rig parts, pipe, whatever, mud motors. What -- I'm curious as to the top three tightest products that you see out there right now? In other words, where are you seeing incremental demand greatest? And just kind of narrow it down maybe to the top three or so, if you could for us.

Downhole drilling motors where we've seen them the greatest pricing gains. And, in fact, we're really back -- pretty close to 2014 pricing for those. That's helped by the fact we've introduced some new technologies for drilling motors that really do well on performance. I would add to that bits. We're seeing some pretty good demand for some of our new ION cutter ReedHycalog bits. That's really driving a strong demand, and I'm looking at Jose, probably in the frac arena certain offerings that we have there.

Yes, I would say that it's -- sometimes it's almost surprising from quarter-to-quarter where we see those pockets of demand. Obviously, things have been pretty stable on the pressure pumping front, notwithstanding the little bit of a lull that we anticipated in Q4 on the booking side related to Tier 2 to Tier 4 emissions changes. But really prior to this quarter, we saw the big pickup in demand for frac equipment and early in the recovery, we saw much better-than-anticipated demand for wireline industry as well. In this quarter, the story within our Completions capital equipment business related to land was on the coiled tubing side. So that's been a strong performer certainly this quarter.

And if I could throw in a fourth, it's small, but a really, really interesting one with good growth lately. It's IntelliServ Wired Drill Pipe, where we're talking to more and more customers. It's going to work on more and more projects around the world. And as we mentioned in our press release, we had a drilling contractor buy 2 strings in the fourth quarter.

Right, right, that's -- so it sounds like it's pretty broad-based. Let me...

Let me also add. High-spec well servicing rigs, there has been good appetite for that and still incremental demand in the market that we're seeing.

For any customers listening, get your orders in now.

All right. Let me shift gears here real quick, Jose. It's hard for us to kind of parse through the impact of tax reform on -- every [time], it's going to be different. Give me kind of your overview of how big of a deal is that for NOV? And obviously, on the repatriation issue as well, is that relevant, is that meaningful to you?

Yes, good question, Marshall. I think the most impactful element of the change in tax reform is related to our long-term tax rate, which ultimately translates into cash taxes, right? And if you sort of go back to healthier times in the industry, you'll see that NOV was a pretty high effective tax rate company and a fairly high cash tax company with our average tax rate being right in the range of 30%. So as we sort of look at sort of the -- where our income is generated around the world or expected to be generated around the world, from the international market standpoint, the average there has historically been and expected to continue to be at around 24% range. So as that blend with 35%, that has really made us a high tax payer related to U.S. tax rate. So blend the two together now, 21%, 24%, you're in sort of that low to mid-20s range. So that can be a significant contributor to the future cash that we get to retain as an organization. From a repatriation standpoint, quite frankly, I'll brag about our tax department a little bit here is, we've been able to navigate things pretty darn effectively. And so repatriation has not been a huge issue for us. Obviously, the new regs, while there are still some friction in the system, I think it will alleviate more long-term friction and make it -- just make it easier for us to move cash around the world. But right now, we're really well positioned. We have plenty of cash domestically to pay down our $500 million note during the quarter and still have about $450 million in cash sitting in the U.S. at quarter end before the tax reform legislation came into effect.

Our next question comes from the line of Sean Meakim with JP Morgan.

So Clay, thinking about the optimism that you're expecting for the second half, could you maybe just give us a little more detail, I guess, is that optimism geared around orders? And therefore, the impact to your P&L is really more of a 2019 event? Or the opportunities are meaningful inflection in your EBITDA generation later in '18?

I think it will help later in '18, Sean. But the basis for that optimism really stems from the oil price moves that we've seen here lately. And it kind of goes back to what we were saying in our prepared remarks that inventories appear to be going the right way. That's lifted oil prices, $65 WTI is -- puts our oil and gas customers in a much, much better mood. And frankly, that's where it all starts. They need to be feel more optimistic about the future to believe that, to move forward with greater levels of activity. And so our reputation is that will drive greater levels of activity as 2018 progresses, if the oil price holds. And so we continue -- we would expect to see continued growth in our activity-driven businesses. And then our longer cycle businesses within Completion & Production Solutions, drill pipe business and Wellbore Technologies. In our Rig business, we'd see benefit of higher orders later in the year and then that translating to revenue and EBITDA in 2019. That's -- from this point, that's kind of the way we see things progressing, again, if the commodity price holds.

Got it. Okay. And then I really appreciate the comments earlier on capital allocation. It all makes a lot of sense. We talked a little bit about repatriation here and we talked a little bit about the impact of higher oil price. Can you maybe just give us a sense of what those 2 variables do with respect to the M&A opportunity, inorganic opportunities that we are looking at for 2018?

Yes, we still see crosscurrents. Despite the basic optimism I described earlier that's fueled by commodity prices, different markets are sort of looking at different prospects. And so our view is -- and we're still seeing really interesting opportunities out there. We closed 8 acquisitions in 2017. That brings us up to a couple of dozen or more I think through the downturn. And we have a number of couple million dollars of letters of intent that are out there in place now. And so this has been a very long, painful downturn for lots of folks, and I think the market for M&A has done nothing but get better kind of year-by-year. And so we're still actively pursuing those. Obviously, a big spike in oil prices and resumption of activity probably will dampen those prospects a little bit, but here in the short term, we still see really interesting, good opportunities. The other thing I would tell you, Sean, is I think the style of the kinds of acquisitions that we've been making through the downturn has evolved a bit. Generally, they'd been more focused on technologies and opportunities to add and supplement our portfolio with products that makes sense and fit. And what we offer to those sellers is really opportunity to put those products through NOV's 66-country infrastructure and sort of accelerate growth and acceptance of those technologies, broadly speaking. And so, obviously, market outlook and oil price matters in that dynamic, but maybe matters a little bit less given that kind of style, that kind of opportunity that's kind of good for the seller and good for NOV to pursue. And so I think that means we're going to continue to be active and engaged on the M&A front irrespective of the kind of market that we're in because there are, I think, good opportunities to enhance what we do by accessing technologies and products through our M&A team.

Our next question comes from line of Byron Pope with Tudor, Pickering, Holt.

Just one question, Clay. I've been hearing you talk about some of the offshore businesses. It struck me that you guys have done a great job over the years in terms of getting closer to the E&P operator. And it seems as though for some of your offshore products, you'll be selling more to the -- directly to the E&P operators as opposed to service companies. At a high level, can you frame where you guys are today in terms of your products of portfolio that you sell directly to E&P versus service companies?

That's a great question. I think most of that activity is probably within the Completion & Production Solutions segment. So in broad brush strokes, Byron, the capped segment minus the well intervention and stimulation equipment portion of that is a pretty good proxy for what's going to the E&P world.

And I would say, also, it's a mix because you also have within our Wellbore Technologies segment, oftentimes, the E&P that's calling the shots, particularly as it relates to some of the tools that are being run downhole, the consumable elements. So there's a good mix. Yes, I don't have a number to pin down exactly how much is to the operator, but ultimately the sales strategy for all of our technologies is -- I can't really think of any exception. It's important for us for both the service company or the contractor as well as the -- and operator to be aware of the latest technologies and the capabilities of those technologies so that they can put those to work in the most effective way possible.

That's a great point. I'm glad you brought it up because frequently, the customers that we've signed the contract with isn't necessarily specifying our equipment and that's true across lots of things that we sell in Wellbore Technologies. It was also true in Rig Technologies when our customers were shipyards, but they were really being told by drilling contractors what to buy.

Our next question comes from line of Igor Levi with Morgan Stanley.

So free cash flow excellence has been one of NOV's key differentiators and in the last few years, working capital has been a tailwind. You've highlighted your ability to decrease this lately. It's now I think below 50%, and you've mentioned that you see further upside. So how much lower could working capital decline by the end of 2018? And is 30% of revenue still a valid target because that could be $0.5 billion to $1 billion of incremental free cash flow just from that.

Yes, thanks for the question, Igor. Look, as we've mentioned before and as we've talked about a little bit in the prepared remarks, we are intently focused on sort of right-sizing the working capital of the organization. It's obviously been a very challenging market in which to do that. But we continue to be very diligent, and we'll probably double down on our efforts over the next year or 2. So in terms of our end goal related to our working capital metrics, as you pointed out, we often think about total working capital as a percentage of revenue run rate and historically, that's sort of been in the, call it, 30% to 35% range, and that's where we intend to get back to. That's not a quick target to reach due to the constraints that we have in our current markets, particularly with the challenges that will continue in the offshore space, but we intend to continue making good progress. This quarter, we reduced that metric from 51% down to about 43.5%, and that's down from about 58% a year ago. So we've made a substantial progress, expect that to continue through the remainder of '18, and frankly, well into '19 as well. As it relates to sort of cash flow freed up from that endeavor, you sort of have opposing forces there to some extent. We're anticipating continued growth into 2018 on the top line, which should counteract some of our efforts from a cash flow standpoint. But net-net, we still anticipate a decent amount of cash flow coming out of working capital through the course of 2018.

Great. That's very helpful. And then on the technology -- from a technology standpoint, I mean, you've had quite a few technology-related initiatives during the downturn and it looks like this innovation is starting to pay off with some particularly strong rewards in the most recent quarter. Is there a large margin upside from this technology uplift? Is this something that you could potentially quantify? And when would you expect to begin to benefit and see this flow through the income statement?

Another great question, Igor, and thanks for asking. Yes, we have had great strides and success across a number of areas. Unfortunately, you're introducing new products and new technology and inevitably, there's going to be a negative margin for a while until they get traction in the marketplace. And so depending on what specific products we're talking about and kind of where they are in their launch process, those may or may not be contributing meaningfully yet. But what's interesting to me is sort of this portfolio now that NOV brings to the oilfield, trying to look to see where the puck is going and positioning ourselves to provide the technologies to get there. And so I'm really excited about kind of the trajectory that we're on and success that we've had so far. To be fair, not a big contributor of EBITDA so far, but really laying the foundation for what NOV looks like in the future. And to me, that's very, very exciting.

Our next question comes from line of Waqar Syed with Goldman Sachs.

I just want to follow up on the question regarding the split of revenues between services and E&Ps. But more precisely, I wanted to find out like what proportion maybe comes in from the big 4 companies, the global large-cap service companies, because it feels that they are kind of more keeping the CapEx budgets relatively unchanged going forward while the rest of the industry may be increasing in the near term. Could you maybe provide some color on that?

Waqar, I got to tell you, I think NOV probably has the most diverse customer base of anybody in the oilfield services. There's almost no one out there that we don't sell to. So we're very pleased to support operations of the big 4, but we also sell to just about every land drilling contractor, every oilfield service company, every offshore drilling contractor, along with a whole host of E&P companies and -- but I would also add to, we kind of referenced this in our opening comments, there's higher optimism out there, but not necessarily translating to tremendous growth in budgets at the first part of 2018. And so what you described with in terms of budgeting for the upcoming year by the big 4, yes, that's probably a fair comment. All around the oilfield, most participants I think remain cautious after a couple of oil price head-fakes in the past. But so far so good as we get into 2018 here with where oil prices are.

So if you think about the oilfield services component, will the big 4 kind of represent maybe 50% of that?

If any one individually was over about 2.5%, 3%.

Our next question comes from line of Kurt Hallead with RBC Capital Markets.

So I think the -- what I'm trying to understand a little bit more here is, in the past, you've talked about a decrease in the amount of drill pipe inventories and stock. The prospect of that business to pick up. I was wondering if I missed some of this that you might have mentioned a little bit earlier, I apologize. You guys do go through this stuff pretty quickly, but can you just mention drill pipe, and then maybe elaborate a little bit more on what's going on with the IntelliServ drill pipe?

Yes, I think we talked about it a little bit without a whole lot of specificity in our prepared remarks, Kurt, and maybe we'll try to slow down our speech in subsequent calls, but the drawdown continues. And from my recollection, last quarter, I think we gave a specific number that basically were down 17% on the customer-owned inventory piece within the U.S. market, and we now estimate that we have, yes, that we have, right. We now estimate that, that's down by about 22%. So those draws continue to come fast and furious and that led to -- leads to our optimism for a good back half of the year and really good '19 and beyond.

Yes. We also introduced a new premium thread connection in 2017 called the Delta connection, which is really specifically focused on land drilling contractors and has a lower total cost of ownership and is a little more durable for land operations and that's starting to get really good traction, and I think that will help fuel demand. And then finally, I think you asked about Wired Drill Pipe. That's -- the ability -- traditionally, NWD mud pulse systems operate at 5 or 10 or maybe 15 bits per second. Wired drill pipe operates at 55,000 bits per second. And so it is truly much, much, much greater bandwidth and what oil and gas customers are realizing is that the ability to get a lot more data from the bottom of the hole, which IntelliServ offers them is opening up new sorts of drilling techniques and better insight into downhole conditions and enables them to avoid lots of trouble, costs and to drill faster and to evaluate formations on the fly much better. And so it's just other way around, a really, really promising technology, and the good news for us, I think we have got enough experience under our belt where it's fairly bulletproof operationally. It's reliable and does a great job, and we are sort of seeing this blossoming of data measurements downhole that utilize that bandwidth to improve operations. And so that's what's driving demand for the IntelliServ Drill Pipe.

And you think, Clay, you're at a point now where you're going to see much more mass adoption?

I think so. It's still single-digit number of jobs that we have going on simultaneously out there, but double digits numbers of customers that are expressing interest. And really not just kicking tires, but kind of getting in line to put it to work. So what's also interesting to me, it's not 1 sort of -- 1 operational challenge or 1 issue that this is being employed to fix. It's a broad, a pretty wide number of downhole measurements that are being made and downhole conditions and challenges that's being applied to and applied to successfully. So I'm really pretty jazzed about where this is going and it's not hard for me to imagine some number of years out where this becomes a much more standard piece of kit on a lot of drilling operations around the world.

And that concludes today's question-and-answer session. I'd like to turn the call back to Clay Williams for any closing remarks.

Thank you, appreciate you joining us this morning, and we look forward to sharing with you the results of our operations in the first quarter in April. So thanks very much.

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