NOV Inc. (NOV) Q4 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to National Oilwell Varco earnings call. My name is Kevin and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions given at that time. I will now turn the call over to Mr. Loren Singletary, Vice President, Investor & Industry Relations. Mr. Singletary, you may begin. Loren Singletary - Vice President-Investor & Industry Relations: Thank you, Kevin, and welcome everyone to the National Oilwell Varco Fourth Quarter and Full Year 2015 Earnings Conference Call. With me today is Clay Williams, President, CEO, and Chairman of National Oilwell Varco; and Jose Bayardo, Senior Vice President and Chief Financial Officer. Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and fiscal year ended December 31, 2015, please note that some of the statements we make during this call may contain forecasts, projections, and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the Federal Securities Laws, based on limited information as of today, which is subject to change. They are subject to risk and uncertainties and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year. I refer you to the latest forms 10-K and 10-Q National Oilwell Varco has on file with the Securities and Exchange Commission for more detailed discussions of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information may be found within our press release, on our website at www.nov.com, or in our filings with the SEC. Later, on this call we will answer your questions, which we ask you to limit to two in order to permit more participation. Now let me turn the call over to Clay. Clay C. Williams - Chairman, President & Chief Executive Officer: Thank you, Loren. National Oilwell Varco faced deteriorating market conditions during the fourth quarter to cap off a very challenging year. The company reported fourth quarter net income of $85 million or $0.23 per fully diluted share, excluding other items, down from $0.61 per fully diluted share in the third quarter of 2015 on a comparable basis. Other items included pre-tax charges of $1.6 billion in goodwill and intangible asset impairments; $139 million in restructuring inventory write-downs, severance, and facilities closures; and $7 million in FX losses in Argentina. GAAP net loss for the quarter was $1.5 billion or $4.06 per fully diluted share. Fourth quarter 2015 revenues were $2.7 billion, down 18% from the third quarter of 2015. Operating profit for the quarter was $141 million or 5.2% of sales. And EBITDA was $308 million or 11.3% of sales, excluding other items from both. Decremental operating leverage was 35% from the third quarter to the fourth. Our management teams across our business units are responding quickly to lower revenues, which fell further than we expected in the fourth quarter, by reducing costs and accelerating restructuring plans, which enabled us to hold decremental leverage to 35%, ex-charges, despite the sharp volume decline and renewed intense pricing pressure we are seeing. As we have stated for the past few quarters, our focus is to manage what we can, namely costs, while continuing to advance our longer-term strategic goals. It nevertheless remains a very challenging time for everyone in the oil and gas industry, and our visibility remains limited. For its full year 2015 National Oilwell Varco posted a GAAP loss of $1.99 per fully diluted share, including restructuring, asset impairments, facility closure costs, and other charges of $2 billion pre-tax. Excluding these items earnings were $2.80 per fully diluted share, down 54% from $6.07 per fully diluted share earned in 2014. Operating profit was $1.6 billion or 11.1% of revenue. And EBITDA was $2.3 billion or 15.5% of revenue for the full year, excluding charges. Decremental operating leverage was 32% from 2014 to 2015, excluding charges from both years, a commendable result in view of the severe downturn and pricing pressures we faced throughout the year. Cash flow from operations for 2015 totaled $1.3 billion with $614 million of that coming in the fourth quarter with improving working capital liquidation. We continued to invest in our future, closing seven acquisitions through the year, which, among other benefits, enhanced our presence in Saudi Arabia, our WellSite Services offering in Asia, and brought in new composites technology. We continued developing new products with our new test rig, which we spudded at the beginning of the year. We also continued investments in the world's most promising regions, adding new facilities in Saudi Arabia, Abu Dhabi, Russia, and West Texas. We returned $2.9 billion to shareholders in 2015 through dividends and share repurchases. With regards to costs we were able to manage the good decremental operating leverage on our 31% decline in revenues, ex-charges, by close attention to costs and efficiency. We in-sourced tens of thousands of hours from outside suppliers to our own workforce to preserve our team wherever possible. Nevertheless our global workforce, including contract labor, declined 21% through the year. And we closed 75 facilities since mid-2014 to retrench to a smaller, more efficient footprint. We expect restructuring will continue through the first half of 2016, perhaps longer, in view of the challenging market. A second major decline in oil prices last year deepened and intensified late during the fourth quarter and continued throughout January, when oil traded into the high $20 range, levels not seen since 2003. This, combined with hedges rolling off for E&Ps and term contracts expiring for drilling contractors, ratcheted up financial stress on our customers and increased pricing pressure on NOV. We believe the present level of activity is insufficient to supply the longer-term demand for oil. And note that unlike the three most recent downturns through the past 20 years, OPEC has not curtailed production to defend pricing. This has made the present downturn far more severe, but will perhaps lead to a sharper eventual recovery. With producers pumping furiously to maximize their cash flow, the relentless march of depletion, the deferral of 68 projects representing 3 million barrels of oil per day of planned future production, and the unfolding of severe capital austerity will help bring supply and demand into balance. But we are not planning for a recovery in 2016. Instead we will continue to manage costs to the reality of the marketplace in the short term. Even with a rebound in oil prices it will take time for our customers to repair balance sheets, reactivate crews, and to ramp up the activity that drives our business. Each day that passes means we are a day closer to the inevitable rebound. Our plan is to emerge with new products, new business models, and new efficiencies. Our Completion & Production Solutions segment fell 7% sequentially in the fourth quarter and posted 56% sequential decremental operating leverage, excluding restructuring and other items. Orders declined from 99% book-to-bill in the third quarter to 59% in the fourth, which led backlog down to $969 million at year end. Strong sequential improvements in our XL Systems conductor pipe connections unit in the fourth quarter capped off a solid year for this unit with higher year-over-year margins. However, these failed to fully offset sequential double digit declines in our other products within the segment. In North America customers delayed picking up well-stimulation equipment previously ordered. And some are now buying frac spreads at distressed pricing to use for spare parts, which further reduced sales but will ultimately help erode the equipment overhang. In North America sales of spares and consumables like coiled tubing declined with reduced activity. But the FSU in the Middle East remained comparatively strong. Sales of composite oil field pipe declined, as the costs of competing steel flowlines have plummeted 35% or more. And our sales into the marine construction market slowed. Our value proposition for the composite pipe that we manufacture is much lower lifetime costs due to its corrosion resistance. But E&Ps under duress are opting for the lowest investment option to bring on wells and their associated cash flow. About 20% of the segment's mix is in production equipment, pump separators and artificial lift, which also fell in the quarter as distributors slowed purchases. We have six major facility consolidations underway within this business unit, which will drive better efficiency going forward. Within our offshore production related businesses we saw rising pricing pressure on flexible pipe, but were pleased to post a 111% book to bill, as we landed some significant orders for pre-salt applications in Brazil. Our floating production vessel unit continues to pioneer new business models we launched a few years ago that leverage NOV's unique vessel construction capabilities to improve construction costs and reduce risks. Out new vessel concepts, which seek to accelerate production from certain types of deep-water fields, are being met with high enthusiasm from our customers so far. We are encouraged by new designs that are steadily whittling costs. But operators remain slow to sanction major deep water projects. It is nevertheless a promising target with 400 discoveries in the offshore. Our wellbore technology segment revenues fell 9% sequentially in the fourth quarter and posted 69% sequential decremental operating leverage, which resulted in a negative 4.1% operating margin, excluding restructuring and other items. EBITDA margins were 9% for the segment, ex other items. Two-thirds of the sequential decline in revenue came from North America, where operators stacked major drilling programs, intensifying pricing pressures and reducing volumes. Rentals of solids control equipment, rig instrumentation, and downhole equipment declined at high variable margins. Nevertheless we were able to increase share in our bits business, owing to new tectonic designs, which we are successfully packaging with our ERT drilling motors. In the FSU we expect to begin production in our downhole tools facility at our new Kostroma plant within a few weeks to supply the local market, which along with Asia posted higher sequential revenues in the fourth quarter. Latin America saw a significant decline for the segment across Brazil, Mexico, and Argentina. Our Tuboscope pipe coating business held up well through the quarter on drill pipe strength in China, but pipe mill inspection activity in North America declined with nine months of casing on the ground, the highest level of inventory seen since the 1980s. Rising activity around tubing, pipeline, and line pipe helped offset this somewhat. But we are even seeing work-over activity fall in West Texas, which is unusual. Prior downturns have seen work-over activity hold up better owing to quick paybacks. Drill pipe sales increased modestly from the third quarter into the fourth quarter but still remain low and under price pressure. Growing operator interest in closed-loop automated drilling technology drove higher revenues for our IntelliServ Wired Drill Pipe unit in the fourth quarter to produce solid year-over-year improvements for the group. This innovative service grew six-fold in 2015 as compared to 2014. And we have lots of interests from E&Ps, as well as drilling contractors eager to differentiate their rigs by enabling high speed data transmission from the bottom of the hole through their drill pipe. Our Rig Aftermarket segment posted flat sequential revenues, but margins fell due to mix. A decline in spare parts sales was offset by higher repair revenues, which came in at lower margins partly due to rising discounts to win repair work. As rigs come down, particularly onshore, they're being cannibalized for parts, impacting our spares business for the quarter. SPS activity on offshore rigs rolled over in the fourth quarter but remains active nonetheless. The Rig Aftermarket segment is actively working on about 40 projects, either underway or in the bidding stage. But these are fluid, as drilling contractors are curtailing scope or in some instances electing not to proceed with an SPS without a clear line of sight on a contract for the rig. Service and repair work in the U.S. Gulf of Mexico improved sequentially for Rig Aftermarket. And BOP repair work in the Middle East remained strong. Rig Systems revenues fell 32% at 24% decrementals in the fourth quarter, driven by sharply lower shipments out of backlog. Customers are delaying acceptance of uncontracted new builds to avoid stacking costs and to slow their CapEx, as they face falling day rates and utilization as their contracts roll off. Revenues from new offshore rig construction fell to about 20% of our consolidated revenue mix in the fourth quarter. We are working closely with our shipyard customers to navigate challenges and requests for delays and to improve our collections. But these situations remain fluid. At this point we expect revenues out of backlog for all of 2016 to total about $2.1 billion or $2.2 billion. Rig Systems saw a 76% decline in new orders in the fourth quarter, which fell to $89 million and totaled $1 billion for the full year. Quoting activity plummeted late in the year. And while we still see interest for new land rigs for the Middle East and some other selected markets, we expect orders to again be very low for the first quarter. Importantly we expect the land rig market to eventually resume its efforts to retool to more efficient AC technology. But the fourth quarter downturn in day rates for Tier 1 rigs will certainly delay that trend. As we disclosed in December we reached a confidential settlement with one of our shipyard customers in Brazil to cancel seven floating rigs being constructed there, which reduced our backlog by nearly $1.2 billion and led to a year-end backlog of $6.1 billion for all of Rig Solutions segment. At year end that backlog includes $1.75 billion for the remaining 15 rigs across three shipyards in Brazil. I would stress that the situation in Brazil with regards to these remains uncertain and continues to evolve, owing to the failure of our shipyard customer to secure long-term financing for these projects. We suspended work within two of these remaining three shipyards early last year. And we are in discussions with all three yards regarding the resolution of their programs. We recognized only $10 million in revenues from the remaining new build rigs in Brazil during the fourth quarter of 2015. As we wrap up a challenging year in 2015, we recognize we are facing increasing headwinds in 2016. But we also recognize that extraordinary opportunities will arise as a result of the stress our industry is under. I'm pleased with the execution of our experienced leaders, who are cutting costs and improving efficiency, but also continuing to advance our long-term strategic initiatives, like closed-loop automated drilling opportunities, which we expect to grow in 2016; new FPSO business models and designs to improve deep-water economics; and new products to improve drilling operations, completion techniques, and more profitable production. Our E&P customers' business models simply don't work in this low oil price environment. And therein lies the opportunity for NOV to once again pioneer new, more efficient ways of extracting oil and gas to reduce their cost. Importantly NOV represents a diverse portfolio of market leaders that participate in every major oilfield market around the globe. If we examine the major global sources of oil, which make up the 90-plus million barrels of oil per day global industry, we see 10 million barrels of oil per day coming out of – each of Saudi Arabia and Russia, both areas where we have invested heavily through the past few years, with our investments continuing to support relatively high levels of activity. Another 10 million barrels of oil per day comes from the Gulf states, where again we are expanding our presence. And the oilfield remains comparatively busy. Nearly 10 million barrels per day has been achieved from deep-water production, where we have benefited disproportionately from the deep-water and offshore rigs we had built and expect to pioneer better methods of production in the future. Another 10 million barrels per day roughly comes from North America, which is dominated by shale production techniques. Each of these major productive areas has been enabled by NOV technology. And we continue to help our customers adapt to lower oil prices across them all. NOV remains well-positioned globally for when the eventual recovery comes, wherever it shows up first. Our leading market positions have been assembled through a combination of organic investments and acquisitions. And we're actively pursuing several targets now. It has been challenging and sometimes frustrating to reach agreement with potential sellers. But as the downturn lengthens, everybody in this space is becoming a lot more realistic. We remain patient and disciplined on values and realistic in our outlook, as the option value of our capital flexibility steadily rises. I am pleased that NOV has the balance sheet and financial resources to pursue these. But I am more pleased that we have tough, capable, experienced managers who can skillfully integrate acquisitions and execute our business plans. To all the NOV employees I congratulate you for navigating such a challenging year in 2015. And I thank you for your contributions in building such a strong enterprise. We have a tough road ahead. But we are laying the groundwork for our future success. Jose? Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Thank you, Clay. I'll next provide some additional detail on our segment operating results for the fourth quarter and full year 2015 and provide some commentary on the near-term outlook. Our Rig Systems segment generated revenue of $1.0 billion, down 32% from the $1.5 billion earned last quarter and down 60% from the $2.6 billion generated in the fourth quarter of 2014. For the fourth quarter the split between offshore and land-related revenue was 73% and 27% respectively. Revenue out of backlog was $843 million, down 35% sequentially. As Clay indicated sliding delivery schedules and limited new order intake have contributed to the decline in revenue. You may recall that in the first quarter of 2015 we announced we were negotiating certain customer requested delivery delays for offshore new build rigs. Although not our first choice, modifying delivery schedules allowed us to better manage our cost structure and level-loading across our operations, as we began sizing our business to support reduced levels of demand. The success of our cost management measures are seen in our decremental operating profit margins, which were 23.9% on a 32% sequential revenue decline and which were 22.7% on a 60% year-over-year revenue decline. Fourth quarter operating profit for the Rig Systems segment was $160 million, yielding operating margins of 15.8%, down 260 basis points from Q3. EBITDA was $184 million or 18.1% of sales. And EBITDA margins decreased 200 basis points compared to the third quarter of 2015. During the fourth quarter we received $89 million in new orders, resulting in a book-to-bill of 10%. Q4 bookings were composed entirely of discrete pieces of capital equipment, as we received no new rig orders in the quarter. Bookings included top drives and blowout preventers for international land rigs, and cranes for offshore construction vessels. We ended the quarter with a backlog of $6.1 billion, down 24% sequentially, of which approximately 89% is for the offshore market and 92% is destined for international markets. As Clay mentioned in his commentary, our customers are under increasing pressures related to falling day rates and utilization associated with the cyclical downturn. Our global portfolio of offshore rig equipment contracts typically incorporate a significant down payment and progress payments, which minimize our working capital investments throughout the life of the agreement. While we do not expect meaningful charges from potential future breaches of contracts, cancellations, or other similar issues, the impact would vary, dependent upon the specific contract, timing of the event, and other circumstances. For full year 2015 Rig Systems generated revenue up $7 billion, down 29% in comparison to 2014 as slowing project progressed and declining orders drove revenue out of backlog down $2.6 billion from the $8.7 billion earned in 2014. With a resolute focus on execution and a commitment to continued cost reductions, Rig Systems generated $1.4 billion in full year EBITDA and maintained EBITDA margins just over 20%, despite revenues declining almost 30% over the same period. Full year 2015 operating profit was $1.3 billion or 18.9% of revenue, down 140 basis points from the previous year, representing decremental leverage at 23.5%. As we move into the first quarter of 2016 at this point we expect Rig Systems revenue decline in the high single digit percentage range and revenue out of backlog to decrease to around $775 million. But I'll stress that our visibility remains limited. We plan to deliver on our current backlog, while continuing to resize the business aggressively to meet a much lower level of demand. We are actively scaling facilities to single shifts, consolidating locations, and implementing other cost-control initiatives. Despite these efforts reduced volumes will work against us. And we anticipate some margin erosion on lower activity levels and continued delays in the range of 200 basis points to 300 basis points. Declining energy prices will negatively impact our order book for the foreseeable future. And we expect new orders for large equipment packages, both on- and off-shore, to remain low. We continue to win in the marketplace due to our commitment to technology, capacity, and operational service and support. But orders are scarce. As such we do not expect this quarter's bookings to improve materially from the fourth quarter. Our Rig Aftermarket segment generated $569 million of revenue during the fourth quarter of 2015, roughly flat sequentially and down 33% year over year from a record $850 in the fourth quarter of 2014. Customers curtailed spending, as rig utilization declined in both land and offshore markets. Land-related sales were approximately 21% of total segment revenue, down slightly from 22% in Q3, but up on a percentage basis from 18% in the fourth quarter of 2014. EBITDA for the segment was $135 million or 23.7% of sales. And operating profit was $127 million or 22.3% of sales, down 330 basis points from last quarter on higher proportion of lower margin service and repair work, as well as incremental pricing pressure on repair and selected spare parts. Overall, 2015 results reflected an increasingly uncertain environment, in which our drilling contractor customers reduced spending in an effort to preserve liquidity. Throughout the year our customers chose to deplete existing spares inventories, rather than pursue new. And did de minimis repair work and maintenance on their rig fleets, deferring more expansive work except where absolutely necessary. For the full year Rig Aftermarket generated revenue of $2.5 billion, down 22% from a record in 2014. For full year EBITDA was $647 million or 25.7% of revenue, down 250 basis points from 2014. And 2015 operating profit was $617 million or 24.5% of sales, down 290 basis points from the prior year. Looking into the first quarter of 2016 we expect Rig Aftermarket will see revenues decline in the mid to upper teens percent range. Due to the seasonal nature of the Aftermarket business we typically expect lower activity with a better mix of spares to service and repair work in the first quarter than in the fourth. However, we anticipate a steeper than usual decline in Q1, reflecting current market conditions. Although reducing costs will be at the forefront of our response efforts, pricing pressure may push margins around 100 basis points lower in the first quarter. Longer term we believe our Rig Aftermarket segment will be a strong early cycle beneficiary of the eventual recovery. We believe drillers will rush to return to suboptimally maintained, stacked, and partially cannibalized rigs to proper operating condition, once they gain confidence that the market has reached a bottom, and they see early indications of a recovery. For the fourth quarter of 2015 the Wellbore Technologies segment generated revenues of $757 million, down 9% sequentially from $834 million and down 50% from a record $1.5 billion in the fourth quarter of 2014. Reduced drilling activity negatively impacted all of our businesses within this segment. Average rig counts declined by 13% sequentially in the U.S., 9% in Canada, and 2% internationally. And segment revenue by geography closely mirrored the sequential fall in rig count. Pricing pressure continued into the fourth quarter across most all product lines. For the fourth quarter of 2015 EBITDA was $68 million or 9% of revenue, down 530 basis points from last quarter. And the segment posted an operating loss of $31 million. For the full year 2015 Wellbore Technologies generated revenue of $3.7 billion, down 35% in comparison to 2014, consistent with the year over year average decline in global rig count. 2015 EBITDA for the segment was $562 million or 15.1% of revenue, down from 26% in 2014. And operating profit was $162 million for 2015 or 4.4% of sales, as the speed of activity and revenue decline outpaced our reduction efforts. Like our Rig Aftermarket business, we expect our Wellbore Technologies segment to be an early cycle beneficiary of the eventual recovery. However, near term we have limited visibility and the activity driven nature of the business contributes to variability. Just four weeks into 2016 U.S. rig count is down 18% from the average in Q4 of 2015. So we expect revenues to fall 8% to 10% with decremental margins in the 40% range. We continue our efforts to optimize our Wellbore Technologies segment, resizing our business to meet lower levels of demand, improving our manufacturing processes to become more efficient on a lower cost base, and shortening our commercialization processes to bring new value-adding technologies to market. Our Completion & Production Solutions segment generated revenues of $746 million for the fourth quarter of 2015, down 7% sequentially and 44% compared to the fourth quarter of 2014. Businesses related to onshore completion and production were some of the most negatively impacted, with customers delaying receipt of finished orders, as operators' inventory of drilled but uncompleted wells rose in response to commodity price declines. EBITDA for the segment was $86 million or 11.5% of sales. And operating profit for the segment was $34 million, resulting in operating margins of 4.6%, down 330 basis points sequentially and 1,160 basis points year over year, as a result of lower volumes and pricing pressure. During the quarter Completion & Production Solutions received orders of $272 million, down $194 million or 42% sequentially, as a substantial flexible pipe order won in the third quarter did not repeat. We recognized $460 million of revenue out of backlog, resulting in a book-to-bill of 59%. Segment ended the quarter with a backlog balance of $969 million, of which approximately 75% is offshore and 87% is destined for international markets. For full year 2015 the segment generated revenue of $3.4 billion, down 28% in comparison to 2014, as revenue out of backlog declined $501 million or 20% and non-backlog revenue decreased 37% from 2014 to $1.3 billion. Full year EBITDA was $507 million or 15.1% of revenue, down 480 basis points from 2014. Operating profit was $286 million or 8.5% of revenue in comparison to $700 million and 15.1% in 2014, representing decremental leverage of 32.3%. Record or near record margin in some of our offshore production-related businesses, including flexibles and large-diameter XL Systems conductor pipe connections, were overshadowed by lower year-over-year contributions from our higher-margin intervention and stimulation equipment businesses, given reduced demand for hydraulic stimulation, oil tubing, and wireline capital equipment and consumables. With oil at 12-year lows orders for new capital equipment will remain challenged, as we move into the first quarter of 2016. Opportunities that do emerge will face continued pricing pressure. As a result we anticipate revenues will decrease by approximately 15%, and expect revenue out of backlog to fall to the $350 million to $370 million range. We anticipate decremental operating leverage in the 30% to 35% range. Now let's discuss some additional detail regarding our consolidated financial results. Working down the consolidated statement of income for the fourth quarter of 2015, gross margin declined 210 basis points to 19.1%. SG&A increased $25 million or 7% sequentially, due in large part to increases in bad debt and other year-end related items, which more than offset overhead reductions. Despite the slight sequential increase we reduced SG&A 28% year over year, which translates into an annualized cost savings of approximately $600 million. Other items for the quarter equaled $1.8 billion and resulted primarily from goodwill and indefinite lived intangible asset write-downs of $1.6 billion, and restructuring and other charges of $139 million. EBITDA was $308 million or 11.3% of sales. Net interest expense remained flat with the third quarter. And equity income was a loss of $3 million, as demand for OCTGs or Green Tubing associated with our Voestalpine joint venture remains muted, given the low demand for new drill pipe. Other expense for the quarter decreased $3 million sequentially to $17 million. And the effective tax rate for the fourth quarter, excluding the impact of other items, was 18.7%, affected by a taxable loss in the U.S. and taxable income in foreign jurisdictions, among other things. Net income, excluding other items, was $85 million or $0.23 per fully-diluted share. Working capital, excluding cash and debt, totaled $5.5 billion at December 31, 2015, down $422 million from the prior quarter. And we generated a total of $614 million in cash flow from operations. After dividend payments of $173 million, investments in our business of $136 million, and FX impact on our cash balances and other items totaling $18 million, we were able to decrease our net debt position by $287 million during the quarter. We ended the quarter with a cash balance of $2.1 billion, $4 billion in debt, and our net debt to capitalization was 11.2%. We also have $3.6 billion of undrawn capacity on our revolving credit facility. Overall 2015 was a challenging year under the backdrop of market uncertainty, falling energy prices, declining drilling activity, and reduced customer spending. In spite of these conditions NOV generated $1.3 billion in cash flow from operations, bought back $2.2 billion in our shares, paid out cash dividends of $710 million to our shareholders, invested over $450 million in organic growth opportunities, and completed seven acquisitions for approximately $85 million, all while preserving a very strong balance sheet. 2016 will prove to be another challenging year. However, the actions we took during 2015 have positioned us well to weather the storm and capitalize on opportunities we identified during this down cycle. Now let me turn it back to Clay. Clay C. Williams - Chairman, President & Chief Executive Officer: Thank you, Jose. I think at this point we're ready to open it up to questions, Kevin.

Thank you. We're now beginning the question-and-answer session. We ask that you please limit yourself to one question and one follow-up. Our first question comes from Marshall Adkins with Raymond James. J. Marshall Adkins - Raymond James & Associates, Inc.: Morning, guys. Thanks, Clay. Obviously the industry, these oil prices coming to a screeching halt. I'm curious. How do you balance the massive cost cutting that you seem to be doing with the ability to meet a recovering market in 2017 and 2018? How much cutting is too much? Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. J. Marshall Adkins - Raymond James & Associates, Inc.: And I guess the corollary to that is, I presume we should expect margins to continue to decrease through the year. At what point in time do we stabilize? Clay C. Williams - Chairman, President & Chief Executive Officer: That's a great question, Marshall. We were hoping to find stability early 2016. And then oil headed down another $10. And all the E&Ps are coming out with sharply lower CapEx forecasts than we had been planning for. So things remain fluid. But to your original question, what's the right balance? I got to tell you, one of the really necessary skill sets in oilfield services for those of us that have been in it a while is the ability to flex up sharply when called upon and flex down sharply when called upon. And the good news for NOV is we have a very experienced management team running our business units around the globe. They know how to do this. We've been called on in the past to double and triple and quadruple production over a short period of time. And we successfully navigated that very well and maximized the profitability and returns through that. This is the flip side of that. As orders fall away, as spending comes to the screeching halt, we have to cut costs in lock step. So I have an abundance of confidence in the capabilities of this team to do both, to respond to this market that's slowing down dramatically, as well as speed up and flex upwards when we're eventually called upon to do that. J. Marshall Adkins - Raymond James & Associates, Inc.: Okay. One unrelated follow-up. Obviously M&A is a focus here with things coming back. That's always been your strength. How is that market looking? And what geographic areas – I mean generically. I don't want you to give away anything. Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. J. Marshall Adkins - Raymond James & Associates, Inc.: But where are you going to focus acquisitions? Clay C. Williams - Chairman, President & Chief Executive Officer: Well we're in an enviable position I think of going into such a sharp downturn with a very strong balance sheet. To recap some of the liquidity items that Jose mentioned just a moment ago, a $2.1 billion cash balance; a $5.5 billion of working capital, which has begun liquidating; a $3.6 billion revolving line of credit. So we have a lot of capital flexibility. We stepped up our efforts, as we talked about on prior calls, to be very vigorous in looking for opportunities that – to deploy capital in what we see as becoming more of a buyer's market. And so we're pretty excited about that and have a lot of flexibility to pursue those. As you know we really fundamentally pursue competitive advantage and really fundamentally pursue evolving trends that we see in the oilfield as attractive areas to deploy capital. So specifically I think in my comments just a moment ago, I mentioned places like Saudi Arabia, which is committed to increasing activity. And they want more local content. We talked a lot in the past about areas like the FSU, where we've done more organic investment than acquisitions. But that's an area of interest. Argentina, the excitement around the Vaca Muerta Shale, which was down in the Q4. But longer term we're pretty excited about the potential there. Those are the sorts of things that we look to, to be potentially interesting when it comes to potential M&A targets. J. Marshall Adkins - Raymond James & Associates, Inc.: That's helpful. Thanks, guys. Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. Thank you, Marshall. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Thank you.

Our next question comes from Bill Sanchez with Howard Weil.

Thanks. Good morning. Clay C. Williams - Chairman, President & Chief Executive Officer: Hey, Bill. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Good morning, Bill.

Clay, I was curious – or perhaps, Jose, just given what appears to be kind of I guess accelerating deferrals here of Rig Systems orders, I get – both offshore and onshore. You've laid out a revenue range out of backlog for 2016. I know you fell short of your view in 4Q. Well just your level of confidence, Clay, right now, given what seems like the further deterioration in terms of being able to recognize that level of backlog revenue if you will. And if you have pretty high confidence on that and given the cost reductions you've continued to make in Rig Systems, do you have any visibility in terms of when possibly a margin trough level could occur? And at what level that could be? Clay C. Williams - Chairman, President & Chief Executive Officer: Well, Bill, I'm hesitant to give guidance beyond what we just did, given that the situation is pretty fluid like we mentioned in our comments. We were disappointed in the fourth quarter that the revenue out of backlog fell so sharply. It fell about $460 million sequentially out of Rig Systems, a couple hundred million short of what our expectations were for the fourth quarter. And that's due precisely to what you highlighted with regards to drilling contractors really getting more aggressive on trying to delay acceptance of rigs and pushing back. As you know the food chain that we work within, drilling contractors sign up for the construction of these new rigs. The shipyards are their customers. And then we work for the shipyards. We've been very diligent over the years about demanding very strong contracts, very strong down payments, progress billings, and the like. But given our focus on monetizing the profit in that backlog, we have slowed our progress on revenue out of backlog to sort of match – better match payments and to minimize our working capital exposure in those programs. So that's kind of what you saw in the fourth quarter, is we slowed down that revenue recognition out of backlog. But on the – ultimately it's really caused by a lot of drillers trying to delay acceptance of rigs. A couple of situations I think have been made public, and a couple of situations are – remain a little tense. Contributing to that was the one shipyard we continued working for in Brazil also slowed in the fourth quarter. I mentioned in my call that we only did $10 million in revenue out of Brazil. And so progress on that particular program slowed as well. So really across the board things have slowed down. It remains fluid. We've haircut our guidance for revenue out of backlog into Q1. And are working to respond to the market kind of week by week as we see things unfolding.

Okay. Thanks for that. Just curious on Rig Aftermarket, Clay. You had a very resilient 4Q on the top line. And I know we've got a pretty significant guide down for 1Q in terms of revenue expectations. Just where do we go from here in that business? I guess and what's a bogey you would tell us to kind of use to think about overall top lines when we think 2016 versus 2015 potential declines? Is there something we should be looking at that could help us gauge where that could go? And is there something in 1Q that would suggest, just given the significant decline, that 2Q actually could stabilize a bit from 1Q? Or how do we think about that? Jose A. Bayardo - Chief Financial Officer & Senior Vice President: I... Clay C. Williams - Chairman, President & Chief Executive Officer: Well... Jose A. Bayardo - Chief Financial Officer & Senior Vice President: I can jump in first. Clay C. Williams - Chairman, President & Chief Executive Officer: Okay. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Bill, on the guidance regarding Q1. Basically as we talked about on the last conference call, and I think has been mentioned before, Q4 often sees an uptick, a meaningful uptick in service and repair related revenue. And we certainly saw that during the year – during the quarter, offset by a continued decline in orders for higher margin spare parts. As we go into Q1, essentially during the course of Q4 we saw obviously a quick deterioration in a number of the product offerings, spare parts included. And so we're expecting a good fall off, not only in that sort of seasonal associated service and repair work, but also a continuing fall off in spares. As I mentioned in my commentary this is a business that we're certainly excited about for the future, as it is tightly tied to the front end of the cycle. And we really do believe that once there are some glimmers of hope out there, things stabilize a little bit, our customers can call bottom, and start seeing any sort of optimism to gain some confidence. There will be a rush to deliver new orders, and which will result in a nice pickup for us. The exact timing of that is really difficult to say. We're obviously in an environment where there's very little near-term visibility. But again we are confident about the prospects for that business when things rebound. Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. Bill, worth pointing out too. You've seen probably three or four steady quarters of drillers beating estimates, land and offshore, and pointing to lower costs. And they consistently have lower costs in guidance. Well their lower costs equal our lower Rig Aftermarket revenues. They slow down spare parts purchases. They're, as we talked about before, cannibalizing. They're deferring maintenance wherever possible. I think it's safe to say that no piece of capital equipment across the oilfield globally is being well maintained right now. And what that sets up for the future is when activity does turn, when we find bottom and then it starts to go up, is a lot of work for our Rig Aftermarket folks to repair, to maintain, to replenish spare parts. And so the deeper this goes and the longer this goes, I think the sharper the rebound and the more positive the rebound.

So, Clay, given that is there any reason that we should expect discounts to rise further from here? Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. I would say this isn't just Rig Aftermarket but across the board. The level of price pressure on all of our businesses rose to sort of new levels of intensity if you will. We saw that particularly late in the fourth quarter and certainly continuing into January. It's almost – in a lot of ways it almost felt like a second shoe dropped in the fourth quarter. I think you had hedges rolling off E&Ps. I think you had some term contracts expiring on rigs out there that were priced in a much – much higher day rates. I think you had sort of a new round of fiscal – or for financial pressure on our customers that came to bear in the fourth quarter. And it's just a – it's we sort of hit a whole new level of pain.

I appreciate the time. I'll turn it back. Clay C. Williams - Chairman, President & Chief Executive Officer: Thank you, Bill.

Our next question comes from Byron Pope with Tudor, Pickering, Holt. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Morning. Clay C. Williams - Chairman, President & Chief Executive Officer: Morning. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Clay, trying to get a feel for any potential structural changes in the businesses as we progress through this downturn. And as I think about Wellbore Technologies, it seemed as though some of that work might be shifting from sales toward rentals. And so as I think about downhole tools, bits, are there any shift there in terms of how you think about the structural nature of that? And are you relatively agnostic between sales and rentals within that segment? Just curious as to your thoughts there. Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. Rentals carry a higher operating margin. And as I mentioned in my call, late in the quarter we had a lot of rental equipment returned, not just in downhole tools but in other rental businesses within Wellbore Technologies. With respect to our downhole tools business we've seen a steady progression in our business over the last few years of working more closely with the E&Ps. And across North America is mostly where I'm talking about, but also elsewhere around the globe, where they're more interested in being involved in the selection of the bottom hole assemblies that go into their complex directional drilling. And so our mix is sort of – our mix of customers let's say has shifted to work more directly with the exploration and production companies to help them sort of optimize their well pads. But that's been sort of a steady progression. I'm not sure we've seen a big change here lately that would – that changes the trend of that. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Okay. And then just a question as it relates to Completion & Production Solutions. Given that you touch essentially all the equipment on the well side as it relates to frac spreads. And I guess I can infer this from the book – Q4 book-to-bill ratio. But it certainly feels like the anecdotal data points about insuring our (48:50) frac spreads, it feels like you guys are seeing it with regard to – like in your orders. But at some point that turned. So I'm just curious as to the anecdotal data points that you all are seeing with regard to – at some point there's a call on the equipment in – on the frac side. Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. Yeah. I'm not sure I can tell you the day or wrap numbers around this. But I would tell you anecdotally, nobody is really maintaining their fleets very well. And in fact as I said I think in my comments, there's a lot of equipment auctions under way where you can pick up fleets at pennies on the dollar. And that becomes a source of spare parts. And that's how it affects our business. Rather than buying consumables, fluid ends, things from us, those are being purchased at auction. So I think the cannibalization of the existing fleet, sort of the erosion of the equipment overhang is well under way in that space. And when it does turn again, NOV's going to be called upon to step up and boost production to satisfy future demand. Byron K. Pope - Tudor, Pickering, Holt & Co. Securities, Inc.: Thanks. I appreciate it. Clay C. Williams - Chairman, President & Chief Executive Officer: Thanks, Byron.

The next question comes from David Anderson with Barclays.

Hey, Clay, your balance sheet remains one of the best in the sector with a really healthy cash position, which really stands out in this downturn. Can you talk a bit about – obviously you're navigating through a pretty severe downturn, one of the worst we've seen. But can you talk about your priorities in terms of that? And maybe remind us in terms of capital allocation? And also remind us what types of leverage ratios you're comfortable of getting up to. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Hey, David. It's Jose. I'll jump in on that one. Now we're obviously very pleased to have the balance sheet that we have today. As Clay mentioned earlier, having optionality in the capital structure in this current environment is becoming more and more valuable day by day. And we're also seeing a narrowing of the nash (50:54) spreads on some compelling acquisition opportunities coming forward. So as we think about capital allocation, for us it's really all about ultimately driving maximum value to the shareholders. So obviously historically organic investment has been a very good use of capital that – current environment over-capacitized. M&A tends to be front and center in our minds. And everything is going to be opportunity specific, outlook dependent in terms of how we think about using the capital structure related to M&A and our other capital requirements. So I don't want to get into any sort of specifics on ratios, et cetera. But I think the company has historically maintained a fairly conservative balance sheet. And we intend to keep it that way. But again it really depends on the specific opportunity, cash flow it brings into the organization, as well as exactly where we feel we are in the cycle and the outlook for the combined businesses.

Okay. Thanks, Jose. And I heard all your guidance, and we have to kind of digest it off of the first quarter. But as I think about kind of decrementals for the full year, and if I use 2015 as a starting point, is there any kind of guide you can help us out with? Kind of say maybe which segments may be a little better, a little worse? Obviously with less revenue coming out of backlog and Rig Systems I'd have to think maybe decrementals look a little worse. On the other hand C&P and Wellbore I think have a pretty high level of amortization in there, so maybe that gets a little bit better. Can you just help us out with some of the trends that you're kind of thinking, kind of from a full-year basis on the decremental side? Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Yeah, yeah. This is Jose. (52:37) It's a really challenging question, David. And I think we gave – there are ebbs and flows. Every business has its own unique components, and things don't always cycle perfectly. And as an example, last quarter we saw decrementals that were sort of in the 18%, 20% range. This quarter we're at 35%. And so the costs and revenues unfortunately don't always sort of go hand in hand. But I think we gave some pretty detailed thoughts that will take some time I'm sure to digest regarding the first quarter. And beyond that visibility really is pretty murky, so... Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: ...I hesitate to give any specifics on that. Clay C. Williams - Chairman, President & Chief Executive Officer: I'd say -you got to add it gets a little tougher from here. As backlog kind of dwindles down, absorption becomes a little more challenging. And we're managing cost in response to that as closely as we can. But our backlog driven businesses that are mostly manufacturing, certainly their decrementals will be affected by that picture. On the other hand we do have a number of businesses that are exposed directly to the drill bit. So you finally find bottom on rig count and maybe have just a little bit of help on the – on rig count, we will immediately for instance get WellSite Services jobs. We will immediately see a turnaround on our downhole tools and bits business. We'll immediately see rig instrumentation work pick up. And those are three rental businesses that I mentioned earlier that come at high sort of variable margins. So just a little bit of activity help I think would help put up much better decrementals for Wellbore Technologies.

Okay. Thanks, Clay. Clay C. Williams - Chairman, President & Chief Executive Officer: You bet. Thanks, David.

Our next question comes from James West with Evercore ISI.

Hey, good morning, guys. Clay C. Williams - Chairman, President & Chief Executive Officer: Hey, James. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Morning.

Clay, as you think about – just another question on M&A. The – I guess the obligatory M&A question, or for Clay or Jose. Are there certain areas or product lines that you're looking at, maybe to diversify away from your core competencies where you dominate businesses, so you can become a more full cycle type player? Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. James, as you know, we operate through 15 business units. Two of those 15 build new rigs, one for land...

Right. Clay C. Williams - Chairman, President & Chief Executive Officer: ... one for offshore. But 13 of our business units do other things. So we do a lot across the oil field, probably more than we get credit for. And already have more sort of diverse exposure. What I would say is the thinking here with regards to M&A and corporate development, which I think the company has a lot of that in its DNA, really is focused on identifying opportunities to make money. What are the trends in the oil field? Where can we drive better industry structure? Where can we offer a better package of products and services for our customers? And it's really a little more granular than trying to globally arrive at some sort of diversified portfolio mix. I think we've ended up at a very diversified portfolio mix already.

Okay. Clay C. Williams - Chairman, President & Chief Executive Officer: But at the end of the day this is a – business is about making money. Right? So where can we put capital in into an opportunity, get that capital back as quickly as possible, i.e., get a quick payback and a good return. And really do something different to drive higher capital returns in an industry where we've all spent our careers and I think have a lot of insight into, which is global oil field services at large. So that's kind of our approach to M&A. And looking for those sorts of opportunities. And honestly Jose and Loren and I wish we could tell you more this morning. But as you understand these things are never a deal until they're a deal.

Of course, yeah. Yeah. Clay C. Williams - Chairman, President & Chief Executive Officer: We are enthusiastic about what we're starting to see out there. And again great to have a lot of balance sheet flexibility and capacity. And I think there's a lot of optionality right now embedded in NOV.

And has there been a significant change in kind of the sellers' asking prices here, as we've taken this I guess third dip down in oil prices? Clay C. Williams - Chairman, President & Chief Executive Officer: Yeah. There's a lot of shell shock out there.

Yeah. Clay C. Williams - Chairman, President & Chief Executive Officer: We're not the only one seeing this.

Sure. Clay C. Williams - Chairman, President & Chief Executive Officer: I would tell you on the – on down – in down cycles, having been through a few, it's really hard to get the bid and the ask to converge on the way down.

Right. Clay C. Williams - Chairman, President & Chief Executive Officer: Because the seller is looking backwards and seeing, hey, a quarter ago, two quarters ago, a year ago, we did much better financially. And as a buyer you're looking forward into a deteriorating P&L, wondering where's bottom and trying to discount appropriate. So the bid and the ask tend to widen early in a down cycle. I think if we're – I don't know. I'm not calling bottom. I don't know if we're there yet.

Sure. Clay C. Williams - Chairman, President & Chief Executive Officer: But as you start to get closer to bottom, time passes, reality sets in, folks recognize this may go – be lower for longer. And I think that's kind of where the industry is coming to now. I think it brings a much more sober, realistic outlook on the part of potential sellers. And I think we're starting to approach that kind of world.

Good. Good. Okay. We'll look forward to your next move. Thanks, Clay. Clay C. Williams - Chairman, President & Chief Executive Officer: Thank you, James. Jose A. Bayardo - Chief Financial Officer & Senior Vice President: Bye.

Ladies and gentlemen, this does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. Williams for closing remarks. Clay C. Williams - Chairman, President & Chief Executive Officer: Thank you very much, Kevin. Appreciate everyone joining us this morning. And we look forward to sharing our first quarter results with you in April. Thank you.