Good day, ladies and gentlemen. And welcome to the National Oilwell Varco Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time [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 2018 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 Forms 10-K and 10-Q filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliation to the nearest corresponding GAAP measures are in our earnings release available on our Web site. On a U.S. GAAP basis, for the fourth quarter of 2018, NOV reported revenues of $2.4 billion and a net income of $12 million or $0.03 per share. For the full year 2018, NOV reported revenues of $8.45 billion and a net loss of $31 million or $0.08 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. Please limit yourself to one question and one follow-up to permit more participation. Now, let me turn the call over to Clay.

Thank you, Loren. National Oilwell Varco delivered solid results for its fourth quarter 2018 as revenue increased 11% sequentially and 22% year-over-year, and EBITDA increased to $279 million or 11.6% of revenues. All three segments increase sales and EBITDA sequentially due to strong operational execution during the quarter. Revenues for the full year 2018 were $8.45 billion, a 16% improvement from the prior year. Full year EBITDA of $910 million improved 49% year-over-year and represents 26% leverage over 2017. During 2018, NOV continued its pivot towards unconventional shale technologies, while preserving and enhancing optionality in offshore and international markets. We continued to benefit from the cost reductions and efficiency improvements we put in place over the past few years and we remain vigilant with regards to continuing to manage costs closely. Before diving deeper into our fourth quarter results, I want to tackle the question that is on everybody's mind, the outlook for the coming year. In a few minutes, Jose will step you through our detailed outlook by segment. But to state the obvious here upfront, the outlook is significantly more opaque than it was just 90 days ago. Oil prices declined sharply through the fourth quarter before recovering modestly in recent weeks, aided by OpEx and Russia production curtailment announcements. In our view, stability at levels of above $50 per barrel for WTI can help maintain oil field activity near current levels in North America, or at least help minimize activity declines, while also continuing to incentivize the recovery in international and offshore markets. We believe this provides a plausible backdrop for a scenario where prospects and activity can brighten for NOV throughout the year particularly of oil prices demonstrate an upward bias from here. However, we are managing to the reality that the lingering effects of WTI…

Thank you, Clay. To recap the quarter, NOV consolidated revenue increased $244 million or 11% sequentially and EBITDA improved $34 million to $279 million or 11.6% of sales. Operating profit was $87 million, and we posted net income of $12 million or $0.03 per share. On a GAAP basis, our operating profit and net income included $21 million of pretax charges, primarily related to the closure of one of our facilities. Looking at a couple of select items on the P&L, other expense increased $9 million, mainly due to higher FX losses and like last quarter, we reported an outsized income tax expense, primarily a result of valuation allowances that prevent us from recognizing foreign tax credits. In our segment level detail, higher inter-company sales resulted in a $13 million sequential increase in revenue eliminations. The margin associated with higher inter-company revenues and an increase in unallocated expenses resulted in $23 million increase in eliminations and corporate costs. In the first quarter, we expect inter-company sales as a percentage of pre-elimination revenues to remain in line with Q4. Lower inter-company revenues along with lower corporate costs should reduce elimination and corporate costs by roughly $10 million in the first quarter. In the fourth quarter of 2018, cash flow from operations totaled $221 million. And after deducting $71 million in capital expenditures, we netted $150 million in free cash flow. NOV has always been focused on generating cash flow and returns, which is why we explained on last year's call that we were making a concerted effort to improve the management of our working capital. We exited 2018 with a revenue run rate that was 22% or $1.7 billion per year higher than our run rate at the end of 2017 and only added a total of $86 million to our…

[Operator Instructions] And our first question will come from the line of Marshall Adkins with Raymond James. Your line is open.

I want to ask about the trends in U.S. versus the international/offshore. It seems like last five years you've been -- had a concerted effort to increase levers in the U.S., your shale, the growing area. But it seems like now we're starting to see a resurgence in international. You mentioned stuff in Saudi Arabia, in the Middle East and other areas that started to pick up, plus the offshore side is picking up. So looking at it over the next several years, not the next quarter but the next couple of years, is it fair to assume that this trend we're seeing back to North America in the last five years maybe starts to moderate and we see more of a balanced growth going forward? Just comment on kind of U.S. versus international and offshore.

I actually hope so, because that means that internationally we're seeing a more robust recovery. And you characterized it accurately Marshall. We did initially pivot toward unconventional shale technologies, which thus far have been mostly focused on North America. But importantly, we did that without sacrificing optionality into international markets or offshore markets. And so I view this as additive to a portfolio of businesses that we carried into the downturn. What's interesting to me is, and this has happened with prior technological evolutions in the industry going back decades that things were kind of figured out here in North America and then they're applied overseas. And so what's encouraging to me is that some of these investments that we've made around horizontal drilling, around pressure pumping and fracture stimulation of these wells, which kind of drive unconventional shale production are being applied in more international markets and in particular, Argentina. It's really gaining traction. You've got a couple of major oil companies and several independents that are very intently focused on developing that resource base down there. Elsewhere, you get the Bowland shale in the U.K. You've got a new shale gas play in Abu Dhabi. The Saudis are focused on gas production out of shales. Lots of places around the world I think are going to see application of this technology. And so it's not hard for me to see NOV providing these technologies to these sort of blossoming regions and seeing more unconventional shale technologies applied elsewhere. In the meantime, North America is going to continue to be cyclical. The oil and gas operators here are very responsive to commodity price changes. And so, yes, we're seeing definitely a slowdown. But if you look back at pressure pumping for instance over the past 15 years or so, it has going through a number of cycles. The good news for an equipment provider into that space is the basic operations of pumping high-pressure high-volume abrasive prompet through all these equipment is that industry tends to eat a lot of it. So supply demand I think kind of corrects itself over time.

Let's talk Middle East and Saudi in particular, to the shift to more international. I know the Nabors JV, they're going to be building a lot stuff that you guys will be heavily involved in. Update us on the jackup stuff and what do you expect to see there to the extent that you can, and/or any other initiatives in the Middle East that you'd like to comment on?

So with respect to that we announced a joint venture with Aramco last year to build land rigs. And that's built on a cornerstone order of 50 land rigs, $1.8 billion, the largest rig order that's ever been placed in the history of the industry. So we're pretty excited about that. That facility, which we're breaking ground on here currently will have the capacity to make equipment, to also go into offshore rigs Aramco also has a joint venture with Rowan and has announced plans to build 20 jackups. And so we're working closely on that program. That is not -- there's not been determined yet, all the equipment for those 20 jackups, but we're working hard to support that program as well. Additionally, this joint venture is set up to provide equipment around the region and to support the growing rig fleet around the region. So really excited about the partnership there with Aramco and the prospects ahead. The Middle East has been a region that through the downturn since 2014 has held spending and investment activity at relatively high levels. And so it's garnered a lot more focus from NOV through the past five years. And pleased to say we're in really good shape there in support of our customers throughout the region. In my prepared remarks I referenced a new fiberglass plant that we're going to have a grand opening on in April. And we've got some other facilities going into the kingdom as well.

Thank you. And our next question comes from the line of Byron Pope with Tudor Pickering Holt.

Realized there's tons of uncertainty -- near-term uncertainty with regard to North America. I guess, Clay, I thought about the potential impact on orders near term impacting more your OFS customers, but it sounds like it's also crept into the mind set of E&P operators. Could you just remind us in terms of your exposure to E&P operators directly? My sense is that that exposure is more skewed toward caps. But I know you're starting to sell motors and other things directly to E&Ps as well. So just frame that for us please.

Yes. Generally it's about 30%. I don't have the precise number in front of me Byron, but it's been running about 30% of our revenue mix to oil and gas operators globally and about 70% are oilfield service companies that we outfit with equipment to execute the well construction plans for the E&P companies.

And then on the international side. Just following on to what Marshall was asking about. I guess I have a specific question about Wellbore Technologies. It seems like you'll have already started to make some inroads in terms of being the enabler to some of these independent companies. Could you just speak to, as you think about the outlook for 2019, the opportunities you see there to continue to progress that part of the NOV strategy?

Yes. We sell equipment and technologies really to all of the service companies and most -- in fact we're the leading provider of most of the equipment into most of the various service verticals that characterize the industry. And what we see in the North American market is, mostly these are fairly fragmented and competitive with respect to individual services provided. You go overseas and I think there's opportunities for smaller organizations to hang out a shingle and provide various services. So in a lot of ways our business plan is the enabler of some of those organizations to get going on providing services. And what we feel like we're tapping into is a real hunger out there that a lot of the oil companies have with respect to having more options around service providers in oilfield services. And our mission is to outfit those smaller companies with the latest and greatest technologies to make them competitive and to really bring higher levels of capability to their organizations. And so we provide the equipment, we provide training, we provide aftermarket support of those operations. We're really there to make them successful.

Thank you. Our next question comes from the line of James Wicklund with Credit Suisse. Your line is open.

Good Q4, but the guidance on Q1 looks to be well below consensus. And so I think that's what taking the stock down. The improvement that you expect to see, hope to see, plan to see in the second half of the year, how much of that is based on expectations of oil price? And how much of that is based on real conversations with customers that we have confidence in?

Well, there's two pieces to it Jim. I think if oil will, let's say, stay here. And this is a think and maybe a little bit of a hope. But if oil will stay here in the mid-$50 range, I think there is sort of building pressure among the larger companies to go ahead and FID some more projects. I do think you're going to see international markets creep closer to recovery. And so that will help the second half of 2019. That's our hope. If oil prices go higher, I think that could lead North American independents to getting back to work in a more meaningful way and then would be additive with respect to the second half of 2019.

And my follow-up if I could. I realized the fallacies of Bloomberg's calculations and all. But you've seen a big shift in the expectation of and valuation of E&P companies in terms of generating returns of capital and generating returns on capital. You guys do a very good job of returning capital to shareholders. But in terms of generating returns above your cost of capital, as a manufacturing company, what will it take over the next couple of years to change the trend of the last seven, eight years, where you're not earning your cost of capital and we hit an absorption level, on an activity level or whatever has to happen for those returns to be positive?

I'm going to answer it in some detail if you don't mind, because I do think it's very important. The short answer is, as a manufacturing company, we need to bring great equipment to the oilfield service industry, which has the important role of constructing and developing wells on behalf of oil and gas companies. So we're always focused on new and better and more efficient equipment that's safer and reduces the cost of development. And that's the path to more prosperity. But in a broader sense thinking about returns on capital in this space, I would stress this is really nothing new to us. I go back 20, 25 years ago before there was an NOV. And I used to cover us at Tuboscope and Varco. And we observed back then that manufacturing equipment for the oilfield was a low capital intensity undertaking. So the investments in rig-up yards and in plants and machine shops was small relative to the revenues and profits that those assets could generate, which is in kind of stark contrast to the rest of the oilfield ecosystem. So oilfield service companies tend to be very capital-intensive, as do E&P companies. So the basic design of NOV around manufacturing equipment comes out of this recognition that since it's low capital intensity undertaking, we get to keep more EBITDA for our shareholders and have to reinvest less. And we I think did a great job of that. So as we entered a period of prosperity and a massive sort of build out, in particularly the offshore, generated strong returns on capital. That obviously all changed in 2014 when we entered sort of this generational down cycle. And I would add, throughout that entire period though, to put it in perspective, our CapEx levels have been pretty…

Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America Merrill Lynch. Your line is open.

I guess the first one, I guess I'll kind of come back to some of the targets that you gave at the Analyst Day and realizing that that was in a different oil price environment. But maybe if we can just kind of talk about the top line and expectations relative to kind of what you gave at the Analyst Day. If we step through each of your segments, maybe you could give us some outlook of kind of overall, whether you expect revenue kind of up or down across each segment for 2019?

First of all, as you correctly pointed out, when we had our Analyst Day presentation we were in a pretty different environment. Back at the time WTI was pushing $65 a barrel. And in our presentation we layered in some very specific assumptions that were sort of the basis for the forecast in the overall outlook that we provided during that presentation. I think it included WTI in excess of $65 a barrel. Global CapEx spend increasing by at least 10% and a number of other assumptions, which obviously at this point after we saw oil prices collapse at the back end of the year from that sort of $65 price, down to the lower 40s appear to be somewhat off the table. So as we look forward in time, as we mentioned, a number of times in our prepared remarks the overall outlook is very opaque right now. We give very clear guidance as it pertains to Q1 and are not prepared to sort of update full year guidance at this point. But think there -- the rest of the year, just depending on how the market shakes out, we could see a pretty decent recovery in the back half of the year as it relates to a question that Clay addressed earlier in terms of our split, in terms of where our revenue comes from between service companies and E&Ps, presents a little bit of an additional challenge in terms of trying of pin down exactly where the market is headed, because first of all, we're getting the vast majority of our outlook based on what our customers are telling us on the service side of the business, while they're still trying to hunt down what their customers are going to do. So probably in a little bit more time before we can provide you with a lot more precision related to the 2019 full year outlook. So that's kind of where we are right now.

I appreciate that. And then if we think about capital allocation and we get to the back half of the year and into 2020 things look a little better. How should we think about capital allocation, kind of split between dividend, buybacks, debt paydown or potentially M&A?

Chase, so as far as capital allocation priorities, I'll also refer back to our Analyst Day presentation where I think we were pretty specific in terms of what our hierarchy is related to capital allocation. So nothing has changed on that front. Still first and foremost is our efforts to make sure that we have sort of the ideally optimized balance sheet structure. Next is investments in high return organic capital opportunities. Then we also look at compelling M&A and then a little further on down that list is return of capital to our shareholders. And so, as I think you're aware, the Board authorized a $500 million share buyback program at the time of our Analyst Day. We set out some pretty specific criteria in terms of what kind of debt metrics that we did see before we really started leaning into that program. And that's -- as I mentioned nothing has really changed on that front.

Yes. Critically important we maintain investment grade rating. That's very important to our business model.

And our next question comes from the line of Jud Bailey with Wells Fargo. Your line is open.

Thanks. Good morning guys. Appreciate the commentary around expectations regarding activity levels and kind orders. But I wonder, focusing on the Wellbore Technologies segment, can you given any commentary on what you're seeing on the pricing front? Have you seen any weakness in pricing across any of the business lines? Or is it all pretty much activity-driven at this point?

I would say Jud, first of all, we came into the quarter targeting pricing improvements to overcome some steel cost challenges and some labor cost challenges that we were facing. The tariffs went in place in the second quarter. The third quarter we really felt that. Q4, we were focused on trying to get pricing to go the other way. What I'll tell you is that oil prices have not been helpful, making that happen. And so through the fourth quarter we did gain some ground in a couple of product lines. But I would say others are definitely starting to feel more price competition out there. And we're certainly hearing that from our oilfield service customers as well. So they're starting to feel the pinch and we've all seen the rig count roll over a bit. So I think we're starting to see more price pressure emerge.

And then circling back a little bit on Chase's question. May be for Jose, I wanted to ask about the C&P and thinking about orders just for this year. There's a lot of moving pieces between what's going on with flexibles and ISE and then probably the delay of offshore orders. How do we think -- is there a scenario where orders year-over-year can stay flat? Would it take a big increase in kind of offshore-related orders in the back half of the year to pull that off? Or -- I'm just trying to gauge the magnitude of weakness in ISE and maybe flexible pipe versus the potential for that to maybe offset in the back half of the year by maybe some bigger, chunkier subsea or offshore-related orders. If you could help us maybe think about that big picture it would be great.

Sure. That's a good question Jud, which has a lot of complex moving parts and pieces to it. So obviously even in a very challenging market environment, in Q4 we still booked 100%-plus book-to-bill for the segment, and -- our ISE group, which is the huge increase in demand that we've seen from a lot of our coiled tubing, coiled tubing-related equipment, had really strong bookings during the quarter. We just talked about very strong bookings for certain offshore components, specifically our conductor pipe connection business. So there's a lot of different avenues for NOV to sort of build its book of business as we move forward during the course of the year. And one of the things we pride ourselves on is position ourselves in the marketplace to capitalize on whatever market opportunity that we face. But we also talked about in our prepared comments that we're sort of deferring our position in terms of when we think the offshore components of that business will bottom. And to some extent that was a result of a little bit of a pull-forward in some of those areas that we saw in Q4 that are going to more adversely impact the first half of the year, but also just the timing as it relates to some of the opportunities that we have been chasing pretty aggressively.

We referenced within rig, shifting segments a lot of rig reactivations and sort of this greenshoots that are popping up that are reflective of oil companies tendering activity inching up. And then on the production side within C&P, again we're continuing to pursue projects that were very helpful that once we get into the second half of 2019, maybe even earlier and hopefully earlier, we'll see more FIDs around these. So specific opportunities in the North Sea, West of Shetlands, Caspian region, offshore Brazil, even offshore West Africa, which has been particularly hit hard through the downturn, a couple of projects that appeared to be [indiscernible]. So we're not yet seeing a lot of the purchase orders flow on those just yet, but again remain hopeful that those oil companies are going to move forward and sanction those projects.

Thank you. And our next question comes from the line of Edward Muztafago with Societe Generale.

I was wondering if you could perhaps talk a little bit about sort of your thought process on the uptake of downhole drilling automation or just drilling automation technologies. A couple other drillers have sort of said that they see the uptake as being somewhat slower, below expectations. But one at least likened it to what we saw with the kind of hockey stick change in the uptake of AC technology. Certainly if you look at AI [indiscernible] some of the survey suggests maybe doubling or tripling of the uptake of this over the next five years. Can you sort of opine a little bit as to how you see the evolution of that playing out? Clearly, you guys have focused your efforts there a lot and then maybe even could you give us an idea as to what percent of your portfolio today might be focused on just those areas in general?

Well, to start having introduced new technologies in the oilfield and witnessed new technology introduction in the oilfield over many years, I would tell you it's not a space that bear hugs, embraces new things, because our customers do tend to be risk-averse. But nothing succeeds like success. And so ultimately you do have the adoption of things like MWD technology, rotary steerables, diamond bits, things like that that do once they do get proven in the oilfield and people kind of understand the risk and the value proposition, then they can sweep pretty quickly. So I guess I think internally we're realistic about the speed of the uptake. With respect to the specific technologies that we're working on, as you know, we've got lots of them. Drilling automation is one. But very pleased to see, for instance, Equinor announce their intention to put wired drill pipe on their offshore drilling programs in a big way to enhance efficiency on those operations, to enhance safety on those operations. And several other oil companies as well, really putting this technology to work. It's now -- at this point it's field ready. It's a very, very impactful is sort of technology that's driving gains and efficiency in addressing specific downhole problems that we're excited about. We're also in our press release we referenced our SelectShift tool, which is a really unique way of drilling horizontally. I mean we're now accumulating runs and experienced with that. And it has since -- I think we have a good chance here of having that be a very impactful technology, which will see greater adoption in the future. We made investments in MWD to enhance geosteering. We've made investments in rotary steerables. We've got three different platforms of that that are all making progress. So it does take time, it takes a lot of patience to get a technology to go in the space, but there's lots of examples you can point to in the past where those that are patient and persistent do in fact win. They do in fact arrive in a place where they're providing transformative sort of technologies. And that's how this industry moves forward. So I really am very proud of the steps and the progress that NOV has made to be an innovator on behalf of our customers. And I think all these sort of new technologies around digital, around machine learning, around automation are going to continue to be transformative in the oilfield.

I appreciate that and I'm glad that you're supplying a lot of that to all of the service companies. Maybe if we could just hone down on wellbore really quick. Clearly appreciate there's a bit of a backing here in the first quarter with the push out of drill pipe and pull forward of some orders. But we're also hearing that there is growing interest with the recovery in commodity price and re-contracting rigs. Would you be willing to call the bottom in wellbore in first quarter? Or do you not feel like we're quite at that point yet?

I think Clay has said very well in his prepared remarks, where typically there's a sort of three or four month lead lag time in terms of how activity responds to commodity prices. It does feel like maybe that could be a little bit quicker and things might be a little bit shallower. But as we've said a number of times, there's just a significant lack of clarity in terms of how budgets ultimately get set and how this year plays out. So not going to say it's out of the question, but we're also not going to commit ourselves to anything like that.

Thank you. And this concludes today's question-and-answer session. I would now like to turn the call back to Mr. Clay Williams, Chief Executive Officer, for closing remarks.

Thank you Chelsea. So to recap, great fourth quarter performance and really appreciate NOV's team for the strong execution. But obviously challenges lay ahead for the first quarter. Nevertheless, we remain hopeful that for the remainder of the year the recovery gets back on track. So thank you all for joining us this morning.

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