Good day, ladies and gentlemen and welcome to the National Oilwell Varco Fourth Quarter 2019 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. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Welcome everyone to National Oilwell Varco's fourth quarter 2019 earnings conference call. With me today are Clay Williams, our Chairman, President, and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today’s comments are forward-looking statements, within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume 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 the latest forms 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 2019, NOV reported revenues of $2.28 billion and a net loss of $385 million or $1.01 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, Blake. NOV's results continued to improve sequentially during the fourth quarter of 2019, as revenue increased 7% from the third quarter and EBITDA increased to $288 million or 12.6% of revenue. Despite continued deterioration of the North American market, all three of our segments increased EBITDA sequentially. On a year-over-year basis, NOV was able to post an increase in EBITDA during the fourth quarter of 2019, despite revenue being down more than $100 million from the fourth quarter of 2018. Aggressive cost reductions and facility downsizing contributed significantly to NOV's improving financial performance. And Jose and I will speak more to this in just a moment. Revenues for the full year 2019 were $8.48 billion, a 0.3% improvement from the prior year. Full year EBITDA of $885 million declined 3% from the prior year. 2019 was a pivotal year for the energy industry. We entered 2019 with commodity and equity markets signaling strongly to market participants that growth for growth's sake, without commensurate returns to capital providers, would no longer be tolerated. Sources of all forms of capital to the industry; public equity, private equity, bank debt, public debt became scarce and expensive as evidenced, for example, by the collapse in trading multiples of oilfield public equities in early 2019. At the time, we interpreted this as the evaporation of a widely held narrative, gauzy conventional wisdom that a commodity price spike would someday soon lead us back to a more prosperous oilfield and save us all. Through the first four years of the downturn, 2015 to 2018, this narrative was responsible, we think, for a significant structural option value component in equities and asset values in the oilfield. This makes sense to me, because the oil and gas industry has a 160-year history of extreme volatility and…

Thank you, Clay. NOV's consolidated revenues increased $155 million to $2.28 billion or 7% sequentially. As the continued momentum in international and offshore markets helped drive a 15% sequential improvement in international revenues more than offsetting the impact of a rapid decline in North American activity levels during the fourth quarter. EBITDA increased $26 million sequentially to $288 million, driven by strong operational performance and continued progress on cost savings initiatives, partially offset by favorable project closeout variances from Q3, not repeating and a less favorable product sales mix in our Completion & Production Solutions and Rig Technologies segments. As Clay mentioned, we continue to make progress on efforts to rightsize our business and improve efficiencies across the organization and expect to realize another $24 million in annualized cost savings in the first quarter or a $6 million improvement in Q1 over Q4. We've also been reducing the working capital intensity of our business. We converted $246 million of working capital to cash in the fourth quarter and generated $473 million in cash flow from operations. After deducting $67 million of capital expenditures, free cash flow for the quarter was $406 million, bringing our second half 2019 free cash flow to $689 million, significantly exceeding our target. Despite our expectation, the capital expenditures for NOV will increase to around $325 million in 2020 as we ramp spending on our new rig manufacturing facility in Saudi Arabia, we believe we will increase free cash flow by at least $100 million year-over-year and that working capital will be a source of cash for NOV in 2020. During the fourth quarter, we took measures to further strengthen our balance sheet by redeeming $1 billion of senior notes due December 2022 and issuing $500 million of new senior unsecured notes due 2029. These transactions…

Thank you. [Operator Instructions] In the interest of time, we ask that you please limit yourself to one question and one follow-up. Please stand-by while we compile the Q&A roster. Our first question comes from Byron Pope with Tudor, Pickering, Holt & Company. Your line is now open.

Good morning, guys.

Good morning, Byron.

Hi, Byron.

By recognizing the extra uncertainty injected into the market by the recent pullback in Brent prices, could you just frame for us at a high level how you think about the international growth drivers among the three business segments again just at a high level?

Yes, we're -- big picture, North America, we expect to -- I think, like everyone else, to endure a slowdown -- continued slowdown in activity and we're preparing for that. But we're much more encouraged overseas and in offshore markets in particular. So that continues to move higher and what we're hearing from our customers is that they're moving forward with a lot of projects that they've been working on reducing costs and engineering in over the last several years. And so, excited about that for 2020. And then, the Middle East has continued to remain very active. And as you're well aware, we've increased our presence in those markets and are encouraged by the needs that our customers have there for equipment and technologies that NOV provides. So, generally, North America, drifting down in offshore and international moving up. Current oil price volatility notwithstanding, Byron.

Thanks. And then, my second question, just, again, in qualitative terms, could you – as you think back on the five incremental NOV growth drivers, growth opportunities that you guys laid out back at the 2018 Analyst Day. Just from your perspective, how things are progressing, again, notwithstanding the near-term North America headwinds, but just how those have played out relative to your expectations?

Well, the main thing I'm most proud of is our continued investment in technologies and products through the downturn. And we certainly highlighted that in our Analyst Day, which was well over a year ago and in a very different sort of commodity price environment. But I look back on the progress we've made, really since the downturn started, I think, NOV's probably introduced more new products and new technologies than any of our peers out there. We launched our NOVOS, sort of test rig at the very end of 2014 and that's been responsible for dozens of products and technologies. We've come out with very impactful digital solutions through this time period. Predictive analytics for BOPs, for example, our NOVOS operating system, our GoConnect digital products, things like that. And so, I think, we've balance the cost-cutting and the retrenchment that has been necessary with continuing to invest in the long-term future of the company and the technologies that are going to make that happen. And so, I'm very proud of our organization in terms of progress on these things. And, I think, in a lot of ways through the downturn, we've been focused on, in addition to efficiencies and getting better at working capital management, on really laying the foundation for what the next up-cycle looks like.

Thanks, Clay. Appreciate it.

You bet. Thank you, Byron.

Thank you. Our next question comes from Tommy Moll with Stephens Inc. Your line is now open.

Good morning and thanks for taking my questions.

Good morning, Tommy.

So wanted to touch on the portfolio review that you've been undertaking for some time now. It's clear, it's a returns-driven analysis that you're running through. And so my question is, as you're evaluating, what to keep and what to prune. How many years forward are you willing to look for a business line or a unit to hit the kind of returns that you'd like to see to keep it in the portfolio? And the reason I'm asking is, clearly, offshore and international have some momentum, but we need to play that forward for some reasonable time horizon to get comfortable to where you're willing to underwrite. So anything you could do to help us frame that up would be helpful?

Yes, that's a great question. I'm going to let Blake chime in here in a minute, because he's heading up this effort. But, I would say, it depends on the potential to achieve what we always aim at in the application of capital, which is a defensible business that has a demonstrable competitive advantage over the long haul is the ultimate goal. And so when we look at these different businesses and kind of the current state of affairs and the current state of their markets and so forth. We take a view necessarily on what's the likelihood probability that we'll get to that state that defensible competitive advantage in a reasonable period of time. And so I would say, our patience level is somewhat dependent upon the potential payoff and attractiveness of that particular business opportunity, but it's really kind of opportunity by opportunity that we evaluate this.

Yes Tommy, I think we touched on this last quarter but this is not just a quantitative exercise but also qualitative. And so we just take a step back and say like, oh, if this business is below the return threshold but it's been nothing along the bottom of the down cycle and we could see a clear tangible path to hey the orders have completely pivoted on this one-and-done a full 180. We're not going to sell at the bottom of its earnings potential. Now I will say, we have (inaudible) upon our patience level for a lot of these that did all below the threshold, we were able to implement some discrete action plans that are in process right now that we will reevaluate. And most of these action plans only take about three to nine months. So it's just more self-help, which is part of our job is managing these businesses. And those that we find are to be unfixable, those will be evaluated for divestiture or just pure exit.

Yes that's our first inclination is around – we're paying to fix these things and run these things. And so are there steps we can take first. So that's probably where our default is for businesses that fall below the threshold initially.

Very helpful. Thank you both. And as a follow-up I wanted to double back on the international and offshore outlook. Again looks like we'll be up for 2020 versus the prior year just in terms of the addressable market there. Are there any particular aspects where you think NOV could maybe outperform the broader market business lines or parts of the world where you're most excited that you would call out for us?

Yes. Probably what we're certainly well-known for drilling equipment offshore rigs all things drilling was probably less well known by investors on Wall Street is the fact that we've sort of quietly assembled a really interesting portfolio of products that are more focused on production going into FPSOs fixed platforms processes around production in terms of sand separation, oil water separation, monoethylene glycol regeneration units things like that. And so I'm really. really proud of that portfolio. And I think there's really interesting opportunities that are going to continue to emerge in the offshore where NOV is likely to play maybe a little larger role than we would have in a prior upturn.

Thank you. That’s all for me. And I’ll turn it back

Thank you.

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

Hey, good morning. So I guess Clay you talked a bit about kind of energy transition. And so I'm just kind of curious, if you can kind of flush it out a little bit more here and kind to talk about your strategy towards energy transition and maybe organically what you're doing? And then also maybe on the M&A side?

Yes. First I'd say that we have a presence in this space going back many years and in fact many decades with respect to geothermal for instance where you probably be hard-pressed to find a geothermal well that doesn't have NOV technology involved with it anywhere in the globe. And then secondly, I think last year we had a couple of announcements around offshore wind installation vessels, which is a space that NOV has a very -- has a market leading position in terms of the technologies and vessels install offshore wind turbines. And so we've been in renewables for going back a long time. My comments in the prepared remarks though really are just to let you know that we're thinking about other ways to participate in this and viewing it as potentially a terrific business opportunity. When I think about energy, energy really is all about infrastructure, about capital deployment, historically pivoting from one form of energy to another is a decade long process, but involves enormous amounts of capital involves project execution, it involves application of technology, it involves creative ideas. NOV has a lot of those in abundance. And so I do think there's a role here that we can play and help me make that happen. But what I want to stress is we're aiming at capital returns coming out of that at the opportunity to develop technologies and services and methods that help in that transition, but also earn excellent returns for our shareholders. And so that's how I'm framing this. I don't have a lot more to add to that other than what I said earlier some ideas in the space that we think are unique that potentially can turn into a really interesting and profitable businesses, and -- but we -- I generally don't -- won't get into the details until we're earning -- making revenue with these things.

Okay, great. Thanks Clay. I guess, if we kind of come to the supply chain a little bit and think about the coronavirus. You mentioned it a little bit there's, obviously, a direct impact and maybe some direct -- indirect impact as we think about the supply chain being so interconnected. Is there a certain segment that we should look at and try to understand better about the impact from what's going on over in China? And then help us understand how much of that is actually in your guide on their Blake?

Hi, Chase. It’s Jose. I'll fill this and Clay can chime in. But no it is a situation that is evolving rapidly and it's something that we're monitoring very closely. So I think our base exposure to this is more from a supply chain standpoint than it is from a customer revenue opportunity set. But as we did talk about in some of the prepared remarks, China is an emerging and growing market for our end products, in which we're having more and more success with our differentiated technology offerings. We do have a very global and diversified supply chain. But as we sit here today and we're looking at an extended shutdown of the China New Year holiday system that is impacting our ability to produce certain products to a certain degree. At this point, we still have a lot of latitude to make up lost ground. But if this were to extend much longer, there are areas for instance within our fiberglass business where we have limitations in terms of the amount of resin that's on the ground at our manufacturing plants right now. So there's some risk there but so far so good. Similar type of exposure related to drill pipe manufacturing, other businesses to a lesser extent, but so far, we think our team is managing through it pretty effectively. But still a lot of uncertainty related to the extent to which this will impact operations.

Yes, yes. And those are sort of first order impacts, I'm equally concerned about second quarter impacts, which is the impact that this has on global demand for oil, what it's done in the commodity price markets. And go to the point kind of what it does to the psychology of oil and gas producers as they think about, how much to drill in 2020. So, it's – as we said, the situation remains very fluid.

Okay. Understood. All right. I will turn back over. Thanks.

Thanks,

Thank you. Our next question comes from Scott Gruber with Citigroup.

Yes, good morning.

Hi, Scott.

Hi, Scott.

Turning to C&P, how should we think about the C&P margin profile over the course of 2020 I'm just thinking about the interplay between the mix shift in the revenue stream towards more international and offshore, but also the cost-out program. I know, you don't want to provide too many specifics beyond one quarter out, but just any general color on how that margin profile should progress given that interplay?

Yes, Scott, it's Jose. I'll start-off on this one. So, we're not going to really deviate from the typical way we describe in terms of thinking about margin progression for the Cap segment, which is really think of it in terms of incremental margins, basically dollar dropping between $0.25 to $0.35 down to the EBITDA line. And obviously that is dependent on the mix of the business and really what you're getting at is with the decline that we're seeing in demand for equipment in the North American market, and the solid growth that we're seeing overseas, particularly for offshore markets. Typically, some of those offshore projects in the early phases of recovery have been slightly more challenged from a margin perspective. But as Clay alluded to, and I think we touched on a couple of times during our prepared remarks with the amount of tendering activity, we think we're starting to now see more opportunities for pricing improvements. But here as we stand today, you also need to think about the latency time associated with some of these offshore projects, where they sort of reside in our backlog, a bit longer than the short-cycle North American-centric product offering. So what's going through converting to revenue right now is to a large degree stuff that was booked nine, 12 months ago. And so as we start capturing better pricing, we should see the incremental margin profile improve, along with being further supported by the cost-cutting initiative efforts that we have underway.

Got you. But overall, for the year do you think that we should be thinking about that are lighter than normal margins? Or given some of the pricing trends you end up doing closer to the normal incremental for the year?

I think on a blended basis, it's more – there's a lot of puts and takes here.

A lot of parts and pieces. So I would assume fairly normal.

Okay. And then maybe, if you could just give us a quick update on the rental initiative that you guys really push forward a couple of years ago particularly on the drilling tools side of the business but even more broadly just an update on the rental model initiative particularly as the international markets pick up further in 2020?

Sure. Scott, you're talking about our drilling tools business, the rental -- we have a couple of general business around over, I think you're talking about the investment we've made in directional drilling technologies, rotary steerables and SelectShift. And we’d tell you that we're continuing to gain traction in that. We've got three different rotary steerable tools in the marketplace including what we think is the lowest cost, a very highly differentiated rotary steerable tool. Our SelectShift motor that we introduced last year, which is the adjustable bent-housing motor that could be adjusted downhole. A very large operator in the U.S. is testing that this week. We've had a lot of excitement around that. MWD tools also that we have in the space. So we're continuing to make progress in here, but that strategy was built on the recognition that unconventional drilling -- unconventional shales really rely on geosteering on horizontal drilling and it is a kind of enabling and key technology for unconventional technologies -- or unconventional shales that NOV has an opportunity here to be a larger provider of technology into that space.

And maybe one thing I'd just add just so there's no confusion about it. So, as Clay mentioned, there's a number of areas where we do provide rentals of equipment. The space that we're talking about is a combination of both rentals and sales, but just want to make it clear, we're somewhat agnostic on that. But what we do want to make clear is that this is not a service that we are providing. We are enabling those directional drilling service companies out there.

Yes.

Got it. Appreciate the color.

You bet. Thank you.

Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. Your line is now open.

Hey, good morning everybody.

Hi, Kurt.

Hey, Clay, thanks for that historical perspective resonates with me, that's for sure. So in the context of what you guys see going forward? And Clay, yes, NOV's always been at the forefront of evolving on the technology front and creating some value propositions that ultimately oil companies and service companies find useful. You threw out that teaser about some things that you're working on in the hopper. Can you maybe elaborate a little bit, maybe give us a little bit more of a teaser as to what kind of value propositions you may be looking at for the next leg of growth for NOV?

On renewables, I'm going to defer on that. On the -- are you talking about renewals, you're talking about a traditional oilfield curve, Kurt?

Well, yes, I'll go wherever you want to take it, Clay. So if you want to dimmer on renewables, that's fine.

Well, matter of fact, we like we much prefer to talk about things that are in the marketplace that are starting to get traction. And so in terms of what I'm most excited about really the predictive analytics products that we introduced a few years ago continue to gain traction. I think Jose referenced the growing number of rigs in our programs. We're monitoring equipment and able to predict in advance operational challenges before those happen. NOVOS operating system for drilling rigs both land and offshore is gaining a lot of traction and really beginning to contribute meaningfully. Our wired drill pipe IntelliServ data transmission, downhole data transmission technology combined with machine learning and artificial intelligence is improving results for operators. In fact there's a great article in this month's Journal of Petroleum Technology about what we've done for a U.S. driller in space. And so I again, just to reiterate could not be more proud of sort of the enhancements that we have going on. And those are actually just a few of many, many things that NOV has introduced through the downturn.

Got it. And then just a follow-up in the context. I appreciate that color by the way. In the context of the capital allocation you indicated that if all goes well you could be potentially in a position to kind of restart a share repo program. Just kind of curious as to the decision framework between the say the share repo versus maybe bumping the dividend a bit. Any insights would be appreciated on that front?

Well, thank you. Yes with respect to where our stock has been trading, we think there's good value in that and have gone through that in a great deal detail with our board. We'll continue to look at it by the way. But we're -- I think the way we view that right now is that share repurchase is preferred but the key thing is that our capital priorities remain unchanged in all of our -- you look back to 2019 all of our actions were really geared towards continuing to improve. We implement a lot of cost savings that are driving better EBITDA. We refinanced and paid down a lot of our debt. And so we're continuing to work towards being in achieving the credit metrics that we talked about that will pave the way for a greater level of capital return to shareholders.

Okay. Thanks. Appreciate that.

Thank you. Our next question comes from Sean Meakim with JPMorgan. Your line is now open.

Thank you. Good morning.

Good morning, Sean.

Maybe I'll try to ask the prior question just with the different angle. So in terms of the free cash guide for 2020 and uses of that cash. So we noted buybacks could be coming earlier this year. Obviously dividend is well covered. CapEx may be a bit elevated this year but that's discrete very specific. You've also in effect supplemented some of your CapEx spend with technology, bolt-ons over time has been a big part of the strategy this cycle in particular, is something like $200 million a good run rate for bolt-ons. Just I'm trying to capture other uses of cash that could come before the buybacks in 2020?

Yes. That's a great point. Sean, we're always looking at opportunities in the M&A space. And I think you've been pretty transparent about that. And so what I'd say is in 2019 and this sort of fits with my prepared comments around the fact that oilfield assets and equities have gotten a lot cheaper in the current environment. And so we're always looking at kind of what's the next best application of NOV's shareholders' capital and to the – and that M&A outlook changes from time to time as we kind of work through the year.

Yes, Sean, this is Blake here. I'd just like to add that we both Clay and our Board gives us the flexibility like we don't have a run rate on like a target for acquisitions for a year. Every acquisition is an individual investment decision that we raised that we also compare relative to the investment in our own stock. So at this point like I think there's a lot of opportunities out there. It's a very crowded field of sellers right now and a very limited set of buyers. So we think that there could be some attractive valuations out there but we're going to be very, very patient.

Got it. That's helpful feedback. And then – so well done to see all the efforts on working capital start to come through and convert the cash and that's been a top priority especially for Jose. So with the 4Q results and your expectation that working capital will be a source of cash again in 2020, just curious to get any updated thoughts on seasonality as we go through the year in terms of working capital? And then just how you're targeting working capital efficiency by the end of 2020 or 2021, maybe any updated thoughts around working capital to sales or DSOs inventory turns DPOs et cetera?

Yes. I don't think we'll get super granular in terms of specifying the targets. But what I would like to spend just a moment talking about is that we are seeing is a lot of good progress and a lot of good momentum by a lot of hard-working people across the organization. We've been at it a while but obviously the results really started to come through in the second half of 2019. And we have a lot more work to do, but with the momentum that we have and opportunities that we've identified, we're confident and our ability to harvest more cash from our working capital and just become a lot more capital efficient as we progress through 2020. So we finished 2019 with that working capital to revenue run rate just a tiny bit over 30%, which was a good outcome for us. Now what we're really going to be focused on during 2020 and you asked the question related to seasonality. It's really going to be more focused on the average level of working capital intensity really throughout the life of the organization. So a lot of progress through the course of the year, but if you look at the average for 2019, average the starting balance sheet and ending balance sheet apply the total annual revenue to it that was 37%. So we're trending in the right direction. But we certainly want that average to come way down during the course of 2020 and that would put us at a Q4 run rate that will be better than where we finish this year.

Fair enough. That’s really helpful. Thank you.

You bet.

Thanks, John.

Thank you. Our next question comes from Vebs Vaishnav with Scotiabank. Your line is now open.

Hi, Vebs.

Hi, Vebs

Hey, good morning and a very good quarter. I guess just a clarification. You guys talked about $230 million of cost savings is I guess I just want to confirm that that's comparable to the $200 million number earlier that you had guys guided to?

Yes. Yes, we found another $30 million in annualized. Both those numbers are annualized cost savings as compared to our structure in the first quarter of 2019.

Got it. Okay. C&P orders, you talked about it could be somewhat lower in 1Q. Can you just talk about what kind of visibility do you have beyond that and that's both for C&P orders and Rig Tech orders? Can we sustain what we saw by in the first Q? Can we sustain what we saw in 2019?

Well, Q4 was I think our fifth quarter in a row of book-to-bill north of one for completion and production solutions. A lot of these orders particularly for offshore projects, we have a lot of lead time into because there's a lot of work that goes into them, sometimes there's Feed studies behind them things like that. And so a lot of the near-term, the downturn that we expect in Q1 in orders in Completion & Production Solutions, it's really just the timing of how those things fall. And -- but that, notwithstanding, what I'm most encouraged about is the fact that our tendering activity across the portions of Completion & Production solutions that are focused on the offshore remains very strong. I think we mentioned that our PFT Group, for instance, the pipeline there is twice what it was a year ago. And so it feels to us like the offshore infrastructure is continuing to move forward and that's a really good backdrop I think to move into 2020 with respect to orders for Completion & Production Solutions.

Great. And maybe just one last question for me. And on the guidance for Wellbore. So, it seems like yes you guys did like only down revenues 4% versus guidance of 5% to 7% so like not very different from the guidance. You talked about North America only declined 11%. So, never spectacular in 4Q. I was a little surprised by the guidance of down 6% to 12% for 1Q. I think like you talked about China and could have an impact. Could you just elaborate like what is guiding that I like -- and how should we think about North America versus international in the guidance?

Yes, part of the overachievement in Q4 was higher drill pipe sales than we had expected going into the quarter. Part of our expectation for Q1 is that turns around. That's a little lumpier than some of the other businesses within Wellbore Technologies.

Yes. And I'd also add you look at the guidance across the Board related to the sequential decline from Q4 to Q1. We do look back the last couple of years in terms of the fall off that we've had from Q4 to Q1. Feels like that the E&P budgeting process both within North America and the international markets is getting a little bit more prolonged and get -- certainly gets amplified when you add in a pullback in commodity prices and the fears related to the coronavirus. So, that is certainly factored in to an extent into the Q1 guidance.

Yes, one more thing. We like a lot of business for instance has seasonality exposure in Russia and the Rockies and places like that. So, it's just -- our expectation is that that will -- those will all contribute to Wellbore Technologies moving down in Q1.

Got it. That's very helpful. Thank you for taking my call.

You bet. Thank you.

That concludes our question-and-answer session. I would now like to turn the call back over to Clay Williams for any further remarks.

I want to thank everyone for joining today. And in particular I want to take the opportunity once again to thank any employees that might be listening frankly to thank you for the great job that you're doing so. Have -- hope everyone has a great weekend. Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.