National Oilwell Varco Inc. (NOV), which makes and supports advanced drilling systems, has moved into restructuring mode to wait out the eventual upcycle, but until then, it's going to be a difficult period, CEO Clay Williams said Tuesday.
The Houston oilfield services company reported a sharp downturn in business during 1Q2015, both sequentially and from a year ago, with the the backlog for capital equipment orders in the rig technology business17% lower than in the fourth quarter and 31% off year/year. Sales in the rig segment increased 12% from a year ago, but the rig aftermarket segment's revenue declined 4%.
"Given the difficult oil price backdrop, first quarter orders were weak for our rig systems segment," Williams said during a conference call Tuesday. "We booked orders of $236 million, half of what we booked in the fourth quarter of 2014...Shipments out of backlog totaled $2.25 billion, yielding an ending backlog of $10.4 billion, down 17% sequentially...
"Our outlook for orders for the second quarter is marginally better but will remain slow as customers who need equipment are taking their time ordering." NOV expects to see more offshore rig retirements, "which will speed the inevitable fleet high-grading process, and bring offshore rig supply-demand into better balance.
"Many of our NAM [North America] land customers indicate they want to pursue upgrading their fleets to Tier 1 in advance of a potential 2016 recovery. In the short run, though, we expect continued soft orders as contractors struggle with lower dayrates, cannibalize components off of stacked rigs, in lieu of placing new orders with NOV."
The rate of decline in active rigs, "most acute across NAM, is breathtaking and unequaled in prior downturns. NOV saw activities and orders slow in just about all areas of our business, and all of our units are experiencing pricing pressure."
A debate rages, Williams said, as to the "shape and timing" of the eventual price recovery.
"We don't know if we are in for a V-shaped, a U-shaped or a W-shaped recovery, but we will all know soon because the industry is conducting its first grand, global empirical test of price elasticity of the supply of oil...
"The facts as we know them point to a pretty good foundation for an eventual recovery."
All of the wells, fields and basins "left wanting for investment inevitably decline...So eventually supply and demand curves will cross and we will see oil prices signaling producers to get back to production growth. We just don't know when. And frankly we cannot wait for the eventual recovery."
This year will be one for restructuring at NOV, the CEO said. Because of the lack of visibility on the recovery's timing, the approach is to focus on costs, without sacrificing opportunities.
"It started with a voluntary early retirement for our long-serving employees, and is being followed by reductions in facilities and workforce as utilization dictates," Williams said. "We are working to in-source more of our production needs, as utilization declines across our manufacturing plants, with a goal of preserving as much work as possible for our own plants and our own employees."
NOV also is "under pricing pressure and requests to cancel work, which we are vigorously opposing. We are seeking to structure discounts around volume-related rebates tied to payments and expanded product purchases, in effect picking our points, to try and win greater share, defend volumes and improve absorption in our plants."
NOV management doesn't want customers "to get out of the habit of buying from us, to maximize our market position when the inevitable recovery comes."
The down market is providing an opening for those with ample cash, Williams said.
"We have the financial resources to invest in acquisitions, as well as the transformative new technologies we have a long history of pioneering," Williams said. "Cyclical downturns provide extraordinary opportunities to deploy capital to better position our enterprise for a recovery. While we don't know the duration of this downturn, we know that we will be better when the recovery comes."
Net income in 1Q2015 was $310 million (76 cents/share) versus 4Q2014 earnings of $595 million ($1.39) and year-ago profits of $589 million ($1.38). Revenues were $4.82 billion, a decrease of 15.6% from the fourth quarter and 1% lower than a year ago. Operating profit was $692 million, or 14.4% of sales.
The rig systems business generated quarterly profits of $488 million, or 19.3% of sales. Revenues of $2.52 billion were down 1% from the fourth quarter and 12% year/year.
The rig aftermarket segment reported profits of $199 million, or 27.7% of sales. Revenues of $719 million were down 15% sequentially and 4% from a year ago. Sequential operating leverage, or the change in operating profit divided by the change in revenues from 4Q2014 to 1Q2015, was 35%.
The C&P business reported operating profits of $108 million, or 11.4% of sales. Sequential operating leverage was 28%. Revenues fell 28% from 4Q2014 and were down 5% from 1Q2014. Backlog for capital equipment orders for C&P at the end of March was $1.46 billion, down 18% sequentially and 10% year/year.
Quarterly operating profits for wellbore technologies, 10.6% of sales, was $124 million. Sequential operating leverage was 42%. Revenues in the latest period were $1.17 billion, down 8% year/year and and 23% sequentially.