Customers are craving the conventional and alternative energy technologies proffered by Houston’s NOV Inc., with the backlog sharply higher in the second quarter. However, CEO Clay Williams told investors Wednesday that “continuing supply chain challenges” and rising costs are a concern.

Williams discussed the latest results and what he sees ahead during a wide ranging conference call. NOV’s operating leverage was solid at 50%, in part on cost reductions implemented in previous quarters. 

Those reductions limited the price increases in some product lines, which helped “offset the inflation we are seeing in most product lines,” he said. The pandemic “bankrupted many of our customers,” but the backlog has begun to strengthen, despite “continuing supply chain challenges in Covid disruptions.”

Barring more widespread pandemic-related lockdowns, NOV expects the market to strengthen.  “Underpinned by broad economic growth, higher commodity prices and the continuing worldwide build-out of an offshore wind power toolkit, the company’s portfolio of technologies developed over the past several years positioned us extraordinarily well to capitalize both on the oilfield recovery underway as well as the enormous energy transition.”

The next five years “look very, very interesting for us.”

Still global manufacturers in every industry experienced supply chain disruptions throughout the second quarter. NOV expects these challenges to persist into 2022.

“Steel mills that supply metallurgy, along with petrochemical facilities and plants that supply NOV epoxy resins thermoplastics… are not fully up and running due to a combination of Covid, the February Texas freeze, and in some cases, disruptions in their own supply chain.”

In addition, there remain transportation bottlenecks around the world, which have led to “port congestion and port closures…

“Freight costs have quadrupled, adversely impacting suppliers two and three levels down from us, driving up input cost and lengthening delivery times on everything from steel to computer chips.”

During the call CFO Jose A. Bayardo said the improving outlook has “stretched supply chains and lead times,” limiting “the ability for new orders to improve revenue beyond the orders we currently have in our backlog.

“Additionally, we believe the significant increase in steel costs could slow tender awards while customers acclimate to a new pricing environment.”

The stage is being set for a “strong recovery in 2022,” Bayardo said. However, “we expect limited revenue growth for our drill pipe business in the second half of 2021. We’re providing high levels of quoting activity for pressure pumpers who need to replace or upgrade existing fleets.

“The pickup in inquiries is reflective of tightening supplies. The competition remains fierce, with the most difficult competition coming from idle equipment,” which limits sales and pricing.” While new equipment orders could be limited, “it also creates opportunities for our aftermarket business.”

NOV’s size has enabled it to move “to the front of the line” for some orders, Williams noted. “Our size and scale generally give us access to a broader range of suppliers and our teams are managing through these challenges better than our competitors.”

People Who Need People

Meanwhile, the U.S. market is experiencing a “tightening labor pool, adding pressure to cost and efficiency,” the CEO told investors. “Our customers tell us that attracting hands back to their oilfield service operations is very challenging.”
On the positive side, the labor shortages have promoted “greater customer interest in some of the new automation products we are now introducing to the market, which reduced the need for field labor. But as we get back to growth in our factories, we’re finding it challenging to attract workers as well.”

NOV is working to stay ahead of the “inflation threat brought on by labor and raw material constraints by passing along these costs as price increases,” Williams said. “Our success is varied, depending largely on the level of excess, lower cost inventories remaining in our competitors’ hands within these markets.

“Day by day however, we know excess capacity within many categories of oilfield equipment and consumables…is approaching depletion.” That could offer “the first opportunities in many quarters to heal pricing and profitability as the North American marketplace continues to get more active and offshore and international markets start to recover.”

Covid-19 measures also continue to impact operations around the world, Williams said.

“Two of our large composite pipe plants in the Far East were shut down late in the second quarter and remain closed until late last week. Operations in India, the Middle East, parts of Europe and Canada, all experienced Covid disruptions to greater or lesser degrees…”

‘Extreme Capital Discipline’

In North America, activity by exploration and production customers remains measured, he said. It’s gaining on stronger commodity prices but is governed by “extreme capital discipline.” 

The Rig Technologies and Completion & Production Solutions (CPS) segments “posted book-to-bill ratios north of 100%,” Williams said. “Wellbore Technologies continued to execute well on modestly higher oilfield activity, generating its second quarter in a row of double-digit revenue growth with leverage greater than 50%.”

Still, net losses in the quarter totaled $26 million (minus 7 cents/share), or 1.8% of sales. In the year-ago quarter, net losses were $93 million (minus 24 cents). 

“While our second quarter financial results continued to reflect 2020’s historic decline in oilfield activity and orders, we are encouraged by rising inquiries and activity, and we believe post-pandemic global economic recovery will spur further top-line growth,” Williams said.

“In the meantime, government-mandated shutdowns continue to disrupt global supply chains, limit raw material availability, and pose challenges for our workforce. 

“NOV did a better job navigating these headwinds in the second quarter, while continuing to advance the company’s leading-edge technology offerings for the oilfield and renewables markets.”

Beyond The Oilfield

The portfolio of newly developed technologies for the energy transition-related market is positioning NOV “to take advantage of what we believe is the beginning of a multi-year growth market for both conventional and clean energy technologies,” Williams said.

Revenue in 2Q2021 fell 5% year/year but was up 13% sequentially at $1.42 billion. 

In the Rig Technology segment, revenue climbed to $487 million, up 2% year/year and 13% sequentially. Operating profit was $49 million, or 10.1% of sales. New orders booked during the quarter totaled $232 million, representing a book-to-bill of 138% when compared to the $168 million of orders shipped from backlog. At the end of June, the backlog for capital equipment orders for the unit totaled $2.66 billion.

CPS revenue declined by 19% year/year but was up 13% from 1Q2021 to $497 million. Improved sales volumes in six of the segment’s eight business units drove the improvement in revenue despite continued pandemic-related operational disruptions. Operating loss in 2Q2021 was $6 million, or 1.2%of sales. 

New orders booked by the CPS business during the quarter totaled $462 million, representing a book-to-bill of 167% when compared to the $276 million of orders shipped from backlog. The backlog for capital equipment orders at the end of June totaled $1 billion.

Wellbore Technologies generated revenue of $463 million in 2Q2021, a 12% sequential increase and up 5% year/year. The gains in revenue were driven by “continued growth in North American activity levels and a slight improvement in international markets.” Operating profit was $6 million, or 1.3% of sales.

Innovation Nation

Across the tech-savvy company, NOV is meshing its conventional drilling expertise with alternative energies to expand its business.

For the conventional drilling business, NOV during the quarter delivered its first project to integrate its NOVOS and MPowerD managed pressure drilling systems. The project is designed to enable multiple drilling sequences to be automated.

In addition, NOV extended its reach into products that enable customers to reduce their carbon footprints while improving economics. 

A repeat order also was secured for the PowerBlade hybrid energy storage and regeneration system, designed to reduce rig emissions and power consumption by up to 70%. Another customer collaboration resulted in a rig design that uses smart controls to optimize power deployment and battery storage.

Making inroads into the offshore wind energy market also is key, management noted. NOV is using its expertise in heavy lift and marine design to expand its customer base. 

During the quarter, the company signed a contract to design and provide jacking systems for an undisclosed European client’s new wind installation vessel. It also contracted for a heavy lift crane upgrade to an existing wind installation vessel. An in-line chain tensioner also was tested for offloading floating wind turbines and mooring operations for floating, production, storage and offloading systems, “which led to a subsequent project award.”

NOV also worked with one customer to design and deliver a proprietary system that automatically tilts and orients a sailing mast to improve the efficiencies of sails on large vessels. The wind propulsion technology could supplement conventional propulsion systems and reduce a ship’s carbon footprint by 40-50%.