National Oilwell Varco 3Q15 Earnings Call Notes

We see further reductions in activity

“A second major decline in oil prices from the high $50 range back into the low to mid $40 range since June has increased financial stress and led to a second round of rig activity reductions, sending the U.S. rig count down by almost 60% since late 2014 peaks. We expect to see further activity reductions and pricing pressures continuing into the fourth quarter. Visibility is limited, but we believe most producers will further reduce their 2016 CapEx plans after cutting spending significantly in 2015. The industry has not seen two years of declining CapEx since the 1980s, signaling the severity of the downturn we find ourselves in.”

Producers are producing fields close to maximum levels

“We believe many, if not most, North American producers and OPEC countries are producing existing fields close to maximum levels, trying to offset lower revenues due to oil price declines with higher volumes while sharply reducing drilling activity. OPEC and non-OPEC production are up year-over-year. This is not sustainable. Production will begin to decline naturally, as it has begun to in the United States. And therein lies the seeds for our recovery.”

We don’t expect recovery any time soon

“However, with swollen inventories, moderating demand growth with economic weakness in Asia and elsewhere around the globe and an uncertain trajectory for incremental oil exports from Iran, we don’t expect recovery any time soon. Nevertheless, it will come.”

As the downturn lengthens company prices will come down

“As the downturn has lengthened, we believe values of potential target companies will become more and more compelling. Thus far, it has been challenging to bring the bid and the ask on potential acquisitions into alignment, but we remain patient and disciplined in these discussions.”

Sellers will likely reduce their expectations

“As we move into 2016, we believe sellers are likely to reduce their expectations and better capital returns on M&A will follow. Consequently, our capital deployment strategy is shifting from share buybacks to an external focus on potential acquisitions”

NOV is a portfolio of market leaders

“NOV represents a portfolio of market leaders with the deepest experience and the most expertise. Within these businesses, we have assembled discrete packages of equipment and services to drive higher efficiency in ways that our customers really want and in ways that really improve their businesses.”

Look for enterprises where we can be a better owner

“Our acquisitions are of enterprises where NOV can be a better owner, to accelerate growth, drive efficiency and fully unlock their potential to create value for our customers and our shareholders”

Grateful to our business leaders

“I’m extraordinarily grateful to these business leaders who are skillfully reducing our capacity, managing costs and leading our core team through this challenging time. They’re providing their teams with a vision of better days ahead to make sure that our folks see the prosperity that will follow for NOV. ”

Difficult conditions will persist

“Difficult market conditions will persist for the foreseeable future. We supply a highly capital intensive industry and have benefited from decade-plus period of retooling with improved levels of technology and automation. But the industrial transformation is far from over. Our view is that we are currently in a cyclical pause.”

Our customers are in a Darwinian quest to preserve cash

“During such a cyclical pause, our biggest competitor becomes the overhang of products and consumables and equipment that our customers cannibalize extremely effectively in their Darwinian quest to preserve cash.”

We came from PE roots

“both National Oilwell and Varco came out of private equity roots. And through the years, between our two organizations, we came together about 10 years ago, we’ve done probably in excess of 300 transactions. So this is becoming a buyer’s market and we’re pretty excited about that.”

Try to move more manufacturing in house in a slowdown to keep teams busy

“we do have sort of an outsourcing model. Basically we recognized all of the things that we manufacture serve cyclical industries, so demand rises and falls. So we’re trying to avoid scaling up to internally manage peak demand. And over the past few years, a number of our business units have done more outsourcing. So as you go with the other way and things sort of cycle down, we really try to bring more in house, keep our core teams busy.”

2016 is going to remain challenging

“I think the first part of 2016 is going to continue to be really challenging and, as I said in my prepared remarks, our expectation is activity is going to trend lower. I think like everybody in this industry that we remain hopeful we’ll get a little bit of commodity price help and relief and then maybe in the second half of the year we start to see maybe some activity pick up a little bit. But I don’t have a lot of data to point to this as to why that would happen.”

Producers want to get back to drilling as soon as they can

“producers come under a lot of pressure when they start facing production declines. And so I think there’ll be an impetus, at least across North America, to get back to drilling as soon as they can”

A little uptick in activity will require a lot of work from NOV in spare parts

“A lot of the equipment that’s out there has been depleted of spare parts and cannibalized. And so a little bit of uptick in activity is going to take a lot of work from NOV, so we’re looking forward to that time.”

Customers have been more aggressive about repositioning equipment to preserve cash

“We’re seeing customers be far more aggressive I think in this downturn with regards to cannibalizing their equipment, about repositioning it. If they have a particular piece of equipment in a different region, there’s a cost to repositioning that; there’s freight, there’s – they have to invest in that just to move it and maybe to get it back to working order. And we’re seeing customers go to more extraordinary lengths I think in this downturn than we have in the preceding couple of downturns with regards to cannibalization”

Customers still want to upgrade their rig fleets to AC technology

“I’m probably more optimistic about in terms of demand in Rig is we know a number of drilling contractors in North America and around the globe who are completely bought into the idea and the need to upgrade their fleets to AC technology. This is clearly where the market is going and so I think in terms of recovery, that’s where we would see it next.”