National Oilwell Varco 1Q15 Earnings Call Notes

Revenues only down 1% y/y

“Revenues were $4.8 billion in the first quarter of 2015, down 16% sequentially, and down 1% year-over-year. ”

Oil price signal rolled through our industry like thunder

“Business in the first quarter of 2015 declined significantly in response to lower oil prices. We entered 2015 with oil prices half of what they were just a few short months. Now, all commodity prices signal producers to add or diminish supply, and oil is no exception. So in the first quarter with global supplies outpacing global demand by 1.5 million barrels per day, the oil price signal rolled through our industry like thunder and thunderstruck participants responded vigorously.”

Rate of decline in rigs is breathtaking

“The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns.”

Most of us have been through these cycles before

Most of us in oil and gas industry have been through downturns many times before and have honed our skills at rapidly adjusting spending through the cycles.”

North American shales are the swing source of oil

“North American oil shales are emerging as the new swing source of oil. Since 2011, in a $100-per-barrel price environment, North American oil shales grew about 4.5 million barrels per day, while the rest of the world posted a 0.5 million barrel per day production decline.”

Shale wells decline quickly and the oversupply is not that huge

“individual shale wells decline exceedingly quickly, 8 to 10 times the rate of conventional resources. We know that the sharp and rapid decline in the addition of fresh and new producing wells of all kinds will result in diminished global oil production over time. We also know that the excess productive capacity around the world, the oversupply, is, thankfully, just a few percent, far less than my first downturn in the 1980’s.”

Eventually supply and demand curves will cross

“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.”

Restructure focusing on costs without sacrificing opportunities long term

“2015 will be a year for restructuring at NOV. Given our short-term lack of visibility into the timing of the recovery, our approach will be to focus on costs, without sacrificing our long-term opportunities.”

Downturns create opportunity

“Prior downturns in our industry have provided great opportunity for those with capital and the foresight to look through near-term adversity. NOV is a remarkable franchise. We are also at the forefront of several transformative trends in the oil business. ”

A list of a lot of the hardware that NOV provides

“So when we look at, for instance, a shale well drilling operation, what you see out there is a Tier 1 rig, premium drill pipe, downhole tools, mud motors. You see on the completion side coil tubing units, in-coil tubing, frac spreads, sanders, mixing units, basically all of the picks and shovels. All of the hardware that go into the unconventional shale trend, NOV is global-leading provider of.”

Lower oil prices incentivize people to become more efficient

“all sources of crude are continually working on reducing their marginal cost, to slide down that marginal cost curve and not be the last barrel produced in terms of economic efficiency. And the offshore is absolutely no exception. And so what’s encouraging about what we see today is that at $100 a barrel, there’s not as much incentive to do things differently. When the oil price drop to $50 a barrel and the IOC’s have found, for instance, 5 billion barrels in the lower tertiary in the Gulf of Mexico, there’s a strong incentive to figure out.”

“They know the resource base is there, how do we figure out how to produce that at lower cost? ”

We think that market leadership carries a demonstrable competitive advantage

“we think market leadership carries demonstrable competitive advantage in this space. We think we reduce risk for our customers by being market leader. We think scale gets us up learning curves faster, it support broader global networks to deliver products and services and equipment. Let’s us leverage R&D efforts and introduce new products more quickly. For lots of reasons market leadership carries lower risk and higher returns.”

National Oilwell Varco 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

We don’t think excess capacity is excessive

“we do not believe the global excess production capacity is excessive by historical standards. We do not face the kind of structural global overhang the industry faced in 1986 when Saudi Arabian production have been prepare down to that 4 million barrels of oil per day as fair global oil capacity exceeded 15% of demand. We believe this downturn will be more like 2002 or 2009. Both prior instances recovery came within about two years.”

Oil production falls steeply from shale basins

“The production type curve from these basins exhibit extraordinarily steep decline rates, which is well documented across thousands of wells in multiple share basins. New share reservoirs exhibit perhaps the highest natural decline rates for many major source of oil and the industries modern history. We see North American shale drilling slowing dramatically and quickly seen the rate of new shale wells coming online will decline and 4 million barrels of oil per day from U.S. shales within begin to decline will decline steeply. We believe this could lead to modest oil price recoveries early is late 2015, however we expect shale production to continue to grow to the first half of 2015 before begins to fall as remaining inventory of Wellbore is completed in brought online, which means recovery once it arise maybe a slower drive higher despite the steep decline curve behavior shale oil.”

World can’t grow supply with oil below 80

“We don’t believe the world can sustainably grow its oil supply with prices below $80 – $75 of barrel and with prices below $60 oil production will begin to contract”

Orders for all our products slowed sharply

“Orders for all our products had slowed sharply. Offshore land drilling completion and production, customers are delaying purchases of both capital and consumables wherever possible seeking to conserve cash in the phase of market uncertainty.”

People aren’t buying new rigs, but this isn’t sustainable forever

“History teaches us to expect this behavior to continue for at least the next couple of quarters meaning orders will continue to be slow and our book-to-bill and Rig Systems well below one. However, this behavior is not sustainable over the long-term. Drilling consumes rigs much like driving consumes your automobile.”

Book to bill of 21% in rig systems

“Rig Systems post the new orders of $470 million, or a book-to-bill just 21% reflecting to customer mindset I just discussed. This resulted in a Rig Systems backlog the $12.5 billion to start 2015.”

Wellbore technology segment revenues fell by 10% in 2009

“If one wanted to use the 2008 to 2009 timeframe is a proxy for 2014 to 2015, one could predict revenues to fall between 20% and 25% would seek 50% to 60% decremental margins. As a point of reference, Wellbore Technology segment revenues for the full year 2009 excluding non-recurring items were 9.8%.”

Customers are being very aggressive about cost

“Yeah, I’ll say that our customers are being very aggressive and seems to have the same form letter that they are sending to everyone within the people receive a letter and demanding very high discounts, double digit percentage discounts. ”

National Oilwell Varco 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

300 drilling contractors in the US. Not all can afford a necessary technology leap

“The capital investment in just one of these rigs is significant. And we believe that most of the 300 drilling contractors throughout the U.S. will struggle to make this technology and capital leap. This means that the retooling of the U.S. land rig fleet to AC technology will probably continue to be led by larger well-capitalized drilling contractors, and can ultimately serve to consolidate the U.S. land contract drilling industry into a smaller group of larger, well-capitalized participants.”

It’s way too early for the final word on 2015

“we also see lots of challenges. Oil prices dropped $20 since the beginning of the third quarter. We have not yet heard of any rigs being laid down due to lower oil prices, nor have we heard from any of our E&P customers about their plans to curtail drilling, but it’s far too early for this to be the final word on2015 activity, and we will continue to monitor activity closely. ”

It’s hard to imagine how lower oil prices wont impact things

“Historically, the impact from lower oil prices doesn’t show up in reduced activity until three months or four months or more have passed, as operators drill out the rig contracts and programs and budgets. We’re cautious right now, because it is difficult for us to envision $20 lower oil prices not taking at least a modest toll on activity.”

Wont be surprised to see rig count declines

“Perhaps this just means that rig counts won’t increase as much as we expected before, but we would not be surprised to see North American rig counts begin to fall modestly in 2015, given how much oil prices have moved down. We believe major North American shales exhibit breakevens below the $80 level, some substantially below the $80 per barrel level. And these breakevens continue to move down gradually, but nevertheless, $80 a barrel for West Texas Intermediate probably begins to approach inflection points for a lot of field developments, and lower oil prices certainly reduce wellhead cash flows for all producers.”

Learning curve effect makes established drilling programs stickier

“:We believe some will find themselves underwater. We believe established drilling programs within the major shales can weather these lower oil prices, because their economics have been steadily improving due to drilling and completions efficiencies. But also because the learning curve effect should make them stickier, and the operator should hesitate to shut down a rig that has been operating for a while, because its finely tuned efficiencies learned during the first several wells, so critical to capital returns, could be lost. So if 2015 sees lower oil prices, we would expect the activity downturn to be moderated, and to hit the older rigs drilling vertical wells in the more marginal shale plays the hardest. ”

Shale production can be shut down rapidly leading to a faster rebalance

“we anticipate that, when shale drilling slows from time to time, shale production will decline rapidly, making commodity price dips driven by shale supply relatively short lived, in our view, as shale supply rebalances more quickly than other conventional production.”

National Oilwell Varco 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Domestic E&Ps are putting money back into more drilling

“we are seeing the major North American shale plays growing, domestic E&P wellhead cash flows are rising with increasing production and strong commodity prices, and producers are choosing to plow back more their cash into new shale drilling.”

Offshore rig demand softening into the second half of the year

“Offshore demand held up well for the second quarter, but as we discussed last quarter, we expect the second half of 2014 to be more challenging. We see the market for new floating rig softening for at least the next few quarters due to lower dayrates pressured by new and contracted capacity coming into the market.”

Deals are expensive even for strategic buyers

“Even though we’re almost are strategic buyer, meaning that we have access to efficiencies and cost savings that financial buyers usually don’t. We are nevertheless frequently outbid. Rather than chase expensive deals ever higher, we will sought through many potential targets to focus on rifle shot singles, doubles with disciplined returns demanded of the acquisitions we execute.”

Acquisitions focused on continuing to build aftermarket service capabilities

“I would say the flavor of this is continued investment in our aftermarket support of the growing installed base of rig equipment.”

Focused on smaller transactions

“the overarching theme here is generally I think we’re seeing smaller transactions and believe that those offer a better purchase economics. The bigger these deals become the more attention they attract. And when that happens, generally the price goes up, the multiples go up and our returns go down.”

Low 20s normalized margin

“I think low 20s normalized margins is probably appropriate.”

Could be a soft few quarters ahead

“with regards to the duration of this downturn. We’re not sure, we believe, it’s not a one quarter dip. We get at least a few quarters and it could extend beyond that overall.

Long-term our outlook is still very, very bright. There’s an awful lot of development drilling and expiration drilling that still needs to go on in deepwater basins require floating rigs. So we think the fundamental demand is there. But a lot of capacity flowing into the market last year, this year, next year is giving rise to this.”

National Oilwell Varco 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Most of the easy oil has already been discovered

“with most of the easy oil already discovered, future conventional sources will continue to become increasingly challenging to find. As economic growth steadily drives oil demand, we believe that growing production from; one, deepwater technology, which opened up vast horizontal expanses of the planet to production, and two, shale technology, which opened up vast vertical sections of the stratigraphic column to production will supply this demand, both oil and NGLs in greater and greater proportion through the 21st century’

Highest marginal cost barrel is the worst positioned

“Since the earliest days of the oil industry, companies have battled ferociously to emerge as the lowest marginal cost source, or at least not be the highest marginal cost source of the last incremental barrel. The high-cost barrel is the most disadvantage position on this battlefield. When economic cycles diminish demand, as they do from time to time, oil prices drop and the highest marginal cost position suffers the most.”

The battle lines of the oil industry constantly ebb and flow

“market forces continually test to resolve high marginal cost producers. The battle lines constantly ebb and flow as various combinations of innovation and geology lead winners to relative advantage and sometimes brief periods of respite from harsh market forces, at least until their fields decline or some other competitor finds better rocks and technology.”

The success of an oil service provider is based on demonstrated ability to lower cost of production

“NOV is a unique supplier of critical components to the combatants on this battlefield. We understand that our success rests on the success of our customers, meaning lowering their marginal cost per barrel”

“Our products win demand in the marketplace by conferring lower cost and higher value to their users. That’s why we must continue to invest in promising technologies and ideas.”

The cost of producing deepwater will come down over time with innovation

“while deepwater producers have struggled lately with project execution challenges and rising costs, these are certain to be remedied by time and innovation.”

Deepwater is facing transient challenges

“The deepwater drilling space faces startup challenges, which we believe are transient. A lot of new deepwater rigs have been launched recently with new crews, and these are operating under tighter operational requirements post Macondo.”

Continuing to do business in Russia, old rigs create opportunity

“With regards to Russia as I just mentioned, we are investing in another facility there. We have manufacturing operations for many years in Belarus, which primarily supplies for Russian market. A couple of years ago, we opened another facility in Nizhnevartovsk. And so it’s a market that has a lot of potential. There are something on the order of 800 rigs operating in Russia and most of those are older technology and there is a growing recognition, I think most Russian oil companies for the need for new technology, much like their counterparts in North America and elsewhere around the globe.”

A lot of supply chain issues that they’ve had to work through

“If you look, back, Brad, over the last couple of years, orders began flowing in, in earnest late 2011, 2012, we rebuilt our backlog up to new record levels here more recently. We began to experience supply chain challenges in the first components that go into rigs, which are typically mud pumps. And the as we can’t work through those again those we get better of that, the next kind of way that we saw was rig floor equipments, derricks, finally BOPs last year with the source of some challenges. And then more lately it’s been IMC.”

National Oilwell Varco 3Q13 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. The quotes are generally pieces of information that I find interesting or helpful to understanding the company, industry or economy and are not meant to provide summaries of the full content of the call. Other posts in this series can be found by clicking here. Full transcripts can be found at Seeking Alpha.

“We have long discussed four big trends that we expect to continue to shape National Oilwell Varco’s destiny over the next decade. One, the build out of a fleet of floating drilling rigs to explore and develop deepwater frontiers open by technology developments of the past 20 years; two, the blossoming of floating production systems, which we expect to produce most deepwater discoveries; three, the replacement of old jack-up rigs with better shape or new jack-up rigs; and four, the steady progression of unconventional shale technologies into new onshore plays overseas, which will continue to drive steady retooling of land rigs and spur demand for other oilfield technologies.”

“Demand for floating rigs has remained high underpinned by we believe strong driller economics on these investments, good day rates, low cost rigs, quick delivery and available financing.”

“we see the opening of deepwater provinces by new technology as presenting an unprecedented opportunity to the oil and gas industry, one that requires the unique sophisticated drilling tools, National Oilwell Varco and our shipyard partners provide.”

“Once oil companies discover deepwater hydrocarbons, they will produce these and we believe floating production systems will emerge as a preferred method in most deepwater basins.”

“The third trend affecting National Oilwell Varco jack-up rig demand has been white hot lately as operators seek to replace aging fleets, 54% of the marketed jack-up fleet is more than 30 years old”

“A few years ago dozens of speculative shale plays were being probed today these are coal lessening down to a handful to a handful of the most profitable.”

“The second major shale market encompasses basically the rest of the world outside North America. Here is where infrastructure is less developed, we view this market as considerably less evolved with tremendous potential and work to be done that will likely span a generation. It is not coincidental that the shale revolution was born on the continent with 2/3rds of the world’s working rigs and the highest level of geologic understanding. Shale plays unconventional plays are by definition marginally economic requiring established efficient oil services infrastructure capable of earthing a well the cost of which is marginally exceeded by the value of the hydrocarbons produced from it at some reasonable expected commodity price.”

“I will submit that one of the most interesting economic opportunities in this scenario would be for a company that actually builds out oilfields services infrastructure.”

“Land rig sales jumped with more than two dozen sold in the quarter almost all overseas and most going into more sophisticated horizontal drilling applications and pulling unconventional techniques. In particular we saw strong demand from Latin America where Mexico seeking to add new modern land rigs and where Argentina has lifted duties on rig imports for the next several months. The Middle-East, Russia and the Fareast also saw strong demand for land rigs.”

“Strong orders continue to load up our manufacturing plants filling up the capacity we have been adding aggressively, which requires we continue to outsource more and to spend a little more than we would like to expedite equipment.”

“From a supply chain standpoint, everyone is working hard to bring our new manufacturing capacity online which will ultimately lead to operational efficiencies.”

“as you take a look at a catalyst that I think you’re going to project out over the next two or three years. You know I keep my eye on a couple of international plays I think number one will be Russia, I think the Russians are going to be very aggressively doing things in the next few years.”

“I think another area that’s going to very exciting, certainly you should keep your eye on it will be Mexico. You have the changeable laws down there, I think as we move into the rest of the year you will have a constitutional amendment hopefully and then you will have the laws that will come out in the first quarter.”

“You know Brazil is very important to us today but I think we’re going to move into another plateau or not plateau but another tier if you will which is going to be the production and FPSO and the flexibles. So as we bring our flexible plant online as we take a look at some of these different engineering ideas we have on FPSOs as Clay mentioned earlier I think Brazil is going to be a very, very positive area for us”

“the deliveries are going to be slower in Brazil…You got to get on that learning curve. And that’s going to happen in these yards.”

“the rigs that we are building today and the rigs that we are delivering now and through the next couple of quarters, really are new designs or new rig floor layouts.”

“As I mentioned in my comments increasingly we see North America become more and more competitive, this inventory overhang issue has been out there.”

“I would add this rig efficiency phenomenon that everyone is being talking about we believe ultimately will grow the pie. It’s going to make some of the less economic basins now more attractive and more economic and so with ample financial resources and kind of growing opportunities perhaps in another basins you know we think that’s a pretty good backdrop to see expansion sometime out there in 2014.”

“things like drill pipe and downhole tools as long as well count is high which it has been those products get consumed and they get consumed pretty quickly. So there was a definitely an inventory overhang for both of those types of products, the downhole tools, and drill pipe. We will work through that at some point in time next year and we will start to see more demand for those products. As you get into the more consumable type items like fluid end expendables, valve, seat liners, pistons. Those are probably going to be consumed as customers need them as opposed to really building up inventory levels, because there is ample supply out there”

“yes, I mean, our customers are pretty busy. They have ordered a lot of rigs. They have a lot of projects underway. Well, time will tell where we end up next year. But I think bigger picture and this is some of the part of the themes that I touched on in the opening comments where it’s an enormous opportunity out there. And with high commodity prices, we are seeing a lot of oil companies, lot of drillers avail themselves to these opportunities. And so we think again, the backdrop, the fundamentals are very strong, day rigs are strong, financings available, the shipyard infrastructure is offering holes at very, very low cost. The risk around building these things is low. And so you are seeing drillers go after that opportunity and grow their businesses by investing in these assets.”

“you take all the floaters that were in existence prior to 2005 and you add all the floaters built since 2005 and you add all the floaters that are on order to be built. You are almost up to half of the rigs working in the state of Texas to go out and drill up the rest of the – two-thirds of the planet covered by deepwater. So we think that’s again a huge opportunity.”