National Oilwell Varco (NOV) Q4 2016 Results - Earnings Call Transcript

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National Oilwell Varco, Inc. (NYSE:NOV) Q4 2016 Earnings Call February 7, 2017 9:00 AM ET

Executives

Loren Singletary - National Oilwell Varco, Inc.

Clay C. Williams - National Oilwell Varco, Inc.

Jose A. Bayardo - National Oilwell Varco, Inc.

Analysts

Edward Charles Muztafago - SG Americas Securities LLC

J. Marshall Adkins - Raymond James & Associates, Inc.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Bradley Philip Handler - Jefferies LLC

James West - Evercore Group LLC

David Anderson - Barclays Capital, Inc.

Sean C. Meakim - JPMorgan Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the National Oilwell Varco fourth quarter and full-year 2016 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. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Loren Singletary, Vice President of Investor and Industry Relations. Sir, you may begin.

Loren Singletary - National Oilwell Varco, Inc.

Thank you, Chanelle, and welcome, everyone, to National Oilwell Varco's fourth quarter and full-year 2016 earnings conference call. With me today is Clay Williams, President, CEO and Chairman of National Oilwell Varco, and Jose Bayardo, Senior Vice President and Chief Financial Officer.

Before we begin this discussion of National Oilwell Varco's financial results for its fourth quarter and fiscal year ended on December 31, 2016, please note that some of the statements we make during this call may contain forecasts, projections, and estimates, including but not limited to comments about our outlook for the company's business. These are forward-looking statements within the meaning of the federal securities laws based upon limited information as of today, which is subject to change. They are subject to risk and uncertainties, and actual results may differ materially. No one should assume that these forward-looking statements remain valid later in the quarter or later in the year.

I refer you to the latest Forms 10-K and 10-Q National Oilwell Varco filed with the Securities and Exchange Commission for a more detailed discussion of the major risk factors affecting our business. Further information regarding these as well as supplemental financial and operating information may be found within our press release on our website at www.nov.com or in our filings with the SEC.

On a U.S. GAAP basis for the fourth quarter of 2016, NOV reported revenues of $1.69 billion and a net loss of $714 million or $1.90 per share. For the full year 2016, NOV reported revenues of $7.25 billion and a net loss of $2.41 billion or $6.41 per share.

Please be aware that our use of the term EBITDA throughout the call this morning will correspond with the term adjusted EBITDA as defined in our press release. We also use other non-GAAP measures as described in the press release.

Later on this call, we will answer your questions, which we ask you to limit to two in order to permit more participation.

Now let me turn the call over to Clay.

Clay C. Williams - National Oilwell Varco, Inc.

Thank you, Loren.

For the first time in two years, National Oilwell Varco posted sequential improvement in revenues, which rose 3% in the fourth quarter as compared to the third quarter of 2016. The company did an excellent job driving incremental profitability on this increase, posting 74% incrementals, which lifted our adjusted EBITDA ex-charges for the second quarter in a row. Adjusted EBITDA totaled $102 million or 6% of revenues in the fourth quarter, enabled by many cost reduction initiatives undertaken by our seasoned managers and held by rising rig counts in certain areas.

As we noted in the press release, NOV achieved another important milestone in the fourth quarter in that our global sales into land markets exceeded our global sales into offshore markets for the first time since our 2005 merger. Our fourth quarter mix was roughly 52% land related, 42% offshore.

Frankly, I'm glad 2016 is behind us. In the fourth quarter, we benefited from rising momentum in North American shale plays in particular, which we expect to accelerate. Our international markets still face headwinds for a quarter or two and offshore markets continue to trend down, so we still have challenges ahead. Nevertheless, $50 oil has been a welcome relief.

I attribute my gray hair to the many previous downturns I've been through, 1986, 1991, 1999, 2002, and 2009. They all required difficult decisions and cost reductions, but this one has been unusually grim and painful. E&P customers cut spending two years in a row and current CapEx is just half the level seen just two years ago. Last year, global exploration discoveries were the lowest they have been since 1947. And in May of last year, the U.S land rig count dropped to the lowest number ever recorded. The industry responded as we always do. Teams have gotten smaller and facilities have been shuttered as purchase orders evaporated.

I'm not the only one here with gray hair though. Our tough seasoned leaders suffered through the same industry cycles of the past, and they have executed superbly through this one. There's no better team in oilfield services, and I'm grateful for each and every one of you every day. Like me, they recognize that as hard as they are, downturns are an opportunity to become better. Great companies like NOV use downturns to reexamine how we do things and then take action to drive better efficiencies, actions like taking costs out of manufacturing processes, actions like streamlining supply chains and collapsing cycle times, so that we can deliver NOV's technologies to our customers when they need it.

Great companies like NOV use downturns to innovate, like developing the industry's first and only commercial predictive analytics tool for blowout preventers, Rig Sentry, to warn customers of component fatigue before failure occurs. Last year, for example, we avoided nearly a dozen expensive BOP downtime events for our customers with this exciting new technology, which we introduced in early 2016 and which we are expanding into other drilling components like top drives, drawworks, and mud pumps in 2017.

Great companies like NOV help E&P customers improve their economics and lower their cost per barrel in a downturn. That's why we continue to invest in promising closed-loop drilling automation, which employs machine learning capabilities to control the drilling process, making it more efficient using rigs that learn.

Great companies like NOV bring new ideas to our E&P customers like aligning with key industry partners to develop a catalog of fully costed FPSOs that reduce the time to first production to help make deepwater development more economic.

Necessity is the mother of invention. In a low oil price world, accomplishing lower cost per barrel becomes a necessity for our customers. At great companies like NOV, invention follows. I started in an industry very different than today's. In the early 1980s, almost all drilling was done vertically with mechanical rigs or occasionally DC electric rigs, using a kelly to turn roller-cone bits. Wells took months to drill. U.S. production was declining following its peak more than a decade earlier. A generation later, we drill horizontal wells with PDC bits turned by downhole drilling motors and drill pipe turned by top drives, and we're doing it with fit-for-purpose AC rigs and massive frac spreads to execute dozens of stages.

The downturn of the 1980s was also particularly severe. E&P operators faced the very same challenges they always do when oil prices plummet, how to improve cost per barrel, again, a necessity to survive and again invention followed. I credit the downturn of the 1980s with the inventions of measurement-while-drilling [MWD] systems, logging-while-drilling systems, top drives, rotary steerables, horizontal drilling technology, and PDC bits technologies that frankly enabled the shale revolution. It's not a stretch to say that the seeds of this amazing new source of oil and gas from shale are a direct result of the downturn of the 1980s.

NOV helped lead the way. In 1982 we introduced the top drive, and since then our NOV brand name has become synonymous with a technology used on most rigs worldwide. We invented breakthrough technology for fixed-cutter bits used by almost every PDC bit today. We introduced coiled tubing injector technology that improved the reliability of this important well completion tool. We retooled the North American land rig fleet.

As a result, from 2011 to 2014, the U.S. became the world's fastest growing oil producer, increasing production by 4 million barrels a day. The ingenuity of our industry coming out of an extended downturn enabled profitable production out of marginal rock, where permeability is measured on a nano-scale. And what has happened in the U.S. is not lost on the rest of the world. In my visits with customers elsewhere around the globe lately, I find all onshore producers seem to have the same thought that they need to learn a lot more about shale technology.

Oil production matters in many places around the world. Many economies and governments rely on oil revenues to fuel economic development, peace, and prosperity. They're all suffering under low oil prices. And I believe most, if not all, are thinking, ignore shale technology at your peril.

But let me also clarify a bit. While the actual development of geologic shale is promising, that's not precisely what I'm referring to. It's the shale technology, specifically horizontal drilling and hydraulic fracture stimulation that matters. Because these can be used to enhance the economics of not just shales, but also other tight reservoirs and even conventional reservoir rocks, rocks found in every basin globally. The opportunity in front of NOV is to bring these promising technologies to the rest of the world.

Our most accomplished E&P customers tell us that landing a long horizontal lateral in the sweet spot within a shale section without a lot of twists and turns known as doglegs is a key success factor. This requires modern AC rigs with lots of mud pump and pressure capacity, premium drill pipe able to handle demanding downhole conditions, downhole drilling motors, PDC bits, solids control kit, drilling waste management technologies, and MWD systems. Rotary steerable tools also have a lot of potential to reduce doglegs, which are created on every slide using conventional bent sub techniques that build cumulatively throughout longer laterals. These doglegs increase vibration, torque, and drag, which present future drilling and production challenges.

Sophisticated E&P customers also tell us that efficient hydraulic stimulation operations with ever higher proppant loadings and more and more stages are a key success factor. This requires reliable coil tubing units, frac spreads, pumps, and treating iron that are continually being pushed to higher pressures and asked to pump greater loads of abrasive sand. It also requires more completion tools and production processing equipment. The good news for NOV shareholders is that we sell all of this kit.

The big picture here is that shale technologies are extremely consumptive of even the most reliably built equipment. Shale is insatiable. It wears out rigs and frac iron. It consumes drill pipe bits, drilling motors, frac spreads, treating iron, and a whole host of expendables like valves, seats, coil tubing, and shaker screens. It's like feeding a Labrador. As the worldwide leader in the manufacture of all of these, I like NOV's competitive position.

Part of downturns teach us that marginal cost positioning across a range of productive basins continually evolves. I'm convinced that the many smart E&P engineers and scientists engaged in the offshore will continue to whittle down the costs of developing the billions of barrels of known volumes already discovered there.

NOV continues to invent to improve drilling efficiencies, reduce the time to first oil, and ultimately drive compelling deepwater economics. Technologies like our Seabox injection water treatment system hold great promise to improve offshore recovery factors. And our initiatives in floating production systems can reduce the cost, risk, and time of offshore facility construction by 20% or more and accelerate first oil. After a very slow 2016, we are hopeful that the industry will begin to see many more FIDs over the next couple of years as costs are taken out development plans.

NOV has a long and proud history of invention to improve our industry. Consider drill pipe for a moment. In the 1980s, drill pipe was largely a commodity, dumb iron used to transmit torque and mud downhole. As the industry migrated towards horizontal drilling, extraordinarily new demands were placed on drill pipe. It is now required to bend 90 degrees and extend thousands of feet horizontally, which places immense stress on drill pipe.

NOV invented premium threads to facilitate higher torque transmission, engineered larger internal diameters to maximize hydraulic power transmission, and engineered higher slip crush strengths to handle higher axial loads, and our innovation continues. Just last quarter, we introduced our newest premium connection, Delta, which makes us 25% faster without the need for stabbing guys on the rig and reduces total cost of ownership by greatly reducing thread galling, and is designed specifically for land operations.

Last year we began installing RFID chips in drill pipe that enable the tracking of each individual joint, including its in-service life and its inspection history. RFID chips also enable drillers to automatically tally the pipe in and out of the hole, eliminating a time-consuming and sometimes error-prone manual process. We wire drill pipe with coaxial cables that turn the lights on downhole through instantaneous bidirectional transmission of downhole data at 57,000 bits per second compared to just 10 bits per second from mud pulse telemetry for MWD and LWD. Today's drill pipe is a highly engineered drilling instrument and a far cry from yesterday's dumb iron.

Individually, our technologies deliver discrete value, but when combined they become more powerful still. We've now combined our high-tech wired drill pipe with our new rig NOVOS operating system and downhole drilling mechanic subs to permit software applications to drive the rig on a microsecond basis, far faster than a human driller can work the brake handle. The result, rigs that learn and faster, safer drilling and better understanding of challenging downhole conditions.

Earlier I spoke to the technologies coming out of the 1980s downturn that have dramatically improved today's industry. I look at the present downturn and ask, what inventions will come out of this cycle that will transform tomorrow's industry. That's our challenge but that's also our opportunity. As NOV has navigated through a particularly painful downturn, we've done what we've said we would do, controlled what we can control, reduce costs nearly $3 billion to match activity levels, retrench to our most efficient locations while preserving our core competency and capabilities so that we continue to serve our customers' needs wherever they are in the world, land or offshore. But most importantly, we've continued to invent for tomorrow's industry.

At the start of this downturn, I said that as the leading provider of technology and equipment to the critical oil and gas industry, NOV would play a key role in helping the industry drive improved economic efficiency. We stuck to this plan and executed well.

As we close an extraordinarily challenging year and begin another one with we believe greater promise, I'm thankful for the efforts of our employees around the world. You have risen to the challenge, and I am proud of you. Keep pushing, keep innovating, better times lie ahead.

Jose?

Jose A. Bayardo - National Oilwell Varco, Inc.

Thank you, Clay, and good morning, everyone.

For the full year 2016, NOV reported a net loss of $2.41 billion or $6.41 per share on a GAAP basis. Excluding $2.08 billion in pre-tax and other items, the net loss was $320 million or $0.84 per share. Consolidated revenues were $7.3 billion for the year, down 51% versus the prior year, and adjusted EBIDTA was $322 million. Full-year decremental EBITDA leverage was limited to 27% on a revenue decline of $7.5 billion.

For the fourth quarter of 2016, NOV posted a net loss of $714 million or $1.90 per fully diluted share. Excluding other items, net loss for the quarter was $57 million or $0.15 per share. Other items totaled $706 million pre-tax and consisted of $582 million of inventory charges and $124 million of other charges, primarily associated with severance, facility closures, and write-offs of certain assets.

Consolidated revenues were $1.7 billion in the fourth quarter, up 3% versus Q3, with three of our four reporting segments generating higher sequential revenues. Adjusted EBITDA increased $34 million or 50% to $102 million or 6% of sales. Incremental sales and sustained efforts to reduce costs and improve efficiencies contributed to the 74% incremental EBITDA leverage quarter over quarter. Operating loss excluding other items was $72 million, representing a 33% improvement over Q3.

Working capital excluding cash and debt decreased $665 million sequentially to $3.9 billion at December 31, 2016. As previously noted, we recorded an inventory charge of $582 million, which was the result of the comprehensive review of our inventories completed during the fourth quarter. Recent activity gains and customer conversations provided us with clear data from which we were able to determine which products across our portfolio were less likely to see demand from our customers in the future, resulting in the charge. Excluding the impact of non-cash inventory charges, we realized $254 million in cash flow from our inventory during the quarter.

One other significant change in working capital worth noting is that our net AR position increased $275 million, which was primarily attributable to a $229 million increase in tax receivables. Excluding the impact of tax receivables, net AR balances increased $46 million.

For the quarter, we generated $153 million in cash flow from operations. Capital expenditures were $63 million, providing us with $90 million in free cash flow. We also spent $170 million for acquisitions, including the Fjords transaction we highlighted last quarter, and $19 million in dividends. In total, the company used approximately $100 million in cash, resulting in an increase in net debt to $1.8 billion.

Earlier, Clay described how NOV benefits from the highly capital intensive nature of today's oil and gas operations. I'd like to add that we also benefit from a capital-light business model relative to others in the space. This provides us with an inherent advantage to leverage a higher portion of every dollar generated into free cash flow.

Full-year cash flow from operations was $960 million, and capital expenditures for the year totaled $284 million. So for the full year, we generated $676 million in free cash flow, defined as cash flow from operations less CapEx. Looking at free cash flow as a percent of revenue, we believe NOV posted a higher free cash flow margin than any other large-cap OFS&E company in 2016.

In the fourth quarter, revenues for Rig Systems were $426 million, down 9% from the $470 million generated last quarter. EBITDA for the segment was $57 million or 13.4% of sales, a 280 basis point improvement from the third quarter. Excluding other items, the segment earned $40 million in operating profit, for a 9.4% operating margin.

During the quarter, we deleted $63 million in orders from our backlog in exchange for payments negotiated with these customers. The net result was a modest unwinding of revenue and an increase in EBITDA. Excluding the impact of the order deletions, the segment achieved decremental EBITDA margins of approximately 20%, as our team continues to demonstrate its ability to scale our cost structure to the needs of the marketplace.

Earlier, Clay mentioned that NOV generated more revenues from land than offshore in the fourth quarter. Though our rig businesses are the two reporting segments that derive more of their revenues from offshore than land, they too are becoming more balanced. Offshore newbuilds increasingly represent a smaller amount of Rig Systems revenues on both a percentage and an absolute basis. In Q4, major offshore newbuilds represented approximately 9% of NOV's consolidated revenues, down from roughly 12% in Q3.

Based on recent bookings and expectations for future orders, we anticipate the land business will underpin much of Rig Systems growth going forward. In the fourth quarter, we booked $115 million in new orders, nearly $50 million or 44% of which were for land markets. Included in the quarter's bookings were one AC 1,500-horsepower land rig, nine mobile rigs, a large crane package, an offshore drilling rig equipment upgrade, and a mix of discrete capital components, including top drives, drawworks, and jacking systems.

During the quarter we recognized $324 million in revenue from backlog, 11% lower than last quarter's $363 million, as we continued to work through our existing backlog while managing customer requested project delays and low order volumes. Rig Systems book-to-bill was 35% and year-ending backlog was $2.5 billion.

In 2016, 49% of our roughly $475 million Rig Systems bookings were for land. In 2017, we think that mix could shift more sharply as land rig orders recover more rapidly than offshore. We suspect the near-term opportunities still lie with smaller independent contractors adding more modern rigs to their fleets and larger contractors investing in upgrades to their existing rig fleets' pressure and torque capabilities and control systems. Customer dialogue around newbuild land rig opportunities in the U.S. and international markets are expanding. However, we believe it will be the second half of 2017 before many of these conversations turn into orders.

As Clay described earlier, the role drilling technology played in U.S. shale development is not lost on international operators, keenly interested in improving efficiencies and driving economic production for more challenging resources.

For the first quarter, we expect Rig Systems segment revenues to decline 10% to 12% as the amount of revenue generated from backlog slows to about $270 million. We plan to continue our aggressive cost management, which after adjusting for the order deletions from the fourth quarter should lead to decremental margins comparable to what we experienced in the fourth quarter.

Our Rig Aftermarket segment generated $339 million in revenue during the fourth quarter of 2016, an increase of $17 million or 5% versus the prior quarter. EBITDA for the segment was $80 million or 23.6% of sales, down $1 million sequentially.

Revenues improved sequentially due to higher than anticipated levels of service and repair work that exceeded the traditional seasonal uptick seen in these areas, partially offset by lower spare parts sales at high decrementals, an unfavorable mix shift. While spare part sales fell in Q4, a slowing rate of decline in the offshore market and two quarters of 20-plus percent increases in U.S. land rig counts contribute to a constructive outlook for rig aftermarket spare parts demand, as North America rigs reactivate and go back to work.

One of the first actions our drilling contractor customers took at the start of this downturn was to eliminate nearly all non-essential spending on spare parts. Many chose to consolidate inventories across their fleets, rationing out spares required for safe, efficient rig operations. Now rising levels of U.S. land drilling activity are forcing active drilling contractors to rapidly deplete their existing stockpiles of rig spares and expendables, contributing to rising demand for spares. In fact, the fourth quarter marks the first time quarterly bookings for spares increased sequentially since the third quarter of 2014, led by land-oriented demand.

Rig Aftermarket, like Rig Systems, remains more heavily weighted to offshore than land. However, the segment is clearly pivoting more towards land to match available market demand. While prospects are improving, we are not yet ready to call bottom for the segment. For the first quarter, we expect revenue to fall in the mid-single-digit percent range and margins to remain stable due to a more favorable mix.

For the fourth quarter of 2016, Wellbore Technologies generated $531 million in revenues, an increase of 1% sequentially. The modest sequential improvement in revenue was a result of an accelerating recovery in North America land, driving strong incremental demand for the segment's short-cycle products and services, mostly offset by continuing declines in international and offshore markets and an anticipated unfavorable mix shift in our drill pipe business.

EBITDA for the segment was $20 million or 3.8% of sales, down $6 million and 110 basis points from the previous quarter. The mix shift in our drill pipe business, which drove double-digit revenue declines at high decrementals and approximately $9 million in reserves taken against aging Chinese AR balances and other items, negatively impacted segment margins.

Across the segment, crosscurrents persist as continuing challenges in offshore and international markets remain and capital equipment sales remain sparse. However, most businesses may have reached the critical escape velocity in the fourth quarter necessary to drive overall results higher. Green shoots have emerged. And in many areas, business is starting to get fun again.

Within the segment, we are seeing a growing number of pockets where demand is rebounding sharply. During the quarter, global piece count for new pipe inspection at mills and processors by our Tuboscope group was up 20%. Rentals of our BRANDT solids control and waste management equipment were up 20%. Demand for drilling fluids was up 21%. And the volume of screen boxes, the consumable element of our large installed base of shale shakers, was up 37%. The increases cited here are for our global operations, so you can imagine those numbers are even greater when looking at North America alone.

Improving market conditions are beginning to create opportunities to claw back some pricing. Specifically, we are achieving some success on getting paid for trucking and standby on rental items and setting price increases on new motor and bit technologies.

We're also realizing more success with our recent product introductions. Momentum continues to build for our drilling automation and optimization products and services, where we recently secured a project in the Anadarko Basin that will use our full complement of wired downhole tools to feed real-time data to our NOVOS process automation drilling control system, the brain behind rigs that learn.

We are gaining significant traction with our latest drill pipe technologies, including the Delta connections in our TracID RFID asset control system. Clay mentioned these earlier, and I'd like to provide some additional detail.

U.S. land drilling applications increasingly demand larger sizes, higher torque connections, and increased levels of technology. Consistent with that premise, we have already sold multiple strings of drill pipe with our new Grant Prideco Delta connection, as customers have been eager to realize the improvements the product provides for horizontal drilling operations. Many E&Ps are requiring new drill pipe strings, often larger diameter 5.5-inch drill pipe, on the rigs that they are putting back to work.

Additionally, we installed a complete TracID system on a rig owned by a major national drilling company in the Middle East, providing them with the ability to create an accurate drill string tally in real time and to calculate bending forces and fatigue development, which should result in more effective use of their pipe and a lower cost of ownership for the customer.

We're also having success leveraging NOV's global distribution capabilities by pushing our recently developed or acquired technologies into new markets. In our release, we announced that our new rotating control device for managed pressure drilling that we launched last quarter has already qualified for an operation in the North Sea.

We also recently sold our first Tolteq iSeries measurement-while-drilling tools into India and Nigeria and qualified for a tender in the Asia-Pacific region following a successful customer demonstration, running the tool in 12.5-inch and 8.5-inch sections of a well.

And while the word growth has finally reentered our vocabulary, we remain focused on implementing systems and processes to streamline and optimize our operations. For example, our Tuboscope machine shop in New Iberia, Louisiana recently installed non-touch production racks to feed the CNC lathes on production lines, reducing the manpower required and increasing the amount of tubing connections by up to 25%. This is yet another example of our business seeking smarter ways to operate that reduce our costs and improve our production efficiencies.

Working smarter remains critically important as we expect crosscurrents to persist. The accelerating recovery in the North American land market should allow the mostly short-cycle activity-driven businesses within the Wellbore Technology segment to more than offset continuing headwinds in offshore and certain international markets.

Drill pipe in international markets should begin to recover in the second half of the year, while offshore will remain more challenged. As a result, we expect revenue to increase in the mid-single-digit range, with outsized incremental margins as we do not expect the AR reserves and other charges to repeat in Q1.

NOV Completion & Production Solutions generated revenues of $602 million in the fourth quarter of 2016, up $59 million or 11% sequentially. EBITDA for the segment was $69 million or 11.5% of sales, which represented a $26 million or 360 basis point increase from the previous quarter.

Nearly all business units reported double-digit percentage increases in revenue. Our Fiber Glass Systems business unit realized sequential revenue growth in excess of 20% resulting from increasing global demand for our fiberglass spoolable pipe and an unexpected boost in orders from certain North American operators who wanted to exhaust their capital budgets before year end, the first time we've heard this from customers in quite a while. We're also seeing distributors begin to restock these products for the first time in two years.

Our Process and Flow Technologies business continued to realize strong sales growth in pumps and chokes as well as growing demand for artificial lift technologies like progressive cavity pumps. Two weeks of contribution from our recently closed Fjords acquisition also bolstered segment revenues.

Our Subsea flexible pipe business posted double-digit revenue and growth, driving strong sequential margin improvements as a result of higher throughput in our plant in Brazil.

Although Q4 revenue for our Intervention and Stimulation Equipment business was relatively flat, we are seeing indications of a faster than originally anticipated recovery for completions-related capital equipment in North America.

During the quarter, demand rapidly increased for certain consumables, including valves and seats, fluid ends, and flow iron. Longer laterals and bigger frac jobs are necessitating spreads to grow from 20,000 horsepower a few years ago to 40,000 horsepower or more, with beefier transmissions and higher capabilities. We are also seeing significant increases in equipment repairs and rebuilds for wireline units, nitrogen pumps, coiled tubing units, frac pumps, and other support equipment that is coming off the fence line and getting prepared to go back to work.

In Q4, we received orders for 12 coiled tubing injectors compared to only six injector orders through the first nine months of 2016. Customer dialogue regarding new orders of capital equipment has continued to increase and is beginning to translate into orders, including the 75,000-horsepower frac spread we highlighted in our earnings release.

In Q4, new orders for the Completion & Production Solutions segment were $370 million, up $186 million or 101% sequentially. Book-to-bill was 103%, as we recognized $358 million in revenue from backlog, and backlog from year-end was $818 million.

Crosscurrents also continue in this segment due to the offshore-oriented components of the business. We believe our Subsea plant in Brazil will remain busy through 2017, as demand for our flexible pipe has remained strong in this region. However, our remaining backlog outside of Brazil continues to shrink with only a limited number of additional projects entering the market, driving fierce competition and challenged pricing.

Our other offshore-oriented businesses within the segment face similar dynamics. Like Subsea, Floating Production and XL Systems all posted stronger sequential results in Q4, but the backlog for these offshore businesses continue to wind down, although XL Systems has seen quotations rise in recent weeks.

Notwithstanding the challenges we face in our offshore businesses, we expect stronger than originally anticipated recovery for completions-related equipment along with continued growth in our fiberglass and PFT businesses to drive overall segment results higher. For the first quarter of 2017, we anticipate revenues to increase a couple hundred basis points with strong incremental margins.

While we're all glad 2016 is behind us and the last two years haven't been much fun, all the stakeholders of NOV should take great pride in what we've accomplished and how well positioned we are moving into 2017.

Loren Singletary - National Oilwell Varco, Inc.

Okay, Chanelle, we'll now open it up for questions.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Edward Muztafago of Société Générale. Your line is now open.

Edward Charles Muztafago - SG Americas Securities LLC

Hey, guys. Thanks.

Clay C. Williams - National Oilwell Varco, Inc.

Hi, Ed.

Edward Charles Muztafago - SG Americas Securities LLC

I was wondering if you might be able to help us think a little bit more about the countervailing forces in rig aftermarket. Clearly, that business will shift more towards land as we go forward. And these rigs now that you're on these big multi-well pads with these super-laterals are really starting to tear a lot of equipment up. How do you think about the progression of that segment through the year? Is it something that you think about as structurally downward through the year, or do you think the rig aftermarket makes a turn as we go through 2017 as well?

Clay C. Williams - National Oilwell Varco, Inc.

I'd say based on what we're seeing right now, we're optimistic, 2017, the business is flattening out and is going to pick up. As I think Jose mentioned in his prepared remarks, Ed, we saw about an 8% increase in bookings for spare parts through the fourth quarter. January had a particularly strong – I think January was our strongest month since December 2015 for spares, and so that appears to be going the right direction.

We did guide down a little bit in Q1 because when we look at the numbers, we believe there was a little bit of seasonality. In the prior two – or really prior three fourth quarters, we've seen service and repair pick up in Q4 and then fall off a bit in Q1. So that led to a little lower guidance in Q1 due to seasonality. But net-net, we are benefiting from reactivations of land rigs going back to work in West Texas. And I believe – we've been saying for the last two years our customers are great at cannibalizing their existing stocks of spare parts, and that's certainly been going on in earnest. At some point, they're going to run out of opportunities to cannibalize, and so perhaps we're seeing some of that turn around as well. So on the whole, I think the outlook for 2017 is getting brighter.

Edward Charles Muztafago - SG Americas Securities LLC

Okay. I mean it's probably not all that dissimilar to what non-capital equipment saw in 2003 or 2002, albeit it wasn't exactly a comparable segment back then.

Clay C. Williams - National Oilwell Varco, Inc.

Right.

Edward Charles Muztafago - SG Americas Securities LLC

And then maybe you could just help us think about Rig Systems margins a little bit. If that business stabilizes, where can we see margins in that business go to as you do some catch-up with restructuring and whatnot? I'm trying to think about that as we make the turn here at some point in 2017.

Clay C. Williams - National Oilwell Varco, Inc.

We did much better in the fourth quarter that we just reported than we expected. And again, I think Jose highlighted some benefits that we had from the removal of some orders out of our backlog for which we were paid. If you do the math on that, that was about a $17 million – $18 million benefit for the quarter. So that's the reason we exceeded. And backing all that out, we're in the high single-digit, double-digit range and looking for that business to level out across 2017.

Edward Charles Muztafago - SG Americas Securities LLC

Okay, that's helpful. Thanks.

Operator

Thank you. And our next question comes from the line of Marshall Adkins of Raymond James. Your line is now open.

J. Marshall Adkins - Raymond James & Associates, Inc.

Good morning, guys.

Clay C. Williams - National Oilwell Varco, Inc.

Good morning, Marshall.

Jose A. Bayardo - National Oilwell Varco, Inc.

Good morning, Marshall.

J. Marshall Adkins - Raymond James & Associates, Inc.

Jose, you went through the completions side and mentioned a whole bunch of areas where things are improving. I want to try to understand just scale-wise. What's the most important? Obviously, you had some offshore, the flexible pipe stuff picking up, but I would think the biggest share of the increase there, because to me that's what really stood out in this quarter was how strong completions and production was. What percent was U.S. land and frac equipment and that type stuff versus everything else?

Jose A. Bayardo - National Oilwell Varco, Inc.

Thanks, Marshall. Really as far as Q4 is concerned, we were tremendously excited about what was coming in throughout the quarter. So the bookings-related activity for U.S. land market was very healthy. We saw really significant increases related to replacement parts and components and the service and repair work in our facilities. But overall, we had a pretty flattish quarter for that business group. What really drove Q4 itself was that we had every other business unit within the segment pick up quite a bit from Q3 to Q4.

Now going from Q4 to Q1, there are a couple of those offshore-oriented business units that are still seeing substantial headwinds. We talked about the backlog deteriorating, so some of those businesses we anticipate will actually step down a little bit from Q4 to Q1. But we are really anticipating that the Well Intervention Stimulation Equipment business unit will really more than offset those drop, and that business unit is really starting to gain some momentum here.

J. Marshall Adkins - Raymond James & Associates, Inc.

Right, so that then makes sense. And with the strong bookings, you had the 75,000 new horsepower in frac equipment. Where do you start to run into bottlenecks in terms of getting stuff out the door? Can you triple, quadruple the throughput there, or are we going to see bottlenecks in terms of adding capacity in the up cycle?

Clay C. Williams - National Oilwell Varco, Inc.

First of all, we certainly look forward to that opportunity. And here early on, we have – even post our inventory adjustment, we still have a very healthy level of inventory in our businesses, so we're able to turn quite a bit here efficiently on the front part of the recovery. The other thing to point out is you've seen the rate at which the business has contracted. This organization is very adept at scaling the operations, both downward and upward. And so we're certainly looking forward to the opportunity to start taking things the other direction.

J. Marshall Adkins - Raymond James & Associates, Inc.

So you don't think there's going to be any kind of issue scaling it back up, since presumably here for the last year and a half, it's essentially gone to zero in a lot of those completion areas?

Clay C. Williams - National Oilwell Varco, Inc.

I will say that we talked about it before on some of our prior conference calls, is that we have been incredibly methodical in terms of how we have consolidated our facilities, consolidated our operations to where we haven't lost maximum manufacturing capacity. There will be some things that need to happen in order to bring things back online. But again, we look forward to making that happen. Another thing I would add is that there certainly is a benefit for customers coming into the queue sooner rather than later.

Jose A. Bayardo - National Oilwell Varco, Inc.

Right, Get your orders in now.

J. Marshall Adkins - Raymond James & Associates, Inc.

Message received. Thanks, guys.

Clay C. Williams - National Oilwell Varco, Inc.

Thanks, Marshall.

Operator

Thank you. And our next question comes from the line of Ken Sill of SunTrust. Your line is now open.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Hey, good morning, guys.

Clay C. Williams - National Oilwell Varco, Inc.

Good morning.

Jose A. Bayardo - National Oilwell Varco, Inc.

Good morning.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Nice to hear the optimism in your voice after the last two years. I had a question, a couple of questions. I wanted to follow up on what Marshall was saying there. Nobody has ordered any pressure pumping equipment in quite some time, and a lot of the customers have worked through their working capital. So you guys seem to be in a place where you could offer terms. Are the people coming to you now people that can finance the orders themselves, or are you able to give these guys terms to help them get through the fact that they don't have any working capital right now?

Clay C. Williams - National Oilwell Varco, Inc.

Hi, Ken, good morning. We certainly are not financing our customers. They're coming to us with healthy deposits and the ability to pay. So there are still a lot of good customers out there with clean balance sheets and ability to fund these orders. And I think they're realizing there's an opportunity to get a little bit ahead of the fray right now with getting in those orders.

Jose A. Bayardo - National Oilwell Varco, Inc.

We think we're a lot better at making equipment than we are at banking. So there are lots of others out there that I think are providing capital.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Yes, that was just one of the issues. That was the follow-up question. Was the pressure pumping order, was this – obviously it sounds like it's coming from an existing or a repeat customer that's been out there for a while.

Clay C. Williams - National Oilwell Varco, Inc.

Yes.

Ken Sill - SunTrust Robinson Humphrey, Inc.

Okay, I've asked my two questions, I'll let somebody go. Thanks, guys.

Loren Singletary - National Oilwell Varco, Inc.

Thanks, Ken.

Operator

Thank you. And our next question comes from the line of Brad Handler of Jefferies. Your line is now open.

Bradley Philip Handler - Jefferies LLC

Thanks. Good morning, guys.

Loren Singletary - National Oilwell Varco, Inc.

Hi, Brad.

Bradley Philip Handler - Jefferies LLC

My first question is probably, it's just vague enough to be hard to answer I suppose in a way. But I suppose you've gone through your massive restructuring, cost initiatives, bearing down on – concentrating manufacturing across certain plants and all of that, and I have to imagine that just the sheer scale of it made predicting your cost savings very, very challenging. And so I suppose perhaps now that you've been living with many of those changes, I guess I'm curious if there's any kind of revision you can offer with respect to ultimately the cost savings or ultimately the revisions that all – in other words the efficiencies that you might have – you believe you may have achieved?

Clay C. Williams - National Oilwell Varco, Inc.

Brad, I think I understand what you're asking. And what I would tell you is, as you enter a downturn, there's obviously a lot of uncertainty. There's just less visibility in the business than any of us would like. And things change quickly, so there is discounting underway and so lots of things happening.

We learned a long time ago, when you enter one of these downturns, we've really got to focus on what you can control. And so what we try to do when it comes to steps to save money in the business to drive more efficiency in the business is to really focus on concrete things that we know have an impact. Sometimes it gets challenging to measure directly in the financial statements. So the way we track our progress is to look at specific ledger balances globally and regionally to see evidence in subsequent periods of steps that were taken. So when we talk about $3 billion in cost savings, that's really what we're referring to.

In the second quarter of 2016, which we believe is our low point on EBITDA at $25 million in that quarter, we mapped out a plan to get another $400 million in annualized savings. And last quarter we reported to you that we had achieved, looking at the ledgers, a little over $250 million in annualized savings. This quarter when we look at those same ledgers, we see another $86 million flowing through. So there's tangible evidence of the steps that were undertaken in prior quarters showing up in the fourth quarter. And what I would tell you in terms of an update on that subject is we have other steps underway through the first half of 2017. So we're very confident we'll handily exceed our $400 million cost savings estimate that we gave you in the second quarter of 2016. Does that answer your question?

Bradley Philip Handler - Jefferies LLC

Yes, I was going to highlight the $400 million and you've drawn it out there, so that is perfect. And I guess – so part of this was a question around your ability to be precise with it and then your ability to set goals against that or achieve that goal, so I do appreciate that. Just to harken back to that for my follow-up I guess, I think the presumption was we would – you said, we'll do more if we have to, right?

Clay C. Williams - National Oilwell Varco, Inc.

Right.

Bradley Philip Handler - Jefferies LLC

We'll kind of see. How do how you measure having to? Is that purely a function of revenue, or is it just a function of uncovering that much more opportunity for efficiencies?

Clay C. Williams - National Oilwell Varco, Inc.

Well, first of all, we need to act on opportunities to drive efficiency in all markets, good markets and in bad. Secondly, with regards to further downsizing given the current market headwinds, we look to order rates, the level of activity flowing through, that sort of thing to map out more near-term tactical moves to capture cost savings. But again, it was in my prepared remarks but probably worth saying again. We have a terrific group of managers that Jose and Loren and I are pleased to work with. And they're terrific at managing these downturns, and they've all been through a whole bunch of them. So that's the playbook. It's well established. We know what to do. And once again this team rolled up their sleeves as we entered the present downturn and is navigating it I think as well as any management team out there.

Bradley Philip Handler - Jefferies LLC

Helpful, helpful color. Thank, Clay. I'll turn it back.

Clay C. Williams - National Oilwell Varco, Inc.

You bet. Thanks, Brad.

Operator

Thank you. And our next question comes from the line of James West of Evercore ISI. Your line is now open.

James West - Evercore Group LLC

Hey, good morning, guys.

Clay C. Williams - National Oilwell Varco, Inc.

Hi, James.

Jose A. Bayardo - National Oilwell Varco, Inc.

Good morning.

James West - Evercore Group LLC

Clay, in the land rig market, the high-spec land rig market, there's a little bit of a bifurcation between these ultra-super-spec rigs, and then you have the high-spec rigs that can be upgraded. Are you having a lot of conversations at this point about upgrading some of those rigs that may not have say a third mud pump or walking capabilities?

Clay C. Williams - National Oilwell Varco, Inc.

Yes, we are. And so a lot of people are very focused on that particular segment in the market. And so third mud pumps, 7,500-PSI mud systems, walking systems for the rigs, but we're also seeing along with that frequently demand for higher torque top drives. And frequently all of that then will require additional generator capacity. And then as Jose mentioned, now we think the land market is moving more towards larger diameter 5.5-inch drill pipe to handle these longer laterals and to put more hydraulics downhole. So there's a lot of upgrading that can happen to achieve the super-spec capability.

But a lot of our prepared comments were what we think is the next-generation rig even beyond that, which is you take that rig and then you wire that drill pipe and you let downhole sensors drive a control system at the surface that operates customer apps that they can write to control the rig. That's the rig that learn – the rig of the future as we see it.

James West - Evercore Group LLC

Got it, okay. And then so with respect to this rig of the future concept – or really I guess it's not really a concept anymore, it's happening. But how much automation and data analytics are being driven or driving these processes on the rigs versus say this last generation of rigs that we saw get built?

Clay C. Williams - National Oilwell Varco, Inc.

This is a whole new area, James. The industry has not used high-speed data transmission from the bit to operate the rig machinery in the past, and that's really what this offers. So this is a whole new breakthrough in terms of technical capabilities.

So we've got, as I mentioned, 57,000 bits per second coming up with vibration torque, weight on bit, stick slip information, all that stuff. And then the software takes that data stream – high-speed data stream and it adjusts the machines in real time. We actually have algorithms, heuristic algorithms that are altitude seeking that adjust the rig, weight on bit, strokes, et cetera to achieve the maximum ROP [Rate of Penetration] formation by formation. And so the machine learns effectively how to drill the stratigraphic section that it's drilling in, and we think that's the next big thing in drilling. So we're very, very excited about this.

James West - Evercore Group LLC

Sounds exciting to me, all right. Great, thanks, guys.

Clay C. Williams - National Oilwell Varco, Inc.

You bet. Thanks, James.

Jose A. Bayardo - National Oilwell Varco, Inc.

All right.

Operator

Thank you. And our next question comes from the line of David Anderson of Barclays. Your line is now open.

David Anderson - Barclays Capital, Inc.

Hey. Clay, so staying on the same lines of questioning, so the project in the Anadarko Basin, I know you've been putting different parts of this in different areas. Is this really the first time that you're putting it all together for a customer? And also, can you talk to me a little bit about how you're going to measure success? Is it rate of penetration? Is it some sort of performance metric? And then is there follow-on work after that that comes from this?

Clay C. Williams - National Oilwell Varco, Inc.

The success measurement really is time savings and cost savings for our customers. So this is one more way we can reduce their cost per barrel of development. And then I would add to that, higher quality boreholes. So that initiative in conjunction with our downhole tools initiative, we're really seeking to enable our service company customers to deliver straighter boreholes, fewer doglegs and the like. Ultimately, those are the wellbores that have the lowest number of production and drilling challenges.

With regards to the first part of your question, David, yeah, we've been doing this before. We've got I think 2.5 million feet drilled with the closed-loop system thus far. But what we did this past quarter, which is new is that we actually are now operating this through our new NOVOS control system. So this is a control system that we can upgrade NOV rigs with. And then our closed-loop automated drilling technology, the machine learning capabilities plug directly into the NOVOS operating system. And so this last quarter – again, we've done it in the past, but this is the first quarter we've done it with all NOV new operating control system and NOV kit throughout the rig.

David Anderson - Barclays Capital, Inc.

So this is proof-of-concept right now of everything you've been working on. Now we're at that point, okay, now we're going to prove it. Okay.

Clay C. Williams - National Oilwell Varco, Inc.

Yes, we're actually beyond proof-of-concept. This is a commercial offering.

David Anderson - Barclays Capital, Inc.

Okay.

Clay C. Williams - National Oilwell Varco, Inc.

We did the first one a few years ago. But in our view, it's the next big thing in drilling. And then while we're on that subject too, the NOVOS operating control system is unique in that it's an open architecture workspace. It's an operating system for the rig, but we will enable third parties to take a software developer kit. So we've got a number of oil companies and service companies now that are actually writing apps to control the rig through the NOVOS operating control system. So that's the basic architecture, and I think that's unique in the space.

So the way to think about it, you can have a service company show up to perform a specific operation on the rig. They can load in their proprietary app that they write and then take control of that rig and execute their work in a more efficient way, so really enabling their business model. Likewise, we've got oil companies that are writing apps for things like safety parameters, operating parameters that they want to make sure their rigs operate within, specific operations on the rig. So we're pretty jazzed about this.

David Anderson - Barclays Capital, Inc.

And then so on a different new business for you, at least a new opportunity for you, I was curious about directional drilling and measurement tools. In the release today, you talked about how you're now planning to offer a full suite of equipment to customers. Now this has traditionally been the area for the big diversified companies, but it sounds like you're starting to see more of these packages to the land drillers. Can you help me understand how this market is evolving, or is there evolution happening here in the market in which do the big guys take the higher-end work, and then you guys can supply the land drillers to do maybe some of the lower-end directional drilling? How do you see that market evolving here?

Clay C. Williams - National Oilwell Varco, Inc.

Our business model is unique in that we view ourselves as the enabler for other oilfield service companies. So unlike the big four, we're not out actually pitching directional drilling jobs. We're providing the hardware, the equipment, the technology, the training to enable all directional drillers, frankly, including the big four, to supplement their offering to the marketplace. And so it's a little different business model. We think that's the best potential for the technology we have and the best application of our capital.

But clearly, the entire industry has moved more towards a lot more directional drilling. Horizontal drilling is one of the two key things that made the shale revolution happen. You've got probably close to 90% of rigs drilling in North America drilling horizontally. So there's a lot more directional drilling going on and a lot more rigs onshore than offshore, but both are drilling directionally. So there's an opportunity for directional drillers in both spaces. So we see that as a great growth market as more and more operators employ horizontal drilling.

And then going back to what I referenced earlier, this high-quality borehole, a borehole with fewer doglegs, you're going to have fewer drilling problems, less torque and drag, better production recovery factors. We're focused on helping our directional drilling customers deliver that high-quality borehole. And again, pretty excited about that with new additions to our MWD offering and the rotary steerable initiative that we've referenced in the past and other things that we can provide into that market.

David Anderson - Barclays Capital, Inc.

Great. Thanks, Clay.

Clay C. Williams - National Oilwell Varco, Inc.

You bet. Thanks, David.

Operator

Thank you. And our last question comes from the line of Sean Meakim of JPMorgan. Your line is now open.

Sean C. Meakim - JPMorgan Securities LLC

Thanks, good morning.

Clay C. Williams - National Oilwell Varco, Inc.

Hi, Sean.

Jose A. Bayardo - National Oilwell Varco, Inc.

Good morning.

Sean C. Meakim - JPMorgan Securities LLC

Clay, I'd like to stay on the NOVOS topic, the automated drilling opportunity. As you think about the long-term potential, how would you rank your opportunity set across shale, maybe international onshore, places like the Middle East, versus offshore rigs? How would you rank those different opportunities?

Clay C. Williams - National Oilwell Varco, Inc.

I think we've been very explicit, Sean, over the last couple years. The company sees a great opportunity in that enabler role onshore. And right now you're seeing rig count going up in West Texas and the Mid-Continent and the Marcellus, where economics are working for the onshore. Offshore longer term we're optimistic, but it's been little more challenged near-term, so the most immediate opportunity we see is this focus on onshore technology specifically around horizontal drilling and then hydraulic fracture stimulation and completion tools. So that's been the guide post we've used to get to deploy capital through the past couple years.

To bring a little more granularity to that, I think obviously these shale technologies were well established across North America, a great opportunity for us to bring things like MWD tools for greater geosteering in the shales.

Overseas, in my travels internationally here recently, what I'm finding is there's a tremendous amount of interest in this technology and in employing shale technologies, horizontal drilling internationally. And you couple that with the move towards local content that we see in a lot of our international markets. There are a lot of regions where national oil companies would really prefer to have some local service providers. And you see how well I think our strategy articulates with what those NOCs desire because we sell all of the kit that local service providers need to provide directional drilling, that they need to provide hydraulic fracture stimulation and the like.

So I think that's just a tremendous opportunity out there for NOV going forward is that enabling local service companies, enhancing our more traditional customers offering internationally, but I think that's the direction technology is going to go.

Sean C. Meakim - JPMorgan Securities LLC

Okay, fair enough. And then just a little bit on 2017 thinking about Rig Systems and the schedule or the cadence of throughput through the year, could you give us a sense of how you expect that to play out? And is there a mix between onshore and offshore, how the backlog shifts that we should think about as we try to model the coming year?

Clay C. Williams - National Oilwell Varco, Inc.

Hey, David – Sean, I'm sorry. The visibility in the back half of the year is still a little bit murky. We are optimistic that a number of the conversations that we're having related to land opportunities both here in the U.S. and in international markets will turn into bookings. And so our backlog and our revenue generation will increasingly become more land-oriented.

But maybe just to talk about order flow out of backlog here for the next couple of quarters, we think it will remain relatively stable at the $270 million-ish type level that we cited earlier, and ultimately it's just going to depend on what additional bookings really come through. So the back half is still a little bit unclear, but we're feeling more and more optimistic about the opportunity set in front of us.

Jose A. Bayardo - National Oilwell Varco, Inc.

The $270 million is offshore, to be clear.

Sean C. Meakim - JPMorgan Securities LLC

Got it. Okay, great. Thank you.

Loren Singletary - National Oilwell Varco, Inc.

Thank you.

Operator

Thank you. and I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Clay Williams for closing remarks.

Clay C. Williams - National Oilwell Varco, Inc.

Terrific, Chanelle. Thank you. I want to thank everybody for joining us this morning, and we look forward to updating you on our next call in April. Thanks very much.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.

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