NOV Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Blake McCarthy, Vice President, Corporate Development & Investor Relations
• Clay C. Williams, President, Chairman, and Chief Executive Officer
• Jose Bayardo, Senior Vice President and Chief Financial Officer

Analysts

• Arun Jayaram, JPMorgan Chase & Co.
• Stephen Gengaro, Stifel Nicolaus
• Ian MacPherson, Piper Sandler Companies
• Scott Gruber, Smith Barney Citigroup
• Neil Mehta, The Goldman Sachs Group, Inc.

Presentation

[Operator]

Good day, ladies and gentlemen and welcome to NOV Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions]I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

[Blake McCarthy, Vice President, Corporate Development & Investor Relations at NOV]

Welcome, everyone, to NOV's fourth quarter 2021 earnings conference call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO.

Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest forms 10-K and 10-Q filed with the Securities and Exchange Commission.

Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a US GAAP basis for the fourth quarter of 2021, NOV reported revenues of $1.52 billion and a net loss of $40 million. For the full year 2021, revenues were $5.52 billion and a net loss of $250 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release.

Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation.

Now let me turn the call over to Clay.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Thank you, Blake. For the fourth quarter of 2021, NOV's revenue grew 13% sequentially and 14% year-over-year. These results marked the first quarter in which our revenue has increased year-over-year since our revenues bottomed in early 2021 and our backlog bottomed in late 2020. The company continued to build its backlog, which increased for the fourth quarter in a row. Book-to-bill was 137%. For the full year 2021, NOV generated $229 million in EBITDA or 4.1% on $5.5 billion in revenue. Revenues declined 9% from the prior year at 21% decremental EBITDA leverage year-over-year.

While we are pleased with the slow but steady recovery of demand and activity in the oilfield and our continued revenue and backlog growth, we are disappointed in our low sequential operating leverage and margins in the fourth quarter. Consolidated EBITDA leverage was only 7% sequentially, nearly 20% lower than we expected at the time of our call. All three segments struggled this quarter with supply chain challenges that we did not foresee along with mix issues and COVID disruptions related to the emergence of the Omicron variant during the fourth quarter. And while we expect these to subside longer term, we now expect supply chain headwinds to continue to persist through the first half of 2022 as our vendors continue to push out their delivery commitments to us.

In addition to COVID-related charges of $11 million on projects that the Completion & Production Solutions segment is executing in Asia, our productivity and efficiency was broadly encumbered by two significant factors. First, the tightening labor market we faced in the United States was exacerbated by COVID outbreaks in certain plants during the fourth quarter. As skilled workers recuperated safely at home, their work was performed by less experience, less efficient crews or by other skilled workers working overtime.

Labor shortages led to higher product costs and scheduling headaches. We had the same issues at plants in the Middle East and elsewhere overseas, and we saw pockets of Omicron, COVID affecting our field personnel in a few areas around the globe. These COVID disruptions intensified greatly with the emergence of the Omicron variant in the fourth quarter and are continuing into the first quarter of 2022.

Second, our manufacturing scheduling headaches were compounded by component and raw material shortages and late deliveries from our vendors who are facing the same sort of challenges that we are. Late deliveries and short shipments of raw materials and subassemblies led to further inefficiencies, under-absorption and higher product costs in certain areas as our creative workforce scrambled to make due with the raw materials and components that they had on hand. Indicative of supply chain inflation, all three segments saw negative purchase price variances. And where we were unable to access raw materials where possible, we substituted different, more expensive components into our bills of materials. These substitutions frequently required additional labor to conform the parts to our standards, which further increased the cost. All three segments experienced this to a greater or lesser degree.

Some businesses report supply chain challenges are getting a little better, but mostly these disruptions persisting or getting more challenging in the near term. Specifically, freight, steel, certain epoxies appear to be stabilizing. Resin prices are falling in Asia, but rising in the United States, for example. But electronic components, motors, touchscreens, certain polymers, etc appear to be getting tighter. The reliability of raw material deliveries is frankly poor as ports and trucks shut down unexpectedly due to COVID outbreaks.

Some of our industrial customers in the CAP segment are delaying purchases of fuel handling piping and industrial pumps because they can't get construction crews to do the installs or they're still missing other complementary items like electronic controllers from other vendors. Importantly, NOV continues to take extraordinary measures to get our products and equipment into the hands of our customers to support their critical operations. So despite these challenges, we were able to put up double-digit sequential sales growth across all three segments. I'm proud of the job our manufacturing team has done getting products out the door. However, we need to do a better job on pricing in anticipation of more inflation that we know is coming.

As we enter 2022, we are operating in the most constrained and inflationary environment the world has seen in at least a generation where labor and materials are tight, and the money supply has ballooned across major economies due to COVID relief efforts. Even though we have been trying to push our pricing higher to defend our margins, we have been less successful so far than we need to be.

On prior quarters, we've spoken of select price increases that we were able to achieve, including many double-digit moves. Nevertheless, our fourth quarter results point to the need to redouble our efforts to get to acceptable margins. We believe the margins embedded in our backlog are solid and the future costs within our contracts are generally protected against inflation through either indexing or contracts with our vendors. However, inflation protection is never perfect. Headwinds like quadrupling of freight, higher labor costs, workforce disruptions and vendor delays can still impact our margins on these as they did in the fourth quarter.

We're fortunate in that we were able to secure sufficient backlog to carry our plants through the depths of the downturn. However, looking ahead, is incumbent on our team to win incremental orders that improve margin and pricing to get back to an acceptable return on capital. In the near term, pricing remains challenging for many of our products, owing to our position in the oilfield food chain. High commodity prices are leading to abundant prosperity for the E&Ps. For products that we sell directly to the E&Ps, our transactions have more room for -- to achieve a fair split of the economic pie, meaning we are better able to move prices up. However, prosperity rolls downhill in the oilfield and it hasn't fully showed up yet with oilfield service companies who make up the majority of our customer base. As a group, most are still working through depressed pricing for their services. For example, leading-edge, super-spec land drilling rig rates for North America have only this quarter returned to the mid $20,000 per day level seen before the pandemic lockdown. But contractors have most of their fleets contracted for the next few quarters at much lower rates.

Leading-edge coiled tubing and pressure pumping rates have bounced off 2020 lows, but remained below 2019 levels. Offshore drillers are seeing day rates rising for drillships with leading-edge discussions above $300,000 per day and some closer to $400,000 per day, but most rigs remain contracted at very depressed day rates, far below levels seen a decade ago. Our customers report that things are definitely going the right way, but more healing is needed before oilfield service contractors can open up their pocket books and spend more freely with NOV. And in the meantime, our competition in many instances remains desperate for work to cover their fixed costs.

The good news for NOV is that the stage is set for prosperity to trickle down soon to our level. The world is facing a tightening supply and demand gap for energy after years of underinvestment and current global activity levels are insufficient to bridge that gap. Commodity markets are waking up to the fact that the world consumed a 1 billion-barrel inventory overhang that we generated during the lockdown of 2020 in less than 15 months. NOV is very well-positioned to benefit from investments which are required and are expected to flow in our traditional oil and gas markets over the next few years.

In addition to operating in one of the most constructive commodity price environments I've seen in my career, which should lead to a multiyear upcycle, NOV has a lot of things going well. Wellbore Technologies, our earliest cycle segment and closest to the prosperity the oil companies are currently enjoying, posted its fourth quarter in a row of double-digit top line growth propelled by the continued recovery of US drilling and emerging Eastern Hemisphere activity. Given its proximity to the E&Ps in the oilfield ecosystem and its activity-driven product portfolio, Wellbore Technologies is best positioned to benefit from pricing early in an upcycle. Notwithstanding its own supply chain challenges, it has, in fact, achieved the greatest pricing gains, mostly in quick turn, high-impact items like bits, downhole tools and rig instrumentation specified by E&Ps. Unfortunately, the fourth quarter saw some of these pricing gains offset by COVID and labor shortages in our labor-intensive tubular services businesses, higher resin and steel costs and a lower margin mix of drill pipe than we expected. Jose will go into this more in just a moment.

Owing to extensive supply lines and operations in Asia and acute raw material supply challenges across a couple of its business units. Our Completion & Production Solutions segment has been our most challenged with respect to achieving an acceptable margin. Most of its project charges stemmed from a COVID outbreak in our vendors operation in the Southeast Asian shipyard, which led to inefficiencies, higher costs and rework. We currently expect this project to be completed late this summer, barring further disruptions. Our Fiber Glass Systems and Subsea flexible pipe businesses also continue to fight for raw materials and are experiencing significant challenges with their respective supply chains, which will impact first quarter 2022 results.

Despite these issues, customer demand is strong and rising evidenced by the $495 million of orders booked by the segment during the quarter, translating to a book-to-bill of 159%. Our internal list of expected project tenders is large, and we are optimistic that 2022 will be a strong year for CAPS orders. While most CAPS orders are E&P offshore project related, most represent years of cost generation and negotiation undertaken during lean times to make the economics work for the E&P. We are pushing pricing and escalation where we can, but it remains challenging. So equally, we're focused on ensuring we have mitigated inflation and execution risk as much as possible. I think the outlook here is brightening as EPCs, manufacturers and shipyards replenish their backlogs like we have been doing, and utilization rises, congestion builds and constraints emerge, urgency will also emerge among E&Ps to rush to the front of the queue, which will provide a stronger pricing backdrop for us.

Finally, our Rig Technology segment also posted a solid quarter of orders. Rigs order book has been helped enormously by its strong position in renewable energy, which once again helped lift its book-to-bill north of 1 this quarter. Renewable wind energy bookings exceeded $400 million in 2021. Despite rising day rates in many categories of drilling rigs, orders for the segment's traditional iron remains low as drilling contractors repair balance sheets and continue to cannibalize units idle during the pandemic lockdown. We are hearing reports now of drilling contractors buying old land rigs on the cheap at auction solely for parts, having cannibalized all their existing idle fleets.

A couple of observations around the near term here. First, the nature of our business has pivoted from iron to Smart Iron. Interest is very high in emission reduction technologies that we've introduced, like our EcoBoost and our PowerBlade products, in our robotics automation upgrade offering which will be in the field in the second quarter. And in our digital offerings around NOVOS operating systems, coupled with IntelliServ high-speed data transmission through the drill pipe.

Second, things are getting better very quickly in the offshore, particularly for drillships. The rising day rates I mentioned earlier are leading to reactivation discussions on more than a dozen stack floating rigs. Underpinned by high oil and gas prices, the increasing likelihood of offshore project FIDs by oil companies, steadily rising land rig activity around the world and sustained high demand for offshore wind turbine installation vessels, all point to continued growth in demand for Rig Technologies. Rig Technologies fourth quarter saw margins fall short of our expectations despite revenues landing where we expected, owing to a poor mix of aftermarket and capital equipment sales.

Again, supply chain issues took a toll in operations and COVID affected some of our service hands. Despite these challenges though, we were able to complete our first land drilling rig manufactured by our new JV facility in Saudi Arabia, and we have many more to come. The state-of-the-art technology will play a key role in the Kingdom's ambitious development of unconventional gas. Given the challenges of the drilling contractor space over the past few years, which saw the majority of offshore drilling contractors go through bankruptcy reorganization, it has been difficult for the segment to raise prices. Nevertheless, drilling contractors eventually find success lifting their day rates, which will be required to overcome the higher wage and operating costs they are now facing. We are confident that our pricing will improve commensurate with the high value our smart iron will provide. Despite the supply chain challenges facing NOV and all global manufacturers currently, I remain decidedly positive about the longer term. Strong commodity prices and E&P prosperity are beginning to flow to the greater oilfield services industry, which was decimated by severe downsizing to survive these past few years.

Oil and gas is still the industry that fuels all other industries. The urgency to address lack of investment in this space will grow from here. And once again, NOV and its oilfield service customers will be called upon to construct the wellbores needed to ensure the globe safe, reliable, affordable energy.

NOV is emerging from the downturn with a strong balance sheet and investment-grade rating and ample financial resources, exciting new products that can retrofit our customers' oilfield assets to reduce emissions, gather critical data, automate processes, drive better safety and improve efficiency and a terrific portfolio of energy transition technologies with hundreds of millions of dollars of energy transition-related revenue. All this has been made possible by our extraordinary teams, who have had the excruciating challenge of consolidating operations by reducing from more than 1,200 facilities to just over 550 facilities and reducing our costs by billions of dollars annually to navigate one of the worst downturns ever experienced in this 163-year-old industry.

We are lean and mean and ready for the challenge ahead. To the employees of NOV who have been on this journey with us, thank you for your creativity, your flexibility, your extraordinary efforts over the past two years to take great care of our customers through all kinds of unexpected challenges. You've positioned this organization for a great run and I'm looking forward to sharing better days ahead with you. Thank you.

With that, I'll turn it over to Jose.

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

Thank you, Clay. NOV's consolidated revenue in the fourth quarter of 2021 was $1.52 billion, a 13% sequential increase compared to the third quarter with both North American and international revenues achieving double-digit growth. Adjusted EBITDA for the fourth quarter was $69 million or 4.5% of sales. As Clay mentioned, our fourth quarter results included $11 million in charges related to ongoing operational challenges on projects in Asian shipyards.

Reported SG&A decreased $11 million sequentially due primarily to lower third-party expenses, a reduction in bad debt expense and a small reclass between SG&A and cost of goods sold, partially offset by increasing wage rates. Looking forward, we expect the reinstatement of certain employee benefit programs and continued labor pressures will result in reported SG&A increasing modestly in 2022. Despite Q4 revenue increasing 14% over the prior year, working capital decreased $244 million during 2021 as we achieved good success turning working capital into cash and reducing working capital intensity across the organization. Through 2021, we generated $291 million in cash flow from operations, with capital expenditures totaling $201 million, resulting in $90 million cash flow.

In 2022, we expect capital expenditures to total $255 million with $20 million of the capital budget dedicated to the completion of our new rig manufacturing facility in Saudi Arabia. During the fourth quarter we reinstated our quarterly dividend at $0.05 per share representing approximately $20 million per quarter and we also used $41 million in cash to acquire a leading provider of managed pressure drilling equipment that is highly complimentary to our existing operations. We ended the fourth quarter with net debt of $122 million comprised of $1.71 billion in debt netted against $1.59 billion in cash.

Moving on to segment results. Our Wellbore Technologies segment capitalized on broad-based activity improvement and market share gains to generate $576 million in revenue during the fourth quarter, an increase of $69 million or 14% sequentially. Through share gains and the need for customers to restock depleted inventories, the segment continued to outpace the growth in global drilling activity levels. We've achieved this growth despite ongoing operational and logistical challenges.

While EBITDA improved $11 million to $88 million or 15.3% of sales, the operational and logistical related challenges, along with a less favorable product mix, limited incremental margins to 16%. Our ReedHycalog drill bit business posted revenue growth in the mid-teens with strong incremental margins. The business unit realized 24% sequential revenue growth in North America, significantly outpacing drilling activity levels due to market share gains, net pricing improvements and an increasing number of projects in the Gulf of Mexico.

Revenue in international markets grew 8%, also exceeding the growth in drilling activity. ReedHycalog's cutter technology leadership is allowing us to steadily gain market share in many markets, including the Middle East, an impressive feat considering we're not able to directly participate in the growing share of lump sum turnkey projects. Our downhole business reported double-digit revenue growth resulting from strong sales across the Western Hemisphere, Asia and the North Sea, partially offset by lower sales in the Middle East resulting from a larger delivery of drilling tools during the third quarter that did not repeat.

Unfortunately, shortages of key product components and in labor within certain regions led to higher costs, including overtime as our teams scramble to find substitute vendors and materials at higher costs in order to take care of our customers. We and other global manufacturers provide plenty of examples of supply chain challenges in the current environment, but I'd like to provide some color on the challenges we and others are facing with labor. One of our global business units in Wellbore Technologies has seen its revenue increase 49% year-on-year, while its labor force has only increased 2%. Some of this disparity is due to cost savings and efficiency improvements we've made within the business. However, many of our operations are simply shorthanded, resulting in cost inefficiencies, primarily in the form of wage escalation and over time.

For instance, in this case, over time is up 109% year-over-year and in the form of operational disruptions and shutdowns, which have resulted when several machinists within a plant came down with COVID simultaneously. While these are transitory issues and our team is doing a fantastic job of dealing with unprecedented challenges, we know that our sales team needs to push pricing to offset inflationary pressures and preserve the type of margin profile warranted by the value of our technology portfolio provides our customers.

Our Grant Prideco drill pipe business delivered double-digit revenue growth driven by strong volumes in drill pipe sales for the US land market. As anticipated, EBITDA flow-through was hampered by continued inflationary pressures and a less favorable smaller diameter land-oriented sales mix. Earlier this year, certain of our higher volume land customers recognize that extended lead times for 5.5 inch green tubes which we use to make drill pipe would not allow us to meet their near-term needs. Despite their preference for larger diameter pipe, they could not wait and place sizable orders for 4.5 inch and 5 inch strings which we're able to turn and deliver in Q4 and into Q1 of 2022 because we had access to those size of green tubes. Despite the temporary unfavorable mix shift as customers begin to better understand lead times in this new world, we're seeing a meaningful pickup in both land and offshore tendering activity for larger premium pipe. As a result, Q4 bookings improved 39% and were characterized by more favorable pricing and a greater mix of large diameter premium pipe, leaving the business well-positioned for significantly improved results as we progress through 2022.

Our Tuboscope business experienced a sequential revenue increase in the high single-digits with strong incremental margins, a meaningful recovery from the third quarter that was plagued by the inability to access resin for its coating operations and operational disruptions caused by hurricanes and COVID outbreaks. While performance improved considerably, labor cost and availability, along with ongoing shortages of resins remain a drag on the business unit's results.

Looking ahead, we expect continued slow but steady improvements in our ability to access key raw materials and expect pricing improvements to offset inflationary pressures. Our WellSite Services business saw mid-teens revenue growth with modest incremental margins. Revenue in our North American solids control operations improved 10% with limited EBITDA flow-through, the result of a transitory decline in higher-margin offshore projects, offset by increased revenue and lower margin US land-based work.

International revenues increased 18% sequentially with outsized incrementals led by increasing project awards in the Middle East and Latin America. As a nascent recovery in international markets advances, we anticipate continued growth from the Middle East and an acceleration in demand from the Far East. Our M/D Totco business realized a mid-single-digit sequential improvement in revenue with solid incremental margins. Revenues from our surface sensor data acquisition systems in North America increased 15% sequentially on higher drilling activity levels, market share gains and improved pricing.

In international markets, continued growth in our eVolve Wired drill pipe optimization services was modestly offset by a decline in capital sales of surface sensor data acquisition systems, which resulted from strong shipments to the Middle East and Far East in Q3 that did not repeat and challenges procuring electrical components, which deferred deliveries into 2022. While we believe we are in the early phase of a multiyear recovery for the oil field, we expect supply chain and inflationary challenges to continue into 2022. For our Wellbore Technologies segment, we expect increasing global activities to be partially offset by seasonal declines in certain geo markets and continued supply chain disruptions to result in sequential revenues that will range from flat to up 5% during the first quarter.

We also expect Q1 margins to be in line with Q4 as inflationary costs and the resumption of our benefit programs will offset pricing gains. We expect Wellbore Technologies to return to normalized incremental margins of 35%-plus after the first quarter. Assuming a normalization of supply chain related challenges, we believe EBITDA margins for our Wellbore Technologies segment will move into the high teens by year end.

Our Completion & Production Solutions segment generated $549 million in revenue during the fourth quarter, an increase of $71 million or 15% sequentially. While all global capital equipment businesses are suffering from unprecedented supply chain disruptions, this segment has been disproportionately challenged due to the heavy concentration of its business taking place in Asian shipyards. After taking $12 million in charges during the third quarter, we were disappointed that our pandemic-related challenges continued into the fourth quarter and affected two additional projects. As Clay mentioned, operational shutdowns, supply chain challenges and spiraling costs resulted in an additional $11 million in expense.

Additionally, our subsea flexible pipe business struggled with the availability of certain raw materials and extraordinary freight charges that were required to meet certain deadlines. The additional expense in our Process and Flow Technologies and Subsea flexible pipe businesses limited incremental margins to 10% and EBITDA totaled $2 million for the quarter. Notwithstanding the extreme difficulties this segment encountered in 2021, the outlook for each of our businesses within Completion & Production Solutions is rapidly improving and is reflected in our bookings.

The segment achieved its fourth straight quarter with a book-to-bill of above 100%. Order intake in Q4 reached the highest level since 2019 and every business unit within the segment posted a book-to-bill greater than 1. Fourth quarter orders for the segment totaled $495 million, resulting in a book-to-bill of 159%. Backlog at the end of the year was $1.3 billion, an 85% increase over year-end 2020.

Our Fiber Glass business unit posted a mid-single-digit percentage sequential increase in revenue. Higher sales to midstream oil and gas markets, which recovered from near record lows and improved deliveries into the marine and offshore markets were partially offset by lower fuel handling revenue. While our backlog for fuel handling equipment is healthy, as Clay mentioned, customers are struggling to obtain peripheral equipment often sourced from Asia and cannot hire the construction crews required to provide installation resulting in customer deferrals.

We, like others, are struggling with labor challenges. Specific to our Fiber Glass business, wage inflation and three plant shutdowns, which occurred when lines couldn't be staffed after several employees contracted COVID, limited incremental margins to the low single digits. Notwithstanding the ongoing operational challenges, which we expect to ease by mid-2022, demand for our Fiber Glass products is strong. Unit posted its fourth straight quarter with a book-to-bill greater than 1, and as 2021 year-end backlog improved 184% over 2020.

Our Intervention & Stimulation Equipment business achieved sequential revenue growth in the mid-teens on higher deliveries of coiled tubing equipment and improving aftermarket revenue. Incremental margins were limited by low margin sales of prior generation capital equipment and higher costs of raw materials and subcontracted components. While pricing and cash flows for our pressure pumping customers are improving, difficulties associated with staffing incremental crews and pricing that is still below what is required to achieve an appropriate return on capital are resulting in minimal capacity additions by our customers. As a result, over 80% of our pressure pumping revenues, which have more than tripled from Q4 of 2020 came from aftermarket sales in the fourth quarter.

We're busy upgrading Tier 2 fleets to Tier 4 dual fuel fleets that can utilize up to 85% natural gas. And we expect the pursuit of ESG friendly operations, efficiency gains and the industry's existing tired fleet of equipment will lead to continued demand for such rebuilds. Coiled tubing continues to be the main driver for capital equipment sales as we continue to see strong demand from international markets for new units, support pumps and nitrogen equipment, which helped drive a 48% sequential increase in orders for the business unit.

Our Subsea flexible pipe business realized mid-single-digit sequential revenue growth as growing backlog and increasing throughput in our Brazilian operation more than offset lower volumes from our Denmark plant that resulted from significant raw material shortages that will continue into the first quarter. Bookings remained a bright spot, with orders during the fourth quarter reaching their highest levels since 2019.

Our Process and Flow Technologies business posted a double-digit sequential increase in revenue. However, as previously discussed, profitability was challenged due to the ongoing operational disruptions on projects in Asia. Despite these near-term challenges, the market outlook is improving rapidly as operators become more confident in a multiyear upturn in commodity prices. We're beginning to see a greater number of the offshore project tenders that we've been tracking shake loose, resulting in orders during the fourth quarter that more than doubled our Q3 total achieving a book-to-bill exceeding 200%.

For the first quarter of 2022, we anticipate that ongoing supply chain disruptions will limit our ability to capitalize on a rapidly improving backlog. As a result of acute raw material shortages, we expect financial results for our Completion & Production Solutions segment in the first quarter to remain more or less flat with Q4. The COVID-affected project that drove most of our charges in the fourth quarter and prior quarter is approximately 80% complete and should finish in the third quarter of 2022. Assuming this project and the broader global supply chain challenges normalize during the first half of 2022, we believe our Completion & Production Solutions segment should achieve a mid to upper single-digit EBITDA margin by year-end.

Our Rig Technologies segment generated revenues of $431 million in the fourth quarter, an increase of $41 million or 11% sequentially. The accelerating progress on our growing backlog of offshore wind installation vessels, increasing revenue from our rig manufacturing plant in Saudi Arabia and the seasonal improvement in service and repair work drove the sequential growth. Adjusted EBITDA declined $4 million to $21 million or 4.9% of sales, primarily due to less favorable sales mix in our aftermarket operations. The lower margin contribution from a higher volume of service and repair work was more than offset by a decrease in higher-margin sales of spare parts. Despite continued healthy order intake and a growing backlog, spare part sales declined due to growing production lead times and shipping challenges. Inflationary forces and start-up costs in Saudi Arabia also weighed down margins. Orders for the segment totaled $191 million, yielding a book-to-bill of 102%. Bookings in our marine and offshore operations remained robust with two-pedestal crane orders for floating production vessels and another order for a design license and jacking system for a wind installation vessel.

During 2021, NOV booked wind installation equipment orders of more than $400 million, and we exceeded our annualized revenue run rate target of $200 million during the quarter. Of equal, if not greater importance, is that we're seeing growing interest for rig equipment. Orders for rig equipment in the second half of 2021 achieved a level almost 2 times the pace of what we realize in the second half of 2020.

We're encouraged that the composition of the orders we are now receiving is representative of the type of bookings we would expect in the early days of a market recovery. We are seeing rising in the inquiries for top drives, high-torque handling equipment and pressure control gear. Additionally, as Clay mentioned, we are realizing growing demand for our digital products and then received an order for 30 NOVOS packages from a single US rig contractor. Following the installation of these packages, this contractor will have its entire active fleet outfitted with NOVOS.

The underlying macro conditions for our base rig business have improved significantly over the past year. As Clay mentioned, in the US land market, day rates have steadily improved and are now in the mid $20,000 a day range. While we still see a few old rigs getting parted out, the opportunity to cannibalize assets diminishes as more rigs go back to work. Customer balance sheets are beginning to improve and while we don't expect to see near-term demand for new rigs in the US land market, we're having more conversations regarding rig upgrades that provide larger setbacks and higher torque handling equipment.

International land markets are also showing more signs of life. We previously stated that there is significant pent-up demand in international markets for leading-edge drilling technology, with a large disparity between the capability of an average rig in international markets and the average rig in the US. The improvement in commodity prices is resulting in customers reengaging in discussions regarding rig tenders in the Middle East and Far East, several of which we believe will advance this year.

Similarly, in offshore markets, NOCs are beginning to respond to the markedly improved commodity price environment with renewed interest in previously deferred offshore projects. We've seen backlogs for our offshore drilling contractor customers increase 33% over the past year, and they're finally realizing improvements in day rates. Additionally, during the fourth quarter, offshore rig utilization exceeded 70% for the first time since 2015 due to a combination of slowly increasing activity levels and rig retirements. As a result of the improving dynamics, our opportunity set is shifting for small-scale projects associated with reactivating warm stacked rigs to large projects that will involve upgrading and reactivating cold-stacked rigs.

Despite the near-term headwinds posed by the current supply chain turmoil, the outlook for Rig Technologies segment is improving. The combination of our growing renewables footprint and a recovery and reactivation spending for our legacy rig business should lead to solid top line growth with an improving margin profile. However, looking ahead to the first quarter for our Rig Technologies segment, typical seasonal declines and continued supply chain challenges should lead to results that are expected to be flat with the fourth quarter. Assuming pandemic-related inefficiencies ease as we move through 2022, we believe EBITDA margins for our Rig Technologies segment will move into the 10% range by year-end.

Throughout 2021, the people of NOV overcame numerous obstacles to deliver critical products for our customers while continuing to make great strides in improving our operational efficiencies and advancing our portfolio of conventional, digital and renewable technologies. Although there continues to be much uncertainty in the near-term outlook and we expect pandemic induced supply chain challenges to continue to affect all global manufacturers through the first half of 2022, we're seeing dramatic improvements in the macro environment, which is setting the stage for what we believe will be a multiyear recovery for our industry and for much improved results for all the stakeholders of NOV.

With that, we'll now open the call to questions.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from the line of Arun Jayaram of JPMorgan Chase. Your line is open.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Yes. Good morning or good afternoon. A quick question here. Clay, you mentioned that the cannibalization of equipment in the field is running its course, but maybe not at the end yet. So I was just wondering maybe if you can elaborate a little bit on that, it feels like we should soon see an inflection point both on and offshore, which would provide a decent setup for you guys as you can equip some more razor blades. But I was wondering if you could give us a little bit more thoughts on that and maybe thoughts on potential rig reactivations from cold-stacked equipment this year.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

You bet, good question, Arun. First of all, with respect to cannibalization of equipment, it's very difficult for us to know precisely how much remains out there to be done. We just know that after several years of curtailing expenditures wherever they can. Drilling contractors are very good at pulling consumables, spares and capital equipment off of idled rigs and avoiding purchases from us and from our competitors wherever possible. It just feels like we're so deep into this, and we've heard anecdotally and the fact that equipment is being purchased at auction for this purpose is we thought a pretty interesting data point that we shared in our prepared remarks and that's on the land side.

On the offshore side, yes, we're -- although it's not really showing up in our orders yet for rig equipment, we're really excited about what we hear from our customers who are engaged in conversations. We understand there's three or four E&Ps that are calling around, checking on rig availability. These are floaters. The leading-edge discussions now have moved up in the $300,000 a day plus category. We've been contacted by a number of offshore drilling contractors to come out and do engineering work and surveys on rigs to see what's required. We know that IOCs are requiring class recertification and OEM recertification on rigs that have been cold stacked for more than a year. And so that's leading to some incremental business. So it's not really show up in orders yet, but the level of activity and inquiries are pointing towards an improving market in the offshore. And frankly, that's what's been missing since 2014. And so we're pretty excited about that. Plus comes on the back of the emergence of offshore drilling contractors out of bankruptcy and reorganization in 2020 and 2021. And so hopefully, the worst is now behind us, and so we're looking forward to a much brighter futures as rigs get reactivated in the offshore.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Great. And just my follow-up, I don't want to dwell on this too much, but I was wondering if you could give us a little bit more thoughts on this situation in the Southeast Asian shipyards. You took $11 million charge this quarter. You're 80% done. Can you just give us a sense of what are some of the risks of additional charges? And if we wanted to take a more conservative tax over the next couple of quarters, this thing is almost done, but give us a sense of what the risk is from here.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. And that's another really good question. And so Arun, as you know, we execute these projects on a percentage of completion basis every quarter for all projects every year we go through, we reevaluate the costs that we're facing. We reevaluate the plan as these projects get executed. We adjust our costs along the way to reflect sort of our view going forward. And so the charges that we've taken for the last few quarters have been very frustrating for all of us, but they point to the fact that we've had to modify significantly our plan quarter by quarter as new COVID challenges have emerged. So let me go back to the beginning. This is a project that just a little bit more complex than we normally undertake and a little more scope on installation and commissioning. A big project and not -- and we signed it right before the world went into lockdown in early 2020 and begin executing on it right before that happened.

Since then, due to COVID, the original country, for instance, where we were constructing the largest, most complex piece of it got shut down in COVID. So we literally had to move to a different yard in a different country, face different importation duties and tariffs and complexity. One of our suppliers who is going to supply the bolts for this job, which are very, very tightly specced, declared force majeure. We had to pivot to a new supplier, a higher cost. Prior quarters, the charges reflected all that. This most recent quarter reflects the fact that as we have undertaken the completion of this module fabrication with a new contractor in a yard, 40 of their 70 employees came down with COVID, brought in new labor, ran into some issues, had to go back and do some rework. And so the most recent charges reflect that. So what's embedded in our financials, and this charge is a realistic view of how do we get this done. It's 80% done now. The plan is to get it into the shipyard late Q1 and get it finished installation commissioning finished through the summer.

And the current costs reflect all that. I'll stop short telling you we're not going to continue to run into new challenges. I mean if I learned anything in 2021, it's very difficult to forecast what the heck is going to happen with COVID and all the impacts on the supply chain and workforce, et cetera. So there is a possibility of future charges. What I can tell you though is this is receiving a lot of attention by everybody. We have our best folks working on it with a great team over there trying to navigate through what is an extraordinarily difficult set of challenges that are presented by COVID and its impact on the supply chain.

[Arun Jayaram, Analyst at JPMorgan Chase & Co.]

Great. Thanks for the color.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

You bet.

[Operator]

Thank you. Our next question comes from Stephen Gengaro of Stifel. Your line is open.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Thanks, good morning gentlemen. Two things. The first is, could you talk a little bit about -- you provided some sort of year-end margin guidance. But when you're -- I'm sure this is baked in, but when you think about the pricing of work that you've been winning and the strong order flow, particularly in the CAP segment in the last quarter, how are you managing sort of price -- the pricing dynamic there relative to supply chain issues and cost inflation, etc?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes, well, not as well as we need to be. That's the message on the call. We need to get out in front of this with pricing, recognizing some of this is transitory and should pass as COVID. I'm going to stop short of predicting which quarter this happens in. But others of it is broad wage inflation, and I think it's here to stay. And so I think it's incumbent on us to get back to margin expansion and do a better job of pricing into it. But look, we're very focused on this on managing through it, on pushing pricing, the steadily increasing level of demand in orders along with higher commodity prices, WTI above $90 a barrel, our oilfield service customers now starting to get pricing leverage in their business models. I think that's a better backdrop for us to push pricing in. And so our expectation is we're going to get better at that as the year progresses, and that's part of our plan.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

But there's -- but you've clearly balanced the pricing with the supply chain issues where you've provided the color on sort of year-end margin targets.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. Yes. We're -- and Stephen, here in the near-term, that's reflects the fact that the first five weeks of 2022, Omicron has remained an issue. Supply chain challenges have remained an issue, and some of our suppliers are saying, hey, we're pushing out deliveries, it's going to take a while to get the supply chain fully healed. And so those sort of pricing gains offset by sort of continued inflation is what's embedded in our plan for 2022.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Great. And then when we think about just cash flow and sort of -- you've provided some capex numbers. But when we think about working capital as we go through 2022 with the impact on cash, any guidance there, Jose.

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

Yes, Stephen. So yes, clearly here, we provided the capex guidance for the year at $255 million. And obviously, we're only providing guidance for 1 quarter out as it pertains to revenue, but we assume some pretty healthy growth at the top line during the course of the year, which naturally starts to consume a little bit more capital through a little bit of a working capital build. However, that gets partially offset by continued progress related to our working capital metrics, made a tremendous amount of headway through the course of 2021 with our working capital optimization efforts going from a run rate of about 31% on an annualized revenue run rate down to 23%. It gets harder and harder as you go forward in time, but there's still a little bit more we can do to improve turns and as well as DSOs. So do think that working capital will be a good consumer of cash, which is a healthy thing and something that we're looking forward to. But I do think that working capital efficiency continues to improve.

[Stephen Gengaro, Analyst at Stifel Nicolaus]

Great. Thank you.

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

Thanks Stephen.

[Operator]

Our next question comes from Ian MacPherson of Piper Sandler. Please go ahead.

[Ian MacPherson, Analyst at Piper Sandler Companies]

Hi, good morning Clay and team. I was interested to see the managed pressure drilling business acquisition. That seems very timely right now as you're inbounding all of these drillship reactivations. So I was wondering, if you could speak a little bit about that acquisition and also what the penetration rate of MPD is on these Seventh Gen deepwater assets and what you think the growth opportunity is for more penetration as well as the earnings opportunity on the installed base there?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. Thank you, Ian. It's a really good question, and thank you for pointing out how strategic it is for us. At a time when floating rig drilling contractors are seeing more interest in their vessels and their fleets, MPD, managed pressure drilling capabilities is one way they can differentiate their rigs in a crowded marketplace and sort of earn premium day rates. And so there's a lot of interest as a way to upgrade. I would add as well. We're also seeing and having discussions around crown-mounted compensators around BOP, second BOP in some instances, and/or improving the sharing capability of BOPs. And so a lot of -- I would say those are kind of some of the areas that the drilling contractors are looking at improving.

As they're putting these rigs into shipyards to be made ready to drill, it's also an opportune time to upgrade their capabilities and further differentiate those capabilities. And so this is one kind of key area. And that's within sort of a market move towards more and more managed pressure drilling capabilities in the offshore. Some of the oil companies that drill offshore has sort of made it a standard requirement. Some basins are -- it's very pervasive. Others have a long way to go. But we're just seeing this general interest in managed pressure drilling that sort of helped us decide this is a good strategic application of capital to pull this into our fold and to offered as part of what we do.

I would add as well, the combination of managed pressure drilling in conjunction with our IntelliServ wired drill pipe, which has the capability of measuring pressure in real time kind of up and down the mud column also combined with our NOVOS operating system and our dynamic well pressure modeling capabilities is really sort of a unique and very impactful offering I think that can really step up safety and efficiency in deepwater drilling. And so kind of all the way around this, I think is a pretty exciting new opportunity for us.

[Ian MacPherson, Analyst at Piper Sandler Companies]

Yes. Good. And is it correct to say that it's still a minority of the deepwater rigs that have MPD now and then the opportunity is to take that to a majority of the rigs that we'll have it in next years?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. Yes. And our goal is to put it on all of them.

[Ian MacPherson, Analyst at Piper Sandler Companies]

My other question was you spoke to the need for more time for the service companies and contractors to get their pricing to flow downhill to you. And I wanted to ask, if that's exactly the same when you're dealing with some of your Eastern Hemisphere, more NOC-sponsored entities that buy from you where maybe the capital paradigm is a little bit different and maybe there's more urgency with respect to getting programs mobilizing at this point since they're already a year plus behind. Do you see any nuance between how your Western hemisphere and Eastern Hemisphere end markets are sort of responding to a higher oil price deck, etc?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. Fair to say all oilfield service providers, the people that construct wellbores that work them over that complete them, discounted heavily in 2020 in face of the downturn of both Eastern Hemisphere and Western Hemisphere and have been trying to claw that back. And with the emergence of higher commodity prices, I think all participants globally are trying to get -- to push their day rates and their pricing up.

The levels of inflation that we see in North America are a little more acute, and North America typically reprices a little more quickly. And so I think we've probably seen better traction here in the US and in Canada with respect to our customers being able to push day rates and pricing up. Overseas, the contracts tend to be a little longer. And I would say we and others are seeing a little less wage inflation. But nevertheless, I think globally, we're going to have to see all parties push pricing up. And I think that's a reasonable expectation that they will go up. They'll be able to enjoy some of the prosperity of $90 plus oil and higher gas prices. And so I think both areas we're going to have to see pricing move.

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

Yes, and I'd add that obviously, within the North American marketplace, the amount of excess capacity is much greater than what you had in international market.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

That's true.

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

There's still excess capacity in the international market. So it impacts both markets effectively equally towards the bottom of the cycle. However, I think as we kind of alluded to in our discussion related to our Intervention & Stimulation Equipment business, the demand for new capital equipment that we're starting to see here in the early phases of the recovery is really coming from those international markets because they have that need sooner and therefore also probably have the opportunity to raise the pricing there a little bit sooner as well. North America is still undergoing the process of absorbing existing capacity, their rebuilds, their refurbishments, their reactivations, very little at this point in the way of really serious conversations about great quantities of incremental capacity additions. So it's -- North America is coming along. It's just going to lag the international markets a little bit.

[Ian MacPherson, Analyst at Piper Sandler Companies]

Understood. Thanks for that.

[Operator]

Our next question comes from Scott Gruber of Citigroup. Please go ahead.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Good morning. So thinking about Grant Prideco here. Should the deliveries of premium pipe at Grant Prideco start to step up in 2Q and 3Q as your access the premium pipe improves? And if that's accurate, do you think it's sufficient to drive Wellbore incrementals above normal in 2Q, 3Q? I think I heard normal incrementals beyond 1Q. But when Grant Prideco sales really kick in, in the past, we've seen those incrementals go above normal. So any color on kind of catching up on some premium pipe deliveries and potential impact on incrementals.

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes, the mix at Grant Prideco, our expectation from Q4 going into Q1, Q2, should improve materially. As Jose said, a lot of the deliveries in Q4 were not premium threads. Our deliveries of Delta premium threads did go up, but also API commodity threads and C50 threads, smaller diameters sort of dominated. And so as we move into 2022, we are now getting better access to larger green tubes for premium pipe plus these rig reactivations in the offshore that we talked about are leading to larger streams in premium pipe. I think the mix -- the outlook is a lot better for Grant Prideco. But it's one piece of a number of business units from the Wellbore Technology as well. But it's -- our expectation is that it should start to go in a better direction from a mix standpoint.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Got it. And then just thinking about your year-end margin targets across the businesses, how much incremental pricing is reflected in those margin targets? Or is it really just reflecting what you've already secured in the backlog? And then in addition, we started to see steel prices actually roll here. Do the exit margins reflect any further deflation in steel price?

[Jose Bayardo, Senior Vice President and Chief Financial Officer at NOV]

Scott, it's Jose. I'll start off on this one. But I mean, really, if you sort of go through and do the math and take in the Q1 guidance that we gave and sort of map out to that year-end guidance, which I know you'll do once the call is over, you'll see that you don't have to make any sort of heroic type of assumptions related to the incrementals that are baked into that type of outlook. So certainly, anticipate pricing to improve. But the biggest obstacle that we're looking forward to getting resolved is just all the disruptions and the one-off costs that have been burdening the organization over the past few quarters.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Got you. I guess the heart of the question was do you -- are you starting to see or line of sight to seeing some of the issues abate such that you don't need the pricing to get to those margins? Or is there just kind of longevity to those issues that you kind of need the pricing to get there and just kind of normalizing the incrementals?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. I would say, we're not counting a lot of deflation in anything that we're buying. We have heard of certain grades of steel that are going down a little bit. We've heard of easing on freight here and there. But the message to the organization is, let's assume, it's all permanent and structural and let's go out there and get prices that get ahead of it and get margins to go the right way. So really, in a lot of ways, 2022 is -- between inflation that we see, some of which may abate and go the other way, and the structural -- or these COVID-driven sort of disruptions that we face that lead to one-off charges versus pricing going in the positive direction, driving margins higher. And so we're very focused on maximizing the ladder to the best that we can. But in our plans, as Jose mentioned, our forecast, it's -- we're making pricing gains, but they're at least partly offset by inflation. If that makes sense.

[Scott Gruber, Analyst at Smith Barney Citigroup]

Got it. Yes, it does.

[Operator]

Our next question comes from Neil Mehta of Goldman Sachs. Your line is open.

[Neil Mehta, Analyst at The Goldman Sachs Group]

Yes. Thank you. Clay, first question is around capital returns. Is it fair to say that as you kind of work through the supply chain issues this year, we shouldn't be looking for incremental capital returns in the form of dividend or share repurchases. But as you go into 2023, have you started to frame out what the framework is for returning what could be a decent amount of free cash flow generation, ultimately as margins normalize?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Yes. This is something we're very focused on. Neil, as you know, we reinstated our dividend in December -- we actually made the decision in November, I think, and then Omicron showed up. And so it got a little more challenging operationally. And so that's very frustrating, obviously, disappointing to us. We're very focused on it. But on the other hand, my outlook for a multiyear up cycle and rising sort of conviction that, that is going to unfold is improving. And so we're going to be looking at this closely as we continue to get deeper into 2022, discussing it with our Board.

Over the past seven, eight years, we have a track record, a very strong track record of returning a lot of capital to our shareholders through both dividends as well as share repurchases. And we understand that that's what need to do. And so it's something we're going to be very focused on. So that's sort of our plan. But on the whole, it's frustrating with the near-term COVID impacts. We are seeing a lot of things going well in terms of demand, orders coming back, outlook for the oil field and our belief that we are in for a much better market in an up cycle, our conviction and that continues to grow.

[Neil Mehta, Analyst at The Goldman Sachs Group]

All right. Very good. And Clay, we didn't talk about the wind business. But how are you feeling about that $400 million opportunity that you've laid out? And any update in terms of how the wind opportunity is progressing?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Very good. We are above our $200 million annualized run rate presently in revenues in the wind space. And as we have said on prior calls, that's going to $400 million by year-end. And what I'd tell you is we're probably running ahead on our bookings in that space. And so that's going really, really well. We think there'll be probably a second, maybe a third Jones Act vessel sold for the US market in addition to a handful of other vessels that will be ordered in 2022. That's in the fixed wind space. We also, as you know, have some offerings for the floating wind space, which is more nascent, but a big Scott wind tender was led here a few weeks ago, excited about the opportunity to participate in that. And we're talking to a number of the winners of that -- of those lease auctions about supporting their operations, along with opportunities in Asia.

And in onshore, continuing to progress our what we think will be a very disruptive land win offering, which is the combination of a lower cost steel tower that's also materially taller than existing towers. Combined with a proprietary way to erect those towers in the field. And we think that, that can greatly improve the economics of land win farm developments, taking the sort of the average size turbine from 3 megawatts up to like 13, 14, 15 megawatts. And so that's very disruptive, materially better economics for the wind developers and the possibility of NOV emerging with some proprietary technology that makes that happen is super exciting. So that's win. And then as you know, we've got things going on in solar, in geothermal and carbon capture. So a lot of opportunities that we see on the horizon for the energy transition.

[Neil Mehta, Analyst at The Goldman Sachs Group]

All right. Thanks.

[Operator]

At this time, I'd like to turn the call back over to Clay Williams for closing remarks. Sir?

[Clay C. Williams, President, Chairman, and Chief Executive Officer at NOV]

Thank you, Latif. As you know, we've been very aggressive on reducing costs through the past few years, focused on cash flow, liquidity and maintaining strong financial resources, that's enabled us to invest in those energy transition technologies that I mentioned along with other digital technologies and new products for the oil field. So as we enter into this multiyear up cycle that we foresee, NOV has a great position and a great portfolio to bring a lot of value to our customers' operations. So looking forward to getting through the near-term challenges and looking forward to a brighter future ahead. Thank you all for joining us today. Thanks to the employees that are listening in today, and we look forward to updating you on our first quarter results in April.

[Operator]

[Operator Closing Remarks]