National-Oilwell Varco Stock

Good day, and thank you for standing by. Welcome to the Second Quarter 2026 NOV Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of IR. Ma'am, please go ahead.

Welcome, everyone, to NOV's second quarter 2026 earnings conference call. With me today are Jose Bayardo, our Chairman, President and CEO; and Rodney Reed, 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 U.S. GAAP basis, for the second quarter of 2026, NOV reported revenues of $2.13 billion and a net income of $112 million or $0.31 per fully diluted share. 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. [Operator Instructions]. Now let me turn the call over to Jose.

Thank you, Amie. Good morning, everyone, and thank you for joining us. NOV executed exceptionally well during the second quarter. Our team successfully navigated continued logistical challenges in the Middle East while capitalizing on improving demand for the critical technologies and equipment NOV provides to the global energy industry. We also realized additional benefits from the operational improvements we've been driving across the organization.

NOV generated revenue of $2.13 billion during the second quarter, an improvement of 4% sequentially. Adjusted EBITDA totaled $283 million. Excluding the approximately $40 million IEEPA tariff benefit recognized during the quarter, adjusted EBITDA was $243 million, reflecting approximately 80% incremental EBITDA conversion on our sequential revenue growth. The strong incremental margins reflect excellent execution on several large projects nearing completion, a more favorable sales mix, improved deliveries into the Middle East and operational initiatives that are beginning to outpace inflationary pressures.

Compared to the second quarter of last year, revenues declined 2.5%, while decremental margins were limited to 17%, excluding the impact of the onetime IEEPA benefit. We achieved this low decremental margin despite quarterly tariff expense that increased approximately $20 million year-over-year from roughly $10 million during the second quarter of 2025 to $30 million in the second quarter of 2026.

I want to thank NOV's employees for the outstanding execution and the pride they demonstrate every day in taking care of our customers, pursuing operational excellence and keeping each other safe. As I mentioned last quarter, pride in what you do, accountability and ownership translate directly into stronger operational and safety performance. During the quarter, our Total Recordable Incident Rate and Lost Time Incident Rate both improved from a year ago, marking a second consecutive quarter of improvements and record safety performance in the first half of the year, further reinforcing the culture we have worked hard to build throughout NOV.

Before moving on, I also want to extend a special thank you to our colleagues in the Middle East who continue to operate through an extraordinarily difficult environment. Their resilience, professionalism and commitment to one another and our customers have been exceptional. Over the past several quarters, we've consistently talked about 2 priorities: driving operational efficiencies and positioning ourselves for the next industry investment cycle. This quarter, we began realizing more of the benefits of those efforts. At the same time, we're becoming increasingly confident that the longer-term market trends we discussed last quarter are beginning to emerge. We're seeing our operational improvements translate into stronger margins. Our differentiated technologies continue to gain market share and conditions are improving across our largest end markets.

While the underlying fundamentals continue to improve, geopolitical uncertainty and commodity price volatility are causing some customers to remain cautious. As a result, and as expected, capital equipment orders in our Energy Equipment segment remained below 100% book-to-bill, but we continue to expect a pickup in orders later this year and a more significant increase in 2027. Additionally, orders for our shorter-cycle capital equipment offerings in our Energy Products and Services segment, including drill pipe and fiberglass remain strong.

Moving on to what we saw across our major markets during the second quarter. In the Middle East, activity remained below pre-conflict levels. But when the bulk of the "kinetic activity" ceased during the quarter, conditions stabilized and customers adapted their operations to what seemed to become a new normal. Even so, logistics remained less predictable and more costly. Our supply chain and operational teams responded exceptionally well. We successfully delivered orders that had been delayed during the first quarter and continued supporting our customers despite a much more complex operating environment. While our operator customers worked diligently to safely preserve activity, certain operations, particularly offshore, were curtailed, resulting in certain orders being deferred and lower overall activity levels.

Notably, activity related to unconventional resource development generally continued unabated. The environment created both challenges and opportunities. Logistical constraints limited our ability to secure commitments from suppliers, affecting certain deliveries and our ability to bid on some projects. At the same time, those same constraints created opportunities where NOV's global supply chain capabilities and operational flexibility allowed us to win work that competitors were unable to execute. Overall, the impact to our business during the second quarter was largely consistent with to modestly better than the expectations we outlined on our last earnings call.

Looking ahead, given the uncertainty in both our customers and suppliers business activities due to the conflict in the Middle East, it remains difficult to predict how conditions in the region will evolve. Operators have been preparing to quickly restore activity once confidence in the reliability of takeaway capacity improves. Until then, our priorities remain unchanged, keeping our employees out of harm's way, supporting our customers and continuing to execute safely while hoping for a lasting return to peace throughout the region.

Outside the Middle East, we're seeing encouraging momentum across most markets as global oil inventories are depleting and concerns related to energy security escalate. In North America, activity improved modestly. Public operators mostly continue to emphasize capital discipline while private operators became more active. More importantly, for NOV, customers continue to prioritize technologies that improve efficiency, enhance reliability, increase production and lower total well costs.

Those priorities play directly into NOV's strengths, and we continue to gain market share as a result. Internationally, we continue to see unconventional development gain momentum and expand into new markets, including Algeria and Pakistan, where we sold several multistage frac sleeve systems for development of tight gas resources. We've always asserted that economically developing unconventional resources outside North America would require a lot of the same high-spec equipment and technologies that NOV developed during the U.S. shale revolution. This is exactly what we're now beginning to see and it helped drive 20% sequential and 33% year-over-year revenue growth in Argentina for NOV during the second quarter.

Demand in Argentina is broad-based. We're supplying pressure pumping and coiled tubing equipment, helping customers reactivate and upgrade high-specification U.S. drilling rigs that will be redeployed in Argentina, assisting customers drill and complete extended lateral wells more efficiently with our drilling and completion tools, helping developers of major infrastructure projects with our pumps, chokes and composite pipe and supporting LNG exports by supplying submerged swivel and yoke systems to more and load FLNG vessels. Customers are also increasingly adopting NOV's digital solutions to improve workflows and accelerate operational decision-making.

During the quarter, we were awarded a significant contract to provide real-time drilling and completion data acquisition, visualization and analytics across a leading Argentine operators development program. Outside of unconventional markets, but also in Latin America, opportunities in Venezuela continue to develop faster than we originally anticipated. For us, demand has been expanded beyond progressive cavity and reciprocating pumps into fishing tools and completion technologies, and we're quoting an increasing range of drilling and production equipment as customers evaluate longer-term redevelopment opportunities. There are a growing number of international markets in early stages of development, and we see heightened energy security concerns accelerating growth, which should create meaningful additional demand for a broad range of NOV technology and equipment.

Turning to the offshore markets, where our outlook for deepwater activity continues to grow increasingly constructive. It's important to remember that the offshore recovery began prior to the conflict in the Middle East and will be one of the clearest beneficiaries of the industry's heightened focus on energy security and plateauing production in North America. Operators continue advancing brownfield expansions, ramping exploration programs and sanctioning new deepwater developments. While continued geopolitical tension and resulting commodity price volatility creates uncertainty and delays, industry forecasts continue to call for approximately 10 FPSO awards this year, a meaningful increase from the 6 sanctioned during 2025. Projects continue moving forward despite today's uncertainty, reflecting the attractive economics of offshore development.

We also remain encouraged by how the mix of mid- to longer-term offshore developments is expected to evolve. Operators are increasingly favoring the development of gas-rich reservoirs, which require more of NOV's sophisticated processing equipment. We also see the pipeline of anticipated projects shifting toward deeper water, harsher and more technically demanding environments, which plays into NOV's strengths. Overall, we believe the future project mix is becoming increasingly favorable for NOV and should continue to support healthy demand for our subsea flexible pipe, gas and water treatment systems, spread and turret mooring technologies, offshore cranes, production chokes and lightweight composite pipe and tanks. Naturally, as demand for offshore production continues to increase, conditions in the offshore drilling market are also improving.

Offshore contracting activity increased 32% sequentially. And if published tenders remain on schedule, our customers should see a sizable pickup in project start dates in late '26 and early '27. As a result, demand for our aftermarket services and spare parts remain healthy, driving our fourth straight quarter with an increase in our backlog for spare parts. As rig utilization improves and contract durations extend, drilling contractors are increasingly focused on preparing assets for additional work. that drives demand for aftermarket spare parts, recertifications, automation upgrades and capital equipment modernization, all high-value areas where NOV has established technology leadership, a large installed base and long-standing customer relationships. When we step back and look across the markets NOV serves, what's particularly encouraging is that we're seeing improvement almost everywhere, suggesting that the recovery is broadening beyond isolated pockets of activity into a more synchronized investment cycle.

That's the type of environment where we believe NOV's operating leverage and the structural improvements we've made in our business over the past several years become increasingly evident. One of the questions we often hear from investors is what does NOV look like in this type of market environment? To assess the answer to that question, it's important to understand our recent results.

Over the last several years, our financial performance has been resilient. Revenue has generally remained between $8.5 billion and $9 billion per year, while EBITDA has been around $1 billion with high levels of free cash flow conversion. That stability might suggest that the performance of our underlying businesses has been relatively stable. The reality is almost the opposite. The resiliency of our intentionally diverse portfolio has masked meaningful shifts occurring beneath the surface. Individual businesses have experienced very different performance over the last several years. When one part of our portfolio has faced headwinds due to such things such as 3-plus years of declining activity in the U.S. or a large number of rigs being suspended in a key international market, another has often performed exceptionally well.

The result has been a business that has appeared stable from the outside, even though there are often meaningful shifts in the performance of underlying components. During periods of uneven and generally soft market environments, our portfolio allowed stronger businesses to offset weaker ones and deliver resilient cash flow, allowing us to continue investing in advancing technology leadership across our portfolio and better positioning all of our businesses for the future. Over the past decade, we have not experienced an environment in which all our businesses can perform well at the same time.

As a result, we believe the earnings power embedded within NOV's portfolio remains underappreciated. So back to the question, what is the earnings capacity of NOV when we have a more synchronized global recovery? Simple way to analyze that question is to look at the strongest quarterly performance each of our businesses has delivered over the last several years. If you take a conservative approach and exclude the seasonally stronger fourth quarters, you arrive at an annualized revenue level of approximately $9.8 billion and EBITDA of roughly $1.5 billion. Keep in mind that the individual business unit peaks didn't occur during an exceptionally strong industry environment. In many cases, they occurred while inflation, including tariffs, was driving significant cost pressure, supply chains remain constrained, activity levels were declining and pricing power was limited. In other words, those results were achieved despite a difficult operating backdrop, not because conditions were favorable.

We believe the high watermark analysis represents a conservative illustration of our earnings capacity. It's based on what our businesses have already demonstrated they can achieve and does not fully reflect the structural improvements we've made over the last several years. We've been working to simplify the organization, consolidating facilities, improving manufacturing efficiency and optimizing our portfolio by focusing on areas where we believe we have a durable competitive advantages.

NOV today is a fundamentally stronger company than it was just a few years ago. While we still have more work to do, we're beginning to see our efforts translate into improving productivity and better margins. Our portfolio also continues to migrate towards higher-value technologies. Digital Solutions are growing rapidly. International unconventional development is expanding, offshore production markets are strengthening, and we believe aftermarket demand is positioned for a recovery as suspended rigs return to work and customers prepare equipment for the next phase of the cycle.

The timing of our earnings progression will ultimately depend on how the market unfolds. Historically, NOV has been viewed as a later cycle company because demand for capital equipment generally accelerated only after activity increased and readily available service capacity became fully utilized.

We believe this cycle will be different. After a decade of capital discipline and underinvestment, the industry is not starting from a position of excess capacity. Equipment attrition, the export of underutilized North American equipment into international markets and years of limited reinvestment have materially tightened the global service complex. As a result, we believe customers will need to begin investing in equipment much earlier this cycle, allowing NOV to more meaningfully participate earlier in the market recovery than investors have traditionally expected. None of this suggests that results will improve in a straight line. Marcets rarely work that way and geopolitical uncertainty, commodity price volatility and customer strength will continue to influence the timing of investment.

But when we look at the operational improvements we've implemented and the market conditions we believe are beginning to emerge, we're increasingly confident that NOV has substantially greater earnings power than we've been able to demonstrate over the past decade.

Our portfolio helped make NOV a more resilient company through one of the most challenging operating environments our industry has experienced. We believe that same portfolio, combined with a fundamentally stronger organization and a broadening investment cycle positions NOV to deliver materially stronger financial performance as more of our businesses begin performing well at the same time. That's the opportunity we see ahead. While the exact timing will ultimately depend on how the market environment and customer spending unfold, we're confident we're taking the right actions to position NOV for the future, and I'm even more confident in this team's ability to execute and deliver materially stronger results. Rodney?

Thank you, Jose. Consolidated revenue for the quarter was $2.13 billion, an increase of 4% sequentially and down 2% year-over-year. Net income was $112 million or $0.31 per fully diluted share. Operating profit was $193 million, which included $17 million in pretax other items, primarily related to severance and facility closures and $20 million in gain on sales of fixed assets. Adjusted operating profit was $190 million or 9% of sales and adjusted EBITDA totaled $283 million or 13.3% of sales.

During the quarter, we recorded a benefit of approximately $40 million related to IEEPA tariff refunds, which is included in adjusted operating profit and adjusted EBITDA. On a segment basis, our Energy Products and Services segment received approximately $26 million of the benefit, while our Energy Equipment segment accounted for the remainder. The net benefit from tariff refunds on year-over-year financial results is slightly more than $20 million as our overall tariff expense has increased from the second quarter of 2025. We collected approximately $17 million of these refunds during the quarter.

As Jose mentioned, second quarter results for our Middle East operations were generally consistent with our expectations. For the third quarter, our guidance assumes that the operating environment remains consistent with the conditions during the second quarter. During the quarter, we repurchased 3.2 million shares for $63 million and paid dividends of $64 million, which included a supplemental dividend of $0.09 per share related to the true-up of our 2025 return of capital program. Since implementing our return of capital program during the second quarter of 2024, we've returned over $1 billion to shareholders through share repurchases and dividends, while cash has increased approximately $700 million.

Free cash flow for the quarter was negative $64 million, impacted by the timing of certain milestone billings and slightly elevated inventory as our supply chain teams implemented more buffers given the ongoing conflict. We expect working capital to benefit cash generation during the second half of the year, consistent with trends experienced in both 2024 and 2025, and we still anticipate converting between 40% to 50% of 2026 EBITDA to free cash flow. We continue to expect capital expenditures to be between $340 million and $370 million and our annual effective tax rate to be between 34% to 36%.

Stepping back, our team's second quarter operational performance was excellent. We're advancing efforts to simplify and standardize business processes to drive efficiencies that reduce operating costs, improve customer experience and support on-time delivery. Sequentially, we delivered strong EBITDA incrementals of 130% or 80% excluding tariff refunds. For the third quarter, we expect sequential and year-over-year revenue growth, and we expect to deliver healthy free cash flow in the second half of the year.

Moving to our segments. Starting with Energy Equipment. Second quarter revenue was $1.22 billion, up 2% sequentially and up 1% year-over-year. Adjusted EBITDA increased $42 million year-over-year to $200 million or 16.4% of sales, representing the highest quarterly EBITDA margin since the segment was established.

Excluding the second quarter tariff benefit, margins still reached a record level, driven primarily by operational excellence across several business units, favorable pricing and mix and cost reductions. The segment also delivered its fifth straight quarter of year-over-year revenue growth. Capital equipment sales accounted for approximately 63% of the segment's revenue in the second quarter of 2026, improving 2% year-over-year, led by continued strength in our offshore production-related businesses, including subsea flexible pipe, marine and construction and process systems. Aftermarket sales and services accounted for the remaining 37% of segment revenue and improved 3% sequentially as our teams continue to navigate the operating environment in the Middle East.

Compared to the prior year, aftermarket revenue was down 2%, primarily reflecting the effects of the Middle East conflict. Capital equipment orders for the second quarter were $474 million, a 13% increase year-over-year, resulting in a book-to-bill of 74% for the quarter. Backlog at the end of the quarter was $4.1 billion.

Orders during the quarter were led by subsea flexible pipe and offshore production equipment. First half 2026 orders exceeded the first half of 2025 and strong operational execution resulted in shipments improving almost 10%. Similar to 2025, we expect order intake in the second half of the year to meaningfully outpace the first half, supported by our discussions with key customers and strong pipeline of projects. Our subsea flexible pipe business delivered another outstanding quarter, achieving record EBITDA performance. Margin expansion reflected exceptional execution, favorable project mix and progress of higher-margin backlog, supported by a relentless focus on quality, safety and on-time delivery.

Demand outlook for flexible pipe and bookings remain strong. On a trailing 12-month basis, book-to-bill was 135% and quarter ending backlog was 28% higher than 12 months ago. Second quarter orders primarily included various projects in the North Sea. Our team recently celebrated a significant milestone, the delivery of a cumulative 1,000 kilometers of flexible pipe from our facility in Brazil. Our Process Systems revenue increased mid-single-digit percent year-over-year, reaching another quarter of record EBITDA performance, reflecting strong demand in offshore production and international gas markets. Margins improved year-over-year, supported by strong operational execution on projects nearing completion.

During the quarter, the business booked orders supporting an offshore gas project in Indonesia and a gas dehydration package for an operator in West Africa. Also, leveraging our NOV Max platform, the business deployed an AI model supporting a North Sea operator's program to optimize their sulfate removal unit. Outlook for gas processing applications, produced water treatment and brownfield applications remains robust.

Revenue from our Drilling Capital Equipment business declined versus the prior year, but improved in the mid-single digits sequentially, driven by strong performance from our Saudi manufacturing facility and improving bookings activity. Orders during the quarter included robotics packages, offshore BOP and NOVOS automation packages. Bookings in the first half of 2026 exceeded the first half of 2025 by over 40%. And looking forward, we continue to have a constructive outlook on the offshore drilling market with floater utilization and day rates improving, providing an opportunity for stronger Capital Equipment orders in the second half of 2026 and into 2027.

Our Marine and Construction business revenue improved in the mid-teens percentage range year-over-year, driven by higher demand for lifting and handling equipment as well as mooring and fluid transfer systems. The market outlook for Marine and Construction remains constructive, supported by strong offshore development activity with the value of offshore FIDs in 2026 already around full year 2025 levels and further growth expected in 2027. These industry trends drive demand for turret mooring systems, offshore cranes, subsea construction equipment and pipeline equipment as well as provide positive demand for several other NOV business units.

Revenue for Intervention and Stimulation Equipment declined year-over-year, reflecting lower overall demand in North America, both was up mid-single digits sequentially, led by Middle East wireline and coiled tubing equipment deliveries. Interest in coiled tubing and frac equipment in the Middle East and Argentina remained strong, supported by expanding unconventional developments. In the U.S. land market, quoting activity has also improved, driven by higher frac utilization.

Turning to the aftermarket portion of Energy Equipment segment. Revenue from parts and services for drilling equipment was impacted by the Middle East conflict due to suspended rig operations, logistical challenges and delays in upgrade projects. While activity was down year-over-year, sequentially, revenue was higher as spare parts shipments improved. Service utilization increased and bookings and backlog for spare parts and repair grew, reflecting higher customer demand. Increasing offshore floater utilization and improving day rates will continue to drive stronger demand for our rig aftermarket business, which we expect to grow meaningfully in the second half of 2026 compared to the first half.

Intervention and Stimulation Equipment aftermarket revenue was effectively flat sequentially and down mid-single-digit percentage year-over-year. The drop year-over-year was led by lower activity in North America and the Middle East. Customer inquiries and quoting activity have increased in North America and Argentina and stabilized in some areas of the Middle East. For the third quarter, we expect Energy Equipment segment revenue to be between 1% to 3% lower year-over-year as growth in our Drilling Capital Equipment and Aftermarket business is offset by certain projects nearing completion during the second quarter. We expect EBITDA to be in the range of $160 million and $190 million.

Moving to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $974 million, down 5% compared to the second quarter of 2025, while sequentially revenue improved 9%. Adjusted EBITDA totaled $144 million or 14.8% of sales. Year-over-year growth in drill bits, digital services and artificial lift supported by improving demand across many of our key markets did not fully offset lower composite pipe shipments, partially impacted by the conflict in the Middle East. Compared to the prior quarter, the segment experienced increased demand across nearly all of its businesses. For the second quarter, the sales mix of energy products and services was 53% services and rental, 30% capital equipment and 17% product sales.

Revenue from Services and Rentals remained resilient, declining just 1% year-over-year as market share gains across several of our product lines largely offset lower U.S. and Middle East drilling activity. Sequentially, revenue for Services and Rentals improved 4% with a significant majority of our business units and regional markets experiencing growth, especially U.S. land. Our drill bit business gained market share across the U.S. and Canada, supported by continued innovation in our cutter technology that is improving rates of penetration and extending bit life to drive operational efficiency. In the U.S., these gains drove record quarterly revenue and marked the eighth consecutive quarter of year-over-year revenue growth.

Likewise, our downhole tools business delivered a strong quarter with higher activity in the U.S., Europe and Africa, while demand in the Middle East remained below prior year levels. Drilling motor rentals achieved their strongest U.S. revenue in over 6 years with market share gains of our slump hole power sections supporting drilling efficiencies and longer laterals. The business also saw increased adoption of our Agitator Rage Friction Reduction tool across U.S. land as well as our PosiTrack Torsional Vibration Mitigation Technology expanding in offshore applications. Our artificial lift business also benefited from higher activity and market share gains of our Electric Submersible Pump Technologies across the Permian and Bakken, posting strong revenue growth as the number of installs during the quarter increased over 20% compared to the prior 2 quarters.

Customers are increasingly adopting technologies to improve run time such as our integrated gas processor and contra-helical pump, which improves system performance for wells with high gas to liquid ratios.

Within our WellSite Services business, higher rentals of our Alpha Shakers across the U.S. drove double-digit growth in the region year-over-year, while adoption of our iNOVaTHERM thermal treatment technology continued. Together, these advances largely offset lower activity in the Middle East. NOV Digital Services continued its trend of 4 straight quarters of year-over-year revenue growth. Revenue from our wired drill pipe services nearly doubled. And during the quarter, we deployed our Max completions remote service rig monitoring solution for a super major, providing centralized oversight of workover operations through real-time monitoring and improved reporting capabilities. This award, along with the win Jose mentioned for a leading Latin America operator reflect growing customer demand for NOV's digital technologies that improve operational efficiencies and decision-making.

Capital Equipment revenue for Energy Products and Services segment declined 15% year-over-year, primarily reflecting strong deliveries of composite solutions for FPSOs in the prior year that did not repeat, lower demand in the Middle East and reduced deliveries of conductor pipe connectors. Sequentially, Capital Equipment revenue increased in the low teens percentage range as shipments recovered from the first quarter delays related to the Middle East conflict. Bookings remained healthy across the segment's capital equipment businesses. Our Drill Pipe business achieved its strongest first half bookings in over 10 years, and our Drill Pipe backlog has roughly doubled from 12 months ago. Our Fiberglass business also reported healthy bookings during the quarter despite reduced demand in the Middle East, resulting in 20% year-over-year growth in backlog. Strong bookings, increasing customer demand for differentiated technologies and increased backlog positions these businesses for improved performance during the second half of the year.

Our Fiberglass Systems business continued working through the effects of the conflict in the Middle East, where the timing of certain infrastructure projects reduced manufacturing absorption during the quarter. Demand across most other end markets remained resilient. Our underground composite fuel handling tank business matched record quarterly revenue as continued investment in domestic fuel infrastructure drove strong customer demand. Reflecting that momentum, bookings for fuel handling tanks have doubled over the past 18 months compared to the preceding 18-month period. The business also sees growing opportunities to support a rising number of FPSO projects.

Additionally, the continued adoption of larger diameter composite pipe for produced water projects in North America and the Middle East provides long-term demand for the business.

Turning to Product sales. Revenue remained relatively stable, declining 3% year-over-year, reflecting lower drilling activity in the Middle East, partially offset by bulk drill bit deliveries into Algeria. Sequentially, improved demand for drill bits and artificial lift equipment in the U.S., along with the second quarter deliveries of drill bits and downhole tools in the Eastern Hemisphere resulted in mid-single-digit revenue growth.

Looking to the second half of the year, we expect seasonal downhole tool sales into the Eastern Hemisphere, increased shipping from improved backlog across our Drill Pipe and Composite Solutions businesses and market share gains of our differentiated technologies to drive strong top line growth compared to the first half of 2026. Continued structural cost initiatives should further improve margins. For the third quarter, we expect Energy Products and Services segment revenue to increase between 5% to 7% year-over-year with EBITDA in the range of $130 million to $150 million.

With that, I'll turn the call back to Jose.

Thank you, Rodney. As we've discussed this morning, we're encouraged by what we're seeing across the business. Our operational initiatives are translating into stronger execution and improving margins. At the same time, we're seeing encouraging signs that customer investment is beginning to broaden across the markets we serve. While uncertainty remains, and we continue to expect volatility from quarter-to-quarter, we believe the underlying fundamentals are moving in the right direction.

We spent the last several years improving our operations, investing in technologies across our portfolio and positioning the company for the type of market that is emerging. We believe NOV is well positioned to drive earnings much higher over the coming years and create meaningful value for both our customers and our shareholders.

I'd like to once again thank all members of the NOV team around the world for their continued commitment to safety, operational excellence and taking care of our customers.

With that, we'd like to open the call to questions.

[Operator Instructions] Our first question comes from the line of Arun Jayaram with JPMorgan Securities.

Sorry about that. I was on mute. Sorry the -- there's been a few calls today. I was wondering if you could help us think about how you see things kind of progressing in the Middle East over the back half of the year. A couple of your big cap oil service peers noted how they would expect, call it, in the fourth quarter for -- obviously, a little bit of uncertainty maybe for top line to be down, call it, 5% to 10% kind of year-over-year. But just wanted to see if you had any thoughts on how Middle East could trend for NOV in the second half.

Sure thing, Arun. Thanks for the question. And Look, obviously, there's a lot of uncertainty related to the Middle East right now. And as I mentioned in the prepared remarks, certainly hoping pray for a quick and a quick resolution of the conflict and lasting peace. But maybe a little bit of commentary would help just sort of frame how to think about operations in the Middle East.

Obviously, we had a significant impact in Q1, about a $30 million impact in EBITDA. Conflicts began in late February and significantly impacted March. But then early in the second quarter, we began to see sort of the "kinetic activity" stop but tensions remain high and logistics remain extremely constrained in and out of the Strait, which limited ability to deal with logistics from our core business standpoint and ability to get takeaway of commodity out of the region on the part of our customers. But nevertheless, operators in the region started adapting to that kind of what was starting to feel like a new normal during that time period and began bringing activity back.

And first of all, I'd say, for the most part, land-based activity was pretty stable throughout the entire time period, particularly in the unconventional gas plays. It's more the offshore that was impacted for a material period of time. Things slowly started resuming during the second quarter, and that sort of gets us to where we are today.

As I mentioned in the prepared remarks, impact in the second quarter was in line to maybe just slightly better than what we were anticipating with that stability in the Middle East, but still very challenged from a logistical standpoint. As we mentioned in our press release, our outlook reflects a scenario in which conditions on the ground in the Middle East during the third quarter remained consistent with what we saw in the second quarter. That doesn't mean activity remains exactly the same. It means the trends that we saw emerging during that time period continue, meaning higher levels -- gradually higher levels of activity with more rigs coming back to work during that time period.

So when we did our bottoms-up roll-up of our forecast for the third quarter, that was translating into between a 10% to 15% increase from Q3 to Q2. And just another data point that might be helpful, from Q1 to Q2, we saw about a 5% sequential increase. So obviously, we risked that slightly, but that's the scenario that we're planning for is roughly 10% to 15% with that risk, you can assume more towards the lower end of that. And so for us, Middle East currently is approximately 15% of total company revenue. And so if you assume that there is more disruption, hard to determine how severe a disruption. But if you have one that's sort of more in line with maybe just potentially not quite as bad as what we saw in Q1 with that 10% to 15% increase and 15% of total revenue, if that doesn't materialize, then you're looking at an impact of $20 million to $25-ish million of EBITDA.

So look, it could be -- obviously be better than that, and that's what our guidance reflects. It could obviously be significantly worse than that depending on what happens in the Middle East. But hopefully, that helps, again, not put bookends around it, but gives you at least some data points that you could think through as you develop your own scenarios around what could happen in the Middle East. And then as it pertains -- well, we'll leave it there.

Okay. That is helpful, Jose. My second question, in EE, you had a 0.74 book-to-bill. You and Rodney both mentioned kind of optimism on second half order trends in energy equipment. Can you just maybe help us think about framing any expectations around book-to-bill? Do you still expect to approach 1 for the full year, but maybe a little bit of order or commentary you can unpack there.

Sure thing, Arun. Yes, look, I think when we came into the year, we set the expectations based on the project time line that we saw on the time line associated with the expected FIDs that we developed in coordination with what -- with our discussions with our customers, that we were anticipating Q1 bookings to be fairly light and then picking up pretty significantly in the second half. And that is still our expectation. If you look at first half bookings, let's look at this last quarter. So bookings were up $54 million year-over-year. Year-to-date bookings up 16% year-over-year.

So directionally heading in the right direction. But more importantly, we view us as having had a good bit of success and things materializing the way that we anticipated that they would. So obviously, we've seen 6 FPSO FIDs year-to-date, of which we've had meaningful bookings associated with those FPSOs on half of those and really look back over the last 24 FIDs on FPSOs, we had sizable bookings on 11 of those 24. And maybe more encouragingly, as we sort of look forward at the shift in mix that we anticipate late this year and more so in 2027, we're seeing the FPSOs that are going to reach FID are slated for higher gas condensate markets, deeper waters, harsher environments that really plays into our strength, and we see a higher concentration of those going forward.

And also, obviously, offshore production isn't the only component of our business. But also, as we mentioned in the prepared remarks, encouraging green shoots effectively all places in the world, including the emerging unconventionals and more and more activity in deepwater offshore on the drilling side. And the other thing that I should mention is that, look, there's a big component of our business that is not EE backlog driven. We have a large capital equipment portion of the business within the EPS segment.

As Rodney touched on, our Grant Prideco business had its best bookings quarter since Q1 of '23, and that's after a couple of other good quarters preceding that. Our Fiberglass backlog is up 24% year-over-year. And as we sort of look around the world and see the state of the industry's asset base, there's going to be a need for a whole lot more investment.

So look, we don't get too worked up over a single quarter or 2 booking environment. It's taking a look at the whole picture of what's going on in the marketplace today and more importantly, where it's headed. And 2027 and beyond certainly look bright.

As it relates to the full year 2026, look, as you know, these orders are big and chunky. Commodity price volatility, geopolitical uncertainty certainly doesn't help things push and pull one way or the other. But our current expectation is still to get at least close to the 100% book-to-bill, but probably more in the vicinity of 90% to 100% for 2026 and meaningfully above that in '27 and beyond.

Our next question is going to come from the line of Marc Bianchi with TD Cowen.

Jose, on the outlook for the second half here, so Rodney, you mentioned about the rig aftermarket business starting to pick up in the back half of the year. I'm curious why it looks like Energy Equipment revenue is guided to be pretty much like flat quarter-over-quarter. Is there -- are there some crosscurrents with the offshore activity in the Middle East that's driving that? And maybe along with it, you could sort of remind us what kind of drawdown we've seen in that rig aftermarket business from prior peak and maybe how much room it's got to go to recover?

Yes, sure. Thanks for the question, Marc. And I'll just give some color overall for some of the moving parts sequentially, in particular, Q2 to Q3. If you look at our EPS segment, really strong revenue growth quarter-to-quarter there, up 5% to 7%. And as Jose was just mentioning, a lot of that's driven off of the capital equipment backlog that we have and the strong conversion opportunity that we have in the second half of the year in our composite pipe, our composite tank and our drill bits -- drill pipe business. and that should lead to strong incrementals. So if you look at the incrementals Q2 to Q3 on the EPS business, strong there at 40% when you normalize for the tariff benefit in Q2.

When you look at the EE business, really kind of flat revenue going from Q2 to Q3. And those changes are really kind of mix related. So as you mentioned, Marc, I think when we look at the first half of the year overall, the second half and the progress that our rig equipment and rig aftermarket business is making, when you look at rig count, just a pure number of rig count increasing throughout the year, utilization increasing, day rates have improved with our position there, we do expect a meaningful pickup first half to second half in the rig business. That's probably in that sort of mid-teens range, first half to second half revenue.

Another piece of color commentary for Q3 on EE, a couple more points. One, really strong operational performance. You saw the strong incrementals from Q1 to Q2 for EE, the outperformance compared to our expectations on revenue. A lot of that was due to just really strong progress, operational execution for some of our production equipment projects. As some of those projects kind of start to near the end and new projects pick back up, there's that timing issue there. So that kind of gets to the mix point. And then just the last point on incrementals kind of Q2 to Q3 for EE. When you're dealing with a small change on the denominator side, roughly flat, really any change on small mix or a few extra pieces of freight costs coming in Q2 to Q3 can impact some of the incrementals. But to Jose's point, I think fundamentally, on the equipment side, we see very good momentum in the second half of the year and into 2027.

Okay. Hopefully, you guys won't count this one as a question, but just real quick. The guidance for 3Q, does it include any tariff IEEPA refund?

No. Nothing.

Okay. And then, Jose, the other one was you kind of laid out the watermark analysis there, and that doesn't -- as you said, doesn't really reflect the full capability. If I work that out, I think the margin was like 15%, which would seem like there's a lot more room to go. When things turn and we get into the up cycle more meaningfully, what is the margin opportunity? And is it really just volume that gets you there at this point given all the actions that you've taken? Or are there other things you need to do?

Yes. Great question, Marc. And so look, what I wanted to do today was provide just a framework in terms of how to think about things. And I appreciate you picking up on that important component, which is these are high watermarks effectively over the last 4 years within our current portfolio. And last 4 years have not been a great environment for the broader industry and particularly for a provider of capital equipment.

Getting to your question, so certainly, volume helps, but there are a couple of other components that come into play. One is look, even without -- let's say we're completely wrong on a market recovery. I don't think we are, highly confident we're not. We're going to continue to drive margins higher. We continue to have initiatives underway that are driving operational efficiencies higher across the organization. And I think you'll see more of that come through over the coming year or so. So really excited about the good work the team is doing in terms of just making us better every single day.

Another component is pricing, right? So obviously, if you look over the last several years, it's been down for as it relates to -- or I should say, there's been really significant headwinds from a highly inflationary environment, plus the advent of really significant tariffs all taking place during an environment where activity was actually coming down. So very difficult to offset those inflationary costs with pricing during that environment. Now that we've turned the corner from an activity standpoint, yes, volume helps, but pricing helps a whole lot, too. Where that ultimately takes us from a margin standpoint, to be determined. And yes, I care a whole lot -- we care a whole lot about margins, care a whole lot more about return on capital employed. And look, the base scenario that you referred to in our prepared remarks, yes, that was kind of a 15%-ish margin.

So with everything that I'm saying, I think you could take away that our expectation and certainly our goal is to get to mid-teens EBITDA type margins, but more importantly, return on capital employed. I think that base high watermark analysis, you'd probably be approaching low teens percentage range. We want to get to a minimum of mid-teens percentage range. So hopefully, that helps a little bit more with how to think about that.

Our next question comes from the line of Jim Rollyson with Raymond James.

I want to follow up on Marc's comment questions a little bit. Obviously, you don't have a perfect crystal ball, but I will take mid-teens margins before we get to something higher since you haven't seen that at any point in the recent past. What do you -- given the outlook you kind of laid out at the beginning, Jose, what do you think a realistic potential time line is to get to this kind of $9.8 billion of revenues, 15% margin kind of profile. Is that something that we could see a run rate like late next year, early '28? Or is it 2, 3 years down the road, do you think? Just kind of curious on how things are shaping up for you?

Yes, I'm not going to pinpoint the precise timing of it. There are obviously a whole lot of variables related to the macro environment. But what I will say is our confidence level is high. You look around the world in terms of what's going on, and it's pretty obvious to us that the cycle that we are entering into is very different. We've had 10 years of a down cycle with little investment across the board, whether that's with service space or whether that relates to exploration on the part of operators. Our company reserve replacement ratios have declined and the asset base and service complex is in pretty rough shape as it relates to its ability to significantly expand activity.

And then you look at the big driver here, which is demand for energy. And I don't know about you, but I certainly don't see the demand for energy declining anytime soon. If anything, I see it accelerating here in the near term. Yes, certainly, data centers are going to pull a lot of demand that everybody talks about. But we can't forget about the 7 billion people in non-OECD countries that consume a fraction of the amount of energy that those of us fortunate enough to be in the OECD get to consume. So demand is going to continue to drive higher.

And okay, let's talk about the other side of the equation, the supply equation. So obviously, we've got a tremendous amount of geopolitical risk, and you've got a maturing North American shale environment. You've got a lot of barrels off the market. You've seen substantial depletion of strategic petroleum reserves around the world. I think the U.S. SPR is at a 30-year low. I haven't seen it since, I think, 1984. OECD stocks at a 20-year low. You know all the stuff better than I do. China is suppressing their imports. How long can that really go on. I don't think very long, there's going to be a huge amount of demand created by just restoring production and then replacing those lost barrels from SPRs. And pretty much every country on the planet, I think, is going to work on enhancing their security, whether that's through developing their own resources or at least expanding reserves.

You got countries like India that have already announced that they're planning to increase their SPR by 3.5x. You also have gas challenges with the 1/5 of Middle East LNG off the market. So as we look at the market, where is the supply going to come from? Clearly, we're short on supply right now despite what commodity price signals were telling us just several weeks ago, didn't make a whole lot of sense to me. But there's going to be a lot of demand that's not currently apparent where that supply is coming from. And we've got North America production plateauing. That doesn't mean we're peaking in North America, but it supplied virtually all supply over the last 15 years. It's not going to continue to do that going forward. Yes, we're going to have to run really hard in North America to drive incremental growth, but barrels are going to come from other places.

And as we talked about before, it appears that deepwater offshore is winning the battle for low marginal cost of supply. And again, I think the deepwater offshore operators understood that the call is on them, and they could see what was coming over the next couple of years, pre-conflict, looked like we had a couple of years to work through a supply overhang. That's gone. But at that point in time, they're already starting to ramp exploration and FIDs and see that obviously continuing. So a lot of demand is going to come from the offshore. We're seeing that our offshore drilling contractors are saying that with of the 95% of the marketed deepwater fleet effectively under contract today, huge amounts of open tender activity and more FIDs coming. And then you look elsewhere around the world, the advent of international unconventionals, they're merging all over, mostly gas direct at this point in time.

And as we talked about in the prepared remarks, that is going to drive a lot of demand for capital equipment as well as the proprietary tools and technologies that we've developed to significantly enhance the efficiencies associated with drilling and completing ultra-long laterals. So a whole lot there to not answer your question directly. We're not going to pinpoint a specific time, but it's hard to see how we don't get there over the coming years. So again, this cycle is different. The availability of assets are not there, and that's going to call demand from NOV sooner rather than later.

Got it. And then just one follow-up. On Subsea Flexibles, obviously, you guys have been talking about this for a while. You noted record EBITDA in that business today. Kind of maybe just what the opportunity set is there. Are you running up against capacity from a generating standpoint, EBITDA generating standpoint before you get your expansion plans completed? Or do you still have room to run there?

Yes. Jim, essentially, we are running up against capacity constraints. I mean there are pockets of opportunity to drive things a little bit higher. But I think we've talked about for a couple of quarters now that -- if we have sizable orders at this point, we're looking at 2028 deliveries for the most part. As I mentioned, there are some pockets of opportunity to provide more in 2027, but really excited about the opportunity set that is in front of us and excited about the timing of when our additional capacity comes on, hopefully in early 2029 because the outlook continues to look really promising as it relates to future tenders and opportunities that are coming up related to subsea flexible pipe.

Our next question is going to come from the line of Doug Becker with Capital One.

Coming into the year, you were talking about $100 million of annualized cost reductions. Your comments today suggest there might be more to come. Where do we stand relative to the $100 million target? Just at a high level, what might the next iteration of structural cost savings include?

Yes. Thanks, Doug. This is Rodney. I appreciate you giving us a chance to really brag on the team's effort over the last 12 to 15 months since we initially put out that $100 million cost saving target. So when we put that out, we laid out a lot of the factors that was going to be driven by and also discussed some of the headwinds that were really in front of us over the next 12 months in terms of tariffs and other inflationary factors. And we mentioned at the time as well that at some point during 2026, those cost savings would start to overlap some of the headwinds on the cost inflation.

And really, as we made it through the second quarter, we started to get slightly more positive in terms of the cost savings outrunning some of the inflation that we've seen over the last 12 months. So really good efforts by the team. And you continue to go see that in several areas just with the operational efficiencies that are driving better results throughout many parts of our business.

Incremental to that, just with some of the hard work and facility utilization analysis that we've done over the last 6 months to 12 months, you see that we sold about $45 million worth of real estate and buildings. So team has put a lot of work in. And as we look to the second half of the year, I think we still have more room to run in terms of taking those same programs from a simplifying and standardizing certain business processes, better leveraging our scale and then just operationally to what Jose mentioned in some of his prepared remarks, just operationally efficiently -- efficiency, getting better at everything that we do. So I think the second half of the year and into '27, we're going to continue to go find more really kind of through that tranche of $100 million, not at a point where we kind of set a next target, but that's just kind of in our DNA, continuing to go drive efficiencies.

And I would now like to hand the conference back over to Jose Bayardo for closing remarks.

Thank you, Michelle, and thank you, everybody, for joining us this morning. Look forward to talking to everybody again in October.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.

Good day, and thank you for standing by. Welcome to the First Quarter 2026 NOV Inc. Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of Investor Relations. Please go ahead.

Welcome, everyone, to NOV's First Quarter 2026 Earnings Conference Call. With me today are Jose Bayardo, our Chairman, President and CEO; and Rodney Reed, 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 U.S. GAAP basis, for the first quarter of 2026, NOV reported revenues of $2.05 billion and a net income of $19 million or $0.05 per fully diluted share.

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 Jose.

Thank you, Amie. Good morning, everyone, and thank you for joining us. The first quarter of 2026 unfolded against a rapidly changing backdrop due to the conflict in the Middle East. And I'd like to start by thanking our team, particularly those in the region, for keeping each other safe while doing everything possible to support our customers in a very chaotic environment.

Despite the disruption, NOV achieved its lowest ever total recordable incident rate and lost time incident rate during the quarter. As I mentioned on our last call, HSE performance reflects pride, accountability and ownership in operations, which translates into higher quality, reduced downtime and better service for our customers.

The actions of our people and the results they achieved demonstrate how deeply these values are embedded in our culture. Turning to our financial results. NOV generated revenue of $2.05 billion and adjusted EBITDA of $177 million during the first quarter of 2026.

As previously disclosed, we estimate that the conflict in the Middle East negatively impacted revenue by approximately $54 million and EBITDA by $32 million. Bookings in our Energy Equipment segment for the quarter totaled $520 million. While this resulted in a book-to-bill of 80%, orders improved by $83 million year-over-year and represented our strongest first quarter order intake since 2019.

We also had strong bookings in our fiberglass and drill pipe businesses within our Energy Products and Services segment, where we do not report book-to-bill and backlog figures. As the conflict escalated during the quarter, the most pronounced impacts were felt across our capital equipment and aftermarket operations, where the movement of goods, access to customer sites and overall logistics became increasingly constrained, significantly affecting quarter-end deliveries.

Our service and rental businesses, particularly those supporting land-based operations, experienced substantially less disruption. For our capital equipment businesses, the primary challenges were associated with shipping finished equipment into and out of the region. As shipments were rerouted through alternate ports, transit times were extended and freight costs increased materially. In addition, safety concerns and access limitations prevented customers from visiting facilities or project sites to participate in typical factory acceptance testing and inspections for manufactured equipment and goods, resulting in delayed delivery schedules.

Supply chain constraints became more pronounced as we progressed through the month of March. We experienced delays in receiving raw materials and critical components and the unpredictability of logistics introduced additional costs and complexity. These disruptions impacted manufacturing throughput, thereby reducing absorption and contributing to higher costs.

In our aftermarket operations, the challenges were somewhat different but equally impactful. We experienced difficulties getting spare parts into the region, while safety concerns affected customers' willingness to pick up or accept orders. At the same time, customer activity was curtailed and certain projects were suspended, deferring demand for parts and limiting service and repair activity. Offshore projects, in particular, faced disruptions and rig-related slowdowns.

Together, these factors created meaningful disruption in the final month of the quarter. Importantly, much of this impact was timing related, and in many cases, deliveries have now occurred and others have been delayed rather than canceled.

Freight costs increased significantly during the quarter, at times by as much as 3 to 4x normal levels and combined with lower manufacturing absorption contributed to higher operating costs. Outside of the affected region, our business has performed well and in line with expectations.

We remain focused on improving operational efficiency in what continues to be an inflationary environment that may be further pressured by the ongoing supply chain disruptions and knock-on effects to the petrochemical complex.

Rodney will cover second quarter guidance, which assumes conditions in the Middle East remain consistent with where they are today, meaning the ceasefire holds, but the Strait remains closed, which continues to constrain logistics and increase both the time and cost of doing business.

While that is our current assumption, the situation remains extremely fluid. Logistics have improved since the height of the conflict, but trade routes are more complex, more costly and carry higher risk of delays. While we cannot predict how conditions will evolve, our supply chain and operations teams have significant experience managing through disruption and are taking action to mitigate risk and serve our customers.

Our operations in the Middle East serve not only as a regional hub, but also support customers across both Eastern and Western Hemispheres. One of the actions we're taking is to reroute manufacturing for customers outside the region to facilities elsewhere in our global network.

While this helps mitigate risk, it may not necessarily improve delivery times and it adds additional cost. No one can predict when the conflict will end, so we cannot reliably forecast the second half of the year. What we can say is the market is increasingly primed for a recovery. And if the conflict ended and the Strait reopened in the near term, we could still conceivably achieve our prior expectation of full year 2026 results that are broadly in line with 2025.

With that context, let me now step back and talk about what we're seeing more broadly in the market. Coming into the year, the prevailing view was that the global oil market was oversupplied by 2 million to 3 million barrels per day. This was driven by a wave of non-OPEC production growth from projects sanctioned during the COVID period, combined with the unwinding of OPEC+ production curtailments.

As a result, we expected 2026 would be another challenging year as the industry worked through the supply overhang. Against that backdrop, in North America, operators were expected to remain disciplined and focused on maintaining production levels efficiently while returning capital to shareholders. In the Middle East, activity was expected to gradually improve, supported by the reactivation of suspended rigs in Saudi Arabia and continued momentum in the UAE, Kuwait and Oman.

Offshore momentum was expected to build steadily with an increasing need for long-cycle deepwater development to offset plateauing short-cycle North American supply as the primary source of incremental production in the coming years. That was the setup just a few months ago.

Today, the world looks dramatically different and the market outlook has shifted materially. The conflict in the Middle East has resulted in approximately 10 million barrels per day of shut-in production and damaged key energy infrastructure, shifting the market from a modest surplus to a meaningful deficit and requiring drawdowns of strategic reserves worldwide.

While there is no clear time line for when trade flows will normalize or when production can fully return, it is increasingly clear that even after the conflict is resolved, the market will remain undersupplied for an extended period of time and will require a significant increase in investment. One industry analysis suggests that approximately 10,000 wells across the region are currently offline with up to 3,000 requiring meaningful intervention to return to normal operations and roughly 1,000 potentially requiring major workovers or recompletions following extended shut-ins.

Not all this production may return. Depending on the duration of the disruption, there is the potential for permanent capacity loss ranging from approximately 500,000 to as much as 2.5 million barrels per day. Restoring this production will require meaningful activity beginning with intervention and workover operations, followed by incremental drilling to replace lost capacity.

In addition, depleted strategic reserves will need to be refilled and energy security concerns are likely to reinforce the need for exploration, development and production capacity.

Many countries are likely to expand or build new reserves over time, creating an additional source of demand. At the same time, reserve lives have declined meaningfully during the last decade, and current conditions likely serve as an additional catalyst for operators to replenish and increase reserves, reinforcing the need for increased exploration and development activity.

While the conflict has clearly created near-term disruption, we believe it will also accelerate and amplify a meaningful new recovery cycle. The work required to restore production alone will drive elevated levels of activity over multiple quarters and potentially longer depending on how conditions evolve.

However, the implications extend well beyond the Middle East. We believe the combination of supply disruption, tighter market conditions and a renewed focus on energy security will increase the urgency for investment across the industry, not only to restore production, but to also secure reliable and diversified sources of supply.

For much of the past decade, the industry has operated with constrained investment limited exploration and reduced greenfield development. The industry became highly efficient and focused on doing more with less. As a result, reinvestment in assets declined and attrition occurred across the global equipment base.

Even prior to the conflict, we saw areas where we expected that a modest increase in activity would require a disproportionate increase in investment in the service complex. However, with a prevailing view just a few months ago, it appeared that the industry would have time to gradually increase investment over the coming years as markets rebalanced. That is no longer the case.

And for NOV, this change is particularly meaningful. As a provider of capital equipment and technologies used to drill, complete and produce oil and gas, our business is directly tied to the level of investment across the industry. After years of underinvestment, the industry is not starting from a position of excess capacity.

Demand will not inflect overnight, but the events of the past 2 months have accelerated and amplified the need for investment, and we are beginning to see early indications of this in our customer conversations. In North America, operators remain disciplined, but some are accelerating plans to complete drilled but uncompleted wells that they had previously planned to defer, while others are backing away from plans to release rigs and some will add rigs.

The North American service complex is already tight, having experienced significant attrition and the export of excess equipment to international markets. While pricing will need to improve before service providers and drilling contractors materially increase capital spending, the conditions for that to occur are increasingly falling into place.

In international land markets, investment had already begun to increase, driven by the emergence of unconventional development and a growing focus on energy security. As mentioned, a healthy amount of the equipment supporting this growth has come from underutilized assets in North America, but the availability of these underutilized assets has largely been exhausted, meaning new build equipment will be required for higher levels of activity. Once conditions normalize in the Middle East, we expect a meaningful increase in activity associated with restoring curtailed production, followed by a resumption of longer-term development programs, including unconventional resource development.

We also expect continued growth in other international markets, including Argentina, where our revenue increased 14% year-over-year and Venezuela, where we have already seen a step change in demand for our progressive cavity pumps and are now fielding an increasing number of customer inquiries for additional tools and equipment.

In offshore markets, we continue to see the early stages of sustained up cycle, supported by improved project economics driven by standardization, industrialization and technology. These factors have materially lowered breakeven costs, making long-cycle offshore developments increasingly competitive and positioning them as key sources of incremental supply.

We have seen steady growth in demand for offshore production-related equipment, and we expect and are preparing for that trends to accelerate. Consistent with that view and our focus on leaning into high-return growth opportunities, we recently approved a $200 million expansion of our subsea flexible pipe manufacturing facility in Brazil.

This investment is intended to address what we believe is developing capacity shortfall in the industry as offshore activity increases. Bookings for our offshore production-related equipment remained healthy in the first quarter, supported by a large subsea flexible pipe order for Brazil and a large FEED study associated with the complex harsh environment FPSO, reflective of increasing confidence in the long-term market outlook.

In offshore drilling, our customers are seeing an increasing pace of contracting activity, along with a meaningful increase in the duration of those new contracts. We now expect the number of drillships under contract in 2027 to reach the highest level since 2015. Higher levels of future activity drive reactivations and upgrades such as large reactivation project we recently received for a rig going to the North Sea and drives additional recurring spare part sales. While offshore project time lines are longer and more complex, we believe the outlook for increased activity has become even more compelling.

Energy security concerns are increasing the urgency to advance offshore developments, which offer scale, longevity and better economics. Additionally, we are seeing operators beginning to increase exploration budgets and accelerate development activity, including brownfield expansions that leverage existing infrastructure to efficiently increase production.

And our pipeline of opportunities is expanding, consistent with improving industry forecasts for new project FIDs. As a result, we expect an acceleration in deepwater investment and project activity over the coming years.

Looking ahead, while near-term conditions remain fluid, the broader setup is becoming increasingly constructive. We remain focused on disciplined execution, improving operational efficiency, expanding margins and delivering for our customers as we navigate a dynamic environment. The near term will continue to be influenced by the situation in the Middle East.

However, when conditions stabilize, we expect delayed activity to resume and underlying demand trends to become more evident. The industry is entering a period of increased activity and reinvestment to restore production, rebuild capacity and meet future demand. NOV is extremely well positioned for this environment.

Our global footprint, intentional and diverse portfolio and strong market positions will provide meaningful earnings leverage to improving market conditions over time. With that, I'll turn the call over to Rodney.

Thank you, Jose. Consolidated revenue for the quarter was $2.05 billion, a decrease of 2% year-over-year. Net income was $19 million or $0.05 per fully diluted share. Operating profit was $47 million, which included $37 million in other items, primarily related to a noncash stock compensation charge, severance and facility closures.

Adjusted operating profit was $85 million or 4% of sales and adjusted EBITDA totaled $177 million or 9% of sales. The conflict in the Middle East resulted in delayed shipments of capital equipment and spare parts and increased operating costs through higher freight expenses and less absorption at our manufacturing facilities, impacting our first quarter revenue and EBITDA by an estimated $54 million and $32 million, respectively.

As we move into the second quarter, our focus remains on the safety of our team and supporting our customers as we work through the delivery of key equipment, parts and services. Adjusting for the estimated impacts from the Middle East conflict that I just mentioned above, year-over-year revenue would have been flat, supported by strong demand for our offshore production equipment, high-performance drill bits and increasing adoption of our digital services, offset by lower global drilling activity levels. First quarter margins were negatively impacted by a $30 million increase in tariff costs year-over-year and a lower mix of aftermarket revenue due to the completion of certain large reactivation projects in the first quarter of 2025.

We're focused on improving margins, both through accretive top line growth with our Energy Equipment segment achieving 4 straight quarters of year-over-year revenue growth and reducing our cost structure. Let me focus on cost reductions by highlighting our strong efforts to streamline our businesses, increase efficiency and drive better margins and profitability.

Since the first quarter of 2025, we've reduced global headcount by 8%, exited over 40 facilities, established a global service center in Kochi, India to better leverage the use of shared services and increased our investment in IT systems to improve efficiency of operations and support functions.

As we mentioned previously, through the first few quarters of these initiatives, tariff costs, upfront IT investments and inflationary pressure in areas like medical costs and certain raw materials are largely offsetting these cost reductions. As we progress through our cost-out program, we will realize additional cost savings and excluding impacts from the Middle East, expect our efforts to begin to more than offset the tariff and other inflationary costs beginning in the second half of 2026.

We continue to execute on our return of capital program. During the quarter, we repurchased 3.5 million shares for $67 million and paid dividends of $33 million, which reflected our announced 20% increase in the quarterly dividend. We also extended our $1.5 billion revolving credit facility by 1 year through 2030.

Over the past 8 quarters, we've returned over $900 million to shareholders through dividends and share repurchases. During the second quarter, we plan to provide shareholders with a supplemental dividend to true up our 2025 return of capital program, where we committed to returning at least 50% of excess free cash flow. Additionally, we filed a claim for a refund associated with the Supreme Court's ruling on IEEPA tariffs. Our first quarter results do not reflect the benefit for this potential refund, and we have not factored the refunds into our guidance.

Capital expenditures for the year, including our investment in our flexibles facility in Brazil, should be between $340 million and $370 million. We continue to expect to convert between 40% to 50% of 2026 EBITDA to free cash flow with generation of cash ramping through the remainder of the year.

Moving to our segments. Starting with Energy Equipment. First quarter revenue was $1.19 billion, an increase of 4% from a year ago, led by continued strength in our offshore production-related businesses. EBITDA for the first quarter was $131 million or 11% of sales.

EBITDA margins compared to the first quarter of 2025 were negatively impacted by a lower mix of aftermarket revenue, which I'll cover in more detail, and higher costs from disruptions in the Middle East. Capital equipment sales accounted for 63% of the segment's revenues in the first quarter of 2026, growing 16% year-over-year, led by strength in our subsea flexible pipe, process systems and marine construction businesses.

Aftermarket sales and services, which accounted for the remaining 37% of energy equipment revenue, experienced a 12% reduction year-over-year, primarily the result of certain large reactivation projects completed in the first quarter of 2025 and the negative impact of disrupted deliveries and reduced offshore rig activity in the Middle East.

Capital equipment orders for the first quarter were $520 million, resulting in a book-to-bill of 80% for the quarter and an ending backlog of $4.23 billion. Orders during the quarter were led by subsea flexible pipe awards in Brazil and Europe, a semisubmersible rig reactivation project in the North Sea and a large FEED study for a harsh environment turret system.

Offshore activity outlook, bid pipelines and customer conversations remain constructive, and we continue to expect full year 2026 book-to-bill to be near 100%. Our subsea flexible pipe business continued its outstanding performance, achieving record quarterly EBITDA for the third consecutive quarter. Margins improved, driven by strong operational execution and progress on higher quality backlog and our quarterly book-to-bill is over 100%.

Reflecting the strength of offshore development, demand for subsea flexible pipe has been exceptionally strong, exceeding 100% annual book-to-bill for each of the past 4 years and extending our backlog into 2028. Our process systems revenue was slightly below last quarter's record level and up more than 50% compared to the first quarter of 2025, reflecting robust activity in offshore production and onshore international gas markets.

Record EBITDA for the quarter was supported by a healthy backlog and solid execution. Orders during the quarter included offshore processing equipment and 2 CO2 treatment projects involving gas dehydration and membrane separation. The Middle East is an important region for this business and FIDs for several projects could see some temporary delays. However, we expect demand for gas processing systems to remain strong in the region as well as in other international and deepwater markets, where 4 FPSOs have reached FIDs so far this year with the industry forecasting 6 to 8 additional FIDs for the remainder of 2026.

Revenue from our drilling capital equipment business declined around 10% year-over-year, resulting from high progress in the prior year on a large 20,000 psi BOP project that was not fully offset by higher revenue from new build land and jack-up rigs in Saudi Arabia.

During the quarter, the business was awarded a contract to support a semisubmersible reactivation, including mud systems, a crane and a BOP stack. Our Marine and Construction business revenue increased in the high teens percentage compared to the first quarter of 2025, driven by higher revenue from cranes as well as pipe and cable lay systems, partially offset by lower activity related to wind turbine installation vessels.

Demand for cranes from multipurpose support vessels remains high, which should drive additional orders over the coming quarters. Tendering activity for cable A vessels also remains active, and we still see the potential for a second half WTIV order with the industry forecast continuing to suggest a shortage of future installation capacity.

We believe that the disruption to energy markets tied to the conflict in the Middle East is renewing urgency around energy security and supply diversity, which will drive demand for all sources of energy. Revenue for intervention and stimulation capital equipment declined approximately 20% year-over-year due in part to delayed wireline and coil tubing equipment deliveries to customers in the Middle East, where we were awarded coiled tubing data acquisition hardware and software packages and continue to see broad-based opportunities for our pressure control products.

While North America-related demand was soft through 2025 in the first quarter of 2026, quoting activities recently increased for pressure pumping capital equipment. And during the quarter, we booked several coiled tubing equipment orders supporting more efficient operations for longer laterals.

Turning to the aftermarket portion of the Energy Equipment segment. Revenue from our drilling equipment aftermarket business was most acutely impacted by the Middle East conflict due to suspended rig operations, logistical challenges and delays in upgrade projects.

Revenues were down mid-teens percentage year-over-year and down 12% sequentially. In addition to the impact from lower Middle East activity, the year-over-year decrease is partially related to lower service and repair work due to timing of active projects.

Encouragingly, spare parts bookings remained robust during the quarter, higher than their 4-quarter rolling average. Given the logistics delays in booking activity, spare parts backlog is the highest level it has been for the last 7 quarters. The business is also executing on roughly 35% more projects compared to this time last year. We expect aftermarket activity to pick up slightly in the second quarter and more materially in the second half of 2026, partially dependent on the timing of the resolution of the Middle East conflict.

Revenue from aftermarket parts and services for intervention and stimulation equipment was essentially flat sequentially and down mid- to upper single-digit percentage year-over-year.

Compared to the first quarter of 2025, wireline and coiled tubing-related aftermarket rose slightly, more than offset by lower North America pressure pumping activity. However, we're seeing increased inquiries related to reactivations and consumable parts.

For the second quarter, we expect Energy Equipment segment revenue to be down 2% to 4% year-over-year with EBITDA in the range of $135 million to $155 million. Moving on to the Energy Products & Services segment.

Our Energy Products and Services segment generated revenue of $897 million, down 10% from the first quarter of 2025. Results were negatively impacted by disruptions in the Middle East that delayed deliveries of capital equipment. Beyond those delays, segment results reflected lower levels of global activity, which more than offset market share gains in our drill bit business and increasing adoption of our digital services.

Adjusted EBITDA was $96 million or 10.7% of sales. Lower volumes, combined with the absorption impact at our manufacturing facilities, higher tariff costs and inflationary pressures affecting raw materials drove larger-than-normal decrementals. As I previously mentioned, we remain focused on growing market share and reducing costs through rightsizing operations and consolidating facilities to improve profitability.

For the first quarter, the sales mix within Energy products and services was 54% service and rentals, 29% capital equipment and 17% product sales. Revenue from services and rentals declined in the mid- to upper single-digit percentage range year-over-year as lower global activity more than offset drill bit market share gains in North America and growing adoption of NOV's wired drill pipe services, including Downhole Broadband Solutions.

Our ReedHycalog business continued to gain market share in the U.S., growing revenue 8% compared to a 7% decline in U.S. rig count since Q1 2025. The business remains focused on supporting our customers and advancing bit performance while also mitigating higher tungsten carbide costs, which have increased by approximately 400% since the end of 2025.

In addition to drill bits, our downhole tools, ESPs and production chokes have components that include tungsten carbide. Our teams are focused on mitigating higher costs through sourcing, pricing and operational actions. Revenue from our digital services business expanded significantly compared to the first quarter of 2025 with strong operational performance from our wired pipe services.

Based on customer interest, we expect to see continued growth and adoption of our services that provide real-time broadband data transmission from the bottom of the drill stream. Rentals of our downhole technologies were impacted by lower activity in North America and Saudi Arabia, but remain mostly steady across other markets as softer activity was offset by adoption of our new technologies, including our Agitator RAG and PosiTrack torsional vibration tools in Asia, the Middle East and offshore Brazil.

Within our wellsite services business, increased rentals of our TUNDRA MAX mud chiller systems and solids control equipment were offset by lower activity in the Middle East and Latin America. Additionally, the business was awarded a contract to deploy iNOVaTHERM thermal treatment technology in Guyana, supporting more efficient drilling cuttings management.

This will be our first deployment of the technology in Latin America. Our tubular inspection business decreased mid-single-digit percentage from lower level of activity in North America and a temporary slowdown in our Tuboscope operations as activity in Argentina shifts from Comodoro to the Vaca Muerta. Further development of our TK-Pone premium thermal insulated coating partly offset lower coating activity in international markets, which we expect to pick up in the second quarter.

Sales of capital equipment declined in the low double-digit percentage range year-over-year, primarily due to the Middle East conflict that delayed deliveries of composite pipe.

These delayed deliveries, along with lower industrial activity and the timing of composite projects for FPSOs resulted in a significant decline in revenue versus the prior year for our fiberglass business. While these headwinds weighed on the quarter, the business achieved record quarterly bookings driven by demand of our produced water transport projects, fuel handling and FPSO-related applications.

Given the strong bookings, along with production and delivery delays related to the Middle East conflict, backlog is at the highest level in 10 quarters. We expect second quarter results to meaningfully improve and revenue in the second half to further increase compared to the first half, supported by robust demand and execution on the strong backlog. Drill pipe orders were also strong, outpacing the average quarterly bookings for the past 3 years with offshore demand leading the bookings mix.

These bookings follow strong orders in the second half of 2025, which contributed to drill pipe sales increasing in the mid-teens percentage range year-over-year. Backlog for the business sits at its highest level in 2.5 years, and we expect strong backlog conversion in the second quarter.

The segment's product sales declined in the mid-teens percentage range year-over-year as reduced drilling activity in the Middle East and Asia decreased demand for certain drilling tools for the quarter. However, we did receive a sizable order for drilling motors destined for Turkey that should support sales later in the year, and we have good visibility into the bulk shipments that typically happen in the second half of the year. For the second quarter, we expect Energy Products and Services segment revenue to decrease between 6% to 8% year-over-year, with EBITDA in the range of $100 million to $120 million. With that, I'll turn the call back to Jose.

Thank you, Rodney. In closing, while the first quarter presented challenges, it also marked a significant shift in the market environment. We believe a meaningful new capital equipment cycle is unfolding, which will cause NOV's technology, equipment and expertise to be in great demand over the coming years.

We are confident in how we are positioning the company for the future and remain intently focused on delivering long-term value for our shareholders. To the NOV employees listening today, thank you for your dedication and commitment to safety and execution. With that, we'll open the call up to questions.

[Operator Instructions] Our first question comes from Arun Jayaram with JPMorgan Securities.

Jose and Rodney, I was wondering if you could maybe talk a little bit about the flexibles business at NOV. You mentioned how you're doubling capacity over the next several years in Brazil. But I'd love to get a little bit of thoughts on where that business is today, perhaps from a top line basis and how you see that kind of progression over time as you're increasing capacity there.

Yes, thanks for the question. Yes, our subsea flexible pipe business has had extremely strong performance, certainly coming out of the pandemic. And really, as Rodney touched on in his prepared comments, continues to crank out really good results, really strong bookings. The outlook is very, very favorable. And as we sit here today and we're taking in orders, we're looking at lead times that are already extending into 2028 for some projects and some of our customers. And then if we look further into the future in terms of what we see related to future opportunities, Brazil will continue to have a tremendous amount of growth.

They're pretty transparent in terms of providing directive guidance to the public in terms of what they see forthcoming related to their future activity. And if anything, things continue to ramp up. So it's not only just continuation with new project development, but we're also entering a time period in which -- the existing infrastructure that's out there is aging, and we're on the cusp of a big replacement cycle for offshore Brazil in addition to more new capacity that's needed.

Additionally, we talked about the solution that we've been working on for CO2 corrosion resistance that we're feeling very good about. We think we'll need some incremental capacity for that. And then as we look elsewhere around the world, as we've touched on, we coming -- even last quarter, we were talking about steady improvements and building momentum in the offshore space is sort of the logical source of incremental supply to displace what North America has done over the last year in terms of supplying that incremental barrel of supply to meet demand that continues to grow.

All the stores are aligning as it relates to economics, need, opportunity in the deepwater environment and consistent with what we're hearing from our customers. And not only is it Brazil that has this replacement cycle that's forthcoming, you have some of that in other markets, but more importantly, you also have a number of markets where you have the combination of both greenfield development as well as big plans related to infill projects to leverage existing infrastructure from a production facility standpoint, but they're going to need a lot of additional pipe in order to connect new wells, step-out wells into that infrastructure.

So everything looks really good from a demand perspective. And as we sort of map out our own capacity as well as our competitors, it's pretty clear to us that in a few years, the industry is going to be short on capacity, and we see a great opportunity to step into that and support our customer base.

Makes sense. Jose, guidance was quite clear, but I was wondering if maybe you could just help us understand what you and Rodney are embedding in terms of 2Q in terms of the Middle East impact. In 1Q, you highlighted $54 million of revenue impact and I believe is it $32 million of EBITDA. What are you guys kind of assuming as your base case, understanding there's uncertainty in 2Q?

Yes. Good question, Arun. So as we look at Q2, it's not a matter of taking March times 3 for us. There's a number of puts and takes, including in the third month of the quarter, we tend to have a lot of deliveries that happen towards the end of the quarter for some reason, that's just the nature of the business that people just want to take everything in the last couple of weeks of the quarter. But also -- and more importantly, the disruption, while it's still meaningful and significant in terms of its impact on the time lines and the costs associated with logistics, things are much improved from the height of the conflict, right? What we're primarily contending with right now is the closure of the Strait.

And so our assumption in Q2 is that the Strait remains closed. However, conditions on the ground otherwise are in line with what we're seeing right now, which again is the resumption of trade activity kind of getting a bit more steady and a little bit more of a constructive environment that we saw at the peak of the conflict.

And so you put all those pieces together and what we're looking at in Q2 is a slightly larger impact than we saw in all of Q1, but not a huge difference.

Our next question comes from Jim Rollyson with Raymond James.

A lot of interesting commentary to open there, Jose. I guess as you see it from a -- stepping back to a high level here, as you see things unfolding now and what conversations you've had with customers so far, how are you -- you mentioned increased activity, higher -- amplifying that activity kind of falling out of all this once it settles down.

Maybe just a little color around what conversations are you having? How broad is that? And just how are you expecting this to translate? Because one of the things you've mentioned over the last several quarters is just the fact that NOV has not been firing on all cylinders. It's kind of shifted around from one market to another. And it sounds like what you're saying and what others are saying kind of implies maybe a more broad-based recovery over a period of time. And I'm just trying to fit NOV into that equation.

Yes. Thanks for the question, Jim. I think all of that was really well phrased. And to your point, you back up a quarter ago and as we were sitting here, we were feeling very good about the mid- to long-term outlook. We anticipated that 2026 was going to be another somewhat rough year with the supply overhang that was in place.

But we've seen several years now of improving fundamentals within the deepwater space that has driven the growth and the improvement in margins within our EE segment, and that's really just been the primary component of a very diverse portfolio that has been in a healthy market environment.

The other big chunk of our EE business, which is our rig business has been in a little bit of a difficult environment over the last 12 to 18 months as our primary customers in that space were contending with the white space in the offshore environment as the industry was a little bit backed up waiting on FPSOs to come out of shipyards and get put in place in order to commence drilling campaigns.

We saw a wave of those FPSOs launch at the end of the year with about 15 of those coming into the market. And that has now resulted in what we were expecting, which is a massive increase in the number of tenders to those offshore drilling contractors and a substantial increase in the average duration of those contracts.

So that was sort of the setup for later this year and into '27 that we're really excited about. In the interim, we were expecting North America to remain kind of flattish with significant discipline and then actual potentially for some downward flow due to the supply overhang.

If you fast forward to today, that supply overhang is completely gone. We're in an extreme deficit. There is going to be a massive need to accelerate activity in the Middle East to bring things back online, plus to get back on with the plan that they originally had, which was to steadily bring production back up and bring activity back up, particularly in Saudi with bringing back the suspended rigs.

We already had and continue to have really good momentum as it relates to development of unconventional resources within the broader Middle East as well as in Latin America. That is continuing, and we expect it to be amplified and move forward with more of a sense of urgency once things settle down.

So look, first and foremost, we hope for a very quick resolution to the conflict in the Middle East, most importantly, so that our employees, our customers, our vendors, our other partners and stakeholders can get back to life as usual in a safer environment. But whether we like it or not, I think the world is very different today than it was 3 months ago, and that's actually a much more constructive market for NOV being primarily a provider of capital equipment and efficiency-enabling tools to enable the production of energy around the world.

It's going to be very, very high demand. And I think late this year and into 2027, as you touched on, we could finally be in that environment where all 8 cylinders of NOV's engine can fire and we can demonstrate significantly higher earnings power than what we've been able to show in a really limited market over the last several years. So we're looking forward to demonstrating that capability. The team has worked incredibly hard over the last several years to position us for that environment. And I think that's getting very close.

Got it. Appreciate all that color. And if I kind of transition that into the cost and margin outlook, you guys have faced a lot of different things over the last few years and still been able to kind of ramp up margins up until we hit the kind of air pocket here and then the Middle East conflict.

You mentioned and Rodney mentioned normalizing tariffs with your cost-out program in the second half of the year, but we also face now this Middle East impact. I'm just curious how many lingering impacts might fall out from that. And as we get into '27 and beyond, how you think about margin progression given all the kind of moving changes around the cost side of the equation?

Yes. Thanks, Jim. This is Rodney. So really wanted to highlight what the team has done, the hard work from the team on cost reductions throughout the last 12 months. So we mentioned in the prepared comments, some of that hard work. So headcount reduction down 8%, facilities down about 40, the number of facilities.

We've been working through some business process improvements, including some shared service center opportunities in India. And so all of that has really improved our cost structure. Now some of the headwinds that we've faced over the last 12 months have offset most of that in terms of tariffs and some of the other inflationary items that you mentioned.

So margins as we look out to the second half of '26 and into '27, let me take the EE segment to start with. So 4 straight years there, '21 to '25 of top line growth and margin improvement. And that's really reflective of the strong portfolio there. So if you look at some of those areas with the business units with technological differentiation that have the ability to have some more pricing leverage in the markets that they serve has really lifted the margins of that business.

Jose mentioned in 2025, like our rig aftermarket business with some of the white space in the market did not have as much margin impact in '25. As we look at that going into the second half of the year and into '27, we see a meaningful impact from our rig aftermarket business going forward.

And then from an EPS side of the segment, similar. So some good market share gains there when you look at our ReedHycalog business, 8% up on drill bits in North America versus a 7% decline in the rig activity and some of the highlights we mentioned on our digital services. Over the last 12 to 18 months, as the U.S. market has declined from an activity perspective about 15%, that's not been as much of a pricing-rich environment there.

But I think as we look at the new technologies and what we're putting into the market to create more efficiencies on longer laterals, those are the areas that we have the ability to get some better pricing leverage. So the cost out, good hard work by the team. That's what we can control. And then I think the setup from the market from what we've seen already on the EE side on production equipment, what we're seeing in the aftermarket business and where EPS is heading leads to better margins in the second half of '26 and '27.

Our next question comes from Marc Bianchi with TD Cowen.

Rodney, when you were talking about the tariffs, you didn't mention the new proclamation from the administration that's going to sort of change the way 232 works is that -- should we take that to mean that you guys don't see that being a big change for you?

Well, let me give a couple of comments on tariffs, starting with the positive news. So in terms of the opportunity for the IEEPA refund, as you know, during February, the Supreme Court ruled the IEEPA tariffs unlawful. And so we've started to file some claims there with respect to that part of the process.

So that's not in our Q1 numbers and not in our Q2 guidance, but kind of round numbers for what we paid in for IEEPA, that's about $40 million. Now the administrative process of filing those returns or those claims, working through that process, we'll see what the end result ends up being, but that's kind of a general ballpark.

The other 2 changes, as you mentioned during the quarter, Mark, that happened were some of the exclusions from a 232 perspective, which has kind of a mixed impact to some of our businesses. Some of our business, that's a benefit. For a couple of our businesses, that's a detriment.

And replacing some of the IEEPA tariffs, as you know, is the Section 122 tariffs. So I think when you put those together from a go-forward perspective, we mentioned in Q4, our tariff expense is about $25 million. We mentioned in Q1, we expected that to slightly increase, which is what we saw.

And I think going forward, tariffs being in that sort of $30 million range, which is reflected in our Q2 guidance is a good marker. So kind of some of those changes that you referred to during the quarter, one on the refund and then two, on the changes in 232, the 232 has probably got just a touch of a slightly incremental cost there.

Okay. That's very helpful. The other one was just on second quarter here. So the war impact we're saying is a little bit more than -- on a dollar basis than it was in 1Q, recognize that we've got sort of 3 months of disruption.

So on a run rate basis, it's less. But is there -- there were some deferral of shipments from 1Q into 2Q? And then I think you mentioned there's maybe some further deferral of some other shipments from 2Q into 3Q perhaps. But just what's sort of the run rate of the business looking like? Like is there a certain amount of help that 2Q is getting from those deferrals? Or is it sort of a wash because there's some more stuff getting deferred into 3Q?

Mark, I would say it's effectively a wash because, yes, as you've astutely assumed, you do have the benefit of some of those delayed deliveries from late Q1 that then fall into Q2. And then we're going to see delays from a logistics standpoint of a lot of things going forward.

And in prepared remarks, I also talked a little bit about how we were rerouting some of the manufacturing to reduce risk to other facilities around the world, which actually extends lead times in many situations. And so there are some things that we're just looking at a knock-on to where there's a couple of areas where things will kind of continue to slide out quarter-to-quarter.

And so overall, it should effectively be a wash. But hopefully, we'll find a way to start catching up a little bit as things improve on the ground.

Our next question comes from Doug Becker with Capital One.

Jose, on the last call, you mentioned leaning harder into M&A and organic growth. We saw the announcement about the manufacturing expansion in Brazil. But now we have this underlying shift in the industry. So curious if some of these changes, does that make you more aggressive either on allocating growth capital or for M&A going forward?

Yes. Good question, Doug. Thank you for it. Look, I think as you highlighted last quarter, one of the messages that we wanted to convey is that we were sort of really shifting from a mindset that has been somewhat conservative and somewhat defensive given what the market environment has presented to us over the last several years.

And with what we were seeing in front of us, we wanted to move on toward more of an offensive mindset. And therefore, we talked more about leaning into growth opportunities which we saw in front of us, particularly organic growth opportunities, which we saw some in front of us that were very compelling, including the opportunity to expand that subsea flexible manufacturing facility in Brazil, which we are very encouraged about.

So look, as you can probably tell the way that the market is laying itself out is doing nothing but spurring additional confidence in terms of our outlook and the opportunity set. So we're going to continue to remain extremely disciplined, particularly from an M&A standpoint, but we want to be opportunistic and certainly lean hard to those Organic growth opportunities that are out there, and we expect more to emerge as the market continues to tighten. So very encouraged on that front.

Sounds good. And I thought it was very encouraging that the full year book-to-bill is still expected to be near 100%. Curious if you think there is any impact to orders in the first quarter from the Middle East conflict. I know tough to gauge, but just trying to get a sense for how orders might progress as the year goes forward, assuming the conflict ends relatively soon?

Yes. Another good question. I think there are always puts and takes, right? When you have something that is kind of a shock to the system as war breaking out always is, that always lends a little bit of uncertainty, at least for a short period of time. But I think that our customer base has quickly gotten over that shock and awe of this major disruption. And I think confidence just continues to build into the system related to being an environment in which we're going to see a sustainably higher oil price. That will drive more activity, more urgency and I think we'll start pulling FIDs forward.

So as we touched on in the prepared commentary, I think Rodney mentioned that industry outlooks have gone from maybe 10 FPSOs coming into the year in terms of expectation for 2025 to '26, that on average has gone up by a factor of 2 -- or not a factor, by account of 2.

Additionally, as we look at the number of opportunities that we are pursuing, at least offshore opportunities, we're seeing a much wider set of customers that we're talking to this year versus a year ago. We're seeing more LNG opportunities in Asia. We're seeing time lines get a little bit more firm. So look, to be determined exactly how things play out, but hopefully, you're getting the sense that we're getting more confident about the order outlook going forward.

Our next question comes from David Anderson with Barclays.

You talked about a new capital equipment cycle starting up here. It's been a long time since we've seen a capital equipment cycle. The last one, I suspect looks a lot different than the one we're about to enter into here. You talked about orders, orders -- you gave the guidance for this year. So I guess I'm really kind of thinking about '27 and '28.

As we kind of get in there, what does the new capital equipment cycle mean to NOV? Where are kind of the drivers here that you list? You mentioned FPSOs, but aside from that, kind of what are the kind of the real drivers here in terms of orders over the next few years from a new capital equipment cycle, as you described?

Yes. Good question, Dave, and thanks for that. Look, it's always hard to predict the future. But look, if you look around the world, I think it's pretty clear to see that there has been limited investment across the industry, particularly across the asset base of the service complex.

And we've effectively been in a market that went from a market that had excessive investment to one where the market had slowly been getting back into balance and as activity has declined. So really, it's been a 10-year process of the market effectively normalizing and getting into balance.

And as I mentioned, quarter 2, 3 quarters ago, we were starting to point out that, hey, the market for equipment is tighter than I think most people appreciate. And we thought that with the oil supply overhang that the industry would have ample time to sort of get its legs underneath it and really recognize the issue and start making the appropriate investments.

But I think what's happened here has accelerated that process and has also amplified the process. So look, it's going to start in the way that it usually does. We're going to see pricing and utilization go up for our service company and drilling contractor customers. They will start realizing the benefit of that in terms of cash flow, and they will start reinvesting in their asset bases and understanding where activity is going and what their needs will be.

So look, I don't think it's going to be constrained to any one market. As I touched on, this is an environment where all 8 cylinders get to fire in all of our businesses. That includes all the capital equipment components as well as a lot more demand for all the efficiency-enabling tools and technologies that we bring to bear, whether it's our digital services and solutions or all of what we do across our EPS segment.

They're going to greatly benefit from this as well. So certainly, continuation and amplification of what's been happening from a deepwater standpoint, acceleration amplification of what's happening within the unconventional markets in terms of pull-through need for modern drilling and completion and efficiency enhancing tools and equipment. And then as we look at offshore drilling that's going to be needed in order to support what is happening from an offshore development standpoint.

Look, the marketed utilization of the deepwater fleet is already at around 95%. If you look forward, that's as tight as it has been since that prior cycle. We're going to see customers continue to do what they can to bring other assets back to bear, but there's a very, very limited opportunity set there. The cost to do that is very high.

And that's going to allow them to get more pricing leverage, improve their day rates. And I think there's a chance here that operators could start getting nervous in terms of availability of equipment. I don't want to speculate on a new build cycle offshore, but it's certainly not off the table. Because there are limited opportunities.

I mean that's going to be a few years away, but that conversation is coming up more frequently. In the interim, there are more upgrade and reactivation opportunities, even upgrades of rigs that are already turning to the right in terms of our latest and greatest in terms of digital capabilities or automation and robotics, things like a rapid emergency disconnect systems that significantly reduce BOP sheer times and also a lot of talk with customers about upgrading other rigs to have 1,400 ton hoisting capacity.

So really long way of saying there's material upside to all of our operations. Exactly how far that goes to be determined, but the outlook is pretty good.

In terms of kind of desperation and content discussions, what does that look like in North America right now? It looks to us like things are very, very tight from kind of the attrition and equipment moving out of the U.S. Are you having those conversations yet? Or is it still a little bit too early on the -- kind of you mentioned the unconventionals. I'm just wondering if you're starting to see those -- having those conversations yet? Or is that kind of to be in the coming quarters or whatnot?

Yes. It's early days, Dave, but the conversations are taking place, right? So certainly more conversations related to reactivating the limited stacked equipment that's out there that can come back. Some talk about new capital equipment orders. As Rodney touched on, we saw some demand for coiled tubing equipment within the North American marketplace this last quarter.

So large diameter extended reach coiled tubing already has a little bit of legs to it. And there's certainly more and more talk, a little bit more actually translating or a little bit of that actually translating into orders. But as I mentioned, this is a geography in the global marketplace that has been -- has undergone some really difficult conditions.

We've been in a market environment where everybody has been incredibly focused on being as disciplined as possible. Pricing for the service complex has not been good. They're going to do what they're saying they're going to do. As you've heard during their earnings call so far, they're going to focus on getting utilization up, getting pricing up before they do a massive expansion of their capacity, but I believe that's coming.

Ladies and gentlemen, this does conclude the Q&A portion of today's presentation. I'd like to turn the call back over to Jose for any further remarks.

Great. Thank you, everybody, for joining us this morning. I appreciate the time. Just a couple of comments I want to make in closing. One, first and foremost, we really hope and pray for a very quick resolution to the conflict so that our friends, colleagues can get back to life as normal in -- across the Middle East.

But we're very optimistic about the longer-term -- the mid- to longer-term outlook here. We remain very confident in terms of how we have positioned the company for the future and think that will present the opportunity for us to demonstrate meaningfully higher earnings power over the coming years. So again, I appreciate everybody joining us this morning and look forward to visiting with everybody again in late July.

Thank you, ladies and gentlemen. This does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.

Good day, and thank you for standing by. Welcome to the NOV Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note that today's conference is being recorded.

I will now hand the conference over to your speaker host for today, Amie D'Ambrosio, Director of Investor Relations. Amie, please go ahead.

Welcome, everyone, to NOV's Fourth Quarter and Full Year 2025 Earnings Conference Call. With me today are Jose Bayardo, our Chairman, President and CEO; and Rodney Reed, 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 U.S. GAAP basis, for the fourth quarter of 2025, NOV reported revenues of $2.28 billion and a net loss of $78 million or $0.21 per fully diluted share. For the full year 2025, revenues were $8.74 billion, and net income was $145 million or $0.39 per fully diluted share.

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 1 question and 1 follow-up to permit more participation.

Now let me turn the call over to Jose.

Thank you, Amie, and thank you, everyone, for joining us this morning. I want to start by recognizing and thanking Clay Williams for his leadership and his lasting impact on NOV. Clay served as NOV's CEO for over 10 years, but he helped build and shape this great organization and its incredible culture over nearly 30 years. As CEO, he led this company through some of the most challenging industry cycles while setting a high standard for integrity, perseverance and commitment to all of NOV's stakeholders. NOV is the great company it is today due to his exceptional leadership, and all of us wish him the very best in retirement.

Turning to our results. NOV delivered an outstanding fourth quarter to cap off a solid year, executing well in what continued to be a turbulent market environment. Fourth quarter revenue improved 5% sequentially but decreased 1% year-over-year against a global drilling activity decline of 6%. EBITDA was $267 million, up $9 million sequentially. For the full year, revenue decreased 1% to $8.74 billion, and EBITDA exceeded $1 billion for the third straight year despite a challenging market environment. I'm proud of the way our team performed and pleased by the demonstrated resilience of our diverse portfolio of market-leading technologies.

We achieved a full year book-to-bill of approximately 91% on a 15% increase in revenue out of backlog, and we ended the year with a total backlog of $4.34 billion. 2025 orders were led by demand for offshore production technologies, resulting in our offshore-related backlog growing more than 10% during the year, supported by demand for subsea flexible pipe, offshore construction equipment and processing modules. Strong demand for offshore equipment and solid execution on our backlog more than offset lower demand for aftermarket parts and services from our offshore drilling contractor customers, leading our Energy Equipment segment to post its fourth straight year of revenue growth and margin improvement.

Energy Equipment's strong performance mostly offset a 4% decrease in revenue from our shorter cycle, more North America land weighted Energy Products and Services segment. Rodney will provide more color on operating unit performance, but both segments performed well in a challenging market due to continued efforts to drive additional efficiencies and process improvements. Those efforts enabled us to reach our second consecutive year of converting over 85% of our EBITDA to cash, resulting in $876 million in free cash flow in 2025 and $1.8 billion in free cash flow over the last 2 years.

Today, NOV is entering 2026 in a position of strength. We have strong market positions in almost everything we do, a fortress balance sheet, and we have what I believe is the best team of people in the industry. They believe in our mission to lower the marginal cost of energy production and help deliver reliable, affordable energy to the world. They also take great pride in providing exceptional service for our customers and come in to work every day with a continuous improvement mindset.

While NOV is in a strong position, we see additional opportunities to drive value for our shareholders over the coming years. As we look forward, there are two simple overarching areas of emphasis on which we are focused. One, continue to drive operational efficiencies, and two, lean into the many growth avenues we have in front of us.

NOV has done a significant amount of heavy lifting over the last 10 years, actions that were needed to navigate through the repercussions of the November 2014 oil price war, the global pandemic and the dramatic shift from investments in offshore activity to U.S. shale. Our work included consolidating, repositioning and simplifying our business and improving operational and back office efficiencies. This work continues today with our ongoing $100 million cost out program, multiple facility consolidations and exiting underperforming product lines and geographic markets.

While we are well beyond the low-hanging fruit, we still have opportunities to drive efficiencies, grow margins and increase return on capital, and we are accelerating the pace and increasing the scope of our efforts. As we drive efficiency and productivity gains, they are being offset by lower activity levels, tariffs and inflation. Still, we are driving more change to make the organization better every day, and our work is positioning NOV to outperform over the long run. There are many indications of the progress we are making, with a number of our operations achieving record performance, some of which Rodney will highlight.

We also see progress in numerous KPIs we measure and benchmark in our businesses, including cost of quality, which measures warranty, scrap and rework rates. We've seen significant improvement in this area over the last few years. And today, most of our operations are well within the top quartile of performance, benchmarked not only against oilfield equipment companies but also leading industrial manufacturing peers. This also shows up in recognition from our customers, such as our subsea flexible pipe business receiving their top customer's Best Supplier of the Year Award for the third consecutive year.

We've also driven improvements in health and safety KPIs, such as total recordable incident rate and lost time incident rate over the last few years. Better [ HSE ] performance means our employees return home from work safely and in good health. Additionally, we are convinced that strong HSE performance reflects a culture that has pride, accountability and ownership in its operations, which translates into higher quality, reduced downtime and better service for our customers.

Another sign of operational and process efficiency is our cash conversion cycle, which has benefited from the work we've done to improve all facets of our operational processes. We exited 2025 with a cash conversion cycle of 119 days and a working capital to revenue run rate of less than 22%, down from 143 days and 28.8%, respectively, in 2023, freeing up around $630 million of cash.

While we will continue to focus on optimizing our portfolio, lowering costs, improving margins and driving efficiencies to increase return on capital, the actions we are taking also enhance our ability to lean more aggressively into both organic and M&A growth opportunities. We've always been disciplined in our allocation of capital, but over the past few years, we significantly raised the hurdle related to our criteria for acquisitions. In 2025, we did not complete a single acquisition. It's not that we're no longer interested in pursuing acquisitions. We've just set a much higher standard for them.

For us to pursue an acquisition, it should fit within 1 of 3 categories: one, core business technology bolt-on, meaning a business or a technology that replaces or supplements a current core offering; two, direct consolidation opportunities; and three, larger acquisitions that already have scale, competitive advantage and compelling growth prospects. Any acquisition must also be accretive to our margins, earnings, cash flow and return on capital. Also, the more efficient or internal processes are, the better we are able to leverage NOV's global manufacturing, supply chain, marketing and other functions to improve profitability and grow the acquired business, making our case for investment more compelling.

We expect all of our businesses to be leaders in what they do. We must either be a top 3 player in the market or have a compelling strategy and path for how we get there. If we do not have an achievable path, we will plan to exit the line of business. Today, we are a top 3 player in most everything we do. The combination of technology leadership, exceptional service and scale can be self-perpetuating, driving market leadership and additional growth opportunities.

Complacency kills, and we will not lose sight of the continuous need to invest in product development and innovation. The success we are having with our new products and technologies is driving increases in market share and additional growth opportunities become even more compelling with the type of market we see emerging in late '26 and into 2027.

Our objective is not growth for growth's sake, it is about value creation. We will invest in areas where we have clear competitive advantages, high barriers to entry, technology differentiation and a high likelihood of outsized market growth, all of which would be expected to result in investments that are accretive to margins and return on capital and drive value for our shareholders.

Our market outlook naturally informs how we think about deploying capital, and 2026 will likely continue to provide a challenging market environment. However, our mid- to longer-term outlook is compelling. The current consensus view is that the oil market is currently oversupplied by between 2 million to 3 million barrels a day. This is due to an oil supply wave coming from OPEC's unwinding of production cuts and from pandemic era non-OPEC FIDs that are now coming online. Despite the excess supply, oil prices are holding up reasonably well due to geopolitical risk and increased storage capacity in Asia. However, with OECD inventories at the high end of their 5-year range and total global inventories that appear to be at their highest level since 2021, there's downside risk to commodity prices.

As a result, we are seeing customers take a cautious approach to the start of 2026, but we expect oil markets will start coming back into balance in the second half of the year, driving higher levels of customer spend and setting up a much healthier market in 2027 and beyond. Overall, we expect global industry spend and drilling activity to decline slightly year-over-year.

In the U.S., we expect activity to be down mid-single digits year-over-year due primarily to the low activity exit rate from 2025 and further declines in oil-directed activity that will be offset by higher activity in gas basins. Slightly longer term, we expect U.S. short-cycle activity to remain sensitive to price signals, resulting in a modest recovery in activity by late 2026 and early 2027. We believe fiscal discipline among operators, due in part to concerns related to depth and quality of drilling inventories and the state of the service complex's asset base, will constrain activity growth. Capacity has moved overseas, and attrition from the wear and tear of equipment operating 24/7 has taken its toll. Any increase in activity levels will likely require a disproportionate amount of demand for capital equipment, creating a compelling market opportunity for NOV. Longer term, we expect U.S. activity to realize modest but consistent growth to maintain a long production plateau as unconventional basins continue to mature.

In international markets, we expect activity will be flat to up slightly in 2026, driven by rigs going back to work in Saudi Arabia and by the expansion of unconventional activity in international markets. This increase in unconventional activity throughout the Middle East, Latin America and Australia will continue to drive investments in the high-spec drilling, completion and production equipment needed to efficiently develop these resources, almost all of which NOV provides.

Additionally, we see meaningful potential in Venezuela for us to help get the industry back on its feet over the longer term. This will require significant investments in capital equipment. NOV has a long and proud history in the country that began back in 1949. We employed over 450 people there before we had to shut down our operations. Since then, we have continued to sell equipment and spare parts to support a major IOCs' Venezuelan operations. And just over the past several weeks, we've received new orders with a value that exceeds the total amount of revenue we've generated over the past several years while supporting this operator's activity in the country. Given our history operating in the country, we will quickly ramp up support for our customers when it becomes appropriate to do so.

Moving to the offshore markets. First, I'll talk briefly about what we see in the construction space, then cover production in drilling markets. NOV is a leading provider of critical cranes and deck machinery for drilling rigs, offshore support vessels, or OSVs, cable and pipe lay vessels and wind turbine installation vessels, or WTIVs. Demand for new WTIVs has been soft, impacted by cost inflation, supply chain pressures and higher borrowing costs for developers. While we booked 1 order in 2025, the outlook for offshore wind has deteriorated, with the latest forecast for turbine capacity additions through 2030 down over 35% since this time last year.

As a result, offshore wind contractors are cautious, and there is poor visibility into future orders. However, demand for cable lay vessels needed to connect power from the still growing number of offshore turbines to shore has remained solid with 2 orders in 2025, including 1 in the fourth quarter. We expect this level of demand to continue through 2026, with longer-term demand contingent on the ultimate pace of offshore wind development.

We're seeing strong demand for offshore cranes, with our operation reaching its highest level of revenue in over 10 years. This demand has been led by operators of OSVs, where the average age of the global fleet is now almost 20 years, approaching a typical 25-year life and giving us confidence that demand will remain solid over the coming years.

Turning to offshore production and drilling equipment. Industry forecast suggests 2026 will be another year of lower spending, down low to mid-single digits. While we do not disagree with this view, the market is nuanced, and we believe the offshore market is rapidly nearing the beginning of a strong extended up cycle.

Over the past decade, the offshore industry has fundamentally changed. Improved project execution, greater standardization, industrialization of infrastructure and better technology have materially lowered breakeven costs. NOV's drilling and production technologies have contributed to this emerging renaissance. Our automation packages, digital solutions and other equipment have improved drilling efficiencies, and the industrialization we've applied to building gas and fluid processing modules for FPSOs has helped lower costs.

Additionally, operators are now benefiting from artificial intelligence using the latest processor chips that enable quicker iterations and better subsurface interpretations to reduce time, risk and costs associated with deepwater expiration. All of this has meaningfully improved offshore economics, with breakevens in many areas now falling below $40 per barrel. Lower costs, along with the growing need to offset structural production declines, are increasingly positioning long-cycle offshore barrels to supplant short-cycle North America shale as a source of incremental supply, supply that is needed to feed the world's growing demand for energy and which will reinvigorate offshore exploration. We're already seeing many IOCs planning to significantly increase their deepwater exploration budgets in the coming years, some by as much as 50%.

In the offshore production space, we are leaders in providing most of the critical components outside of power and compression for FPSOs and mobile offshore production units. We also provide mooring and fluid transfer systems and other equipment for FLNG projects. 2025 was a massive year for deliveries of FPSOs with 15 vessels starting operations, many for projects sanctioned before the pandemic. Only 5 new FPSO FIDs advanced during the year, while others were postponed due to higher costs, supply constraints and macroeconomic uncertainties. Over the last year, operators and suppliers have been working together to lower upfront capital costs by evolving designs of large FPSOs to smaller to midsize units optimized for average anticipated fuel production rather than maximum throughput. The projects are now starting to move forward.

In 2026, we see the potential for up to 10 FPSO FIDs and expect demand to remain strong with an average of 8 FIDs per year through 2030. Notably, while we expect the average size of FPSOs to decrease, we see a higher proportion of FPSOs destined for gassier markets and harsher environments, which plays into NOV's strength in gas and condensate processing and in quick disconnect turret mooring systems.

Lastly, in offshore drilling markets, we are seeing green shoots with growing indications that the white space for our offshore drilling contractors is beginning to shrink. Our customers are seeing an increase in the pace of contracting, and the average duration of new contracts is increasing significantly, which we believe reflects building momentum for long-term offshore developments. From September 2025 through January 2026, there have been 59 floater contracts awarded in comparison to only 33 during the same period last year.

Additionally, as of year-end 2025, public open tenders for all offshore rigs reflected approximately 30% more minimum rig days relative to open tenders at year-end 2024. That number increases to over 100% if you consider only open tenders for floating rigs. While most new contracts are scheduled to begin in 2027, our offshore contract drilling customers typically call us as soon as contracts are signed to begin preparing rigs to go back to work. This drives demand for service and repairs, spare parts, recertifications and capital equipment upgrades. We've now realized 2 straight quarters of increased spare part bookings and expect orders to improve further in the second half of the year. We also believe the stage is set for an extended recovery as the call on production from deepwater increases driving the industry to get back to work.

We're extremely excited about NOV's future and the market environment we see unfolding over the next several years. We performed well in 2025, reflecting the strength of the diversity in our portfolio and the great work our team is doing to execute well in a tough environment. Rodney?

Thank you, Jose. Consolidated revenue for the quarter was $2.28 billion, an increase of 5% sequentially and down 1% year-over-year. Net loss was $78 million or $0.21 per fully diluted share, impacted by higher effective tax rate from valuation allowances on deferred tax assets and a higher mix of foreign earnings. The company also recorded $86 million within other items primarily related to the impairment of goodwill and long-lived assets.

Adjusted operating profit was $177 million or 7.8% of sales, and adjusted EBITDA totaled $267 million, representing 11.7% of sales. Sequentially, margins benefited from strong operational execution, offset by a less favorable mix of business and higher tariff expense. Our team delivered another strong quarter of free cash flow generation, totaling $472 million in the quarter. As Jose mentioned, free cash flow was $876 million for the full year, our second consecutive year with an EBITDA to free cash flow conversion rate of over 85%, representing our best 2-year free cash flow in 10 years. Working capital as a percentage of revenue run rate decreased to 22%, our lowest level in 10 years.

We continue to execute on our return of capital program. During the quarter, we repurchased 5.7 million shares for $85 million and paid dividends of $27 million, bringing total capital return to shareholders to $505 million year-to-date. This includes a supplemental dividend of approximately $78 million paid in the second quarter. In the past 2 years, we've returned $842 million to our shareholders while increasing our cash balance by $736 million. Through our disciplined share repurchase program, our current shares outstanding are at their lowest level in 18 years.

Our balance sheet remains strong with net debt-to-EBITDA at 0.2x, and we remain committed to our return of capital framework. For the quarter, tariff expense was $25 million, increasing around $8 million sequentially. In the current regulatory environment, we expect our tariff expense to slightly increase in the first quarter, leveling off at a similar amount for the remainder of 2026. We're seeing an increased cost in our supply chains from secondary impacts from tariffs, including sizable increases for items like tungsten carbide. We continue to focus on our supply chain and execute strategic sourcing initiatives to reduce tariff impacts.

Our efforts to reduce structural costs, standardize and simplify processes and upgrade systems to improve productivity are progressing as planned. These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. As Jose mentioned, we expect overall upstream spending to contract slightly from 2025 levels, with reductions in North America being greater than international and offshore markets. We expect this will lead to slightly lower revenue in 2026 with the results being more weighted to the second half of the year, and full year EBITDA in line to slightly lower than 2025.

Given the strong fourth quarter collections and anticipated timing of progress billings on projects, we expect EBITDA to free cash flow conversion to decrease to between 40% to 50% for 2026. Capital expenditures for the year should be between $315 million and $345 million. Higher expected foreign earnings will likely lead to a higher effective tax rate of around 34% to 36%.

Turning to segment results. Our Energy Equipment segment fourth quarter revenue was $1.33 billion, up 7% sequentially and 4% year-over-year. Adjusted EBITDA for the fourth quarter was $180 million or 13.5% of sales, driven by solid execution on our higher quality backlog and further strength in our offshore and production-oriented businesses. As Jose mentioned, this represents 4 years of consecutive revenue and margin growth, with annual revenue increasing almost 60% over that time. Capital equipment sales accounted for 63% of the segment's revenues in the fourth quarter of 2025, increasing 8% sequentially and 15% year-over-year, led by growth in our subsea flexible pipe process systems and marine and construction business units. Aftermarket sales and services accounted for the remaining 37% of revenue, growing 6% sequentially, but declining 12% year-over-year, which I will discuss momentarily.

Capital equipment orders for the quarter were $532 million and $2.34 billion for the full year, resulting in a book-to-bill of 91% for 2025 and backlog at the end of the year of $4.34 billion. Orders during the quarter were led by a newbuild offshore jackup rig equipment package, additional scope on offshore production projects, subsea flexible pipe, subsea cranes and a cable lay vessel. These bookings reflect the diversity of end use markets where NOV has leading positions in technologies critical to our customers.

We continue to have a constructive outlook on bookings and expect the full year 2026 book-to-bill to be near 100%. Our Subsea flexible pipe business delivered another exceptional quarter, achieving its highest quarterly revenue and EBITDA on record for the second consecutive quarter.

Backlog since the end of 2023 has doubled, while annual shipments have increased around 50%. Margins remained robust, driven by better quality backlog and operational execution. Production levels set new records as the team continues to produce high-quality on-time deliveries, bringing further recognition from customers for reliability, quality and consistent execution. Another sizable project was booked in the fourth quarter, and we expect strong bookings in the first quarter of 2026. Given the expectations for growth in greenfield projects, tiebacks and an increased need to replace aging pipes, the outlook for this business remains bright.

Our Marine and Construction business achieved an upper single-digit increase in revenue sequentially and a sizable increase compared to the fourth quarter of 2024, driven by higher revenue from cranes as well as pipe and cable lay systems. During the year, this business has booked orders for critical equipment supporting cable lay, FLNG, FPSO, offshore supply and wind turbine installation vessels. As Jose mentioned, we expect an increase in FPSO and FLNG-related awards, which should drive incremental demand for our gas and liquids processing systems and our mooring and fluid transfer systems over the next several years.

Our Process Systems business delivered solid performance during the fourth quarter, with revenue slightly outpacing last quarter's record revenue. Compared to the fourth quarter of 2024, revenue was up more than 40%, supported by continued strong activity across offshore production and onshore gas markets, particularly in the Middle East. For the full year, the business delivered more than 30% growth, reaching its highest ever revenue and EBITDA. Bookings for the year doubled compared to 2024.

During the quarter, the business secured key awards for a gas dehydration unit in Saudi Arabia and an expansion of scope in existing North Sea project. Representing over 40% of 2025 business unit bookings, demand for [ MEC ] systems remained strong, driven by offshore projects and large onshore gas field expansions. Also, the business is seeing increased opportunities for brownfield applications in our produced water technologies.

Our book-to-bill over the past 3 years in subsea flexible pipe, Process Systems and Marine Construction has exceeded 120%, with backlog growing nearly 40%. These businesses represented over 70% of total energy equipment bookings for 2025, and we anticipate continued strong demand as momentum builds and FIDs increase in offshore markets.

Revenue from our drilling capital equipment business during the fourth quarter experienced a year-over-year decline in the low teens percentage range, but notably increased nearly 10% sequentially. We're encouraged by recent contracting activity among our offshore drilling customers, which helped capital equipment orders improve sequentially. We delivered our 14th high-specification land drilling rig manufactured in Saudi Arabia and expect a solid cadence of rig deliveries in 2026 and beyond.

And as previously mentioned, we secured a drilling equipment package for a newbuild jackup rig being constructed in Saudi Arabia. Continued engagement with customers as offshore tendering remains active is leading to an increase in demand for select upgrade opportunities, including BOP-related equipment, managed pressure drilling and automation and robotic systems. We're having more constructive dialogue around future opportunities, positioning the business to benefit as offshore drilling activity should improve later this year and into 2027.

Revenue for intervention and stimulation capital equipment declined 10% year-over-year, but increased substantially compared to the prior quarter, driven by solid demand for coiled tubing equipment and wireline equipment. During the quarter, we shipped new coiled tubing equipment to the North Slope and the U.K. and wireline equipment throughout the Middle East. New orders included 2 dual trailer large-diameter [ CTE ] units with 50,000-foot reels and injectors. Even with constrained budgets for our North America customer base, book-to-bill for the year was 94%, primarily supporting international markets, which more recently represents about 50% of the business' total revenue.

Turning to aftermarket portion of the Energy Equipment segment. In our drilling equipment business, fourth quarter revenue for aftermarket parts and services was down in the mid-teens percentage range year-over-year, but increased nearly 10% sequentially. Spare parts bookings for the fourth quarter were above their trailing 8-quarter average, reaching their second highest level in the past 6 quarters. Aftermarket revenue for our intervention stimulation equipment business was down mid-single-digit percentage sequentially and low double-digit percentage year-over-year. The year-over-year change was due to lower sales of spare parts and a decrease in rentals resulting from reduced completion activities in North America, partially offset by higher coiled tubing repair and service activity. For the first quarter, we expect Energy Equipment segment revenue to increase 3% to 5% year-over-year, with EBITDA in the range of $145 million to $165 million.

Moving to the Energy Products and Services segment. Our Energy Products and Services segment generated revenue of $989 million during the quarter, representing a sequential increase of 2%, driven by higher sales of the segment's composite solutions, seasonal bulk sales of downhole products and stabilizing activity in the U.S. and the Middle East. Compared to the fourth quarter of 2024, segment revenue declined 7%, and adjusted EBITDA decreased to $140 million or 14.2% of sales. The year-over-year decline was driven by lower drilling activity in the U.S., Saudi Arabia and Argentina. Lower volumes, increased tariff expense and other inflationary pressures more than offset cost control efforts and efficiency improvements, resulting in larger-than-normal EBITDA decrementals year-over-year.

In North America, the segment continued to outperform underlying activity levels. Market share gains and increased adoption of new technologies contributed to a modest increase in revenue year-over-year despite a 6% decline in rig count. Our strong market positions in Saudi Arabia and Argentina hurt our performance in 2025 as drilling activity declined. However, we expect meaningful activity improvements in those markets progressing through 2026.

For the fourth quarter, the sales mix within Energy Products and Services was 49% service and rental, 33% capital equipment and 18% product sales. Revenue from services and rentals declined 7% year-over-year, driven primarily by softer global activity levels. This decline was partially offset by increased adoption of NOV's wired pipe enabled Downhole Broadband Services, DBS, and continued market share gains across several offerings. Revenue from NOV's DBS services more than doubled compared to the prior year, driven by increased activity in the North Sea, where technology is enabling enhanced geosteering and faster drilling and complex long lateral wells.

During the quarter, a North Sea operator highlighted the value of high-frequency downhole data enabling faster and more confident decision-making, crediting the technology with enabling the drilling of a reservoir section that likely would not have been achievable without real-time data transmission. NOV's drill bit rental business also finished the year strong, capturing additional market share across U.S. land markets and driving a revenue increase of about 20% in the region for the full year compared to 6% decline in U.S. rig count.

Across the broader services portfolio, [ software ] activity in Saudi Arabia, North America and Latin America reduced demand for rentals of downhole tools, solids control services and tubular inspection operations. These declines were partially offset by growing adoption of our advanced technologies into new markets and higher activity levels in the UAE. Sales of capital equipment declined in the low single-digit percentage range year-over-year, but increased at a high single-digit rate sequentially, driven by a recovery in shipments of composite solutions. The year-over-year decline reflected strong shipments of composite pipe for the Middle East and FPSO vessels in the prior year that did not repeat, partially offset by continued strength in demand for fuel handling tanks and large-diameter composite pipe supporting produced water takeaway capacities in North America.

Our composite business experienced its highest annual revenue in history during 2025, with fourth quarter bookings reaching their highest level in 3 years with strong demand from multiple end markets, including fuel handling, where orders doubled from 2024. While we expect to see typical first quarter seasonality, demand remains supported by ongoing investments in infrastructure and offshore developments.

Our tubular products business, which includes drill pipe and large diameter conductor pipe, saw orders for drill pipe in the second half of 2025 significantly outpace the first half, leading to a high single-digit revenue increase year-over-year. However, timing of orders for our large diameter conductor pipe led to a year-over-year decline in revenue for this product line, which will also have a negative effect for the first quarter of 2026.

Revenue from product sales increased modestly sequentially during the quarter, but declined in the mid-teens percentage range year-over-year. The year-over-year decline reflected lower industry activity levels, particularly impacting typical year-end bulk purchasing in the Eastern Hemisphere of our downhole drilling tools and drill bits. Sequentially strong shipments of completion tools to customers in the Middle East, Argentina and Europe were offset by lower shipments of fishing tools and drilling tools to Asia.

For the first quarter of 2026, we expect our Energy Products and Services segment to experience a seasonal decline consistent with prior years, translating into revenue that is down 6% to 8% year-over-year, with EBITDA between $105 million and $125 million.

That sums up our financial results for the quarter and for the full year. If we take a step back, our adjusted EBITDA for 2023 was $1 billion, with 2025 improving about 3% to $1.03 billion despite significant market headwinds. Over that time, North America rig count declined 15%, Saudi Arabia rig count declined over 10%, and the offshore floater count declined 4%. Additionally, changes in trade policies resulted in tariff expense of over $50 million in 2025. Nevertheless, NOV generated $1.8 billion in free cash flow during that 2-year period, demonstrating the diversity and resilience of our portfolio.

With that, I'll turn the call back over to Jose.

Thanks, Rodney. As we go forward, NOV is in a very strong position. The near-term market environment may become more difficult, but we will further improve our operational efficiencies. We also intend to lean harder into growth opportunities that will generate value for our shareholders and that will be supported by a much more favorable market setup that we expect to emerge later in the year.

I'd like to end by saying thank you to all our employees for delivering another solid year and for the dedication you have to our customers and to our fellow employees. I appreciate your focus on making NOV better every day. Our outlook is bright, thanks to everything that you do.

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

[Operator Instructions] The first question will come from the line of Jim Rollyson with Raymond James.

Maybe on the offshore rig kind of expected ramp late this year going into '27, you guys have done an interesting job of kind of laying out like the FPSO opportunity set for you, which is a pretty wide range from a revenue standpoint. Maybe if you could just kind of give us order of magnitude, how you're thinking about the order opportunity set for spares and upgrades and all the different components that you're in discussions with on folks as they look to ramp back up, hopefully, into the next couple of years?

Yes. Thanks for the question, Jim. So yes, as you can tell, we're pretty optimistic about the lay of the land in terms of what we expect to happen in the offshore space, both from an offshore production equipment standpoint as well as in the drilling environment.

And so the last few years, as Rodney really laid out, we've seen a tremendous increase in terms of demand for offshore production-related equipment, and we have really positioned the business well to capitalize on that opportunity set. And as I mentioned, it was just a huge year in terms of FPSO deliveries in 2025, really a wave that kind of came out from FIDs that are around the time of the pandemic. Some of those were pushed out later than anticipated because of all the dysfunction that occurred in the marketplace during the pandemic era. And they're finally coming online.

And recall that part of the reason or really a big driver for the reason of the white space in the offshore drilling market was because the production equipment wasn't yet in place to put those rigs back to work. And so we've been saying for a while now that, hey, do you really think the world is going to build all this production equipment and not drill a bunch of wells to feed into those assets. And that's what we continue to expect to happen. Those -- a lot of those vessels just recently set sail and are connecting. And we're also now starting to see, unsurprisingly, really significant impact or improvement in terms of offshore rig tendering, and we provided those stats with comparable period contracts increasing from contracts a year ago to 59 over the most recent period. And really importantly, the average duration of these contracts that are being tendered is significantly longer than they were before, indicating that, hey, we're moving from an era here recently where rig contracts have basically been very short term in nature for single well or double well projects, and now we're shifting to crew development road from a mode from some of these offshore opportunities or field development projects.

And so we feel really good about all facets of our offshore business. As we mentioned, still continue to see a lot of demand for offshore production-related equipment with potentially 10 FIDs this year and averaging 8 or so going forward for the next several years. Additionally, we see a little bit of a different mix in terms of the types of vessels that will be needed, and those -- that mix kind of plays, we think, into our strength with having higher gas and condensate content, which is where we really shine as well as more of those vessels that will be operating in harsh environments which create larger opportunities for our quick disconnect turret mooring system. So excited about that.

But here, as we've talked about over the last year with the white space, there's been a lot of pressure on our rig aftermarket business, which, as Rodney mentioned, was down mid-teens percent year-over-year. And Jim, as you know, that's a really good business worthy -- we really have a really good position as the original OEM of a lot of this equipment that's out there. And so we're going to benefit from just a higher pace of activity offshore that's going to command a higher level of aftermarket parts. But also as these rigs go back to work, there is service and repair work that needs to be done. There's recertifications, there's upgrades, et cetera. And so we feel like the outlook here is really bright.

And then just 1 quick follow-up. Rodney talked about the tariff impact, and you guys have talked about this over the last couple of quarters or so really since it all started. And I seem to recall maybe a couple of quarter conferences ago, conference calls ago that 1 of the plans was the $100 million cost-out program to help kind of offset that. But longer term, I think the hope was you passed some of the tariff costs through higher pricing. And I'm just curious, like where we are in the status of maybe that actually happening? Is the market still soft enough that you can't quite get there and you need that to change? Or maybe where we are in that process?

Yes, Jim, we're certainly having some success passing on those costs. But as you can imagine, it is a difficult market environment to pass along those costs, right? We've been -- we've seen a steady decline in industry activity over the last couple of years at a time -- during a time period when not only are we seeing heightened costs from tariffs, but also inflationary costs hitting in other areas.

And so while in general, the number of areas that are experiencing large increases related to inflation, the number of areas has decreased a little bit, we're still seeing certain areas where there are really significant increases. Rodney highlighted the tungsten carbide. That's going to be a bit of a shock to the system, really important in the manufacturing of matrix body bits as well as for hard-facing steel body bits. And we've gone up a couple of hundred percent in a couple -- in a 1-month time period due to all the supply constraints there coming out of China, and that's just really volatile. Also, costs associated with electronics and memory. And then not to mention continued pressure on labor and medical has been a real challenge.

But look, this is just a fact of life. And in our business, sometimes these things are more volatile than others, and we're managing through it. We've got some good efforts underway in terms of making sure that we get paid an appropriate value for the technologies that we bring to bear for our customers. Also have good efforts underway to continue to improve the efficiencies across the organization and offset some of those costs.

And when we talked -- or initially talked about that cost-out program, which we're making really good progress on we mentioned that it would not fully offset what we expected to happen over the next few quarters related to inflation, tariff expense, et cetera. So you haven't really been able to see it just looking from the outside in on the P&L, but we're certainly seeing the benefits of what we're doing internally in some of the KPIs that I referenced earlier. And then as we progress through 2026, when tariffs will stabilize, assuming no other changes to the regime, and a larger amount of those cost savings come through. I think you will really start to see more of that in the second half of the year.

Our next question comes from the line of Marc Bianchi with TD Securities.

Jose, you had some comments in your prepared remarks about M&A. And it sounded to me like the company, given the stuff that you guys have put in place over the last several years to sort of respond to the new world is maybe in a better position to pursue M&A going forward? And I don't know, maybe that wasn't the intended takeaway, but just maybe frame for us how we should be -- how investors should be thinking about your intentions around M&A now?

Yes. Thanks for the question, Marc. I think you picked up on the general message, but let me clarify a little bit. Yes. Certainly, our focus has been a little bit more internal recently, really focused on cost out, driving internal efficiencies and really preparing to get ourselves ready to really capitalize on growth opportunities. And so it's really a mindset shift to a large degree in terms of having played defense in a very challenging market to really moving into the -- in the role of playing offense. And having really incredibly efficient processes, whether it's manufacturing, whether it's supply chain, whether it's back office processes certainly helps in terms of being able to just find and validate M&A type transactions. So we're very confident.

Look, 1 of the benefits that we get when we do acquisitions is being able to buy businesses that are within our core expertise areas, leveraging our core competencies to make those businesses better and accelerate their growth through leveraging our manufacturing base, our global supply chain, our marketing resources around the world, et cetera. And so the more efficient those are, the better we can integrate these acquisitions and drive more value.

But the other part of what we were really trying to get at is that while we will lean into M&A a little bit more and try to be a little bit more aggressive, we're still going to be incredibly disciplined. We're still going to be focused on making sure that that's the best use of our capital, certainly in comparison to buying back our own shares and things of that nature. So we will continue to be very, very disciplined.

And what we're really excited about is the organic growth opportunity that is in front of us. Our businesses have developed some fantastic technologies that have recently been commercialized or that are soon to be commercialized. And that, combined with the market outlook that we see evolving over the next couple of years, has us extremely excited and presents additional growth avenues in areas where we can invest our capital to lean into those growth opportunities.

And look, those -- the need for capital in those opportunities is not -- we're not talking about huge amounts because it's organic, but there are opportunities where we look into the future, and we see, hey, we're going to be manufacturing constrained in this area, and we need to build these areas out. There are other areas where we're seeing really rapid adoption of what we're doing, and we need to build out more capacity from a rental equipment standpoint to be able to effectively deliver for our customers. So that's -- hopefully, that helps provide a little bit more clarity in terms of what I was getting at there.

Yes, sure does. The other 1 I had was on the order outlook. I think, Rodney, you mentioned a year 1 book-to-bill. And within that context, you also talked about FPSO FIDs doubling in '26. So maybe help us think about the range of scenarios if you were to get your fair share, and there are 10 FIDs for FPSOs, should we be comfortably above 1? And then along those lines, how are you seeing 1Q shape up?

Yes. Thanks for that question as well. And look, it's never over until it's over, but we feel really good about our prospects to win our fair share related to the opportunities that are out there. As I touched on earlier with Jim's question, there are some of those opportunities that really are areas in which we should do very well related to leveraging our expertise in high condensate gas processing and or environments. So we're excited about that.

And look, if you look -- if you think about kind of what we've done over the last several years, yes, this year was a 91% book-to-bill, but each of the preceding 4 years was greater than 100% book-to-bill. We've got a very healthy backlog today that has been driven by those offshore production awards, backlog of [ $4.34 billion ]. So while it's 91% for the year, we're only down $93 million year-over-year, and the outlook for this coming year is really good.

Always tough to give precise guidance related to future awards. As you know, these are big and chunky typically, and they can push and pull from quarter-to-quarter. As we suggested here, we anticipate a relatively slow and cautious start to the year. So I think we'll be below onetime book-to-bill in Q1. But for the year, we think things will even out, and we expect to be around 1x.

Our next question coming from the line of Stephen Gengaro with Stifel.

Jose, I think you got Clay's words for a minute down pretty pat.

Had a lot to say this morning, Stephen.

No, the commentary is great, and there's a lot of detail. I may be overthinking this, but when we think about the aftermarket business that you have and given your large installed base, the amount -- do you know -- do you have a sense for the amount that you serve of your installed base? And maybe more importantly, over the last couple of years, has the third-party ability to service existing assets dwindled at all from a competitive perspective?

Yes. It's a good question, Stephen. Look, it always ebbs and flows. And inevitably, people want to look for ways to do things more efficiently and more cost effectively. And at times, that leads them to go to the sort of proverbial [ shake tree ] mechanic. But more often than not, those efforts are short-lived because they realize the complexity of what it is that we provide and what we do and the critical importance of making sure that you operate incredibly efficiently and reliably, and that tends to drive people quickly back to the OEM.

So I can't precisely tell you exactly where we are. But we feel great about our position and that we're getting our fair share. And look, every day, we're focused on providing better and better service and delivering better value for our customers. So certainly, intent is to bring that down more and more every single day, but there are always little ebbs and flows here.

Okay. And then just the quick follow-up was when you -- when you look at sort of the basket of sort of stacked idle deepwater assets, it's -- I think it's fairly small, but do you have a sense for what the market opportunity is there for reactivations?

Yes. I think, look, it's -- when you talk about deepwater drillships, it's pretty limited. And I'm not going to give specific numbers. I'll let our contractor customers talk about it. But look, it is limited. I think it's -- you can sort of see exactly what's been operated here in the recent past and what those levels are that we could probably more easily get back to. But then I think your question is really around the stuff that's been stacked for a really long time or rigs that were never fully completed that were ordered during the last boom cycle. And I think that opportunity set, lucky to call it kind of a handful.

So it's a limited opportunity, and those opportunities that do exist, they're going to be large opportunities, right? They've been stacked for a very, very long time. And when I say a handful, that's the number that or higher spec and that we think will be in line with what the market currently demands. And like I said, they've been stacked or uncompleted for a very long time. There's going to be a big ticket associated with bringing those back.

So TBD, exactly how that will play out. But it's a good opportunity for us. And then we see the market obviously tightening up very quickly, which means it will be a very good market for our drilling contractor customers, and that's a good thing for the space.

Our next question coming from the line of [ Dan Guts ] with Morgan Stanley.

So just coming back to Venezuela. I was wondering if you guys could kind of quantify at all, maybe what the level of revenue you were doing back pre sanctions when you had the -- I think you said 400 employees in country? Or kind of what the equipment and spares revenue streams have been the last couple of years, which you said like the inbound that you've gotten is kind of a multiple of the annual revenue stream. So basically just driving that, anything you could help us with as we're trying to kind of quantify the potential opportunity in Venezuela would be really helpful.

Yes. [ Dan ], a fair question. But I think what I would point to is that I don't think kind of the history is -- the precise dollar amount isn't particularly relevant, right? There's been a lot of change in pricing. And more importantly, I think the market environment going forward is going to be very, very different.

But look, you can do the quick math. I said 450 employees. Today, we have a little over 30,000 employees. And so you can sort of figure out what the revenue per employee should be, and that's kind of in line with where we were. But the reason why I say it's not entirely relevant is because if and when the right fundamentals get put in place to really get back to work in the country, and what I mean by that is the right governance, the right laws and rules that allow us and more importantly, our customers to go to work there, along with alleviating security concerns and all those sorts of things. It's a country that's been -- it's a country whose oilfield assets have been neglected for an incredibly long period of time. And so that's going to create should create massive opportunities for new capital equipment.

So when you go back in the day when we were active there, virtually all lines of business were active there. So we have -- certainly have the capability to do that and scale up very quickly. But we think the opportunity there, if and when the right guardrails are put in place, will be meaningfully larger than what they were in the past.

Awesome. That's really helpful. And then I just wanted to check in on kind of your [ 3 cycle ] CapEx and free cash flow framework. So not asking about 2026 because I know you guys gave the explicit guidance for both of those items. But I just wanted to check in on, I guess, you guys have kind of said like 50% plus free cash flow conversion framework through cycle, and I wanted to see if that's still a good assumption or that's the latest? And then maybe if you could kind of unpack CapEx a little bit, how you think about that cycle, whether it's in terms of revenue or some type of maintenance level, plus some growth investments? So yes, anything you can help with on the through-cycle CapEx and free cash flow framework would be great.

Yes. Thanks, [ Dan ]. This is Rodney. So just stepping back and giving some credit to the team with respect to free cash flow conversion for the last couple of years, 85% free cash flow conversion, really excellent performance by the team. A lot of that was really a system structural improvements.

So if you look at the improvements that we've had on DSOs during that time, we look at the improvements that we've had, in particular, for some of our project-based businesses with some of the progress billings and timing of collections during that time, really strong. And also on our inventory turn improvement, so 2023 inventory turns at 3.1 improving to 3.9, almost 4 turns in 2025. So just across the board.

I know Jose gave some commentary on cash conversion through the cycle, but just some components there. And then we kind of mentioned, as we think about '26, a little bit more directed to your question. about 40% to 50% free cash flow conversion for '26. And if you look at the components of that, CapEx in that sort of $315 million to $345 million range, you look at working capital as a percentage of revenue, probably about flat to maybe slightly up. So that kind of gets you to that cash conversion rate there for '26.

And I think going forward, as Jose mentioned, we've got some organic opportunities that we always evaluate. I think our CapEx in '24 and '25, if you look, was a touch higher than '22 and '23. '26, that sort of midpoint gets back to a little bit more sort of average level. But the positive thing is with the strength that we have on the balance sheet and where we're at right now, we've got the flexibility to look at those opportunities going forward. But overall, I'd say kind of through cycle, that sort of 50% -- 40% to 50% number from a conversion perspective is a good market for us.

Our last question will come from the line of Jeffrey LeBlanc with TPH & Company.

I wanted to see if you could provide an earnings potential of your ATOM RTX robotics platform over a multiyear period? And how we should think about the gating events for it to become the next top drive?

Yes. Thanks, Jeff. Look, we are super excited about kind of what we're doing on the automation front and really more broadly speaking, on all things that we're doing digital-wise.

First of all, just a quick answer on the robotics piece. It is something that we put our first actually pilot system out a couple of years ago. It's been operating consistently with a couple of upgrades and getting better and better every day over the last couple of years, operating in a very harsh environment. We've been working very closely with the drilling contractor customer and an IOC. This is a great stage that's set to where we're doing a lot of cooperation with industry partners to ensure that this is successful. And we're working with 2 different IOCs and 2 different drilling contractors, and all 4 of those customers are really excited about what we're delivering with them out in the field. We currently have rigs operating on land, 3 operating offshore. And we sold around 27 to 30 robot arms, and we're having super constructive conversations with our customers about doing a whole lot more.

So that's really about all I can give you on that front right now. But look, the other thing that I'm extremely excited about is the capabilities that we have under 1 roof related to data control systems and automation. Look, we've been in the data business for over 100 years when we started an instrumentation business. Obviously, we've migrated from analog to digital on a lot of fronts, including data capture aggregation and now more and more, high-speed downhole data transmission. Combine that with our world-class capabilities for control systems, then layer on top of that, automation and robotics and now the use of AI, and we're super excited about where we can take all this over the coming years. So really excited about our prospects there.

And I will now turn the call back over to Mr. Jose Bayardo for any closing remarks.

Great, Olivia. Thank you very much, everyone, for joining us here this morning. We look forward to talking to everybody again here in late April.

This concludes today's conference call. Thank you for your participation. You may now disconnect.

Good day, and thank you for standing by. Welcome to NOV Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the call over to Amie Ambrosio, Director of Investor Relations. Please go ahead.

Welcome, everyone, to NOV's Third Quarter 2025 Earnings Conference Call. With me today are Clay Williams, our Chairman and CEO; Jose Bayardo, our President and COO; and Rodney Reed, 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 U.S. GAAP basis, for the third quarter of 2025, NOV reported revenues of $2.18 billion and a net income of $42 million or $0.11 per fully diluted share. 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.

Thanks, Amie, and good morning. NOV executed well in the third quarter. Revenues of $2.2 billion were down just slightly, less than 1% year-over-year and sequentially despite a challenging macro environment and softening oilfield activity. EBITDA was $258 million or 11.9% of revenue, up sequentially despite rising tariff and inflationary headwinds.

Cost control and strong project execution allowed NOV to lift margins sequentially while increasing free cash flow to $245 million. Energy Equipment saw strong demand for its growing production-related portfolio, leading to higher backlogs and record revenues from our subsea flexible pipe and our gas-focused process systems businesses. These businesses as well as our marine construction and production and midstream units all achieved their highest EBITDA in 5 years, expanding segment year-over-year margins for the 13th consecutive quarter.

Our drilling activity driven Energy Products and Services segment once again outperformed the underlying global rig count declines of 8% year-over-year, aided by our growing share of efficiency enhancing, downhole technologies and strong demand for drill pipe, including NOV's proprietary wired drill pipe data telemetry system. But generally, activity continued to soften. In North America, E&P has once again trimmed short-cycle oil activity, which is likely to slow further seasonally in the fourth quarter.

Internationally, the Saudi rig suspensions appear to be behind us. And while spending there remains low, expectations are building for a few more rigs to go back to work in 2026. Elsewhere in the Middle East, demand from the UAE, Qatar and Kuwait remain healthy as customers continued to invest to meet production goals. Many are pursuing unconventional shale developments. Argentina, Saudi Arabia and the UAE are leading the way but interest is emerging elsewhere around the globe as I'll speak to in a moment.

Offshore, our customers expect a meaningful exploration and development drilling ramp to begin in late 2026. Offshore FIDs are expected to pick up over the next few years following a lull in 2025 and our discussions with customers around deepwater FEED studies support this view.

Bookings tied to offshore development are already up double digits year-over-year. Further out, NOV's prospects through the next decade are extraordinarily bright. Why? Step back from the near-term noise created by OPEC quota unwinding, oil oversupply, commodity price pressures, tariffs, inflation and geopolitical uncertainty. And you will see 2 major structural shifts that are setting up a powerful decade of opportunity for our company.

First, the globalization of unconventional shale development. Oil and gas or commodities and the winners and losers in all commodity industries live and die based on costs, development costs and marginal production costs. The clear winter and the race to lower marginal production costs since about 2012 or so has been North American unconventional shale, which has arguably provided more than 80% of global supply growth since then. It's been the winner of the horse race to lower cost. And as the winner, it has attracted the most capital.

Technology, capital and ingenuity led marginal costs for the shale juggernaut lower and lower, outpacing the marginal cost reductions secured for offshore and other sources of oil and gas, and these competing sources saw capital investment fall sharply through the same period. But as North American shale producers have chipped away at Tier 1 inventory locations, production growth is flattening here and may well be peaking now.

And as the mix of lower quality Tier 2 locations rises, marginal cost per barrel for North American unconventional shales is creeping up as comments from producers in a past few Dallas Fed surveys note. After 20-plus years of refining the technology that enabled North American shale revolution, these same technologies are now being deployed at scale internationally because international E&P see opportunity to develop lower marginal cost sources of oil and gas elsewhere.

The Advantage International shales have at this point is that they will benefit from decades of advancement and several hundred thousand shale wells that have been drilled and experiment with and continuously optimized here in North America, and these learnings will now be applied to new Virgin International rock. The near-term challenge they have is they lack the necessary tools and equipment. That's where NOV comes in.

Since prosecuting a successful unconventional shale play requires pretty much everything NOV makes, we're pretty excited about this. Recall that the U.S. shale miracle started with a complete retooling of its land rate fleet and the build-out of a lot of frac, coiled tubing wireline completion and production equipment. These tools and technologies are squarely in our wheelhouse. And we see the emerging build-out of infrastructure to support international shale development is driving demand for us for years to come.

Second, the reemergence of deepwater and offshore development. After years of second place finishes and the marginal cost horse race, deepwater is back to winning. Deepwater has quietly but steadily gotten better since 2012. NOV-supplied offshore drilling rigs are drilling more efficiently, higher hook load capacities are enabling more cost-effective casing programs, the standardization of subsea production kit and FPSO designs have all served to steadily reduce the marginal cost of deepwater barrels and make its economics more compelling.

Simply put, we believe that deepwater broadly has brought marginal cost below North American shales, and it is now winning the marginal cost horse race. This is a big deal. We believe this inflection, this leadership change will drive many more investment dollars into deepwater in the coming decade to satisfy growing global energy demand. Evidence of this is apparent exploration success stories in new basins in Guyana, Suriname, Namibia, Senegal, the Eastern Mediterranean and the Palo gene in the Gulf of America.

Industry forecast call for offshore oil output to rise to roughly 13 million barrels a day by 2026, making deepwater the leading source of incremental supply growth. The pivot and spin is further helped by the emergence of profitable floating LNG, which adds natural gas as another viable target for offshore E&Ps. NOV's technology portfolio from subsea flexible pipe and process systems to mooring solutions and rig aftermarket and automation is critical to enabling this expansion.

Customer performance expectations favor selection of NOV technology, providing NOV a strong competitive advantage in deepwater operations. Finally, I'll stress that this 166-year-old horse race is never over. Innovative North American shale operators have an amazing track record of honing costs to improve competitiveness. But honestly, all operators and all basins do, and they have to, given the business they're in.

But right now, we see deepwater pulling into the lead in international shales entering the race as a serious contender. We believe these 2 will define the next decade plus of oil and gas development and both depend on the tools, equipment and technology that NOV delivers. Back to the near term, however, as I said, we expect market conditions to remain soft through the next few quarters. Tariffs and inflation uncertainty will continue to weigh on margins in the near term. And global drilling activity is likely to drift lower. But looking further ahead, we see the back half of 2026 and beyond as a period of strengthening demand across both offshore and international land markets.

As deepwater projects ramp and unconventional development expands globally, NOV's technology leadership and global platform will enable us to capture the growth efficiently and profitably. And that's why I'm so excited about NOV's future to my NOV teammates listening this morning. Thank you for all that you do to strengthen and improve and lower the marginal cost of the operations of all of our customers globally.

You've helped build NOV to perform through cycles and to lead in the next phase of global energy development. And I'm grateful for the way that you get up every day, put your boots on and make this industry better. Now let me turn it over to Rodney.

Thank you, Clay. Consolidated revenue was $2.18 billion, down slightly year-over-year and sequentially. Operating profit was $107 million or 4.9% of sales. Net income was $42 million, and the company recorded $65 million within other items. Adjusted EBITDA totaled $258 million, representing 11.9% of sales.

Sequentially, EBITDA margins improved as strong operational execution and cost controls offset the effects of softening oilfield activity and higher sequential tariff expense. Free cash flow generation remained robust at $245 million. Over the last 9 months, NOV converted 53% of EBITDA to free cash flow and achieved a 95% conversion rate during the quarter which was a result of strong cash collections on projects and a focus on systematic structural working capital efficiency improvements.

During the quarter, we repurchased 6.2 million shares for $80 million and paid dividends of $28 million, bringing total capital return to shareholders year-to-date to $393 million, which includes a supplemental dividend of approximately $78 million paid in the second quarter. During 2025, we expect to significantly exceed our minimum threshold of returning 50% of excess free cash flow to our shareholders.

For the quarter, tariff expense came in just under $20 million, increasing approximately $6 million sequentially. For the fourth quarter, we expect our tariff expense to be around $25 million. We continue to realign our supply chain and execute strategic sourcing initiatives to reduce tariff impacts. We also remain focused on removing structural costs to improve margins and returns, including consolidating facilities, standardizing internal processes and rationalizing product lines or regions that don't meet our profitability requirements.

These programs are on track to deliver over $100 million in annualized cost savings by the end of 2026, although tariffs and other inflationary impacts remain headwinds. While we expect the near-term environment to remain choppy, we're executing well, managing what we can control and positioning NOV well for the future. With that, I'll turn to segment results.

Starting with our Energy Equipment segment. Third quarter revenue was $1.25 billion, up 2% from the third quarter of 2024. EBITDA increased by $21 million to $180 million resulting in a 140 basis point increase in EBITDA margins to 14.4% of sales, driven by strong execution in our capital equipment business, more than offsetting lower aftermarket revenue. Capital equipment sales accounted for 63% of the segment's revenue in the third quarter of 2025, increasing 20% year-over-year due to strong growth in offshore production equipment. Aftermarket sales and services accounted for the remaining 37% of energy equipment revenue with sales declining year-over-year by 19%.

Capital equipment orders of $951 million for the quarter more than doubled sequentially reaching our second highest quarterly bookings in the last 18 quarters. Orders represented a book-to-bill of 141% for the quarter and 103% book-to-bill over the trailing 12 months. Continued strength in demand for our offshore related production equipment offerings led the order book with multiple orders for subsea flexible pipe, a monoethylene glycol processing module and our second order for a large submerged swivel and yoke system for LNG offtake in Argentina.

Backlog at the end of the third quarter was $4.56 billion, the highest since we started reporting energy equipment as a segment. Our Subsea flexible pipe business had another exceptional quarter with solid year-over-year and sequential revenue growth. The operation also continues to improve profitability due to strong execution on projects. The business delivered record quarterly revenue and bookings with project backlog achieving an all-time high. While the business is performing exceptionally well, our team continues to identify ways to further optimize our manufacturing processes to accelerate production and improve operational efficiencies.

Our Process Systems business continued its strong performance, both for offshore production and onshore gas fields with revenue growing high double digits year-over-year, finishing the quarter with record revenue and EBITDA. Offshore production market forecast remained robust, which should continue to drive demand for gas processing and produced water treatment opportunities.

Additionally, the build-out of FLNG and FSRUs is driving opportunities for our fluid and gas transfer systems, like the order I previously mentioned for the submersible swivel and Yoke system for an FLNG project in Argentina. Our Marine and Construction business experienced a sharp increase in revenue compared to the third quarter of 2024, driven by a significant increase in progress on crane and cable A projects partially offset by lower activity related to wind turbine installation vessels.

The outlook for offshore supply vessels, which provides opportunities for our subsea cranes remain strong, and we continue to see tenders for cable A vessels. The fixed wind market remains challenging. However, we see the potential for another award later this year or early next year with the continued need for larger new build vessels in Europe and Asia. Several countries are still planning to expand offshore wind supply, which could lead to a shortage of WTIVs around the end of the decade, and therefore, should drive incremental new build demand over the next few years.

Revenue for our Intervention and Stimulation capital equipment fell double digits year-over-year due to a steep drop in demand for pressure pumping equipment in North America, partially offset by strong and growing demand for coiled tubing and wireline equipment. This growing demand related to the development of unconventional resources in international markets and to offshore activity has led to 3 straight quarters of bookings growth and trailing 12-month book-to-bill of over 100%.

Revenue from drilling capital equipment decreased high single digits year-over-year due to market uncertainty and contracting gaps from some offshore drillers. Capital equipment orders improved sequentially, but the demand remained soft as offshore drilling contractors preserve capital while navigating through white space in their contract portfolio.

Outlook for the offshore drilling appears to be improving for the second half of 2026 and beyond, as Clay mentioned, leading to a more constructive dialogue regarding opportunities to support recent and upcoming tender awards including higher hook load capacities, crown compensators, managed pressure drilling and BOP upgrades. Additionally, demand for automation and robotics continues to gain momentum for land and offshore rigs due to improved safety and operational efficiencies provided by our Adam RTX robotics packages.

In our Drilling aftermarket business, revenues were down significantly compared to prior year. The decrease is the result of lower spare parts bookings over the last few quarters as customers slowed spending in response to gaps and contracting activity but we did see a mid-teens percentage increase sequentially in spares bookings, which should lead to a stronger fourth quarter revenue for the drilling aftermarket business.

For the fourth quarter, we anticipate a less pronounced than usual seasonal increase in our Energy Equipment segment due to timing of capital equipment deliveries. As a result, we expect revenue to decline 2% to 4% year-over-year with EBITDA in the range of $160 million to $180 million. Our Energy Products & Services segment generated revenue of $971 million, a 3% decrease compared to the third quarter of 2024, reflecting lower global activity levels and delayed capital equipment orders for infrastructure projects, partially offset by technology-driven share gains.

EBITDA was $135 million or 13.9% of sales. Higher decrementals resulted from an unfavorable sales mix, pricing pressures in North America and increased tariff expense. We're focused on reducing structural costs, including consolidating facilities and exiting product lines or regions that don't meet our return requirements. North America represented 57% of segment revenue and grew 7% year-over-year on higher drill pipe sales compared to a 10% decline in rig count.

Segment revenue decreased 15% year-over-year in international markets due to some activity declines in the Middle East and Latin America. For the quarter, the sales mix for Energy Products and Services was 51% services in rental, 31% capital equipment and 18% product sales. Services and Rentals revenue declined 4% year-over-year as demand for our solids control services declined in the mid-teens due to lower international activity.

However, increased traction for our efficiency-enhancing technologies in North America as well as an unconventional and tight gas applications internationally, helped partially offset the impact of an 8% global rig count decline. In North America, drill bit revenue rose mid-single digits due to market share gains tied to superior performance and reliability, and we realized growing demand for our drill bits, downhole tools and tubular coatings from increase in gas-directed drilling, particularly in high-temperature applications in the Haynesville.

Internationally, our downhole drilling motors were deployed in the first unconventional wells drilled by an independent in Bahrain and rentals of our downhole technologies increased in Argentina supporting unconventional development. Tubular coating and inspection revenue was down modestly year-over-year with strong growth in North America coating sales, partially offset by lower demand in Latin America and the Eastern Hemisphere.

Capital sales increased 5% year-over-year, supported by mid-teens percentage growth in drill pipe sales as customers replenished inventories. Drill pipe bookings reached their highest level since early 2022. However, composite pipe and tank sales declined primarily due to delays in infrastructure projects affecting timing of orders. Orders for infrastructure projects stepped up late in the third quarter and included an order for 2 large fuel storage tanks for a data center and 9 miles of 55-inch glass reinforced plastic pipe in Brazil.

The strong order intake for our drill pipe and fiberglass businesses positions us well for improved capital equipment revenues in the fourth quarter. Product sales decreased in the mid-teens percentage range year-over-year with higher downhole tool sales in Asia more than offset by fewer international bulk sale deliveries. Additionally, we are seeing an increase in international customers changing their preference from purchasing to renting drill bits, more in line with predominant customer preferences in North America.

Looking to the fourth quarter, we expect a modest sequential pickup in capital equipment sales from our Energy Products & Services segment to be more than offset by softer market conditions. As a result, we expect fourth quarter segment revenue to decline 8% to 10% year-over-year with EBITDA between $120 million and $140 million. With that, I'll turn the call over to Jose.

Thank you, Rodney. NOV executed well during the third quarter in a challenging market environment. While we expect near-term activity levels to remain soft, we also believe that growing demand, natural decline rates in a decade plus of underinvestment in exploration will drive a meaningful recovery potentially beginning as soon as late 2026.

We have a very constructive view regarding the industries and NOV's outlook over the medium to longer term as a result of the market backdrop and how we are positioning the company. We remain sharply focused on improving operational efficiencies while positioning NOV to capitalize on key secular trends, including offshore production, supplanting U.S. unconventional resources as the dominant incremental source of global oil supply accelerating activity in international unconventional basins, natural gas is becoming the fuel of choice for power generation and the application of technology to drive efficiencies.

These trends are driving actions we see from our oil and gas operator customers and are driving how we invest in and position our business. Clay highlighted that we provide many of the critical tools, equipment and technology required to meet the growing needs of our customers. NOV has a unique but broad portfolio of solutions and serves multiple end markets that often move through cycles at different rates.

The diversity in our business, along with our technology and service-driven market leadership are intentional and strategic and provide operational and financial resilience. Let me explain what I mean. In 2023 and 2024, NOV generated roughly $1 billion in adjusted EBITDA, and we expect it will deliver about that same amount in each of 2025 and 2026. While our earnings appear stable at the consolidated level, our mix can change meaningfully from year-to-year.

Following the pandemic, we realized a rapid recovery in demand for shorter-cycle activity-driven products and services, particularly in North America. As a result, our Energy Products & Services segment drove our growth and contributed roughly 62% of our adjusted EBITDA in 2023. Since then, we've seen slowing activity in North America which has been offset by growing demand for capital equipment in offshore and international markets.

As a result, we expect Energy Equipment's contribution to EBITDA to rise from 38% in 2023 to approximately 55% in 2025 while Energy Products and Services EBITDA contribution moves to about 45%. While we have seen a sizable shift in the contributions from our 2 reporting segments, some of our businesses have realized a greater than 40% increase in the revenues and significantly higher percentage movements in EBITDA, which offset declining activity in North America.

The diversity in our portfolio provides resilience during times when market cycles are out of phase as we've seen over the last decade. And when not if cycles align likely driven by higher commodity prices and a more sustained global upcycle. The amplitude of NOV's earnings will be materially higher even without an offshore rig new build cycle. While our business is intentionally diverse, we're extremely deliberate about how we position our portfolio and how we compete. Each of our operations leverages NOV's energy expertise driven core competencies in engineering, material science, manufacturing, service delivery and supply chain management.

We also focus on participating in businesses where we can be market leaders and establish and advance competitive advantage often achieved by harnessing our core competencies and world-class R&D capabilities. Additionally, we focus on markets that have high barriers to entry, typically due to complex technological hurdles and the associated capital requirements. Market leadership in high barrier to entry markets enable scale, scale across multiple product and technology-oriented businesses that can leverage common manufacturing, engineering and supply chain resources, further advances competitive advantage and provides resiliency during market cycles, allowing us to continue investing in innovation regardless of market conditions.

You'll find market leadership across our product portfolio. We pioneered numerous technologies that helped unlock the shale revolution by enabling efficient drilling and completions of ultra-long lateral wells. As Clay noted, these technologies are now realizing accelerated adoption in emerging international unconventional markets. We've also pioneered numerous technologies that unlocked major efficiencies associated with the exploration and development of deepwater resources.

Our game-changing leach PDC cutter technology dramatically increased thermal stability and wear resistance of drill bits, leading to substantially higher rates of penetration and longer run times with fewer trips. While the bulk of the industry now uses our technology, we continue to leverage our material science expertise to further advance Qatar technology that drives improvements in rate of penetration and reduces costs.

These advances have allowed our Reed High log drill bit business to gain share in many markets, including the U.S. whereas revenue grew 11% year-over-year against an 8% decline in drilling activity. Another game-changing downhole technology we pioneered was our agitator friction reduction tool, which enables operators to drill further and faster. We continue to advance our technology to build better fit-for-purpose versions of the tools, such as our agitators VP and our Agitator rage friction reduction tools. The VP is a 0 pressure drop friction reduction tool that allows customers to maintain maximum low rates and pressure limited drilling situations.

On the opposite end of the spectrum, our Agitator rage leverages the high-pressure capabilities of super-spec drilling and pump packages to produce extreme levels of friction reduction for type curves, U-turns and ultra-long laterals in the most demanding environments. Revenue from new downhole drilling technology, which includes our latest agitator offerings, is up over 30% year-over-year comprising almost 20% of our downhole tools businesses revenue with more room to run.

Even in areas where many people may not think technology plays a big role such as in tubulars, innovation drives our market leadership. After setting the global standard for premium high torque drill pipe with our XT connection that can handle 70% more torque and improve Hydraulics with up to a 50% reduction in internal pressure loss in comparison to standard API connections, our engineers developed Delta Connection.

Delta can handle 20% higher torque than the XT connection for extended length of drilling applications and its proprietary design prevents going, reducing total cost of ownership and enabling up to 50% faster makeup than other premium connections, reducing tripping time. We also recently introduced wear-resistant drill pipe to address accelerated body wear in extreme drilling environments and insulated coatings to protect against extreme well temperatures that cause premature failures of bottom hole assemblies.

Additionally, we are a leader in providing subsea flexible pipe for deepwater production. We have won the Supplier of the Year award from the largest global consumer of Subsea's flexible pipe 2 years in a row, as a result of our technology execution and service. We continuously advance technology that addresses our customers' most pressing needs. This quarter, we received an order for our active heated flexible riser system, which combines flexible pipe and heating technology to address flow assurance challenges in environments where heavier oils become even more viscous and cold deepwater conditions.

We also offer our OptiFlex condition monitoring system that utilizes embedded fiber optics to continuously measure temperature and fatigue. And we're undergoing qualifications for what we believe is the leading contender to cost-effectively mitigate CO2 stress corrosion cracking which is a costly issue in Brazil's pre-salt fields. We've been investing in our solution for the CO2 stress corrosion cracking channel since 2019, reflecting our commitment to invest in critical solutions for our customers throughout the cycle.

I could go on all day covering the technology leadership across our product portfolio, but you probably detect the patent here. NOV pioneers technologies that provide meaningful advancements for the industry, then we continue advancing our technologies, allowing us to maintain our competitive advantage and market leadership. While we focus on rapid innovation and continuously improve our products, R&D efforts that drive potentially revolutionary changes like our CO2 stress corrosion solution and our industry first 20,000 PSI BOP take place over longer periods of time, sometimes over a decade, an investment horizon that few in this industry have the fortitude to stomach.

We continue to be relentlessly focused on several other potentially revolutionary long-term R&D initiatives and would like to highlight a couple of our ongoing efforts to digitize and automate the energy industry. Over a decade ago, we commercialized wire drill pipe that can transmit data at up to 58,000 bits per second compared to the 5 to 15 bits per second for standard mud pulse telemetry.

Since our initial commercialization, we have significantly improved connection reliability, lowered costs and built a portfolio of advanced sensors and tools that harness the capabilities of real-time broadband data transmission. Additionally, we've invested in a software stack to aggregate, visualize and contextualized data to drive more value for our customers through better analytics, decision-making and automation.

During the third quarter, our downhole broadband solutions team helped the customer drill an important exploration well in the North Sea. Our wired drill pipe technologies enabled advanced geo steering ultra-long horizontal sections at unprecedented speeds reaching up to 200 meters per hour and precision accessing significantly more reservoir than the customer previously thought possible. The operator stated that a typical exploration well might intersect a few hundred meters of reservoir but we helped our customers drill a multilateral multi-target exploration well that exceeded 20 kilometers of reservoir exposure.

This complex well drilled with leading-edge technology cost a bit more than a conventional exploration well but it access to very large multiple of the amount of reservoir a conventional well would have encountered. Additionally, with the quality and quantity of data collected, we help the customer meaningfully reduce uncertainty and accelerate their time line from discovery to development.

Lastly, I want to highlight the success we're having with drilling automation. Our NOVOS drilling automation system was designed to automate repetitive drilling activities and more importantly, to serve as a platform that would allow multi-machine control and rig floor automation. Leveraging this platform, we developed our Adam RTX robotic system, which we commercialized in January 2024 on a rig working for an IOC in Canada. Our Adam RTX system completely automates the vast majority of operations without human intervention on the rig floor, significantly improving safety and drilling performance while providing high levels of consistency.

We now have a total of 6 operational robotics packages, 3 on land and 3 offshore and the IOC using our robotic system in Canada recently shared with us that the automated rig is their best performing rig in the region. We're hearing more and more of our customers describe our robotic system as the next top drive for the industry, which, by the way, was another revolutionary technology that NOV pioneered for the industry.

Excitingly, the backlog for our ADAM RTX system is growing at a healthy clip. NOV's technology and market leadership and business diversity drives operational and financial resilience. This resilience enhances our ability to leverage our core competencies and invest through cycles to further advance our competitive advantage, but none of this would be possible without our fantastic people.

NOV will play a key role in the emergence of international unconventional resource development and the coming growth of deepwater production. Our technologies from downhole tools to advance digital solutions are developed through intensive collaboration among multidisciplinary teams and close engagement with our customers to improve the efficiencies and lower the marginal cost of energy production.

Few organizations outside NOV possess the breadth of capabilities required to commercialize solutions of this complexity. The people of NOV continuously demonstrate a remarkable ability to design, manufacture and service essential technologies for our clients. Every member of NOV plays an important role in putting customers first and making NOV better every day. And I'd like to thank our team for their dedication and their unwavering focus. With that, we'll open the call to questions.

[Operator Instructions] The first question today will be coming from the line of Jim Rollyson of Raymond James.

Nice results and obviously, great bookings and ending backlog. And I guess, clearly, nothing like starting -- going into a little bit of slowness before we get to the nice vision you have for where this is all going down the road with a record backlog. And maybe if I can ask about that is your energy equipment business, looking at it the way things have trended this year, you've had pretty solid growth year-on-year every quarter in capital equipment. And then you had aftermarket kind of be a drag.

And I'm wondering with the backlog you have and kind of the timing and that as you look out, can you continue to put up pretty decent year-over-year growth like through '26 even in a maybe a bit of a softer near-term market because of that backlog?

Yes. I think it will certainly help on that side. What we're concerned about, Jim, and we referenced this in our prepared remarks, is the general softness in every -- look, everybody in the oilfield is worried about the overhang of OPEC barrels and as those come in, what they're going to do to commodity prices.

So I think quick return items like aftermarket and spares and that I think people are going to be very circumspect about what they spend in that area. But yes, so far, so good on the capital equipment side of energy equipment and -- which as we also noted, is really driven by our production-related equipment.

That's risen in our mix from south of 20% of the mix to now north of 30% of the mix for the segment revenues and has really dominated our or something like 80% of our orders for the past few quarters have been in the production side of things. So the drillers are still very cautious on capital spend, but this is really an engine that's fueled by demand for production equipment.

But as we look into 2026, we do foresee pickup in deepwater late in the year. That's a very consistent theme we've heard from offshore drillers and IOCs both. But I also think that the year's results are likely to be tempered by continued slowing of activity here in North America and otherwise. But as you rightly point out, once we get into late 2026, 2027, once we get through the excess barrels that OPEC is putting back on the market and kind of that gets behind us, I think it's really setting up for a much stronger market for NOV.

Absolutely. And as a follow-up, just maybe sticking with EE. The other issue you've had this year is probably not what we thought 9, 12 months ago, but margins have actually been pretty strong there and kind of bounced around this 13-something to 14-plus percent. And I'm curious, as you look into '26, just on the mix of capital equipment versus aftermarket, the types of stuff like more production-related equipment. How do you think about the margin profile? Like is kind of '25 margin profile, something we could see again in '26 when you throw in the tariffs and then the cost offsets that you're also doing?

Jim, this is Jose. I'll start off on this one. Really, we'll have to see how things play out during the course of the year. So I think Clay did a nice job at sort of describing the scenario that we envision for 2026 in general, but the timing of how things play out is always difficult to pin down.

So as you pointed out, we've had really nice steady improvement in terms of the overall quantity of the backlog, but we've also seen continued improvement in terms of the mix and really embedded pricing and margin within that backlog as well. So feel really good about our positioning from a capital equipment standpoint, going into 2026.

The real variable is going to be as it relates to a lesser extent, book and turn type items. A bigger driver is obviously going to be the aftermarket piece. But really, as we sit here today, we feel pretty good about the way that, that is shaping up. I guess Rodney touched on it in his prepared remarks, line of sight towards recontracting a lot of the offshore fleet is looking more and more promising.

When those rigs are recontracted, keep in mind that once a contract is signed, it's typically 9 to 12 months before they start turning to the right. But once those contracts are signed, they're typically picking up the phone and calling us for additional spare parts to replenish those rigs and get them ready to get back to work and also doing any potential upgrades.

But -- so the setup is very good, but the timing is a little bit uncertain. So it really just depends on what happens through the course of the year. But as Clay mentioned, what's really exciting to us is the setup for 2027. We talked about the -- when sort of these cycles and our various components of our business converge significant increase in the amplitude of our earnings when that happens. And what we've seen happen over the last several years is we start off with North America. The North America trends down.

Then we saw a reactivation cycle for the offshore rig drilling space and that sort of tapered off. But we got a pickup in offshore production-related equipment, and that's the bright spot in the portfolio right now in -- towards the latter part of 2026 and the latter part of -- and in 2027, that's when we sort of see those -- more of those cycles converge, particularly as it relates to all things offshore, but also think we could see a really nice continued activity for international sales.

And do think that North America will have to run a little bit harder as well just to maintain flat production, if not sort of wind things just a little higher. So sorry it's a long-winded response, but I think the setup for NOV is really good over the next couple of years.

Lissa, so we have another question? Operator. Hello, operator?

Mark Bianchi, here. Yes, I wasn't hearing anything on my end either. But I guess, you had a really strong quarter of orders in Energy Equipment. How are you thinking about fourth quarter and beyond? Can we see clicking along at a one or better book-to-bill from here on? Or what's the general outlook?

Mark, what I'd tell you is orders here are always lumpy. We're always very hesitant to give too much guidance because a lot depends on some large orders. Going into the fourth quarter, so far, we've got line of sight on a couple of large interesting orders.

One, we feel pretty good about another maybe a longer but. What I'd tell you is that kind of given the caution, I think, that's out there, my expectation is for the fourth quarter orders probably will slip a little bit below 100% book-to-bill right now. But if we do land that second order, I think that may help put us over 100% book-to-bill. But my best guess right now is probably just a tad short. But I'll stress again, we've had 4 years of great quarters. I think our backlog is up 40-something percent, 43% since 2020 and over 100% book-to-bill trailing 12 months.

And obviously, Q3 is very strong at 141% book-to-bill. So we don't get too worried about one particular quarter. What's more important is a longer-term trend. And the longer-term trend for NOV for the past few years has been very solid.

Yes, it has. The other question I had was just on the -- there was $65 million of other items, and I think write-down of long-lived assets and inventory were mentioned. Can you say how much of that was the inventory and how much of a benefit to margin was that in third quarter, if at all? And how much is it benefiting kind of going forward?

Yes. Thanks, Mark. Our other items were really an output. As we mentioned in our last quarter earnings call that we're going through some detailed business process reviews. We're looking at product lines, or product lines, business units, facilities for high-return opportunities under a return lens.

And as we continue to go through that process over the last 90 days, we have had some facility consolidations, facility closures, some exiting of certain subproduct lines, which, to your point, the output was some inventory charges, those inventory charges don't have any impact to margins going forward. Those -- that inventory is scrapped and does not have any margin impact going forward.

Our next question comes from the line of Arun Jayaram of JPMorgan.

Clay and team, I was wondering if you could maybe elaborate a little bit about the build-out of unconventional that you're seeing, you mentioned Argentina, the UAE and Saudi. Maybe you could talk a little bit about what you're seeing there?

I think you highlighted increased coiled tubing and wireline types of orders, but talk about the early build out there and perhaps other countries or regions where you're seeing unconventionals gained share?

Yes. Let me talk about that, and then I'll hand it over to Jose to talk about maybe our demand for intervention and stimulation equipment. What I'd tell you that's most interesting to us is you've got very well-known programs in Saudi Arabia with the Jafurah field with Vaca Muerta in Argentina, unconventional fuels in the UAE that are being prosecuted in earnest by the oil companies that control those, they're moving forward.

But what's interesting to me is the number of really successful North American shale entrepreneurs now that are prospecting and looking for kind of the next basin to move to. And so there are, I think, a wave of unconventional prospecting underway in places like Algeria and Turkey and Oman and Bahrain we mentioned in our press release, Australia. And so these are really interesting technologies or transformative technologies. They have the potential to catalyze new low marginal cost sources of production. And so we're pretty excited about what that means for NOV in the future.

Yes. And Arun, just to pick up on that. So yes, there's a broad spectrum of effectively NOCs in countries that are at different stages of the development. As Clay touched on Argentina, Saudi or sort of at the more mature end of the spectrum and then you have folks like Pakistan and Turkey that are really just starting to get stored and everybody else is somewhere in between.

And this is an exciting backdrop for NOV and all of these markets tend to start in a pretty similar way. In some of these less mature, very early-stage markets, we're seeing a big pickup in demand for our coring services. As you might imagine, as people try to delineate the boundaries of what these unconventional plays look like, then you typically translate from that type of work to a little bit of probing the formations, but that quickly, assuming everything goes according to plan, that quickly moves to realizing that a lot of investment is necessary in order to make things go and that translates into investments in infrastructure, which has been driving a lot of demand for businesses like our fiber glass business, a lot of build-out of a flexible pipe and rigid pipe as well to transport fluids and gas to and from locations.

Also things such as chokes, manifolds, things of that nature also get gone. And that, as it relates to once things get a little bit more mature that's when we start to see a big pickup in demand for effectively more traditional service appointment, whether it's drilling equipment or intervention and stimulation related equipment.

I guess what I'll say, related to intervention stimulation equipment business in general, is obviously, that's been a pretty tough business for us over the last couple of years. Historically, that was very much a North American-centric business. Obviously, there hasn't been a lot of demand here over the last couple of years. But what we have seen here really over the last year is steadily increasing demand for our intervention and stimulation equipment business entirely related to demand from overseas and unconventionals, particularly for large diameter coiled tubing units, new wireline equipment all the things that are really necessary in order to enter into development mode from an unconventional standpoint.

So to put things in perspective, we had a greater than -- slightly greater than 150% book-to-bill this quarter. But really, for the last 4 quarters, we've seen a steadily improving book-to-bill in that business. And while we're still down quite a bit from where we were over a trailing 12-month period, we're now back to being over a 100% book-to-bill for that business. So things definitely heading in the right direction and see a lot more opportunities to come.

My follow-up is just wondering if you could just discuss what you're seeing in terms of FPSOs, maybe provide the context of how many FIDs that you see in 2025 and maybe thoughts on how that could progress in '26 and '27 because typically, that could include chunkier types of awards for NOV?

Yes. So we've seen -- I think everybody has been affected by this OPEC overhang of production. And so there continues to be a little caution out there. And as a result of that, as we progress through 2024 and 2025, estimates for FIDs and for the number of FPSOs to be ordered have been kind of walking down a little bit. Year-to-date, I think they've been pre awarded, and I think there likely a couple more to come here at year-end. But what we're excited about is by -- as we get into late 2026 and 2027, and we get this oil overhang behind us, again, I think it's a much brighter outlook, and I think we'll see demand pick up again.

Our next question comes from the line of Stephen Gengaro of Stifel.

I think my first question, I think it was about a year ago, it may have been a little longer, but you had talked about sort of better price backlog that was sort of primed to start flowing through the income statement, and we've seen some of that. And I'm just curious if you could talk a little bit about the current backlog, recent orders and how we should think about the margin impact at a high level in '26 and maybe beyond.

Yes. So good point there, Stephen. So as you mentioned, really throughout 25 we've seen a couple of different cost currents in particular for the EE business. One, as Clay mentioned, a significant number of our bookings throughout the year have been in the offshore production space as we have strong technological advantages there, high barriers to entry, our margin profile is able to continue to increase in addition to good operational efficiencies over the last 12 months.

And some of that offshore production area, which has really driven revenue and margins up in that particular area, offsetting some of that has been a decline in some of our aftermarket business. So we mentioned during the quarter, sort of a high teens decline in our aftermarket business. and that sort of spans across the full portfolio, principally in the drilling space.

I think as Jose mentioned on the question earlier, as we look into 2026, we're still able to have strong margins on what we're quoting in our offshore production equipment. And also the team is working diligently to continue to improve operational efficiencies. So that sort of strong backlog heading into '26 should be positive on the margin side. And then part of the other equation is sort of timing of when some of the rig aftermarket, some of the offshore piece happens and mentioned that's probably more in the second half of '26 than in the first half. So put those pieces together and put a glimpse into some of the 2026 margins.

Stephen, Rodney said it well, I'm going to add to what he went through the fact that I think our processes and our controls around the risk on signing new contracts in terms of very thoughtfully going through how we're going to execute, how we can improve our operations, how we can make sure that the scope that we're taking on is clear and we're the right company to handle that scope, the payment terms, all of the above. I think the quality of the backlog is as high as it's ever been today.

And so that's why you've seen margins continue to walk up there in energy equipment and that's strong clear contract provisions with our customers and then just an outstanding team executing these contracts after we win them, it's a great combination.

Great. And my second question is more high level, and we've all been doing this a long time. And when we start hearing about U.S. production plateauing. We've been hearing that sort of theme from a couple of companies and that activity is not high enough to sustain production. Do you guys see that? And do you think that is a critical sign towards maybe getting a stabilization and ultimately recovery in U.S. land?

Yes. I'm going to caveat this and just full disclosure, I've been wrong on this before, so I'm hesitant to call U.S. production peak. What I would say is though it's becoming clearer and clearer that growth is decelerating than what it used to be. 2023, U.S. production grew almost 1 million barrels a day and the EIA now is forecasting 2026 growth to be 0. And so it's been steadily declining. The level of activity has been shrinking. I think you have not seen production declines quite as meaningful as people have forecast, but that's because what activity is going on out there is being done at very high levels of efficiency and all that longer laterals and continuing to improved completion techniques and the like.

But it's just -- I think it's becoming more and more evident to a lot of people in the industry that U.S. shale, North American shale is kind of approaching the twilight that Tier 1 locations are being exhausted, Otherwise, why would you drill a horseshoe shape well. why would you do a refrac? I think why would you go to Turkey and look for opportunities or Algeria. So I think that all sort of signals the behavior in the industry. The production numbers points to the fact that -- I mean, this has been a fantastic horse in the horse race I described earlier, and it's produced a lot of oil and gas. 8.5 million barrels per day have been added from U.S. [indiscernible] since 2008, on a $1 trillion capital investment campaign and has done a lot of good for humanity around the globe to provide oil.

But I think we're seeing this basin begin to roll over. And as all basins have always done in the entire history of the oil in the gas industry, and I think it's inevitable now that this technology get it supplied to other basins elsewhere around the world.

Our next question comes from the line of Doug Becker of Capital One.

So EBITDA to free cash flow conversion was 95%, even with a bit of an increase in CapEx sequentially. And so it seems like some of the structural changes in working capital management are having an effect. So I wanted to get some color on what's the outlook for CapEx and free cash flow in the fourth quarter. But more importantly, just do these structural changes put a little bit more of an upside bias to free cash flow conversion as we think, I think, in 2026 and 2027.

Yes. Thanks, Doug. This is Rodney. I appreciate the highlight of the team's effort on free cash flow conversion for the quarter. As we mentioned, 53% on a year-to-date basis. So strong performance there. And that's been predicated on a couple of different points. One, strong project execution, as Clay mentioned earlier, good contractual terms, good collections.

So when you look at things from a DSO perspective, overall AR contract assets, liabilities, we've seen some good improvement there. And the last 12 months, some good improvement on the inventory turn side of things. So that's led to right now, and working capital as a percentage of revenue for the quarter, just a touch under 28%, 27.9% just a couple of pieces of commentary to help on Q4, think that working capital percent may just get a touch better, so call that in that sort of 27% to 28% range and really on kind of flat revenue Q3 to Q4, working capital may improve just a touch.

As you mentioned, our CapEx is up just a bit year-on-year as we've had some good organic opportunities on high-return investments so that continues to sort of flow through during Q4. And overall, feel good about 2025 sort of being in that ballpark of 55% free cash flow conversion. As we look out into '26, still early as we look at our budgets and composition of the different revenue streams. But with some of the structural improvement that we've made in working capital. I think that sort of ballpark of about 50% conversion is sustainable in the future.

Got it. And then, Clay, I really appreciate the reluctance to talk too much about orders on a go-forward basis because they are so lumpy. But a lot of constructive commentary about the intermediate term outlook, is it a fair way to think about this? If we see the offshore drilling pickup that we widely expected in late '26, maybe early '27. Is that a point where we'd start to see book-to-bill pretty consistently above 1%, is that a reasonable way to think about it?

Yes. I think it is, Doug. I think that will be additive to the demand we're seeing for production equipment. And honestly, right now, within Energy Equipment, it's the demand for offshore drilling equipment that's really missing.

And I think that comes back in like 2026, that will be additive, and I think that's a good thing for us. I also think -- again, I can't say too many times, the clearing of OPEC overhang and a more constructive commodity price outlook, I think that will help in all categories of equipment demand.

Thank you. I would now like to turn the conference back to Clay Williams for closing remarks.

Thank you, operator.

Thank you, operator, and thank you all for joining us this morning. The company looks forward to discussing its fourth quarter results with you in February. Operator, you may close the call.

Thank you, sir. This concludes today's conference call. Thank you for participating. You may now disconnect.