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National Oilwell Varco Inc  (NYSE:NOV)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, ladies and gentlemen, and welcome to the National Oilwell Varco Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

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

Loren Singletary -- Chief Investor and Industry Relations Officer

Welcome, everyone, to National Oilwell Varco's third quarter 2018 earnings conference call. With me today are Clay Williams, our Chairman, President and Chief Executive Officer; and Jose Bayardo, our Senior Vice President and Chief Financial Officer.

(Forward-Looking Cautionary Statements)

Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a US GAAP basis, for the third quarter of 2018, NOV reported revenues of $2.15 billion and a net income of $1 million. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation.

Now, let me turn the call over to Clay.

Clay Williams -- President, Chairman and CEO

Thank you, Loren. National Oilwell Varco's revenue in the third quarter of 2018 increased 2% and EBITDA increased $19 million to $245 million or 11.4% of revenue. While the company posted consolidated sequential improvement, our third quarter performance fell short of our expectations. This was due to a combination of market headwinds, which have rose late in the quarter in North America, a sharper than anticipated fall off of product sales into offshore markets, and a couple of self-inflicted execution challenges which we are focused on fixing.

Jose will go into these in more detail in just a few minutes, but generally, our Completion & Production Solutions segment saw completion services' customers slow deliveries of pressure pumping units, spares and coiled tubing strains in September in North America. Some of this revenues will push out into the fourth quarter as deferred units are delivered. But, nevertheless, we recognize that our North American customers for this equipment are facing lower day rates and pricing. They began slowing acceptance of equipment on order and cutting expenditures to manage their cash flows over the past few weeks. The Completion & Production Solutions segments offshore products also showed significantly lower sequential sales, which were partly offset by much higher sales of fiberglass pipe and completion tools, a good incrementals throughout the third quarter.

The Wellbore Technologies group achieved its expectations for revenue, but with a different mix, owing to some tool shipments that did make it out by the end of the quarter, which was roughly offset by higher drill pipe and drilling fluid sales. Margins for the group were below expectations due to mix and inflationary forces around labor and steel. We have been less successful than we anticipated at passing on higher costs as our customers are pushing back hard on price increases.

Rig Technologies posted better-than-expected margins compared to guidance, despite lower revenues, owing to a higher mix of aftermarket revenue associated with land rig demand and offshore rig reactivation activities as well as better execution on offshore projects. These revenue gains were offset by lower-than-expected revenues on a lower margin land rig, which was expected to ship in the third quarter but did not, which shifted revenues to later periods.

Overall, NOV's EBITDA improved 8% sequentially. While EBITDA is going in a right direction, we are focused on delivering better results as we continue to position the company for future growth, which we expect to unfold in 2019.

Before Jose goes into our detailed financial results for the third quarter, I'd like to spend a few minutes offering color into some of our major geographic markets, beginning with North America. 46% of NOV's consolidated revenues came from North America during the third quarter, reflecting sequential growth of 7% or $66 million. US revenues increased 6% sequentially and Canada seasonal improvement produced 17% sequential growth. Within the North America directional drilling market, downhole tools saw increased sales with share gains in both bits and downhole drilling motors. Our high tool at high flow rate ERT motors continue to win share and we are seeing more operators rent motors directly from us as opposed to relying on directional drilling service providers to supply them.

The strong performance of our motors has lead to a 30% increase in power section sales year-to-date and out first half price increases appear to be holding at least for these products. On the other hand, MWD spares sales into North America slowed in the third quarter after strong performance through the first half. Drill pipe saw double-digit sequential revenue growth and 58% of our global drill pipe bookings were for the US markets in the third quarter, as we achieved our highest level of Delta premium connection sales to-date at $44 million.

Drill pipe demand still remains materially below its long-term averages, despite customer-owned inventory being at the lowest levels that we've seen since 2010. But customers are focused on Delta's lower cost and ownership as they resume buying. US saw its control rental jobs increased 6% in the quarter and we've been able to get selective price increases in North America for rig instrumentation services. Nevertheless, steel and labor costs are continuing to rise, eroding margin gains from price increases across many of our businesses to the scope posting North American revenue gains from both coating and inspection services.

Higher steel prices are driving demand for our tubing and sucker rod reclamation services, which provide lower cost used pipe and sucker rods as compared to new. As I mentioned, I will intervention equipment businesses within our completion of production solutions segment, saw generally lower sales for everything except coiled tubing units for North America. Pumping units deliveries fell from 40 units in the second quarter to only 24 this quarter. But processing equipment, like mixers and blenders, still see comparatively strong demand.

We secured new orders for about 27,000 horsepower in the third quarter for replacement units and we are seeing high interest in our new high capacity coiled tubing units, as well as our new 2.4 million pound SandBank proppant silo system, which we are introducing this quarter. Coiled tubing string sales declined in the third quarter at high decrementals hurt by higher steel costs. Within workover rigs, our customers are interested in taller mass and 1,000 horsepower pumps to reach down the longer laterals characterizing North American unconventional wells.

We sold another super spec land drilling rig to a repeat customer from North America, and we saw improvements in demand for spares for land contractors. 57% of our overall rig technology's capital orders in the third quarter were for land markets, partly in support of DC to AC land rig conversions, as well as to add high torque top drives. We continue to promote super spec rigs to North American drillers, complete with NOVOS operating systems. Higher drilling day rates in North America around $25,000 a day. Meaning that they are very interested, but smaller operators tell us that securing financing remains very challenging. Overall, our drilling contractor customers from North America seemed to be willing to increase their spend, while pressure pumpers are retrenching hard as we enter the fourth quarter.

On the production side, North America revenues for fiberglass flowlines are very strong, particularly in West Texas. Higher steel costs are helping to shift more demand to composite fiberglass flowlines, where NOV is the global leader. Our completion tools business sold its first new liner hanger product into the North American market in the third quarter. Midstream pipeline valves and closures are also seeing brisk demand within our PFT Group, offset by the order demand for artificial lift products as many producers in Canada and elsewhere appear to be moving a little more toward gas lift.

The PFT Group won a nice order for 93 reciprocating pump packages for a major US pipeline operator during the quarter and we are seeing high interest in separators and sand traps for the North American market for the Group as well.

Turning to international markets. Overall, National Oilwell Varco's revenues declined 2% sequentially, mostly due to lower offshore production equipment sales. Middle East activity has been steady. NOV's consolidated revenues for the Middle East and North Africa totaled 14% of our third quarter mix and were roughly flat sequentially with lower rig sales offset by higher Wellbore Technologies revenues.

During the third quarter, we saw strong demand for drilling motors, roller reamers and fishing tool packages, including our Wide Catch Overshot grow to support new drilling programs across the Middle East/North Africa region. Bit sales declined following large sales into Algeria and Kuwait in the second quarter, but we did win a large three-year tender in North Africa during the third quarter. And MWD sales improve there as well. 27% of our third quarter total global drill pipe orders were from the Middle East/North Africa region. However, we saw the sale of one string of wire-drill pipe into the Middle East actually slipped into the fourth quarter, as the operator pushed it spud date for this pipe back a quarter.

Pressure pumping aftermarket sales improved sequentially in the region, offset somewhat by lower coiled tubing sales, but demand generally for stimulation equipment across the region appears to be rising. Demand for fiberglass tubulars is also high, again helped by higher steel costs shifting demand to composites. We are currently commissioning our new fiberglass tubular production plant in Saudi Arabia. Our completion tools business sold its first i-Frac system in Burst Port subs to a National oil company in the Middle East during the quarter, but planned shipments of a large pump skid order into Kuwait by PFT were delayed.

Nearby, in Central Asia, we had successful test runs for our new rotary steerable offerings and MWD tools. Unfortunately, though, these were completed after the end of the quarter, so again revenue was deferred into Q4. We expect Q4 sales of rotary steerables in MWD into Russia and China to be strong. While bit sales will slow seasonally.

Our Completion & Production Solutions segment benefited from higher sequential shipments of fiberglass pipe into China and Russia, and our completion tools business in Russia remain strong as operators are adopting our Burst Port subs and liner hangars, even though the oilfield market has been under pressure related to FX and budget constraints. Within Rig Technologies, we are also pursuing large opportunities around the Caspian region.

Turning to Latin America. NOV's revenues declined 2% sequentially and made up about 10% of our consolidated revenue mix. Gains in Mexico were offset by declines in Brazil. In Mexico, we are benefiting from leasing rotary steerable tools and MWD equipment and drilling motors to an independent directional drilling services firm. In Argentina, we saw significant pressure on Tuboscope and Well Site services related to the devaluation of the peso, but we are nevertheless able to post sequential gains owing to fiberglass pipe shipments and rig sales into the region, and completion tools sold its first i-Frac order for three wells there during the third quarter.

Despite the FX challenges in Argentina, that Jose will address in a moment, the country remains a key focus area for us as operators there seek to replicate North American unconventional successes and the Vaca Muerta formation.

Finally, turning to the offshore, NOV saw revenues decline 1% sequentially, driving our offshore mix down to 33% of consolidated revenues or about $720 million. As we noted last quarter, we continue to see positive signs of onshore recovery. XL Systems, for instance, which makes conductor pipe connections posted its fifth quarter in a row of book-to-bills north of 100%. Orders today for these products speak to offshore drilling plans for late 2019, early 2020, given lead times for specialized heavy wall, large diameter pipe from international mills.

This business, like many other businesses, is having only mixed success on recouping higher steel costs through higher pricing, but the growing volumes of demand are a clear indicator of expected future growth in offshore drilling.

Rig Technologies is seeing rising inquiries in spares bookings on rig reactivations for the offshore, including larger more complex reactivation. Overall, spares bookings increased 7% for rig, our fourth quarter in a row of rising bookings and SPS work improved $7 million sequentially as contractors are seeing rising levels of rig tenders, particularly for jack-ups. This fits with what we're hearing from operators, who tell us that they are moving toward more FIDs and higher levels of activity, given higher stable oil prices.

After a few years of low activity, offshore market needs to get back to work. We are not seeing a lot of urgency here yet, but inquiries and tenders and studies appear to be accelerating. So, in the meantime, we continue to pursue field development projects in our subsea flexible pipe unit in the face of tough competition of price pressure. Likewise, our wellstream processing group within PFT is bidding fluids processing skids into several offshore projects and our Turret Mooring Systems Group, which won a nice order this quarter for the Jubilee Field in West Africa is doing the same.

While we are still probably a couple of quarters away from significant activity level increases in the offshore, our customers' actions point to the early stages of an offshore recovery in the works underpinned by higher oil prices and growing global energy demand, all while we continue to invest in new drilling and production automation technologies, subsea water treatment technologies, and fluids processing technologies to position ourselves for the coming recovery.

Although the near-term outlook is clouded by North American activity challenges, we think the coming year will see this reverse and 2019 more likely to bring broad-based offshore and international recovery. It is clear that North American producers have embraced capital discipline and are returning more cash to their shareholders, while also facing short-term logistical constraints in certain unconventional basins.

IOC's are continuing to reduce their per barrel development costs offshore after cutting CapEx by half since 2014 and are also exhibiting restraint and returning more capital to their shareholders. And many NOC's are struggling with outdated rig fleets and methods, while facing inadequate cash flows to fund both drilling needs and government takes. Globally, oil companies in all regions have been cautious and measured in their drilling and development budgets through a difficult downturn as they navigated extraordinarily challenging commodity price declines. Meanwhile, global crude inventory overhangs have now evaporated and oil prices have doubled, in fact nearly tripled. Well, I think the next couple of quarters will be challenging. We also see more signs of recovery and improving macro tailwinds bolstered by stronger price decks.

To our employees, who are listening, I want to tell you how much we appreciate all that you've been doing to take care of our customers around the globe that depend on you. You are part of a great NOV team and you make me, Jose and Loren very, very proud. Thank you.

Now, I'll turn it over to Jose.

Jose Bayardo -- SVP and CFO

Thank you, Clay. To recap the quarter, NOV's EBITDA improved $19 million to $245 million, and operating profit increased by $21 million to $73 million. However, net income declined sequentially to $1 million due to higher other expense and a higher tax rate.

Other expense increased $17 million, primarily due to FX losses from the continuing devaluation of the Argentine peso against the US dollar. Argentina was designated as a highly inflationary economy requiring us to change our peso currency functional ledgers to US dollar functional during the third quarter. A change that has the unintended effect of amplifying the impact of movements between the Argentine peso and the US dollar on our income statement. Other expense also reflects a small loss associated with a divestiture of a small non-core operation.

Pre-tax income totaled $33 million and we reported an income tax provision of $29 million. The outside income tax expense is primarily the result of valuation allowances, which prevent us from fully recognizing tax credits and other increases in non-deductible expenses. As we previously mentioned, we will continue to have significant volatility in our effective tax rate until we begin reporting higher levels of pre-tax income.

One other item on the consolidated P&L worth pointing out is SG&A, which increased $17 million sequentially due to higher employee benefit and workers' compensation costs and an increase in property tax assessments. We expect to report a slight sequential increase in SG&A in the fourth quarter.

Looking at our operating segment detail. Lower intercompany sales lead to an $11 million sequential decrease in revenue eliminations. This decrease along with lower compensation costs and a reduction in third-party service expense resulted in an $18 million EBITDA improvement at the eliminations and corporate cost line. Most of our business unit sell products or services to at least one other business within NOV. And the need for intercompany sales are fairly obvious. For example, if a customer orders a new drilling rig and wants to be equipped with a full string of drill pipe, our drill pipe business unit will sell the string to our rig operation that will send one invoice to the customer. Some intercompany sales may be less obvious, such as Rig Technologies providing certain engineering, procurement and manufacturing for large components associated with our Seabox subsea water treatment system that is sold by our Completion & Production Solutions segment.

We regularly leverage the scale and diversity of our operations around the globe to manufacture or fabricate or assemble products in plants where we can be the most efficient. Frequently, this results in sales across segment lines. The amount of intercompany revenue can fluctuate quite a bit from quarter-to-quarter as it did in Q3, due to a decrease in transactions between Rig Technologies and caps. As all of you know, total third-party revenue and profit is reflected in our consolidated results.

For the fourth quarter, we expect revenue eliminations will remain in line with Q3 and corporate costs to increase approximately $5 million.

Cash flow from operations was $190 million and capital expenditures totaled $71 million. We did not complete any acquisitions during the third quarter, but see the potential for several attractive transaction opportunities in the fourth quarter and the early part of 2019.

Turning to results for operations. Our Wellbore Technology segment generated $847 million in revenue in the third quarter of 2018, an increase of $54 million or 7% in line with our expectations. Segment revenue continued to meaningfully outpace the rig count in the US, but this growth was partially offset by a 12% decline in Latin America, mostly due to the devaluation of the Argentine peso, resulting in 2% growth in the Western Hemisphere. More signs of life are emerging in other international markets, allowing the segment to post second quarter in a row of double-digit growth in the Eastern Hemisphere at 17% for Q3.

EBITDA increased $2 million sequentially to $135 million or 15.9% percent of sales. While we noted on our last call that rising inflationary forces were impacting our business, we had lower-than-expected success in passing costs through to customers in North America. We also had mix changes resulting in poor EBITDA flowthrough. Even though drilling activity has not been materially impacted by the takeaway constraints in West Texas and the resulting slowdown in completions activity, it is difficult for an E&P drilling department to tell their executive management team that they are accepting price increases while their fellow completion department is boasting of price concessions from completion service providers.

Clay mentioned that our downhole tools business unit realized solid growth from all major regions of the world, outside of Latin America, driving a 5% sequential increase overall. The business unit is also seeing more demand from the offshore markets and received orders for two 8045 TorqueMaster units used to make and break threaded connections on offshore rigs. The first such orders received since mid-2015.

The downhole tools business also continues to advance new technologies. Our SelectShift downhole adjustable motor, which offers the ability to adjust the motor bend setting while downhole has been undergoing field trials in the Permian and the Bakken. The tool completed 13 runs, drilled over 45,000 feet and completed over 100 motor bend changes while downhole. Use of the tool is delivering substantial increases in rate of penetration and reductions in vibration, which should meaningfully improve the economics for our customers.

The business unit also recently began field trials for its next generation two-and-seven-eights inched coiled tubing Agitator. The new tool is designed to generate significantly higher pressure pulses than earlier generations of the product. This is important, because it can significantly increase the distance for which coiled tubing can effectively mill plugs in extended reach laterals.

Our ReedHycalog business saw a 5% sequential improvement in revenue during the third quarter. Share gains for fixed cutter bits and increased Canadian activity after the seasonal Q2 breakup were partially offset by hurricane-related slowdowns in the Gulf of Mexico. Unlike other businesses in this segment, revenue decreased slightly in the Eastern Hemisphere after realizing strong growth in the prior quarter.

Improved sales into the UAE, Qatar, and Turkey were offset by sequential decrease in sales into other countries. This group is achieving success with its directional drilling in downhole measurement tools. We've recently commenced rotary steerable field trials in three countries. Two of the trials are ongoing but one successfully completed resulting in the sale of two VectorEXAKT rotary steerable kits to the directional driller.

Additionally, we've received our first orders for our symmetric propagation resistivity LWP tool. With a successful commercialization of these products, we have filled two critical holes in our directional drilling tool portfolio and we are now positioned to capitalize on the compelling directional drilling tool market opportunity. We're also advancing our closed loop drilling automation systems, selectively executing our North American land projects and preparing for a major ramp up in North Sea activity with several jobs expected to begin by year-end.

As Clay noted, our drill pipe business recorded its second straight double-digit percent sequential increase in revenue, but integration costs associated with our acquisition of Vallourec's drill pipe business, limited EBITDA flow through during Q3.

Bookings decreased slightly from the second quarter, but remained over $100 million for the third quarter in a row. We expected traditional seasonal Q4 slowdown in drill pipe bookings as many customers have exhausted drill pipe capital budgets for 2018, notwithstanding the anticipated one quarter pullback in orders. We believe customers will expand budgets in 2019 as their inventory levels continue to decline.

Our Tuboscope business realized a 5% sequential revenue increase in coding services, driven by increasing sales of drill pipe, partially offset by record Thru-Kote sleeve sales in Q2 that did not repeat. Tuboscope's global inspection service revenues decrease slightly. Strong demand for tubular inspection services in North America was offset by decreasing revenue in Latin America, due to currency devaluations.

Lastly, our well site services business posted 9% sequential increase in revenue, led by strong sales of drilling fluids in the US, our well cellular containment systems and solids control services in North America and Europe. Improved sales were partially offset by lower revenues and higher volumes in Latin America as a result of currency devaluations against the US dollar. Demand for solids control services for offshore markets remains challenged. However, we saw our backlog for our prime inspection services increased to 12 jobs from two during the third quarter. Prime inspection services are detailed assessments of the condition and performance of solids control, fluid processing and waste management systems on offshore rigs. The service informs drilling contractors of what equipment needs to be repaired, replaced or upgraded in order to ensure solids control and waste management packages operate reliably and efficiently. This is another clear indication that offshore drilling contractors are preparing to get back to work, as Clay mentioned a few minutes ago.

For the fourth quarter, we expect the strong momentum in most of our Wellbore Technologies businesses to more than offset any softness in fourth quarter activity levels, resulting in a 2% to 3% sequential increase in revenue. We anticipate a better mix of business and slightly improved success in passing on increased inflationary cost to our customers, resulting in incremental EBITDA margins between 30% and 35%, during the fourth quarter.

Our Completion & Production Solutions segment generated $735 million in revenue in the third quarter, a decrease of $3 million sequentially. Slowing demand for pressure pumping equipment and sharper than anticipated declines in our offshore focused businesses more than offset strong growth in our fiberglass and completion tools businesses. An improved mix of product sales led to a $5 million increase in EBITDA to $99 million or 13.5% of sales. Shipments of $439 million exceeded our bookings of $372 million, providing us with an 85% book-to-bill. Total segment backlog at quarter end was $880 million.

Sales in our Intervention & Stimulation Equipment business fell sharply late in the third quarter. As anticipated, revenue from sales for coiled tubing equipment increased sequentially but not to the full extent we expected as deliveries of several large coiled tubing spreads slipped into the fourth quarter. The modest growth in coiled tubing equipment sales was more than offset by significantly reduced demand for pressure pumping units and associated aftermarket sales.

Wireline equipment deliveries also fell short of expectations due to a combination of customer change orders on several wireline skids and manufacturing challenges. The decrease in revenue also resulted in high decremental margins as inflationary pressures on steel, aluminum hydraulic components and labor compounded the business units challenges.

Q3 bookings declined 24% sequentially, resulting in a 69% book-to-bill for the quarter. Demand for coiled tubing equipment remained strong and, as Clay mentioned, we are still seeing limited opportunities for additional pressure pump unit sales, primarily for replacements or backup units.

Demand remained steady for other pressure pumping support equipment and wireline equipment bookings remain strong globally. However, US customers are becoming noticeably more cautious as a result of the slowdown in completion activity in West Texas. So while we expect to ship the Q3 unit deferrals in the fourth quarter, we may see additional pushback in the fourth quarter.

Our fiberglass systems business unit posted to a 23% sequential increase in revenue with strong incremental margins despite inflationary pressures on raw materials and wages. The business unit shipped major projects of jointed pipe into China, Russia and West Texas, and delivered large orders of our Fiberspar spoolable composite pipe into Argentina, Oman and the US.

As expected, bookings for the quarter returned above the $100 million threshold, an increase of 44% over an uncharacteristically low Q2. While global demand for our corrosion-proof composite pipe remains strong and our backlog is solid, we were recently notified by our supplier of a critical resin used to make our flexible pipe that it had experienced a major plant failure, which will persist into December. Consequently, there is a significant global shortage of this resin, which we expect will result in total business unit revenues falling back to the levels we saw in the second quarter. We anticipate high decremental margins associated with the revenue decline due to the additional absorption challenges we expect to face in our Fiberspar manufacturing plants.

Our Completion Tools business posted its second quarter in a row of double-digit percentage growth. It is garnering market share gains in a number of markets around the world as a result of our innovative product offering and our ability to leverage NOV's global infrastructure and customer relationships.

Our Process and Flow Technologies business unit saw revenues decline 6% sequentially. Strong demand for reciprocating pumps and chokes from midstream applications in North America, certain separation equipment in the US and pump packages in Africa and Southeast Asia were offset by weakness in Canada, delayed equipment deliveries into Nigeria and Russia, and challenging market conditions for the business units offshore oriented well stream processing operation.

Our Subsea Production Systems business unit saw a significant sequential decrease in revenue, which was greater-than-expected due to a customer delayed delivery and new project orders coming in much later in the quarter than planned. Bookings also remained soft with the business unit posting an 81% book-to-bill during the quarter. Notwithstanding the ongoing challenges, there are encouraging data points for the offshore businesses in our Completion & Production Solutions segment.

Our Floating Production Systems business unit realized a slight sequential increase in revenue during the third quarter and more importantly had a book-to-bill in excess of 200%. Our XL Systems' Conductor Pipe Connector unit achieved the highest backlog ever recorded for this business.

Lastly, tendering activity in each of our offshore businesses within this segment is materially higher today than it was at this time last year. While we do not yet see much urgency from our offshore customer base, as Clay mentioned, we believe market dynamics are improving and our operations are well positioned for the inevitable recovery in the offshore.

Looking at the fourth quarter, we expect to see more demand for midstream production equipment, modest improvements in our offshore operations, a pickup in Q3 deferred deliveries of coiled tubing and wireline equipment, and higher conductor pipe sales which should roughly offset the impacts from the slowdown of completion related activity in West Texas and raw material supply challenges in our fiberglass operations.

Our Rig Technology segment generated $637 million in revenue, a decrease of $14 million or 2%. Revenue out of backlog decreased $20 million to $256 million and EBITDA decreased $6 million to $78 million or 12.2% of sales. Margins came in better than guidance as a result of revenue mix.

After achieving three quarters in a row of improved bookings, new orders decreased to $151 million, a sequential decline of 32% excluding the $1.8 billion in Saudi rig orders received in the second quarter. We exited the quarter with $3.4 billion in backlog for the segment.

Our bookings for capital equipment were softer in Q3. We see growing opportunities to support our North American land customers by providing upgrades to existing rigs and through occasional sales of super spec rigs into the market where utilization of these rigs remains near 100%.

In the international markets, operators continue to advance tenders for land rigs in the Middle East, Asia and North Africa. We are realizing rapidly growing demand for our NOVOS operating system. To-date, we have sold 103 NOVOS packages to a customer base that includes 11 land and 5 offshore drilling contractors. We also recently commissioned our first NOVOS installation on an offshore floater for one of these contractors and it is performing well.

We, along with certain customers, have written over 30 applications for the control system and are seeing more pull through sales from E&P operators who recognize the value of this unique process automation system. While offshore contracting is slowly improving, the market remains oversupplied and we anticipate few newer term new builds apart from potential opportunities for niche applications, but we see growing opportunities to help our customers reactivate and upgrade rig fleets.

As Clay mentioned, our offshore customers are seeing a significant amount of tendering activity and are working to make sure rigs are well positioned to go back to work. This work is driving demand for such items as our Crown Motion Compensation Systems, for which we booked an additional three orders in the third quarter.

For the fourth quarter, we expect continued progress on offshore projects and land rig upgrades for the US market. Land rigs, which slipped from Q3 to ship and a seasonal pickup in service and repair work in our aftermarket operations to drive a revenue increase of 4% to 6% with incremental EBITDA margins in the mid-teens. While there will be near-term difficulties associated with year-end capital budget exhaustion and take away constraints in certain US basins, we currently expect to realize a slight sequential improvement in our fourth quarter consolidated operating results. And, as Clay mentioned, we believe significantly improved macro fundamentals are setting the stage for a broader recovery in 2019.

We'll now open the call to questions.

Questions and Answers:


(Operator Instructions) James West, Evercore ISI.

James West -- Evercore ISI -- Analyst

Clay or Jose, I was wondering if you could kind of bracket for us what the -- we share the bullishness around the offshore markets in the rig reactivations that you're starting to see and what does it cost for, I mean, I think these offshore drillers really went to the bottom of the barrel on spares and things like that during the downturn, because they had to. So to reactivate a cold stacked rig today, whether it's a jack-up or a floater. Can you give us some idea of what that would be in terms of revenue for NOV?

Clay Williams -- President, Chairman and CEO

Yes. It's a question we get frequently, James, but it's kind of like asking how long is a piece of rope. Hence, they depends on a lot of things. First, what condition was that rig in when it was stacked? How hard was it run prior? Secondly, what conditions was it stacked under? And so, we're do as well that shut (ph) where dehumidifiers pull on board. Did you have a crew going around sort of bumping the electronics and cycling through the equipment periodically. And then, thirdly, how long has it been stacked?

We believe that after two, three years, the cost of reactivating that rig starts to go up exponentially. So there are a lot of variables here. And what I would tell you is, what we've seen is, are showed across all over the map. Generally though, given how difficult it is to store this complex equipment in salt air and this is equipment that we've been building through the last 10, 15 years, it really wasn't designed to be stacked. None of us really know. So, I would generally take the over. We do have one data point of an offshore rig that we're working on now, that's basically a $40 million ticket to us. So I think the industry is going to find out as it goes back to work. But there's a lot of work for NOV and our competitors to do to put these rigs back to work.

James West -- Evercore ISI -- Analyst

Okay. But you would say that some of the estimates that have been out there from some of your customer base, generally speaking, you think the over is probably more likely now, it's not going to matter to really investors, because the rigs going back to work, but those are probably going to be a series of overruns, cost overruns (multiple speakers)

Clay Williams -- President, Chairman and CEO

I'm not referring to any specific estimate or any specific comment by a customer, but just generally taking equipment off the beach and putting it into a shipyard and really opening the hood and seeing what's under there. Until you do that, none of us really know. And I think even the drilling contractors wouldn't acknowledge this. There's still some uncertainty in that. But, yeah, nevertheless, I think we continue to move toward a world where more and more rigs are going to get reactivated and you can get several data points in our prepared remarks a few minutes ago around this. And so this is kind of where it starts. We alluded to it last quarter, we kind of sought, build through the third quarter and so, again, we're not -- we're still a long way from a robust recovery, but it begins with drilling contractors looking at reactivating rigs and we're seeing clear signs that many of them are really thinking hard about it.

James West -- Evercore ISI -- Analyst

And what's the timeline on a reactivation? When they need to talk to you about the equipment versus when the rigs are supposed -- should be back on contract and working?

Clay Williams -- President, Chairman and CEO

The sooner the better. We're pretty responsive. We certainly have some slack capacity. However, it does take a lot of time, a lot of engineering effort that goes into these rigs and actually in terms of tangibly what we're hearing from our customers, it's more along the lines of that. We're doing more engineering upfront war around these rigs to see what's needed and that's starting to go. But it's not a trivial undertaking. And if history is a guide and I'm going way back now, but usually when these stacked rigs go into shipyards and actually do get reactivated out of warm stacking or cold stacking usually it tends to run -- projects tend to run over budget and over time.

It also add that -- it's clear that we do have some slack in the capabilities right now, but like virtually anything in our portfolio when things inflect they tend to inflect pretty sharply and people come to (multiple speakers) at the same time. So one of the things that we are already talking about and worrying about a little bit is a good problem to have when it exists -- when it arises is how do we expand that capacity, because we're certain that will happen at some point and things will get tight in a hurry, but we're looking forward to addressing that challenge.


James Wicklund, Credit Suisse.

James Wicklund -- Credit Suisse -- Analyst

International expectations out there seem to be for either high single digit or low double-digit growth, the US is expected to recovery, you guys know that. Which one do you think in 2019 wins the race in terms of who grows the fastest? And which one is best for NOV? Is it better if international grows by 11% or the US grows by 11%? Which benefits you guys the most?

Clay Williams -- President, Chairman and CEO

The good news is, NOV is certainly exposed to both. We're introducing new technologies to both. We have a lot of optionality with respect to both. And so, I think that's all good. We're happy, I'm happy with growth anywhere and I think about -- it's about portfolio. Like I said, we've continued to position ourselves around unconventional technologies that in the past three, four years have clearly been outpacing activity gains in other areas. I think 2019, you're going to continue to see more international customers look at employing these in their respective areas of operation. We're already seeing that in Argentina. We're seeing growing interest in the Middle East. And so, that -- I think that trend is going to steadily kind of move ahead.

The other big opportunity for NOV overseas is the fact that the unconventional share revolution in North America started by replacing all of the older rigs with new modern AC rig technology and the Eastern Hemisphere has -- still has a long, long way to go in that respect. And so, I think we're kind of in a very early innings of seeing that happen as well. So all I can do -- I don't know which one wins. I hope they both win and -- but NOV really, again, we're positioning for that sort of recovery. And rolling into 2019 with materially higher oil prices than we've had over the past couple of years and a recognition of under investment across kind of the global oil and gas infrastructure is setting up a pretty good backdrop for 2019.

James Wicklund -- Credit Suisse -- Analyst

Okay. That's very helpful. I appreciate it. And when we talk about offshore, the improvement has been somewhat limited really so far to jack-ups and more shallow rigs. There have been more tenders for deepwater, but going into IOC budget season, some of that has to be just updating at least for budget submission. Can you talk about the scale differences between the work you do on jack-ups versus floaters? I know floaters are whole lot more expensive, but just in terms of the workflow we see out there, I know you sell a lot of equipment to the deepwater floaters, but in terms of reactivations and the work you're doing, can you talk about the difference as we transition from jack-up and shallow water into floaters over the next couple of years?

Clay Williams -- President, Chairman and CEO

Yeah. Clearly the floaters are a bigger opportunity around reactivations. There is a lot more sophisticated equipment on board, but nevertheless we've got good opportunities with jack-ups as well. In fact, we just introduced a new crane design that is kind of special fit for purpose for jack-ups that can be retrofitted and kind of improve their capabilities. So the opportunity is in both arenas, but the floaters typically are a little bigger ticket item for us.


Byron Pope, Tudor, Pickering, Holt.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

The continued top line growth for international mobile (ph) technology suggest that you guys are having good success in terms of being that enabler to some of the independent service companies there, but Clay I was struck by something you touched on with regard to, it seems like some of your US customers are purchasing some downhole tools directly as opposed to using a three-dimensional (ph) driller, so is that a sustainable trend when that's in its early stages. Could you just provide some more color on your thoughts (multiple speakers)

Clay Williams -- President, Chairman and CEO

I found it interesting too. We're seeing more components of the bottom hole assembly being accessed directly by the oil and gas companies that were probably previously lumped into kind of a directional drilling tool package. And, by the way, we're happy to sell to either. But what it speaks to is that in certain North American markets, customers are just aggregating this a little bit and buying on. I think, we provide the best drilling motors out there in terms of quality and longevity and value. And I think that's being recognized by some of the E&P companies that are sort of breaking that out of the packages and so just kind of an interesting trend around disaggregation of the tools away from the service.

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Okay. And then just one additional question as it relates to thinking about the steel cost and the impacts there. From what you guys described in your prepared remarks, it seems as though -- it's most acute in Wellbore Technologies or is it more a broad-based than that and at some point it seems as though the ability to get through some surcharges would be easier. So, how do you think about that in terms of --

Clay Williams -- President, Chairman and CEO

Yeah. I think we're dealing with the first full quarter of higher steel costs arising out of the Section 232 tariffs. There are three business units here that are most affected by it: Drill pipe, which is in Wellbore Technologies, but also XL Systems' Conductor Pipe Connections, and our coiled tubing string business, quality tubing, which are both in Completion & Production Solutions. All three are kind of having mixed results with regards to passing on steel cost to their customers in terms of higher pricing. But I think we're going to achieve a little higher level of success as we work a little deeper into this and sort of adjust along the way. One of the outcomes of all of this is that, irrespective of where the steel actually comes from, we're seeing much higher steel prices across the board. And so, it does show up really in all three segments to some degree. But I would say those three product lines that I mentioned are most acute.

On the positive side, higher steel costs are actually helping our Tuboscope business that provides reclamation services around used tubulars and used sucker rods, because customers are saying, gosh, new sucker rods and new tubulars are so much more expensive, and so there are -- we can inspect and reclaim tubulars and sucker rods coming out of existing wells for reuse and that's become incrementally more attractive.

And then, likewise, our fiberglass and composite pipe business typically benefits when the cost of steel pipe rises incrementally, demand tends to shift more toward fiberglass and composite tubulars which offer. They are still more expensive, but the benefit is, is that they're not as susceptible to corrosion and so the longer -- they tend to last much, much longer.


Bill Herbert, Simmons.

Bill Herbert -- Simmons -- Analyst

Notwithstanding the slowdown in Q3 or relative to expectations cash flow still strong, so you're on your way to becoming overcapitalized and you've mentioned that, you're giving a lot of thought with regard to return of cash options. Clay and Jose, can you just give us your latest thinking on that front? Please. Thank you.

Jose Bayardo -- SVP and CFO

Sure, Bill. It's Jose. And I'll just say that nothing has really changed on that front except for -- we're inching our way closer as you described with a continued healthy cash flow generation from the business. So, as we talked about before, by far the number one priority is making sure that the balance sheet is where it needs to be. It's certainly heading in the right direction and in great condition this quarter on an annualized basis. Net debt-to-EBITDA, 1.45 times, very comfortable with that. Gross debt-to-EBITDA is about 2.77. So probably a little tiny, but higher than we wanted to be, but again everything heading in the right direction. Outside of the balance sheet, it's about investing in compelling organic growth opportunities, which we have obviously ample cash flow to do that. Then we look at -- as we sort of exhaust those opportunities that put us into the realm of M&A.

We were very active on the M&A front over the last several years with over 30 transactions about $700 million that we spent on that. As we talked about last quarter, we sort of knew that the M&A environment was going to be a little soft in Q4, but we don't think that that's something that's going to be long-lived. We're pretty optimistic that more and more interesting opportunities are emerging here in Q4 and into the early part of 2019. But if they don't emerge and even if they do emerge and we spend at the same pace we have been spending over the last several years, we see ourselves having an excess of capital which we will then look to return to shareholders.

Bill Herbert -- Simmons -- Analyst

Okay. And two final quick ones from me. First, Clay, you mentioned execution challenges, which should ameliorate in Q4. What were those? And then secondly, Jose, expected revenues out of backlog, so rate tax for the foreseeable future? Thank you.

Clay Williams -- President, Chairman and CEO

Yeah. First, Bill, we had a number of things that we didn't quite get done building frankly by the end of the quarter and they didn't go out. We had some units particularly in the North American, in the intervention and stimulation world that our customers really didn't want except delivery of. So that's really not on us, but we had a few that we didn't quite get done. And so, a little disappointed in that. But good news is, they're done and should go in Q4. So, we're working through those issues.

Jose Bayardo -- SVP and CFO

And as it relates to revenue out of backlog for the fourth quarter, just for rig, we're looking at just a tiny bit over $280 million.


Sasha Sanwal, UBS.

Sasha Sanwal -- UBS -- Analyst

So just on Wellbore, maybe without getting too much into specifics, would it be fair to say that margins for Grant Prideco are still significantly dilutive to overall margins, while maybe bits and downhole are above the average?

Clay Williams -- President, Chairman and CEO

Yeah. We had some challenges in drill pipe. We had an acquisition earlier this year that was quite large and so one of the drags on Q3 in drill pipe was the fact that we had some more integration cost flow through in the third quarter. Not big enough really to break out on a consolidated basis, but that was one challenge.

The second is, is that, we inherited a lot of backlog there that's at very low margin and so we got to kind of work through that and ship that out for a drill pipe that came in at -- that was diluted to our own drill pipe business.

And the third is, is that, a part of the reason was the steel costs up for that business and in particular the raw materials, the green tubes and the tool joints that go into manufacturing of that pipe are more expensive, kind of, what than we have in our base business. So the flow through for drill pipe was up as we mentioned, but the flow through was not nearly what it could have been, had we sort of had a more typical mix of our traditional Grant Prideco business.

With respect to the downhole tools business and the bits business, we've referenced several different technologies in new products that we've been introducing across that business, and really pretty strong growth in the third quarter and that's -- those businesses have continued to grow now for several quarters, more or less, outpacing the rig count. And so, a really good base of new technologies that are really designed toward delivering Wellbores that have lower torch (ph) velocity that are more precisely geosteered into the sweet spots formations and getting some real traction with those so a lot of things going in the right direction for our downhole tools business.

Sasha Sanwal -- UBS -- Analyst

Thank you. And then just to follow-up. Just sort of maybe touch on pricing briefly as well. You made the point that it's difficult to kind of push the pricing kind of in this environment, so as we think about what the catalyst might be that might just make those conversations easier, does the Jan, Feb, kind of reset an E&P budgets, does that help? Or are we going to have to, kind of, maybe wait till the back half of the year before we see a more meaningful turnaround activity to kind of drive those pricing discussions?

Jose Bayardo -- SVP and CFO

Sasha, I'll start and maybe Clay can chime in on this one as well. But one of things that referred to in my prepared comments is just it's an unusual environment right now, right. We're considering -- we're continuing to see outpaced growth in demand for our drilling-related products in our Wellbore Technologies segment. So that would typically be an environment, which we could be very successful in passing on, at least passing on inflationary core cost to our customers. But as I mentioned, it's just very unusual with the decline in pricing that's taking place on the completion side for our E&P contractors. So, we think this is a very sort of temporary and transitory thing as you know, first of all, pressure pumping and other completion services prices are probably approaching stabilization and once that takes place we can be a lot more optimistic and confident in terms of our ability to get those pricing concessions that we think we're deserving of.

Clay Williams -- President, Chairman and CEO

Yeah. I mean ultimately it's all about scarcity at the risk of oversimplifying most products, most markets in oil field services are highly cyclical and as you're sort of tracing a path to the bottom of the cycle, everyone is focused on price and costs. And as you emerge from that like a switch flips and everyone begins to become much more focused on time, because so much that we provide into development and exploration activities is critical and you kind of have to have it all to spud your well and to develop your wells. And so, it feels like we're kind of knocking on the door of transitioning from that first world where everyone is very keenly focused on price and to the world where everybody is focused on time. But we're -- and we had some setbacks in the North American well completion this quarter.

But generally, I think the industry is moving toward that world of more scarcity. They -- our customers are burning through their stocks of spare parts and inventory that we provide. They're burning through their drill pipe, they're burning through downhole components through rigs. And so, I think generally we've got a fairly steady tailwind of moving back into a place where we have more pricing leverage and can do a better job overcoming higher steel cost.


Marshall Adkins, Raymond James.

Marshall Adkins -- Raymond James -- Analyst

Clay, I'm going to ask you to speculate a little bit here and I know how much you like doing that? Let's assume oil prices stay roughly in these levels, $70-ish WTI, $80-ish Brent for the next few years. How do you see 2019 playing out generically? I'm not asking for specifics on the subgroup in your businesses, but just generically how would you see it playing out in 2019? And then, wouldn't 2020 be meaningfully better than 2019, again assuming oil stays in roughly where it is now?

Clay Williams -- President, Chairman and CEO

Yeah. First, I am a little more bullish on oil prices generally than the premise of the question. After four years of underspending and all the capital -- restrained capital discipline that's in the space, I think, that that's going to -- have to turn around to more activity in the oilfield to continue to provide growing demand. But given the premise of your question, I think oil companies are going to have to figure out how to replace reserves. I think they're going to have to get after developing more reserves in the offshore, in particular. I think take away constraints in a couple of the unconventional basins across North America are going to work themselves through in 2019 and I think that sets up -- I agree with you, I think in 2020 it is even better.

Marshall Adkins -- Raymond James -- Analyst

But in 2019, is that early 2019 or late 2019?

Clay Williams -- President, Chairman and CEO

In terms of improvements?

Marshall Adkins -- Raymond James -- Analyst


Clay Williams -- President, Chairman and CEO

I think early 2019. I mean here in the near term and you've heard this from others. I think a lot of people are kind of running out of 2018 budgets. I think E&P companies don't want to tell Wall Street that they want to up CapEx until they get into 2019 with their 2019 budgets. And so, there's kind of a general -- we're facing a little bit of near-term pressure here in the fourth quarter around that. But I think once we get into 2019, I do think you're going to see people reload budgets, get back to buying. We've heard this from several different customers for different products that we sell. And so, I think once we get into 2019, we're going to get, kind of, back on the path to more growth.

Marshall Adkins -- Raymond James -- Analyst

Okay. My second one, I want to, kind of, shift gears here. We all kind of know that the US business -- I think, we're all pretty bullish on where the oil prices are, but I guess the surprise here is, as you're starting to see a lot of need things going on in Rig Tech. So, help paint a picture here on the relative importance between rig reactivations, managed pressure drilling to me seems to be a bigger deal that a lot of people aren't paying attention to when you are in the heart of that and then, obviously, restocking of aftermarket. So all of those three, maybe some of that that I forgot or hadn't put in there, how relevant are those in terms of 2019 and 2020 going forward?

Clay Williams -- President, Chairman and CEO

Yeah. It's really, I think, setting up for a better outlook for rig, although orders were down in the third quarter after three quarters of growth. We did see our mix continue to move upwards with respect to aftermarket, which is a higher margin opportunity for us. In fact, it was a little more than 50% of the rig mix in the third quarter. And we've had our fourth quarter of higher spares bookings with a little more offshore flavor to it in the third quarter, which reflects the fact, I think a lot of the offshore drillers have depleted a lot of their spare parts and/or looking at -- when they look at putting these rigs back to work.

So, they kind of sum up the outlook for rig. You've got day rates around $25,000 in North America, which is right at the cusp of justifying new build super spec rigs. You've got some of the larger drillers now upgrading rigs, converting from DC to AC, and moving toward the super spec rig category, which is at a very high level of utilization. So you got a lot of financial health across North American drillers.

Internationally, we've talked a lot about more modern rigs going into Argentina, opportunities in the Middle East, there's three or four major tenders going on across North Africa, the Middle East and India currently. And so, that's picking up. So, on the whole, the rig business is, I think, is on a much firmer footing both land and offshore. And within the offshore too, I don't know this will happen in Q4, but we've got a couple of large opportunities in the Eastern Hemisphere, which if they don't show up in Q4, I think we're going to show up early in 2019 that we're feeling better and better about.

So, on the whole, I feel pretty good about where we are with rigs. Good acceptance of our NOVOS operating system, a good acceptance of our condition-based monitoring, aftermarket equipment maintenance, that reduces total cost of ownership, interest in upgrading certain aspects of rigs. So, on the whole, I think, we're in a good position as we've been in for a couple of years here.


Thank you. And, ladies and gentlemen, this concludes our Q&A session for today. I would like to turn the call back to management for any final remarks.

Clay Williams -- President, Chairman and CEO

Thank you, Carmen, and thanks to all of you for joining us. Goodbye.


And, ladies and gentlemen, with that, we thank you for participating in today's conference. This concludes the program, and you may all disconnect. Have a wonderful weekend.

Duration: 62 minutes

Call participants:

Loren Singletary -- Chief Investor and Industry Relations Officer

Clay Williams -- President, Chairman and CEO

Jose Bayardo -- SVP and CFO

James West -- Evercore ISI -- Analyst

James Wicklund -- Credit Suisse -- Analyst

Byron Pope -- Tudor, Pickering, Holt -- Analyst

Bill Herbert -- Simmons -- Analyst

Sasha Sanwal -- UBS -- Analyst

Marshall Adkins -- Raymond James -- Analyst

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