National Oilwell Varco, inc (NOV) Q3 2021 Earnings Call Transcript

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National Oilwell Varco, inc (NOV 0.64%)
Q3 2021 Earnings Call
Oct 27, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the NOV Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to introduce your host for today's conference, Mr. Blake McCarthy, Vice President of Corporate Development and Investor Relations. Sir, you may begin.

Blake McCarthy -- Vice President of Corporate Development and Investor Relations

Welcome, everyone, to NOV's Third Quarter 2021 Earnings Conference Call. With me today are Clay Williams, our Chairman, President and CEO; and Jose Bayardo, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-K and 10-Q filed with the Securities and Exchange Commission.

Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the third quarter of 2021, NOV reported revenues of $1.34 billion and a net loss of $69 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. [Operator Instructions].

Now let me turn the call over to Clay.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Thank you, Blake. For the third quarter ended September 30, 2021, NOV once again posted strong orders with consolidated book-to-bill of over 150%, reflective of steadily strengthening commodity prices and oilfield activity. However, NOV's reported consolidated revenue declined 5% sequentially, and EBITDA fell to $56 million during the third quarter. I'll start by reminding everyone that our second quarter financials included credits related to a project cancellation settlement within Rig Technologies, which contributed $74 million in revenue and $57 million in EBITDA. We excluded those credits from our discussion on our last call and excluding these credits again from the sequential comparison today, points to consolidated third quarter revenues that were essentially flat, down only $2 million sequentially and EBITDA that was up with EBITDA margins on this basis, rising from 3.5% to 4.2%.

Through the quarter, we continued to face logistical and supply chain challenges, which our teams are managing pretty effectively day-to-day. Nevertheless, these weighed on certain results in certain areas, most notably in Southeast Asia. We recognized a $12 million charge stemming from a combination of COVID disruptions and execution challenges on a large offshore project within our Completion & Production Solutions segment, which I'll describe more fully in a moment. If we look beneath the surface, the trajectory of our business is somewhat more positive in our view than the headline numbers suggest, and our outlook for 2022 and beyond continues to strengthen. In fact, given: one, stronger oil and natural gas prices lately; two, the emergence of many of our key offshore drilling customers from bankruptcy; three, the significant reduction in costs that NOV has achieved through the past two years; four, our third quarter in a row of sequential double-digit top line growth and solid flow-throughs for our Wellbore Technology segment; and five, book-to-bill is in excess of 100% for the second quarter in a row for both the Completion & Production Solutions and Rig Technologies segments. I'm decidedly more positive about the outlook for the coming year.

Nevertheless, global supply chain issues are making business challenging in the short run, which leads me back to the project for which we took charges. Our Completion & Production Solutions segment has been working on a large project in Southeast Asian shipyard that ran into COVID-related operational disruptions, specifically a combination of shipyard shutdowns, labor quarantines and shortages of critical components. Additionally, our subsuppliers in the region have faced similar disruptions, which also affect project execution. Our team is working closely with our customer to figure out how to get this vessel built in online as efficiently and as safely as possible, while recognizing the need to be resilient as challenges shift and change daily. Across the company, we are intently focused on executing effectively in the face of persistent supply chain challenges globally.

Most COVID operational disruptions have been in Southeast Asia and continued to disproportionately affect the Completion & Production Solutions segment, owing to its large base of operations there. Similar to other industrial manufacturers that you read about in the financial press, we are facing inflation in labor, raw materials and components that we buy from subcontractors. But our teams have been diligent in pursuing alternate supplies, and we are generally able to offset most of the cost inflation with higher pricing to customers. Supplies of resin, epoxy and fiberglass integral to our composite pipe and Tuboscope tubular coating businesses remain critically low and, in some instances, have nearly doubled in cost. Lead times for forgings have extended out from six weeks to 18 weeks. And while prices for plate steel and coiled steel are now up more than 240% year-over-year, at least we appear to be seeing some stability in steel pricing as iron ore prices have declined.

We are hopeful that the worst of the steel inflation is behind us. Outside of steel, epoxy, fiberglass and other raw materials, I'd say we have generally seen low double-digit cost increases on other finished or semifinished components that we buy. Semiconductor boards, chips, electric motors, gearboxes and other subassemblies remain in very tight supply. Freight has also been challenging. Spot container shipping rates from Asia to the U.S. are now five times what they were this time last year, 14 times what they were in 2019. Additionally, ocean freight reliability is down to 38% and about half of where it was historically, which has led to more use of expensive airfreight. It's more reliable than ocean freight, but it drives costs up. One NOV business unit went two months without steel deliveries because our European steel mill supplier could not secure a vessel into port without guaranteeing you a full load. In North America, trucks and drivers can be tough to secure and hotshot drivers are dropping book shipments to take higher-priced jobs, making even domestic land deliveries less reliable.

Labor availability, particularly in the U.S., is very tight in certain areas, and we have stepped up recruiting and are redeploying some workers into new assignments. Our customers are also encountering these challenges. In fact, we are hearing of many instances of crew availability delaying planned equipment reactivations in West Texas and elsewhere. These challenges are affecting our customer behavior in other ways, too. NOV products like fuel handling pipes and tanks, pumps and mixers, etc, that go into large construction projects are facing headwinds in certain instances because our customers can't secure other complementary components or can't secure construction crew to install them. So they are delaying project launch and delaying orders to us. I want to stress. Thus far, NOV's team has done a good job covering inflationary cost pressures in the form of price increases. As market leader in many categories of equipment, we benefit from scale with our suppliers vis-a-vis our competition.

And we have moved raw material across our manufacturing plants to maximize value. Some of our businesses are achieving price-driven margin expansion as they recover discounts given during the downturn of 2020. And while a few products with longer production cycles like drill pipe have struggled to stay up with raw material cost increases on orders taken in early 2021, resulting in some margin compression, most are at least able to hold margins through pricing, but all are intently focused on managing inflation risks that continue to mount. Our businesses are reducing costs. Completion & Production Solutions identified another $50 million of annual cost reductions, including shuttering another half dozen facilities over the next few quarters.

While volumes and margins are clearly not where they need to be to generate sufficient returns, the organization's intent focused on downsizing over the past several years, together with higher orders and oil fleet activity on the horizon, give us confidence that we are moving in the right direction. We share the view expressed by others that the world is moving into a multiyear up-cycle in commodity prices. The combination of significant money supply growth, economies emerging out of pandemic lockdowns, under investment in oil and gas exploration and development over several years, higher cost of capital for E&Ps and flattening efficiency gains for North American shale producers will lead to tightening petroleum supply and demand in our view. In its current shape, the oilfield will struggle initially to respond to calls for increasing production.

So far, incremental drilling activity has been cautious and measured. Our land drilling customers tell us that they find it very difficult to crew rigs, even though the rig count is still well below pre-pandemic levels and the green crews that they hire cost more and are less productive. The industry will have to pay more to get back the expertise that it has lost. The industry is also paying more for the capital employees. Following OPEC's decision to let market forces rule in Thanksgiving 2014, U.S. shales emerged as a swing source of oil, characterized by fairly rapid responsiveness to commodity prices. This is made possible by two things: the resourcefulness technology and efficiencies of the U.S. oil and gas industry as well as large, easily accessible pools of low-cost capital in the form of both equity and debt from Wall Street.

However, poor returns on capital investments came into increased focus by 2019, and this, coupled with a widespread move to decarbonize investments by many capital providers, led to sharply higher cost of capital for the very capital-intensive oil and gas industry. Consequently, the U.S. operator base has necessarily embraced capital discipline as its new ethos. Going forward, it seems to reason that the U.S. unconventional market will be more challenged to fulfill its role as the world's quick cycle oil supplier, now that its constituents are more focused on returning capital to shareholders and reducing reinvestment rates. Further, we believe rising utilization of oilfield service assets, depletion of consumables and higher labor costs will drive up pricing by oilfield service providers.

We're hearing stories from the field of drilling contractors not willing to reactivate incremental rigs unless they can secure contracts at higher day rates and a pressure pumper is not adding incremental crews unless they can achieve a certain degree of net pricing improvement, which is required to get pay back on incremental cost of equipment reactivation. Higher well construction costs made worse by overall diminishment of efficiency as green crews man incremental units going to work will impact returns on shale wells, which will reduce the industry's responsiveness to higher commodity prices in our view. As economies and demand recover, OPEC spare capacity trickles back into the market and oil supply demand gap becomes more evident.

We think the industry response will be more broad-based than just U.S. shale ramping up activity. Much of the world's international offshore oilfield equipment has been stacked and neglected for some time and will require significant investment to bring it back to working order. One of the most interesting trends that we observed in the third quarter was a rising number of inquiries around potential offshore rig reactivations. Despite the level of contracted offshore rigs declining sequentially and I'll add a low level of actual offshore equipment orders for us, outside of the 20,000-psi pressure control equipment order for Transocean, we are being quietly asked to quote on several stacked rigs that are looking at coming back to the market. This is being driven by high rig tenders currently being floated by NOCs and others who are also looking at higher levels of activity onshore in certain international markets.

So to sum up where the industry is now, E&P operators worldwide are enjoying newfound prosperity as their existing production commands higher prices, but they will certainly pay more for constructing new wellbores and bringing on more production in the near future. Oilfield service providers, which are NOV's primary customer base are just now starting to claw back discounts given last year while simultaneously facing higher labor and component costs and constraints. We see them raising their prices materially over, say, the next 18 months as prosperity trickles down to this level in the food chain. NOV's late cycle manufacturing businesses will follow suit as prosperity continues to trickle down. As a reminder, all three of our segments are engaged in manufacturing, which blossoms a bit later in the oilfield up cycles given the trickle down nature of our ecosystem.

Rig Technologies has benefited strongly from its exposure to offshore wind development, which has helped offset some of the weakness that has seen in demand for traditional drilling equipment. Completion & Production Solutions has felt the brunt of the oilfield downturn, but it's recent additions to backlog point to a brighter future. And although Wellbore Technologies manufacture some capital equipment like drill pipe, it tends to behave more like a traditional oilfield service provider, and it is clearly recovering quickly. Throughout the downturn, NOV has continued to invest in technologies that improve efficiency, reduce labor and optimize operations. Whether it's through automated drilling processes, through its NOVOS operating system accompanied by our new drill floor robotics, delivering downhole data in real time through our wired drill pipe, reducing the emissions profile of a completion site with our Ideal eFrac fleet, NOV's oilfield product portfolio continues to evolve to enable our customers to achieve better operational performance.

Concurrently, we are also developing offerings that will help our customers in their pursuit of a low-carbon future. Our offshore wind installation vessel business won two packages from Cadeler and remains on track to achieve revenue run rate of $400 million a year by Q4 of next year. In addition, we were awarded our first FEED study for a carbon capture system aboard an FPSO in Asia, utilizing our extensive gas processing expertise. And as our other efforts in onshore and offshore wind, solar, geothermal biogas and carbon capture utilization and storage continue, NOV is positioning itself as a leading technology provider to the energy transition just as it is to traditional oil and gas.

On the whole, we are increasingly confident that NOV is approaching an inflection point with the hard work our team has put in over the past several years will bear fruit in a big way. To the employees of NOV who are listening today, thank you for your extraordinary efforts. Your hard work, creativity and dedication has set us up for success and the opportunities that are coming our way. Thank you.

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

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Thank you, Clay. NOV's consolidated revenue in the third quarter of 2021 was $1.34 billion, a 5% decrease compared to the second quarter. Adjusted EBITDA was $56 million or 4.2% of sales. Excluding the credits from the rig cancellation in the second quarter, revenues were essentially flat with cost reductions more than offsetting charges taken for our project in Southeast Asia. During the third quarter, we generated $105 million from cash flow from operations and $66 million of free cash flow. We ended Q3 with net debt of $36 million, comprised of long-term debt of $1.70 billion and cash and cash equivalents of $1.67 billion. Moving to segment results.

Our Wellbore Technologies segment generated $507 million in revenue during the third quarter, an increase of $44 million or 10% sequentially. Revenue improved 6% in North America and 13% in international markets as the momentum of the global recovery continued to build in all major geographical regions. EBITDA improved $14 million to $77 million or 15.2% of sales as inflationary pressures and a less favorable mix limited incremental margins to 32%. Our ReedHycalog drill bit business posted another quarter of double-digit revenue growth, primarily driven by strong performance across the Western Hemisphere and Middle East. Our leading-edge cutter designs and bit technologies continue to drive revenue growth that exceeds the rate of improving global drilling activity.

While this business faces many of the supply chain issues faced by all global manufacturing businesses, and at times has been forced to substitute higher cost materials to meet delivery schedules, management has been successful in raising prices to offset cost with minimal customer pushback as the efficiencies gained by ReedHycalog's technology more than justify higher pricing. Our downhole tools business realized a 5% improvement in revenue during the third quarter. Top line growth was constrained by shortages of key materials and therefore, did not fully reflect the demand we are seeing for our downhole technologies, which continue to enable record-setting drilling performance. Our Agitator system was recently used to help a customer establish a new rate of penetration benchmark in Colombia, delivering a field record rate of penetration of 201 feet per hour.

Our SelectShift Downhole Adjustable Motor was used by a large operator in the Northeast U.S. during a 12-well drilling campaign and drove a 30% reduction in average drill times due to the tool's ability to change bend settings downhole saving trips out of the hole. Our WellSite Services business posted double-digit revenue growth, primarily driven by growing demand for solid control services and equipment sales in international markets. While the business unit saw improvements in all regions, the North Sea and Latin America were particularly strong and offshore job counts improved by 17% sequentially, despite the impact of hurricanes in the Gulf of Mexico during the quarter. Recent tendering activity points to continued improvement in the outlook for our Wellsite services business unit. Our M/D Totco business realized double-digit sequential revenue growth with strong incremental margins, higher global drilling activity levels drove demand for sales and rentals of our surface sensor data acquisition systems, and we saw a sizable pickup in revenue from our digital solutions.

We were recently awarded an additional three year contract from a customer in the North Sea for our eVolve Digital Drilling Optimization Services, which leverage high-speed telemetry from our IntelliServ Wired Drill Pipe. We also secured several international contracts for our WellData Remote Drilling Monitor Solution, which allows operators to easily analyze well performance against offset wells, identify potential upcoming trouble spots and oversee drilling efficiency across all wells from any location. Looking forward, we anticipate our legacy data acquisition offering will continue to benefit from rising activity levels and market share gains, and we expect our digital offerings will continue to gain greater market adoption by operators looking to extract additional operational efficiencies to offset inflationary pressures.

Our Tuboscope business experienced a mid-single-digit sequential increase in revenue, driven by improving demand for our coating and inspection services. While demand is strong and our backlog of inspection and coating projects has grown, revenue growth was hindered in the third quarter by operational disruptions related to Hurricanes Ida and Nicholas and a COVID outbreak at a key coating facility. Additionally, constrained supplies of raw materials limited our ability to capitalize on our backlog and resulted in higher costs as we were required to airfreight resin from Asia to the U.S. to meet certain customer delivery requirements. In the fourth quarter, we expect operational challenges to subside, aligning for the business unit to capitalize on its growing backlog and improved pricing to drive better results. Our Grant Prideco drill pipe business posted solid top line growth on higher volumes. EBITDA flow-through was restrained due to a less favorable sales mix and inflationary pressures.

New orders remain solid with a notable improvement in demand for larger diameter premium pipe. U.S. operators are showing an increasing preference for 5.5-inch drill pipe, which unlike smaller diameter pipe sizes is in limited supply. Additionally, operators are specifying specific grades of drill pipe and recent offshore rig tenders driving additional demand for premium pipe. While fourth quarter results will be muted by ongoing supply chain challenges and cost inflation, recent orders, growing global drilling activity and improved pricing have us increasingly optimistic regarding 2022. For our Wellbore Technologies segment, improving global activity levels, partially offset by lingering supply chain challenges, should allow for sequential revenue growth between 3% to 6% in the fourth quarter.

We expect improving absorption in our manufacturing facilities and better pricing to be partially offset by supply chain challenges and continued inflationary pressures, limiting incremental margins to around 20% in the fourth quarter. Our Completion & Production Solutions segment generated $478 million in revenue during the third quarter, a decrease of $19 million or 4% sequentially. EBITDA for the quarter was a loss of $5 million or 1% of sales. Orders during the third quarter were $384 million, yielding a book-to-bill of 144% with all but one business realizing a book-to-bill greater than 1. Backlog for the segment ended at approximately $100 million higher sequentially to end the quarter at $1.1 billion. A second consecutive quarter of strong order intake along with constructive ongoing customer dialogue, give us growing confidence in the sustainability of this higher level of orders as we head into 2022.

Our Intervention & Stimulation Equipment business experienced a double-digit sequential decline in revenue on lower capital equipment sales. Impact to EBITDA was limited primarily due to an improved sales mix resulting from steady global aftermarket sales activity. New capital equipment orders remained light but improved sequentially. In North America, we're seeing higher quoting activity, particularly around dual fuel conversions, reactivations and rebuilds, with the average size of quotes increasing as the industry is now preparing to take its last mile of inventory off the fence line. We're also seeing more inquiries on bulk cementing and pumping equipment to support increasing drilling activity levels. Prospects for the international markets are equally, if not more, compelling.

As one of our customers described on its conference call, lower spending by service companies in international markets for more than a half decade and improving activity is resulting in tightening supply of equipment. Although orders remain light, we're seeing growing inquiries for pressure control equipment in many regions around the world and greater inquiries around next-generation coiled tubing equipment, particularly for the Middle East and in the former Soviet bloc countries. Our Fiber Glass business unit saw relatively flat sequential results as improving demand across the businesses end markets was offset by continued supplier disruptions. Global supplies of key raw materials such as resin and glass remain extremely tight, a condition we expect to extend over the next few quarters.

Additionally, while we are experiencing fewer direct effects of COVID, such as government-mandated lockdowns, we're now working through derivative effects in the form of ongoing logistical challenges and even power shortages, which are occasionally shutting down our operations in China. Despite these headwinds, the outlook for the business is strengthening, driven by increasing oil and gas activity in the Middle East, improving marine and offshore activity in Southeast Asia and continued strong demand for our fuel handling products. Our Process and Flow Technologies business realized a high single-digit sequential decrease in revenue. Clay described the significant operational challenges this business faced during the quarter.

And while operational challenges will linger into the fourth quarter, we remain optimistic regarding the longer-term outlook for this business. We're seeing growing demand for chokes and pumps, for gas processing equipment and for FPSO process modules. And as Clay highlighted, we anticipate additional opportunities to showcase the carbon capture usage and storage skill set we've been cultivating within this business unit. Our subsea flexible pipe business realized a low double-digit percentage sequential increase in revenue with strong EBITDA flow-through due to solid execution and a better sales mix. Indicative of the improving outlook for offshore activity, orders improved sequentially, achieving their highest levels since 2019, resulting in a book-to-bill that exceeded 140% for the second straight quarter. Outlook for orders remain solid, and we expect to continue replenishing the business's backlog and move prices higher.

For the fourth quarter of 2021, we anticipate our Completion & Production Solutions segment will continue to face COVID and supply chain challenges, but improved backlogs and growing aftermarket activity should allow for segment revenues to improve 10% to 15% with incremental margins in the mid-30% range. Our Rig Technologies segment generated revenues of $390 million in the third quarter, a decrease of $97 million or 20% sequentially. Excluding the $74 million in revenue recognized in the second quarter from the settlement of the offshore rig project cancellation, revenues declined $23 million sequentially, primarily due to the timing of certain projects nearing completion during the third quarter. Adjusting for the impact of the offshore rig project cancellation, EBITDA increased $7 million on an improved sales mix and cost savings.

Orders for the segment increased to $300 million, yielding a book-to-bill of 190%. Once again, wind installation vessel equipment orders comprised over half of our bookings as we continue to establish ourselves as the most trusted provider of vessel designs, jacking systems and heavy lift equipment to the offshore wind industry. As Clay mentioned, we remain on track to achieve an annualized revenue run rate of $200 million by the end of this year and a run rate of approximately $400 million by the end of 2022. Additionally, we remain optimistic that the number of offshore wind installation vessel projects will continue to grow. Rig capital equipment orders improved for the second straight quarter, highlighted by an award for our third 20,000-psi BOP project. Last quarter, we noted a growing sense of optimism from our offshore driller customer base, which we believe continues to build.

The global offshore rig count is trending higher and rig tendering activity is growing more active in Brazil, West Africa, the Middle East and Southeast Asia. One of our customers recently indicated that it expects to have the entirety of its fleet under contract by the end of 2021, a remarkable feat considering where the industry was just 12 months ago. With fleets of hot rigs approaching full utilization and operators unwilling to accept rigs that are not in near-perfect condition, a number of our customers have approached us about rig recertifications, upgrades and potential reactivation projects. Most of the upgrade conversions have centered around BOP equipment, automation and emissions reducing technology like our PowerBlade offering. We expect most near-term reactivations to be centered around rigs that are in relatively good shape and will only require modest overhauls.

But as we get deeper into the stack, the scope of these rig reactivation projects will grow significantly and, in turn, so will the revenue opportunity for NOV. Demand for land drilling equipment remains low, but we are seeing positive developments in land markets. As the rig count recovers in the U.S., there is a clear preference for rigs that have leading-edge torque flow rate and pressure capabilities along with larger setbacks to efficiently handle larger diameter drill pipe. Operators are also demanding the latest control systems and automation capabilities with interest in our NOVOS and multi-machine controls growing stronger by the day. The domestic rig fleet is quickly approaching full utilization of rigs meeting the desired specifications and day rates are rising, leading to increasing inquiries for land rig upgrades that will bring currently idle rigs into this ultra-premium rig class. In our aftermarket business, we realized our third straight quarter of improved spare part bookings.

And based on what we've seen to date, we expect this trend to continue into the fourth quarter. After more than a half a decade of rationed maintenance, spending is beginning to normalize as offshore drilling customers gain more confidence in their capital structures and business outlook. We also saw a 30% sequential increase in the number of quotations by our field engineering group, predominantly driven by the customers I described earlier, who would like help from our engineers in determining the requirements to reactivate their stacked rigs. Looking ahead, we find ourselves becoming increasingly optimistic around the prospect of improved financial results from our Rig Technologies segment in 2022, due to several specific segment tailwinds: one, improving maintenance spend from our contract drilling customer base; two, a growing pipeline of potential rig activation projects; three, ramping production from our rig manufacturing operations in Saudi; and four, an increasing rate of converting wind installation vessel backlog into revenue.

Near term, our Rig Technologies segment must contend with the same headwinds currently faced by all global manufacturers, primarily supply chain and labor shortage issues, which will likely blunt incremental operating leverage. For the fourth quarter, we expect revenues for this segment to grow 8% to 12% with incremental margins in the mid-teens.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Stephen Gengaro with Stifel. Your line is now open.

Stephen Gengaro -- Stifel -- Analyst

Thanks, good morning, everybody.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Hi, Stephen.

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Hi, Stephen.

Stephen Gengaro -- Stifel -- Analyst

A couple of things, but can we start -- on the rig tech order side, you highlighted in the release and I think earlier the two offshore wind installation vessels, can you talk a little bit about the market and sort of the opportunity you see there unfolding over the next couple of years?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. In addition to those two, we also had a jacking system for a third vessel in the third quarter that we booked, Stephen, which led to, as we said, a pretty strong level of orders for the wind installation vessels for Q3. Q4, I think it's going to be down a little bit, given kind of our pipeline of opportunities. But when we get into 2022, we're pretty optimistic that there'll probably be another, I don't know, four, five, six vessels ordered, including likely another Jones Act vessel -- qualified vessel for the U.S. market.

So our outlook is pretty strong, underpinned by like the Biden Administration's announcement of its aspirational ambitions of 30 gigawatts in U.S. waters of wind power generation capability and continued bright outlook for further offshore installations in Europe and Asia and elsewhere. So on the whole, we're in pretty good position in that market segment.

Stephen Gengaro -- Stifel -- Analyst

As we think about 2022, and I know there's a lot of moving pieces with costs and COVID disruptions still lingering, etc, how are you guys thinking about getting back to more normal incremental margins as you look at 2022 in the different segments? Do you think we're close or do you think you still have kind of some transition as you go through the year?

Clay C. Williams -- President, Chairman and Chief Executive Officer

A lot -- it's a good question. A lot, in my view, depends on how we sort of battle our way through all these supply chain challenges that we talked about. That's still kind of a wild card out there. But the world, we do think, at some point, gets back to normal, things even out, economies open up fully, demand for crude grows, underinvestment in crude and natural gas over the past few years, I think, sets up a really interesting backdrop. So just the situation we find ourselves in, I think, is pretty constructive with respect to how we can do in 2022 and beyond.

And then that's on the heels of a very significant cost out effort that we've had underway here for a couple of years, that's now north of $800 million and headed closer to $900 million. And so we think the business is really, really well positioned to put up better margins, better profitability going forward. So that's where we find ourselves. Can't speak to how quickly that unfolds, but I think it stands to reason that the world does get back to normal, we get the COVID disruptions, economic disruptions behind us, and I think that feels good things for NOV's future.

Stephen Gengaro -- Stifel -- Analyst

Is there a segment that's leading the way or not necessarily?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. Well, you're already seeing the Wellbore Technologies, right? So double-digit growth, three quarters in a row, 15.2% EBITDA margins in Q3, and that -- by the way, that's in spite of its own sort of COVID supply chain issues, too. So it's sort of overcoming those. But as you know, that's a little earlier cycle compared to Completion & Production Solutions and Rig technology, a little less capital equipment driven. And so it's on its way. And then with respect to the other two, I touched on this in my prepared remarks, prosperity rolls downhill through the oilfield and it starts with high commodity prices that help restore oil and gas producers balance sheets and gets them back to a little higher levels of activity, and then it shows up in the services segment.

And I think they're going to be quickly realizing high rates and margins, and then it will flow into higher demand for capital equipment. But big picture, we're on the heels of several years here of depleting the stocks of capital equipment that perform oil -- wellbore construction activities in the oilfield. And so there's been underinvestment and that equipment wears out. And as utilization rises, activity rises. I think there will be a call on some of the things that NOV makes.

Stephen Gengaro -- Stifel -- Analyst

Excellent. Thank you.

Clay C. Williams -- President, Chairman and Chief Executive Officer

You bet. Thanks, Stephen.

Operator

Your next question comes from the line of Ian MacPherson from Piper Sandler. Your line is now open.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Good morning, Ian.

Ian MacPherson -- Piper Sandler -- Analyst

Thanks. Good morning, Clay and Jose. Good morning. Clay, I know that you said that some of the offshore rigs that come out first will be relatively less cold, but I know that you never like to let a reactivation go without an upselling opportunity on upgrades as well. And we know the upgrades that could apply to the remaining U.S. land rigs that need to come out and get to super spec. Could you compare and contrast what that delta of opportunity is for NOV near term between land rigs and offshore rigs between fairly minimalistic reactivation versus what your upgrading upsell opportunity is?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes, it's hard to generalize, Ian, because a lot depends on the specific rig. And so it's kind of how long is a piece of rope question. But starting with the offshore, what we're seeing is the oil companies -- a rig has been stacked for more than a year offshore. The oil companies now are requiring a survey to establish class. So the classification societies come in, they survey their rig. And that also involves the OEMs checking out equipment. And so I think the oil companies want to know that what their contracting has the capabilities as advertised. And so we're seeing that drive more rigs in the shipyards. So I think the rigs and shipyards is up half-a-dozen or so quarter-on-quarter, and we're roped into that to provide OEM certification of equipment.

The other thing that we're seeing in the offshore is more stepped-up requirements around pipe-sharing capability by the BOP. And so that typically involves adding accumulator bottle capacity to the BOP, maybe some other changes to the ramps and so forth, more interest in pipe-handling capability, which steps up rig efficiency, enables the rig to trip pipe faster. And then the third kind of big area that there's a lot of interest in is emissions reduction. And so right now, we've talked about our PowerBlade product to reduce offshore emissions on prior calls, the results of that -- the first one that we've installed offshore is being actually measured for emissions reductions right now and a lot of customers are watching that closely. And so in terms of upgrade opportunities that would go along with this rig reactivation opportunity, those categories of equipment, I think, are most promising and most near term.

Of course, every rig, again, every rig looking around what their capabilities are, trying to set themselves apart from a competitive field, we also look at other areas to improve capabilities, but that's what we're seeing most predominantly right now as part of that recertification process offshore. Turning to onshore. As Jose mentioned, yes, there's a lot of interest -- rising interest from land drillers now as utilization is starting to rise in sort of the highest capacity rigs, and it ties to the phenomenon that he also referenced around demand for 5.5-inch drill pipe. So North American shale drillers are really looking more toward larger diameter 5.5-inch drill pipe for a couple of reasons, it has better hydraulics, it has larger IDs, so you get better hauls going down with the mud.

And then the 5.5-inch drill pipe coupled with our delta premium connection enables a smaller OD tool joint, and you get better hydraulics of the mud coming back up the hole and less turbulent flow and wash out. And to handle 5.5 drill pipe requires higher torque, iron roughnecks. And so we haven't quite seen it yet, but we think there'll be a rising level of inquiries around upgrading Iron Roughnecks to handle the bigger pipe, to handle the higher torque that it requires along with engineering around higher setback on those rigs. So you can set back 25,000 feet or whatever, a 5.5-inch pipe, which takes a little more substructure and drill floor capability. And so near term, we see opportunities there. I would add to continued growth and interest in our NOVOS operating system, which is really -- we're really pretty jazzed about because this is the digital operating system on NOV rigs that is going to be the foundation for rig floor robotics, which we're going to have on rigs in Q4.

And this is a cost-effective way to really get -- reduce the labor requirements on a drilling rig, to get people away from well center, to let the machines actually trip the pipe. And what we found is that they can trip the same number of stands basically as a human crew can and do that in a cost-effective upgrade in combination with this sort of digital operating system support for these land rigs. So pretty excited about that as well. So on all fronts, NOV is right there with technology that we've continued to make better through the past several years, and to continue to upgrade capabilities and make these rigs safer and more efficient. And so we stand ready to do whatever our customers need us to do, both land and offshore.

Ian MacPherson -- Piper Sandler -- Analyst

Good stuff. Thank you, Clay. Jose, you had a good quarter for free cash flow in the third quarter. I was just going to invite you to refresh the full year free cash outlook, if it needs to be or just kind of leave it where it is?

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Yes, it was a good quarter from a free cash flow standpoint. So we continue to get better and better in terms of managing working capital. No real revision to full year cash flow. We're obviously well within the original targets that we had originally provided. I'd say that typically, Q4 tends to be our best cash flow generation quarter of the year, if you look back at the last several years and certainly hope to generate a little bit more free cash flow in Q4, but it might be a little bit different this time around. So if you look closely at the balance sheet, you saw that we had a good release of cash from working capital, about $108 million with the majority of that coming from -- or the difference between our contract assets and contract liabilities. And if you look forward to Q4, that probably goes a little bit the other direction plus if you look at the guidance that we provided, you do the math, there's a pretty sizable step-up in the top line.

So it could be a little bit of a buildup in AR. And then lastly, as we sort of went on in a great bit of detail related to the supply chain challenges that we've been having and expect to continue into Q4, we are building buffers in certain parts of our supply chain in order to try to better withstand some of the potential disruptions that we see on the horizon. So a long way of saying that we're still optimistic in terms of our future cash flow generation, not just Q4, but certainly into 2022. We're getting better in terms of our working capital management, but don't expect another very large windfall of free cash flow in Q4. But overall, I feel fantastic about the condition of the balance sheet.

Ian MacPherson -- Piper Sandler -- Analyst

Great. Thank you, Jose. I'll pass it.

Operator

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

Clay C. Williams -- President, Chairman and Chief Executive Officer

Hi, Niel.

Neil Mehta -- Goldman Sachs -- Analyst

Hey. Good morning, guys. If I could ask a strategic question here around M&A. And the company hasn't pursued a transaction in some time, but you're evolving the business and you're focusing on some new growth areas, including offshore wind. Do you think you can build the business organically as you diversify? Or do you think there is a role for bolt-on M&A in your strategy?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. Great question, Neil. And to clear the record, yes, we have been engaged in M&A for consistently, we just found everything too expensive, particularly in renewables and particularly with all the capital with apparently very low cost of capital chasing some of these transactions. And so, yes, we feel very comfortable pursuing these opportunities organically. You step back and look at the company's capabilities, our assets, our global footprint, our fantastic engineers that are super creative, our deep expertise in materials, metallurgy, robotics, digital, I mean, you name it. We think we've got the toolkit here to pursue these things organically and launch with a few steps ahead of competition in many of these areas. And so yes, that's the plan.

We have made a couple of small investments. We've talked in the past about our investment in a land wind tower manufacturing technology that we're -- we've brought a lot of those skills that I just referenced to bear on helping them achieve their strategic goals and are pretty excited about that. And we've also developed complementary products, specifically a mobile tower crane lifting system for that technology that we'll be bringing to market in early 2022. But yes, I'm pretty excited about -- I feel pretty good about being able to move forward organically, mostly. But nevertheless, I just want to be clear, we're always looking, always looking on the acquisition side for opportunities to strengthen what we do both in the energy transition space as well as our traditional oil and gas space, which we continue to invest in organically as well.

Neil Mehta -- Goldman Sachs -- Analyst

That's great, Clay. Maybe you could talk about how you're seeing the offshore opportunity and quantify for us what the opportunity -- what the cash flow or EBITDA opportunity set would look at? As we look at your slides, you do talk about 240 gigawatts of offshore wind capacity over time by 2030. It's a big prize, but help us tie that back into what it means for your model?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. Offshore specifically, we've talked earlier and before about the installation vessels that are required to install these leading-edge wind turbines and they're just gigantic pieces of equipment. I mean the 14-, 15-megawatt turbines, which are sort of leading edge are 500-foot hub height. So that's a 50-story building, and then blades that are 100 yards or more long and assembling that at altitude is a major undertaking. So the vessel requirements have continued to rise with the heights and the weights involved in installing these things as well as the industry -- installation industries, aspirational goals around making installation more efficient, taking cost out of installation, which really plays well into NOV's capabilities in terms of equipment handling, sort of time and motion studies around that process and really bringing some pretty creative months to bear on improving that.

But the outlook remains good because we don't think the industry is going to stop at 15 megawatts. I think 20 megawatts or more are probably on the horizon a few years out. And so that space looks pretty good, and so we're glad to be a part of it. But shifting gears, there's potentially even more interesting space further out, which is in the area of floating wind. And so if you think about it in fixed wind, it requires shallow water, and we're building the toolkit in the same way we build drilling rigs. We're building these installation vessels. In deepwater, the wind power generation industry is going to have to move to floating wind turbines. And there, we've got some very clever hull designs that our GustoMSC Group has developed. They've been in this -- in and around this space for 20 years and that we think can be manufactured industrially with less steel, working in concert with shipyards.

And just as a reminder, we've done that a lot, building 400 offshore rigs through the last 20 years. And so we worked closely with most of the world's leading shipyards around the world. We think we can help them industrialize processes to make these vessels at scale. And then NOV proprietary kit around mooring, fairleads, those sorts of things that would anchor those vessels are discrete items we could sell into that in addition to working with the shipyards to fabricate the hulls. And the difference between that opportunity and the fixed wind opportunity is we would participate economically in each individual asset. So it's a little different. And I think that makes the total addressable market in the floating wind space in the long run, far larger than the fixed run. Does that answer your question?

Neil Mehta -- Goldman Sachs -- Analyst

Yes. And Clay, going back to the fixed offshore, you talked about $400 million of annual run rate by, I think it was fourth quarter of 2022. Does that still feel like a good number? And is there an upward or a downward bias to that?

Clay C. Williams -- President, Chairman and Chief Executive Officer

I think that's right down the middle of the fairway. I think that's -- it fits with the orders that we've won up through the third quarter that we just announced and we're on that trajectory to be able to hit that by the end of 2022. As you can appreciate, Neil, these vessels take sort of several months of gestation and so forth. We're working closely with these customers to get the specs right and the plan right to execute these projects. And so line of sight on that has been pretty decent. And so the $400 million guidance that we gave a couple of quarters ago kind of fits that pipeline of sales opportunities.

Neil Mehta -- Goldman Sachs -- Analyst

All right. Great color, guys. Thank you.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Marc Bianchi from Cowen. Your line is now open.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Hi, Marc.

Marc Bianchi -- Cowen -- Analyst

Hey, thank you. Hey. Hi, everyone guys. I wanted to start with the charge that you took on the vessel projects in the third quarter. Just to clarify, is this a charge on a percentage of completion-type projects? So you're recognizing all the expected higher costs for the project here in the third quarter, and we really shouldn't have any of that effect in the fourth quarter and beyond, assuming things don't get any worse.

Clay C. Williams -- President, Chairman and Chief Executive Officer

That is correct. It's a POC project. We've roped in all of the extraordinary costs that we have encountered there. And we're fairly far along getting it done, but we still have a ways to go. And just worth noting there's still COVID challenges out there, but this is our latest and best view on cost to get to -- get this vessel completed.

Marc Bianchi -- Cowen -- Analyst

Right. Okay. So then if I sort of exclude that from kind of the -- or put that back into the third quarter in caps, it would look like the implied incremental is maybe in the mid-teens. And I know there's lots of supply chain issues and so forth, but maybe you could talk to maybe what's going on in the fourth quarter that could be holding back incrementals and how you see that progressing beyond fourth quarter?

Clay C. Williams -- President, Chairman and Chief Executive Officer

Well, first, you're right. If you sort of accept for that, then you see Completion & Production Solutions revenue down $19 million of EBITDA, actually up $3 million in Q3 through that math. But looking forward to Q4, our guidance with low incrementals, frankly, it's just acknowledgment that the state of the global supply chain is in a place that's really never been before. And we're battling through sort of shifting constraints and challenges and freight issues, etc, etc, etc. And so I'll confess there maybe there's sort of some conservatism in Q4 that I think is appropriate, frankly, given what we just saw in Q3 and the fact that the COVID supply chain disruptions aren't going away.

I will note, in terms of color that we've seen over the last couple of quarters, Q1, Q2, when we were talking about COVID, it was much more around moving our workforce around the globe. So we have service technicians across international boundaries that have to face potential quarantines to go offshore to come back to their home countries, etc, etc. That is probably getting a little better. But when -- through the third quarter, what we're seeing are more of the second order effects where our subsuppliers are more disrupted by supply chain issues. Freight is getting more challenging, raw material constraints and allocations in some instances, that sort of thing. So the nature of this is shifting, but it's just -- it's an uncertain time and as the world tries to get out of this pandemic and reckon with the economic disruption that the shutdown last year and early this year caused.

Marc Bianchi -- Cowen -- Analyst

Yes. Makes sense. On the order outlook, I didn't quite catch because you've got so many moving pieces within the segments that Jose was discussing. But just if you look overall, like rig tech and overall caps orders, strong performance here in the last two quarters, how do you see that shaping up over the next quarter or two? And how do these supply chain issues influence that? Do they hold back orders? Do they cause customers to pull orders forward because they want to get ahead of potential supply chain issues? Just if you could talk through that a little bit.

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Marc, it's a good question. So as it relates to the order outlook, as we were talking about, we feel really good about sort of the sustainability of this new level of orders that we're receiving within our order book. And so I see that sort of continuing to build some momentum into 2022. But for a lot of the things that we're booking right now, particularly within our CAP segment, our CAP segment, as you might imagine, order intake for sort of the smaller type items, i.e., pieces of completion-related equipment are still pretty light. And so we're talking about big chunky orders that are coming in. And if those slip or pull one quarter, that can make a pretty big difference. But the good news is that what we're seeing right now is things are kind of either pushing or pulling, they're not going away, right? Momentum is continuing to build for the order book.

So I'd say, all in, things are going really well. But you talked about the current supply chain dynamics, I think, does add some wrinkles into the precise timing of when these things come in. So there is a little bit of uncertainty. That's never good for order intake. But I think some of that is starting to get resolved. People are getting more confident, and they are cognizant of inflationary forces and the potential impact of what might take place going forward. So in some instances, customers are trying to move forward very quickly and lock in pricing and build in that type of certainty. In other instances, and this ranges the gamut from the very large projects to small one-off orders even that we see within our Wellbore Technology space.

Sometimes somebody asked for a bid and we quote them a price, they sit on their hands for a little while and come back for an updated price and they're not happy with it. So they may choose to wait hoping that what we're seeing in terms of steel costs abate to a certain extent. So it's a little bit of a mixed bag, but overall heading in the right direction.

Marc Bianchi -- Cowen -- Analyst

Yeah, super. Thanks so much. I'll turn it back.

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Thanks Marc.

Operator

Your next question comes from the line of Chase Mulvehill from Bank of America. Your line is now open.

Chase Mulvehill -- Bank of America -- Analyst

Yeah. Thanks for squeezing me in here. Yes. So I guess first thing I wanted to ask about was really just -- when you think about the cost pressures that you've seen, you know with steel costs, container rates and just overall kind of supply chain friction, can you talk about how much of that is actually flowing through numbers in Q3? And like, for example, like container rates kind of -- are they flowing through at the leading edge? I know you said you're doing some air freight instead of that. And then HRC and steel cost and everything like you've seen kind of those costs up a lot. So the costs that are running through in the third quarter, are they kind of really reflective of what the costs are today? And then you talked about increasing prices, and I don't know if you're doing surcharges. And so when did those really start flowing through? So just trying to understand the moving pieces of those two.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. Yes, good question, Chase. We -- I'd say that it felt like freight kind of got a little worse through the quarter. Hard to say what it looks like in Q4. This will necessarily be anecdotal. It's impossible for us to be sort of a big stuff, as you can appreciate. But freight wise, things are getting more backed up, more difficult to get vessels, container costs are pretty high. We certainly felt a lot in Q3, whether that's up or down going into Q4, really hard to speculate on. I do think in the long run, this does sort of dissipate and the world gets back to normal. But here in the short run, we're kind of bearing the impact of freight. On the inflation front, as I mentioned earlier, it also felt like it started to mount in most areas, I would say, other than steel. Steel rose a lot in Q2.

It's kind of one raw material that a couple of our business units pointed to and said they are feeling like there's a little more stability there. I know iron ore prices have moved down sharply on the one hand, but coking coal is way up on the other hand. And -- but time will tell, but that's on the heels of some really big moves. I mentioned 200% sort of price increases on hot rolled coil and plate, less so on other types of steel, but still 25%, 30% on seamless screen tubes, that sort of thing. We understand casing is up probably 25%, 30%, something like that. So big moves recently. So hopefully, steel is stabilizing, and we're -- the worst is behind us. But other sort of petrochemicals that we buy: resins, epoxies, you've heard us talk a lot about those things.

We use them in our fiberglass business. We also use them in our Thread Protector business. We use them in our Tuboscope internal lining -- tubular lining, coating business. And so it's affecting us in those areas, too. So just a lot happening out there. And again, I'm confident we'll get it all sorted out and get it behind us and just really proud that our folks are on top of it. They're passing this on through either price increases or surcharges or a combination of both and really trying to minimize our risk exposure to inflation as best that we can.

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

And Chase, maybe I could add just a little bit more color on that and tag on what Clay was saying. Certainly, from an overall pricing perspective in terms of our pricing from our vendors and our prices to our customers, it's a little bit of a mixed bag. So in some instances, we have fixed pricing for our raw materials for an extended period of time. And so we are extremely well situated in that situation, right? In other instances, we have provided fixed pricing to our customers for a period of time, and we may not have been perfectly matched up from a cost perspective. But as Clay mentioned, our team is managing it extremely well. So it is a mixed bag across the portfolio. And I think Clay touched on it a little bit in his prepared remarks.

And then a little bit of color that might help from -- the impact of freight, it's really remarkable because, obviously, one of the benefits we, as NOV, have is our size and scale and our diversified footprint that we have around the world. And so over the last couple of quarters, there are several of our businesses that over the last several years, we have done what makes sense, right, which is to locate a lot of our manufacturing in low-cost regions around the world, but we preserved some manufacturing within North America as part of diversifying our overall supply chain and manufacturing footprint. And what we've seen over the last quarter or two or three is that freight costs are getting to be so excessive that the benefit of that low-cost manufacturing doesn't work for us.

And so we have actually repatriated a lot of our manufacturing back to North America while we're dealing with these massive freight charges.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Yes. Yes. And could have options in our manufacturing footprint to be able to do that to respond.

Chase Mulvehill -- Bank of America -- Analyst

Absolutely. One quick follow-up here. I didn't hear anything mentioned about the Saudi facility. Just kind of talk about how that ramp is going? Is Saudi looking to slow down and do less than five per year near term because of the crude oil, are they looking to accelerate it? So just kind of talk about the -- what's going on with that facility there?

Clay C. Williams -- President, Chairman and Chief Executive Officer

No. Thank you, Chase. I was just here a few weeks ago. It's going really, really well. If anything, the Saudis are accelerating, you probably have heard about the unconventional gas development aspirations along with their aspirations to develop more crude productive capacity and very excited about. We're going to have the first rig commissioning going on there by the end of the year and the second one will follow just a couple of months afterwards. So, almost completely done with the facility very close, but very excited about the outlook for that region. So thank you for asking.

Chase Mulvehill -- Bank of America -- Analyst

Okay. Perfect. I'll turn it over. Thanks everybody.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. This concludes today's Q&A session. I will now turn the conference back over to Clay Williams.

Clay C. Williams -- President, Chairman and Chief Executive Officer

Thanks. Thanks to everybody for joining us today. I'm going to end again by thanking our terrific employees for your diligence, your hard work, your creativity and in particular the care that you show for our customers and for each other. So thank you all for what you're doing. And those of you listening, we look forward to speaking to you on our fourth quarter results in February. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Blake McCarthy -- Vice President of Corporate Development and Investor Relations

Clay C. Williams -- President, Chairman and Chief Executive Officer

Jose A. Bayardo -- Senior Vice President and Chief Financial Officer

Stephen Gengaro -- Stifel -- Analyst

Ian MacPherson -- Piper Sandler -- Analyst

Neil Mehta -- Goldman Sachs -- Analyst

Marc Bianchi -- Cowen -- Analyst

Chase Mulvehill -- Bank of America -- Analyst

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