National Oilwell Varco CEO Clay Williams Sits Down With The Motley Fool

In 1859, Colonel Edwin Drake completed the first oil well in Titusville, Pennsylvania. This monumental event was the beginning of the oil and gas industry we know today. Within less than three years of Drake's feat, oil drilling equipment manufacturer Oilwell Supply was born, and after more than 150 years in business, that small Pennsylvania parts manufacturer has transformed into National Oilwell Varco (NYSE: NOV), the world's largest supplier of oil and gas drilling equipment. 

Today, National Oilwell Varco has emerged not just as a market leader in the oil and gas space, but also one of the leaders in the industry in leadership and corporate culture. So, we sat down with National Oilwell Varco CEO Clay Williams to discuss the company's role in innovation, leadership, the company's culture, and an overall look at where the oil and gas market goes from here.  

A full transcript of the video can be found below.

Tyler Crowe: Hello Fools, I'm Tyler Crowe here with Clay Williams, CEO of National Oilwell Varco. Mr. Williams thank you very much for being with us today.

Clay Williams: My pleasure, Tyler. Great to be here.

Crowe: You know it's been a interesting time here, but just to get started, it's been about one year since you guys did the spinoff of NOW Inc / DistributionNOW (NYSE: DNOW), however you want to say it. And a couple of days ago, we spoke with Robert Workman, CEO over there, and he got to talk about some of the benefits that they have as a separate entity now.

What do you guys see over this past year has been a benefit for you guys being your own company?

Williams: You know I think the main reason we moved forward with that spinout was we recognized we had a great big enterprise here, and something we looked at for a long time that, when we looked at comparables in the marketplace, the comparables traded at a higher multiple than we were able to capture at National Oilwell Varco.

So, this is really purely a shareholder value unlocking mechanism. Recognize that we can spin that out, create a separate public company, and do a lot of good for our shareholders. And importantly recognize that we had a very talented managers here -- Robert Workman, Dan Molinaro, David Cherechinsky -- who could run that business very effectively. And so [we] created that spinout really to unlock shareholder value.

Operationally, we still work very closely with DistributionNOW; they're one of our prime channels to market for a lot that we make at National Oilwell Varco, but they're not our only channel to market. And so we recognized we had alternatives in cultivating those, and likewise DistributionNOW, I think it gave them a little more flexibility in terms of what they could distribute in the marketplace. So, I think it's been a real win-win for both companies. Still great friends with DistributionNOW and all of our old NOV alumni over there, they're doing a great job and just very, very proud of what they're accomplishing.

Crowe: When I spoke with Robert, he was saying how you guys still get together once in awhile for beers and stuff like that, and I think that was one of the reasons we were able to secure that interview. So, we're grateful you guys are still friends. But actually on that, you're talking about all these people from National Oilwell Varco going over there and leading that team.

One of the things I do find fascinating about National Oilwell Varco as of late is you guys have kind of, I would say, bred leadership in the oil and gas space as of late. I mean, [here you have someone] who has kind of gone through the ranks at NOV, Robert Workman over at DistributionNOW, we have Jeremy Thigpen now over at Transocean (NYSE: RIG), and of course, Pete Miller's now, it seems like he's a board member of half the oil and gas industry nowadays.

What do you see has, what has NOV done that has been so good at kind of forming, breeding, or training leaders in this space?

Williams: Well, I would add to that list Kevin Neveu, CEO of Precision Drilling.

Crowe: I wasn't going to get them all. You guys have...

Williams: Joe Winkler, well ,you know I've had the great fortune to work with a lot of great leaders in my career here. Pete, Kevin, Jeremy, Robert, Joe Winkler at Complete Production Services. So you're right, we do have a good history of a lot of leadership. We have a lot of different business models here at National Oilwell Varco, and the way we're organized is very decentralized.

So, I think we give leaders a lot of authority around how they run their businesses and a lot of responsibility to generate returns on the capital, and they manage on behalf of the company. So I think our managers really learn how to run the business like an entrepreneur, and have a lot of leeway in determining strategy and tactics to execute the strategy. And I think it's a great sort of learning environment, and that management system operates within, basically, controls and procedures that are not negotiable.

So, there's certain things that we have a hard set of controls against, but it's just a great environment to learn how to run businesses. And then the other really important element I think is culturally, we're very focused on people. We recognize that without great employees, without a great team, we won't have a great business. And that's why I think that's something that all of the folks that you mentioned learned and understood here through their time with National Oilwell Varco, and [it's] so very, very critical to get that right.

Crowe: [In] your role as a CEO, do you feel like with that management team, are you a little bit more hands-off, where you kind of let them run with a lot of things?

Williams: Absolutely, absolutely. I recognize that sitting here in our corporate office, I'm far less likely to make the right decision about a business than the folks that are actually on the ground, interfacing with our customers directly, that really see the challenges. So we really decentralize everything that we can, and we try to be very, very thoughtful about the different functions that we do centralize. But we really try to empower our managers and give them a lot of autonomy to run the businesses, but also hold them accountable to make sure that they're running their businesses the right way. And that they're generating good returns on [the] capital that they're entrusted with.

Crowe: When people hear the word innovation, a lot of people think Silicon Valley, tech in the next app that's going to be developed on an iPhone. But in the oil and gas space, especially oil services industry, new technology you guys need to create all the time to basically survive. It's a very dynamic market. And National Oilwell Varco has been pretty adept at doing that.

Williams: Thank you, yes.

Crowe: And what do you see as some of the, what has enabled you guys to kind of unlock innovation in the space?

Williams: That's a great question. And something, again, we're very thoughtful about. So if you kind of build on what I was telling you earlier about how we're organized decentralized business units that operate relatively independently, business leaders focused on the P&L. One of the trade-offs with that is that I think we, at the operations level, you may get a little short in your time horizon.

So, we have a corporate head of technology, a fabulous lady named Hege Kverneland from Norway, who really runs effectively an incubator at corporate to incubate promising technologies that are a year or two, or five or 10 away. And so she really tries to cultivate and develop new technologies that are maybe a long way from a product, and develop those in an environment that's a little more protected from the, "Oh my gosh, are we going to hit our budget next quarter or not?"

In that sort of more P&L driven short-term environment, these are the kinds of things that are more likely to get cut. So, what we try to do is steer longer-term technology opportunities into Hege's technology group and develop businesses around those. For instance, late last year, we spudded with our new test rig. So our corporate technology group has our own rig that we're testing new technologies on both surface technologies [and] things down hole.

We have developed cross-business unit technologies and products out of this group that have been great successes. One of the areas, for instance, that we're pioneering is closed-loop drilling, letting data from the bottom of the hole that streamed up on a microsecond basis to the rig, actually operate the rig controls. And this spanned a couple of different business units at NOV, and that innovation really came out of Hege's group. So that's kind of our approach.

Crowe: Do you find that in today's market, where it's not exactly great, do you feel any pressure at all to cut back on some of the innovation in any way? Or like come back on the funding for it?

Williams: It's a great question. In today's market, we're continually trying to get more efficient and get better, and reduce costs where we can. But we have ring-fenced technologies we recognize that we're passing through this cyclical downturn. That's very challenging, but the industry will emerge, and when we do emerge, we plan to emerge with better technology and better products. And [that] means we need to continue these efforts and continue investing.

So, what we're doing is pressing, for instance, our test rig to get more and more done and to experiment, to run new products, and to really make sure we're using that asset as efficiently as we can through this downturn. But again, you've got to continue to invest in the future. This is much more of a high-tech industry, I think, than most people unfamiliar with it understand, and you have to continually invest and press for new and better ways of doing things, new technologies that lower the cost of producing oil and gas. That's kind of our mission.

Crowe: Yeah I mean, just talking about like you said, streaming data instantly from the borehole, or something like that. It almost seems like it's not giving it justice by calling it drilling a well. Because when somebody hears the word drill, they just think going straight down, but it's so much more than that today.

Williams: Absolutely. It's a lot more than just grinding up rock, and NOV's very proud to be a technology leader and continuing to pioneer new and better ways to drill.

Crowe: Awesome. Just shifting gears just a little bit, talking about our mergers and acquisitions. It has been I guess one of the cornerstones of National Oilwell Varco's growth over the years. You know you guys have done hundreds over the past decade, and I'm sure as a CEO, CFO and various management roles, you've been tied to a lot of them.

But yet when we look beyond just you guys, so many companies fail at mergers and acquisitions in creating value for shareholders and for the business itself. And I just wanted to know, what do you feel like are some of the reasons so many people fail at this? What are the pitfalls that happen that don't allow people to unlock that shareholder value?

Williams: Well, a couple things. First I would tell you, I can't speak to other people's programs, but I will tell you here, and I actually joined the company through an M&A corporate development role back 20-something years ago. So, I spent time in that area. But having done hundreds of acquisitions, I can tell you everything that you can do wrong, we have done wrong. And I think the benefit of that is that we learn from it. And we try not to repeat those mistakes.

So when you look at NOV, what you're looking at is a very deep well of experience on M&A. And out of that, to me the most important thing to get right as an acquirer is to stand in the shoes of the employees of the company that's being acquired, and think about how scary that is. These things are disruptive, frequently there's displacements that arise, folks end up with a new healthcare plan, they end up maybe with a new boss, a new place to work. It becomes very -- when the specter of a corporate transaction arises, it's very scary to them personally. And understandably, they get refocused on themselves, which means they're not focused on the customers.

So, I think the challenge for an acquirer really is to understand that, and to do everything that we can to make sure that they understand they're joining a great company, here. A great company to work for, a company that's going places, a company that makes these acquisitions to grow businesses, to offer opportunities to people, and to address that right up front, and make sure that they understand this is going to be OK. And then related to that, the most important aspect of integration is the organization.

Again, it's a bit of a cliche, but it's absolutely true. Business is all about people. So you've got to get that organization right, and you've got to get it right quickly. One of the aspects of doing an acquisition is when the ownership of the company changes, it's a scary time, but it's also an exciting time. And people expect change, so they have a mind-set that's ready for it, I think. I think most folks will consider change constructively in that setting, and so they're ready for it.

And if weeks turn into months, turn into quarters, into years, and the change doesn't come, that window closes. And so we try to act quickly and really get the organization right, and do that quickly and kind of get the organization settled and back focused on executing the business, and taking care of customers. And so that's the, there's nothing terribly elegant in that, it's just really understanding what they're going through and help them shepherd the new members of our team through that period.

Crowe: That's awesome, because it's really not something a lot of people think about what they think of mergers and acquisitions. People, I don't want to say myself included, but I guess you could say I'm in that group as well. But you know on that Wall Street analyst kind of end, we're always focused on the things like the price and the valuation of things like that.

Williams: Right, sure.

Crowe: But you know, there's so much more to it.

Williams: It's not a spreadsheet.

Crowe: Yeah.

Williams: Business is people at the end of the day.

Crowe: Yeah.

Williams: And keeping them motivated and excited and pointed in the right direction is the secret to business. But it's not the math, it's really the team.

Crowe: Would you say that doing several, a lot of what you guys do is several smaller bolt-on acquisitions rather than the larger ones. Which have happened, but a little bit less frequent. Would you say those smaller ones kind of give you, it's almost like reps at practice. Practicing for the big game, or something like that?

Williams: Well, they do, and so we like to stay in practice, we've got a great team that executes these transactions. They work closely with operations around those, but we also take a portfolio approach. I guess another critical success factor on acquisitions is getting the value right. And you can only really do that if you're looking at a range of opportunities. So we try to be very expansive in terms of what we look at and consider. And so if you're looking at a range of opportunities, it makes it easier to make judgement calls around what are the best opportunities? What's the best deployment of capital? Where are we going to get the highest returns? And you develop that sort of, that capability and expertise around M&A. So volume helps a lot in this effort.

Crowe: That's great, and just kind of wrapping up on these, I guess you can say more general questions about business in general, as your role as a CEO, you've been a little bit, little over a year now. What do you feel as your role in the CEO? What are like three things that you kind of need to remind yourself about every day in terms of pitfalls to avoid, things that you need to stay focused on, and how it helps to drive the business?

Williams: Well certainly, the market's been challenging, and again, certainly No. 1 is understanding the folks that make NOV go. Business is the ultimate team sport, and we all have our roles to play. And we need to, even though we're mostly a manufacturer, I would tell you we're fundamentally a service business. We make a lot of iron for the oil field, but others do as well. What differentiates our equipment is the service attitude behind it. And so to deliver that, we need a workforce that's motivated. And so I think understanding kind of what our employees are going through is important out there.

I think secondly, listen. We have a lot of very, very talented right people engaged in the marketplace, and we need to, I need to personally make sure I'm always listening to and looking for new and better ideas that our folks come up with. And then thirdly, more recently, we need to be more opportunistic. The market has cycled down, it creates a lot of near-term challenges, but long-term opportunities. And so we're working hard to find new, not just new acquisition opportunities, but new opportunities with regards to technology development. And so both areas really kind of work in concert, and that's really what's going to shape what NOV looks like 5, 10, 25 years from now.

Crowe: That's awesome. So just kind of shifting, I guess, a little more specifically to the oil and gas industry. I mean, I would feel remiss if we didn't talk about it a little bit. Because of your guys' position, unlike maybe, say, a driller, who focuses maybe just on one particular area, where you guys from the mom and pops all the way up to the Saudi Aramco of the world. You guys are customers or suppliers to them. What are some of the common questions you're getting from your customers today? And how does that, how's it giving you a feel for the business?

Williams: Can you give me a bigger discount? You know, it's tough all over out there. And we certainly understand that. I think more specifically, customers in all areas of the oil field are working to reduce their cost of production. Oil's a commodity, they're all price takers, so the only side of the equation they can really focus on is the cost to produce a barrel of oil or an Mcf [thousand cubic feet] of gas. And I think in a lot of ways, the oilfield represents a bit of a battleground of different sources of oil.

And as worldwide energy demand has grown, we pressed into new types of rocks, new basins, and opened up things like unconventional shales in North America, deep water basins in the Gulf of Mexico, West Africa, and North Sea. And so in all areas, our customers are saying, "Can you help me?" And what's really interesting about being in a cyclical downturn right now with oil prices low, at $100 a barrel, there's not really a lot of incentive to do things differently. The focus is on just execute. Let's just get the hole in the ground, let's get the flow line run, let's get the grease in the tank, and it's about execution and just making it happen. At $40 a barrel, our customers note they have to do things differently.

So, it's actually easier to have the conversation around, "Hey, we may have a better idea here." Or, "We've got a product that will help you reduce your marginal cost." And so what's encouraging to me, or the conversation's we're having. We're not necessarily winning as many purchase orders as I would like, so business has slowed down, but we have customers thinking more expansively about really changing what they're doing. Because as opposed to the $100 world, where it's all execution now, it's like we really are going to have to do things differently. We're going to have to do them better, and we're going to have to do them more efficiently.

And this is our wheelhouse. This is what National Oilwell Varco does. We really try to focus on new and better ways of drilling for, of developing and producing oil and gas. And so this is the stage where we can present new and better ideas, more industrialized processes, standardization that will make, sourced all these different camps trying to produce oil and sell them to this commodity market more efficiently.

Crowe: That's awesome. Like you said, oil and gas is a very cyclical business, but if you look over these cycles that we have gone through over the years, no cycle is the same. And at the same time, the industry always looks a little bit different than it did pre-cycle. So we're a little over a year into this one now, and not completely sure if we're out of it yet. But what are some of the things that you're seeing as potential structural changes to the industry as a result of this downturn, and how it's going to look on the other side?

Williams: Well, certainly consolidation. So, there's large transactions announced. Things like Halliburton (NYSE: HAL) and Baker Hughes (NYSE: BHI), Schlumberger (NYSE: SLB), Cameron (NYSE: CAM), and so you're seeing consolidation of certain subsectors. You're also seeing a lot of financial distress among other sectors. Probably unfortunately, we have some companies that aren't around for the upturn. In our view, that consolidation, the industry tends to go through these cycles as consolidation and fragmentation.

And so this is sort of setting the stage, I think, out in the future once we get back out into a higher oil price, activity starts to go up. My belief is that oil companies always want alternatives, and so structurally, we will, once we get back to that prosperity, we will see start-ups in the business, we will see new entrance in certain subsectors. And so this thing kind of goes in cycles. So I think that's probably the next part of this cycle. And that's a ways out, admittedly but, that's kind of the way we see things going.

Crowe: Do you feel that any of the cost savings efficiencies that have been gained so far in this down cycle, will that carry over into the next cycle?

Williams: Certainly.

Crowe: I mean, we see like a company like EOG Resources. You know they say that back in 2012 their breakeven price in the United States was about 90 [dollars per] barrels. And today they're saying breakeven is 40. Are they going to be able to maintain that sort of progress going forward?

Williams: Yeah. I think we're all smarter, and again, necessity is the mother of invention and $40 oil makes ...

Crowe: Changes things very quickly.

Williams: ... efficiency a necessity. So, I think most of that will be retained. The flipside, though, is there's been a lot of deflation and a lot of discounting across the entire service sector. That part's not sustainable. And you have rental companies, for instance, that that have assets on the shelf that carry high depreciation load, that they're not being reimbursed for. So, the consumption of capital is not being paid for in this environment.

So once we move back to prosperity, you know I think if the way wells are engineered, joint programs are engineered, certainly that will remain, and the industry will benefit longer term from that. But the deflationary aspects of this won't. So the industry will have to go back to replacing capital and replacing consumables that go into these drilling programs.

Crowe: Specifically for National Oilwell Varco in this kind of cyclical change, do you see any changes coming to your company, or something that you're anticipating coming down the pipe, that you're like, "We need to be ready for this"?

Williams: Yeah, we had our earnings call a couple days ago, and we talked a lot about our focus on acquisitions and deployment capital. And so the answer is, yes without a lot of specificity, because obviously I don't want to be too specific around what we're planning. But what we try to do is think a couple chess moves ahead in terms of subsectors that are undergoing structural changes in this downturn. And what are the implications of that, and then kind of, who are the winners and losers a little ways down the road. So, we really try to think long and hard and deep about what the world looks like out in the future.

Crowe: Specifically, turning a little bit to the offshore region, which has been a very large component of your business over the last couple years, certainly. Some of the, would you say that some regions of offshore, say the Gulf of Mexico or in the North Sea, obviously, that some are more resilient than others?

What are you seeing right now as some of those regions of the offshore world that are better handled for this, or better prepared to handle this downturn, versus some that you kind of see as activity could really decline in these areas anytime soon?

Williams: Well, if you focus on the deep water portion of the offshore, which is where we, most of our exposure has been, certain basins have benefited and will continue to benefit from the build-out of infrastructure. So, the way you find oil fields is sort of a lognormal distribution of sizes. And so you find a lot of small marginal fields, and maybe a few larger fields, and if you think about moving into a new basin, you really need to find that large field to justify setting a big FPSO [Floating, Production, Storage, and Offloading vessel], for instance, and developing that field.

Once you have that asset in place, then, the other smaller fields can be tied back to that asset at a lot lower marginal cost. So, in answer to your question, places like the U.S. Gulf of Mexico, where you have a lot of pipeline infrastructure, you've got a lot of services capacity, incrementally developing fields that would be marginal in another, more remote less-developed basin. Those development opportunities in the Gulf of Mexico and the North Sea, increasingly in Brazil, those will become more economic. And so there's sort of this network economics effect that enable certain basins to bootstrap their way through more development, lower commodity prices. So, that's kind of what we're seeing going on in the offshore world now.

Crowe: Sure, and this might be a little off-topic, but in that regard to kind of bootstrapping onto it, we've seen Mexico start to open up a little bit. Do you see the assets in place in the United States side of the Gulf of Mexico being an assist, or help make the Mexican side of the Gulf of Mexico that much more economical? Or is it going to be kind of separated too much because of the country versus country?

Williams: Well, certainly crossing an international boundary is complicated, but it's manageable. So you look at the North Sea, for instance, where Norway, Denmark, the U.K. have worked that out. I think it can be worked out in the U.S. Gulf of Mexico as well. And I would add to that, trends like the Eagle Ford Shale in south Texas extend across the Rio Grande into Mexico, and so there's a lot of, it's not just offshore, but the extension of these plays into northern Mexico. I think we can bring technology and techniques to the development of that as well. So, very excited about the structural reforms that Mexico has undertaken, and I think it has a pretty bright future ahead.

Crowe: Yeah, that's great. And actually just kind of talking about this bootstrapping sort of thing, one of the things you mentioned in a recent investor presentation, or one of the industry presentations was, a lot of these major Gulf of Mexico projects taken on by the integrated majors: BP, Chevron, such and such, they have drastically cut their development projects. I think one of the big ones that has been announced recently was like Keathley Canyon for Chevron. How have they been able to cut this billions of dollars off of these projects? And how have you guys maybe been helping facilitate that?

Williams: Well, thank you. We're here to help and, I think, getting some pretty good traction. So, you go back a few years ago, these developments were very customized, very spoke type solutions when it came to developing a discovery, and what that introduces from a manufacturing standpoint is a lot of cost and a lot of inefficiencies.

And from the manufacturer's perspective, frankly, making the same thing over and over again, you get much more efficient. And so our costs on subsequent manufacturing of virtually everything we make falls with the number that we make, and the experience that we gain in that area, and our ability to kind of manage the supply chain around that gets more finally honed, and that drives efficiency.

So, the style previously of developing these projects really was to add a lot of nice-to-haves, and a lot of -- frankly, I think -- false precision around the outcome on these discoveries. So you go out and you drill one well, and you make a discovery, and you start designing a FPSO, for instance, and a subsea development scheme to fit that around some sort of forecasted production profile. Oil companies typically find the actual production profile in hindsight, let's say a decade or two, or three later, will vary from what you think it's going to be initially. And so there's some false precision around trying to get too specific on how this thing is designed to hit a point solution.

What frequently happens then after that is the oil company out there may be stuck doing pre-drilling, they'll start drilling the wells, getting ready for the FPSO to get on site, and not surprisingly, the results from the individual wells come back just a little bit different than the initial well. And it changes their picture of what the field looks like, and so they attempt to make changes along the way to the design of the FPSO. This introduces all kinds of problems and complexities when it comes to executing the FPSO, and as a result, that particular space really hasn't had a very good track record of delivering vessels on time, on budget. So, it delays the fields and creates a lot of challenges economically.

We think by focusing on FPSOs and vessels that can handle more production flexibility, they're more standardized in their layouts, that we can simplify the supply chain. We can better manage complex interfaces between components that work together on an FPSO and make this a more industrialized kind of process, and less customized, more fit for purpose -- if you will. And we think that's starting to get some traction with some of these FIDs [final investment decisions] that you were mentioning just a minute ago.

That they actually are reducing their costs as a result of some of these techniques. And we think there's a lot more to do. There's a lot of potential here to drive better standardization and industrialization around this. We're focused on the vessel; others in the supply chain are focused on the subsea equipment, and they're trying to accomplish much the same thing. So you hear about, you know, OneSubsea Cameron, and you hear about FMC [Technologies], General Electric, Dril-Quip talking about the standardization of subsea hardware going into these developments. And so I think this industry can really improve the marginal cost of producing deep water oil, and I think that's the key.

Crowe: It's really, and just to kind of riff on this a little bit, a lot of investors may not be quite as familiar with FPSO floating production storage and offloading facilities. It's, I wouldn't say a new phenomenon, but certainly something that, as investors, we may not be as familiar with.

Williams: Okay.

Crowe: A lot of people understand rigs. Transocean's been around for 20, 30 years and FPSOs have not been kind of the "it" thing. So, how would you say the dynamics of FPSO's differs from rig? Or is there some similarities you see in how you guys are approaching that new market?

Williams: Well, what's interesting is this is a strategy of focusing on developing FPSOs. And as you mentioned, they are floating production storage and offloading systems that are used in deep water. Getting beyond about 300- or 400-foot water depths, you need floating production systems to produce into, and that's very different than fixed platforms that most of your listeners are familiar with.

So, you go back a ways, this whole idea of simplifying a supply chain, managing complex interfaces, and executing these large, expensive projects, we really cut our teeth in offshore drilling rigs. It had similar challenges in the late 1990s -- there were a couple dozen rigs built, all over budget, all late, way over budget, and really an inefficient, more customized sort of asset delivery mechanism. In the, starting around 2005, about the time of our merger, we really started to pioneer a better way of working with the shipyards in standardizing the design of these drilling rigs and were very successful. So our company, you know when the dust settles, we'll have built and delivered over 300 offshore rigs pretty much on time, on budget.

Working very closely with these shipyards, [we] have great project management expertise here at NOV as a result of that experience. Along the way, our shipyard customer said, "Hey by the way, the FPSO supply chain is similarly challenged. Let's talk about a better way." And so this was really kind of led by our shipyard customers, who recognize that they were struggling to manage complex supply chains, hundreds of vendors, and that led us to this FPSO strategy.

So, 4 or 5 years ago maybe, we acquired a turret mooring system builder called APL, great swivel stack technology, turret mooring systems that enable these vessels to weathervane or pivot around the connection point to the bottom, to the sea floor. And a lot of technology in that, in a very big portion of an FPSO spend, we acquired a flexible pipe company, and these products were additive to what we were already doing at work that could go into an FPSO cranes conventional mooring systems, hose reel systems, offloading systems, composite piping systems, some production kit that we could make available. So, we built out a package in the same way we did with drilling rigs years ago, building out a package that can go into an FPSO that we can manage as a single vendor, and frankly, manage more effectively than having independent providers of all of that.

And that, combined with our expertise of working with shipyards, people that have really delivered vessels on time [and] on budget, and managing that project I think uniquely positions NOV to tackle this challenge for the industry and come up with a better way of building FPSOs.

Crowe: Certainly with a lot of these new deepwater projects transitioning from the, "Hey we found a lot of oil" to "Now we actually need to actually produce it," it seems like a very opportune time to be getting into those sort of markets. And then just kind of shifting gears to the onshore, because we've seen a lot of development and changes in technology in offshore, but onshore I think has been really everybody's kind of heart and soul, seeing this change in hydraulic fracturing and what has happened to, but certainly in the United States. We've seen over the past year costs going down, and efficiency has become much, much better.

Williams: Right.

Crowe: And as a result, not just from the downturn in oil, but also because of efficiency, we've seen the rig count, or the amount of rigs out on the field, go down drastically over the past year.

Do you foresee, because they have become so much more efficient on a per-rig basis, that we may be able to do more with less in that the demand for rigs in the future on the onshore may not be as robust as [what] we saw maybe a couple, 3 or 4 years ago?

Williams: No, I actually think we're kind of growing the pie, and we're seeing the very early days of an ... important new source of oil in the shales blossom. And it will continue to grow. So if you look at the shales, which are right now really North American-centric, they've grown to about 4.5 million barrels a day, 5 million barrels a day, which is certainly a big, meaningful level of oil.

But if you consider, I think it's the IEA that says base decline rates across the whole global supply of oil run 8.5%, 9% a year. You go out 10 years, we're going to have to come up with, like, 60 million barrels a day through the next decade to replace decline curve as well as to meet growing demand. We think shales will be a big portion of that, and that means more rigs go to work. So, I think this new rig technology, new rig efficiency really is opening up the capability of producers to monetize more and more fields and basins and rocks, and I think we're going to see that spread overseas as well, which heretofore hadn't been -- it's been mostly a North American phenomenon.

So, we really see this as a technology that enables more drilling, and ultimately, when commodity prices recover, that's where we're going.

Crowe: That's awesome. And just actually talking about the international realm of shale, it's been a very North American phenomenon for the past couple of years and, like we said, places like Mexico, where we actually share a common geology with the Eagle Ford shale. Yet at the same time as American shale has boomed, we haven't really seen any large development overseas -- or at least not as noticeable in the international realm.

Williams: Yeah.

Crowe: What has been the reasoning? Is it purely a technology and economics thing? Or are there some other factors that have made American or North American that much more unique?

Williams: I think two things. One is that it's a very empirical undertaking, meaning you've got to drill a lot to figure out the right formula to make the wells work economically. And so what you've seen across North America is a lot of application of capital in rigs and development into honing those processes, to make the wells economic.

And so getting the right drilling program and completion program to fit the geology takes time and effort, and experimentation, really. And also, I think the North American shales -- to some degree -- threw Wall Street a head fake, in that this goes back to the 1990s. You had George Mitchell drilling wells in the Barnett Shale in throughout the 90s, and looking for that magic combination of horizontal drilling fracture stimulation to make those economic. And it takes a while and has resulted here, you fast-forward to 2015 now, and a meaningful source of oil and gas, you know that's a multi-decade kind of experimentation program. It will go faster internationally than that. But it's under way in places like the Vaca Muerta shale in Argentina, Saudi Arabia's got some interesting shales, the Bazhenov in Russia, the Chinese are continuing to work on shale programs.

And so worldwide, you have this recognition of industrial magic being done here in North America that works, and a lot of folks working hard around the globe to try to make the same thing happen there. The other piece of this, though, is the buildout of rig fleets of a services industry that can drill these wells efficiently and then complete these wells efficiently, and those two kind of go hand in hand. That second part is really where NOV hopes to make a difference.

Crowe: Do you feel as though some of the processes, or the way we have kind of honed it in the United States, is that very applicable to what has happened overseas? Or is a lot of stuff that we see in terms of development very geology-specific, where they have to get in, drill the wells, and really understand the formation before they can start to make those tweaks?

Williams: Yeah it's -- every basin's, every shale's different, and so ... by definition, this is a marginal source of oil or gas. I mean this shale -- when I started in the industry, we didn't produce from shales. We drilled through them to get to reservoir rock, and so by definition, it's a marginal rock, you have to do a lot of very close cost management and technology, or figuring out that the stratigraphic column and what works in those shales. And so that empirical process is under way. But we're confident folks are going to figure that out and make that work.

Crowe: Okay. We may not be a month or two months from the rebound in oil prices and kind of the, I guess you can say, drilling activity around the world. But when it does happen, how long do you feel like it's going to take to really impact your business? And how do you feel, or how long would it take you guys to ramp back up to ... pre-downturn sort of levels?

Williams: It would take a while, I think, for the industry to ramp back up. One of the [phenomena] we see in our business and we talk about on our earnings call is the cannibalization of equipment. Our customers are very good at moving strings of drill pipe, at moving spares, and expendables from one of rig or one frack fleet to another to keep assets that are running, running without buying new spare parts. So the idle fleet of equipment that's out there are systematically being robbed, and it will take time ...

Crowe: Turned into skeletons almost.

Williams: ... it turned into skeletons, and it'll take time to get them back in working order, A. And B, our customers are going to have to bring in crews and probably train crews, and you know they've lost a lot of experience, here. So it's not a smooth transition, I think, back to prosperity for anybody. I would add I'm really looking forward to that day. We know it's out there -- I'm terrible at predicting when, but I tell our folks: "Look, every month that goes by, we're a month closer to recovering in the commodity price." It's definitely coming, and when it does, NOV will be called upon to come in and get those assets back to working order.

Crowe: That's awesome. So, I want to shift gears one more time. And what we did before we came down to Houston, here, is we actually took questions from the Motley Fool investor community and gave them an opportunity so that you guys could specifically ask questions to Mr. Williams.

And we got a ton of questions, but I don't want to ask 20 or 30, so I took a lot of them and condensed them down to, I guess you could say, the three biggest ones that we got from our investing community. And the first one that we got was, offshore has obviously been a huge market for you guys, and probably right now, in terms of business, is a majority -- if not more -- of your business. Looking, it could be a little lean for a while with buildout that we have seen, and demand for new rigs may get kind weak as we work through that oversupply. What are some of the levers NOV can pull for growth in the meantime?

Williams: First, to wrap some number around it, because we just reported our third-quarter earnings. We did $860 million in revenue in the third quarter -- about 26% of our overall mix. We reported $3.3 billion. So 26% of our current revenue mix is going into constructing new offshore rigs, meaning 74% of our business does other things. All these business models are under pressure given the current environment that we're in.

So like I said earlier, we're investing in new technologies, things like this closed loop automated drilling technology, which we're very excited about. ... One of the few business units that saw sequential growth was our IntelliServ, our drill pipe business unit, and they're seeing rising demand and interest for application of that technology to specific fields. It kind of ties back to what I was talking about earlier in the shales. If you can drill with real-time data as to what's going on at the bottom of the well through the shales as you're drilling horizontally, it lets you get up that empirical learning curve faster.

And so, it lets you develop shale basins more quickly and arrive at that, sort of, magic formula of how to produce these wells economically that much more quickly, which is the reason we're seeing more interest, I think in this particular technology. And so, very excited about that, the promise of that. Very excited about the promise of bringing more automation to land rigs in particular, and I think it's still early days with regards to upgrading the fleet of land rigs out there. And so, we're seeing a bit of a pivot from offshore to land where we now have a much larger installed base of high technology NOV kit out there. Our customers, as we get back to a little more drilling activity, they are going to need more aftermarket support of that. And then on the production side, I've talked at length this morning about our initiatives around FPSO changing that business model and arriving at a better industrial solution for our customers.

So, there's a lot of things across NOV to be excited about. And that really builds on a foundation of market leadership across all that we do. Very proud of what we've done in building offshore rigs. Frankly, I think a lot of investors oversimplify NOV and think of this as only an offshore rig builder, and nothing could be further from the truth. We have 14 other business units that are market leaders globally that have great technologies and future growth prospects. And so very, very excited about all that we do and know we have a very bright future ahead.

Crowe: Okay. If I were to take a 30,000-foot view of NOV -- and this is kind of getting into one of the questions that was asked -- beyond just oil and gas, one of the things that has been your keys to success is taking that ad hoc kind of segmented business somewhere and consolidating, bringing it into a more standardized sort of format.

Do you feel any time in the future that there are any opportunities outside of oil and gas industry that NOV could pursue and use that kind of model to really bring value to it?

Williams: Absolutely. We actually have some very good industrial businesses that are outside the oil field today. They all share some sort of tie, though, to what we are typically doing in the oil fields. We make, for instance, downhole drilling motors that use drilling mud to create torque and to actually turn the bit at the bottom of the drill pipe. And so you put fluid in, and you get torque out. That's just the pump run in reverse. So if you put torque in, you can pump fluid out. And so our downhole drilling motor business also supports an industrial progressing cavity pump business, for instance.

So, I think there are adjacencies that we can act on in industrial spaces, and when it comes to corporate strategy, we continually kind of look not just in oil field, but elsewhere in terms of where we might be able to bring some value. The key thing, though, and I want to stress this, is if we move into a new area, we really need to be a better operator. We need to be a better owner of that business because we have some competitive advantage, some skill set we can bring, some perspective we can bring to that business that's unique. And so we really try to find areas where we're going to operate, where we're going to be the best operator. And so we're -- that's a long way of saying we really try to be very disciplined around where we choose to operate ... recognizing all business is hard. Where we deploy capital, we need to see our way clear where we're going to generate great returns.

Crowe: Awesome. And I feel like a lot of our investors seem like they're maybe losing a little bit of sleep as of late watching the oil and gas market. And a lot of investors kind of looked at specifically National Oilwell Varco. One of the things that they saw is a security blanket was your backlog -- all that built-up work for rigs and for FPSOs and some other projects you guys have been working on. They kind of use it as their security blanket that says, "Oh with that much backlog we'll be fine."

But it's been declining quite a bit as of late, and one thing that a lot of questions we got related to [was] basically contract commitments. Because we have seen some companies -- rig owners specifically -- have been canceling a couple contracts. We saw Seadrill cancel a contract for in the shipyard because of some delays and whatnot. Is the contract backlog that you guys have, is it as a secure source, or is there any risk of maybe some of that decline because owners or customers [saying], "We can't really afford this right now"?

Williams: Well, over many years, we've recognized when we sign these contracts, although times were good, people were ordering rigs, this is a cyclical business, and we will be tested from time to time. And so we've always required down payments and progress billings along the way that front run our investment in these projects.

So, it's unfortunate that we find ourselves in a market where you're seeing some drilling contractors seeking to get out of these things. The good news for us is that we've -- these contracts have largely been paid out. And so our financial exposure is limited. We actually, to get into the contracting, we most typically work directly for the shipyard. And the payment terms that the shipyards offered in the past were more generous than we typically have been able to get. So, we're paid in advance of these. I would add, too, that although our customers are coming under financial stress from this, we've long [had] great relationships with our shipyard customers and with the drilling contractors.

I think in our case, there's a recognition that the drilling contractors [and] the shipyards alike need the OEM to support the equipment to make sure that we're there to support these assets going forward. And so we feel pretty good about -- I wouldn't say "good," that's probably -- but we sleep well at night when it comes to our backlog as well. I would add, though, out of the $8 billion we just reported at the end of September, three of those are in Brazil. And that's certainly a situation that's very challenging, and so we're watching that closely and [are] hopeful that our customers there will figure out their financing to get that back on track.

Crowe: Kind of beat me to the punch. I was actually going to specifically ask about Brazil, but got a little ahead on that one. We're going to wrap up with two last questions -- the kind of things we like to ask at the Motley Fool, anybody when we get opportunities to do this.

So if you were to be able to speak directly to an investor, what do you feel are three things that an investor should focus on when they look at NOV to say, to keep track of you guys, to let them know that you guys are on target, and what you guys should be doing?

Williams: To me, business is about two things: one is getting a good strategy. Doesn't have to be the perfect strategy. But secondly, executing that strategy well.

And I think execution is the main thing that makes business success go. So, we're very focused on execution, and that shows up in margins, and that shows up in financial discipline, and so, and I just can't say enough good things about the team here -- our business unit leaders that actually run these businesses -- and in terms of their ability to execute. So I'd say that's what to focus on.

And the second thing I would tell investors is be an investor. Most people I talk to are traders. And there's a difference. And this is a great global franchise that has market leadership across a supply chain that's critical to providing the world's energy needs. And it's cyclical. And so now I believe we're obviously at a cyclical low. I'm not calling bottom yet, but we're certainly a lot closer to it now than we would've been a year ago.

Crowe: You guys don't have a crystal ball in the back closet or anything like that, that says what's going to happen?

Williams: We discovered our crystal ball is defective and not terribly accurate. It's accurate in the sense that we know this is a cyclical business. We've talked very openly with investors in good times and bad. Hey, it's going to go up, and it's going to go down, and you've got to be prepared for both worlds. And we sort of manage our business that way.

And so you're looking at longer term, this is a capital consumptive industry that we serve. It's an industry that requires new and better technology to press into new basins, and new sources of oil and gas. And when it does so, it consumes that capital and it requires consumables and spare parts and a very complex infrastructure to kind of keep it going. And NOV plays a vital role in making that happen.

I think that's a pretty good place to be, and the cyclicality will pass, and this industry will recover, and this company is exceptionally well-positioned, and we stand ready to step back in and kind of get us back to where we need to be in terms of industrial activity. And to me, that's investing. Buying a great business, a great franchise, one that's got the right level of diversity, the right level of financial resources and balance sheet strength. That's investing. Trying to time that and tick that at the right points, maybe your listeners can do that. I can't. So I think it's a great franchise I'm very, very proud of [it], and [we've] got a very bright future.

Crowe: Awesome. Last question. We're stealing from Peter Lynch. One of the things that he always got to do when he sat down with management, he always asked them who were some of the people that, either a competitor, or maybe even somebody in a different space than you, that you really look to, that you admire as a management team, or somebody that every once in a while, you look at them, take a couple ideas, because you think that they're really doing something right. So, who would you say are some of the people that you look to as maybe people you get advice from, or ideas from time to time?

Williams: Yeah, interesting question. A couple of names come to note. I had back in the early 1990s, I went to the University of Texas business school and got to know George Kozmetsky, who cofounded Teledyne with Henry Singleton. And I never met Mr. Singleton, but got to meet Mr. Kozmetsky and you know, they kind of built Teledyne up through smart capital allocation and timely capital allocation in kind of a decentralized way, which always intrigued me as a business model.

More recently, we've had Berkshire Hathaway as a shareholder and as an enterprise, I think the decentralized approach and the confidence that Warren Buffet has in the leaders of his portfolio businesses to do the right thing, to run those businesses, that they're closer to the coal face. There's a lot of parallels, here. I mean, we have very different business models, and great business people running those those businesses, and trusting them is pretty central to what we do. And I think the right approach, the opposite of that is to centralize everything. And I think a lot of big organizations fall into that trap of thinking, you know -- we need to take control of this, and we need more command and control, and frankly, that's built upon the assumption that somehow or other, I'm smarter, or [the] head office is smarter, and usually, that's not the case.

And so we trust our folks, and that's the kind of company I think that we want to be.

Crowe: Awesome. Mr. Williams, thank you very much for your time today.

Williams: My pleasure.

Crowe: It's been a pleasure. Maybe next time when we do this, we'll be in a little bit more favorable market conditions than we are today.

Williams: I look forward to it; I certainly hope so.

Crowe: Thank you very much for watching, and we'll see you next time.