The supply chain disruptions that have begun to impact the oil and gas world with the emergence of Covid-19 are not ending anytime soon and may in fact get worse, according to NOV Inc.

CEO Clay Williams, as usual, offered an unrestricted assessment of the oil services (OFS) industry during a wide-ranging conference call on Friday. He shared fourth quarter results and provided insight into the activity of NOV’s clients, a mix of OFS sector operators and exploration and production (E&P) companies.

“Strong customer demand helped push newly placed orders above company shipments out of the backlog once again this quarter as customers increased activity in response to higher prices. energy,” Williams told investors.

“Nevertheless, the emergence of the Omicron variant of Covid-19, along with continued and growing supply chain disruptions, increased freight, manufacturing labor and component costs in a number of areas and continues through 2022.”

Challenges across business segments

During 4Q2021, headwinds impacted incremental margin flow across NOV’s three business segments, namely Wellbore Technologies, Completion & Production Solutions (CPS) and Rig Technologies.

The three companies “struggled” in late 2021 with “supply chain challenges we hadn’t anticipated, as well as mix issues and Covid disruptions related to the emergence of the Omicron variant,” said Williams to analysts.

“And while we expect these to ease in the longer term, we now expect supply chain headwinds to continue to persist in the first half of 2022 as our suppliers continue to make us respect their delivery commitments.”

In the last three months alone, NOV recorded $11 million in Covid-related charges in the CPS segment for ongoing projects in Asia. Moreover, productivity and efficiency have been “largely burdened” by the labor market and Covid outbreaks in other factories.

“First, the tight labor market we faced in the United States was exacerbated by the Covid outbreaks and some factories in the fourth quarter,” Williams said. “While skilled workers recovered safely at home, their work was carried out by less experienced and less efficient crews or by other skilled workers working overtime. Labor shortages lead to higher product costs and scheduling issues.

The same issues plagued facilities in the Middle East and elsewhere overseas. “We have seen pockets of Omicron Covid affect our field staff in a few regions around the world,” the CEO said. “These Covid disruptions escalated significantly with the emergence of the Omicron variant in Q4 and are continuing into Q1 2022.”

[Tune In: Amid plunging temperatures, pipeline freeze offs, shrinking storage levels and near-record export demand, the U.S. natural gas market was tested the first week of 2022. Listen to NGI’s Hub & Flow podcast to hear how the industry performed.]

“Manufacturing planning headaches have been compounded by shortages of components and raw materials, and late deliveries from our suppliers, who face the same kinds of challenges as we do,” Williams said.

Late deliveries for raw material and sub-assembly shipments led to more inefficiencies, with higher product costs in some areas. NOV’s workforce “struggled to make do with the raw materials and components they had on hand, indicating supply chain inflation.”

At all three companies, there were “negative purchase price variances… When we were unable to access raw materials, where possible, we substituted different and more expensive components… Substitutions often required additional labor to bring parts up to our standards, which further increased the cost of all three segments…to a greater or lesser degree.

Some issues within the supply chain are “getting a little bit better,” Williams said. However, “we will see these disruptions persist or become more difficult in the short term. Specifically, freight steel and some epoxies seem to be stabilizing. Resin prices fall in Asia but rise in the United States.

Says Williams, “Raw material delivery reliability is, frankly, poor.”

Why do customers delay their purchases?

There have been issues with the unexpected closure of US ports and trucks due to the Covid outbreaks.

“Some of our industrial customers,” Williams said, “delay purchases of fuel handling, piping and industrial pumps because they can’t get construction crews to do the installations or they lack yet other add-ons, such as electronic controllers from other vendors.”
NOV continues to take “extraordinary steps to get our products and equipment into the hands of our customers to support their critical operations. So, despite these challenges, we were able to post sequential double-digit sales growth across all three segments…

“However, we need to do a better job on pricing in anticipation of the rise in inflation that we know is coming.”

During the call, Williams also didn’t mince words about the struggles ahead.

“As we enter 2022, we are operating in the most constrained and inflationary environment the world has seen in at least a generation, where labor and materials are scarce and the money supply has exploded in the major savings due to Covid relief efforts.
“While we have tried to push our prices higher to defend our margins, we have so far had less success than necessary. In previous quarters we have talked about some price increases that we have been able to achieve, including many double-digit moves.Nevertheless, our fourth quarter results indicate the need to redouble our efforts to achieve acceptable margins.

Margins built into the order book remain strong, he said. “The future costs of our contracts are generally protected against inflation, either by indexation or by contracts with our suppliers. However, inflation protection is never perfect. Headwinds like quadrupling freight and rising labor costs, labor disruptions and supplier delays can still impact our margins…as they have. in the fourth trimester.
NOV was fortunate, he said, to have a secure backlog to carry out the work during the recession. “However, going forward, it is incumbent on our team to win additional orders that improve margin and pricing to return to an acceptable return on capital.”

“Abundant Prosperity” for E&P

In the near term, pricing is going to remain a challenge for many of NOV’s products “due to our position in the oilfield food chain,” he said. “High commodity prices lead to abundant prosperity” for E&Ps, but NOV needs a “fair distribution of the economic pie, which means we are better able to drive prices up.”

However, “prosperity is deteriorating in the oilfield, and it has not yet fully manifested.”

NOV customers have said that “things are definitely going in the right direction. But more healing is needed before oil service contractors can open their wallets and spin more freely within NOV. And in the meantime, our competitors, in many cases, desperately need work to cover their fixed costs. »
For the Houston-based company, the good news, the CEO said, “is that the stage is set for prosperity to trickle down to us soon. The world is facing a narrowing gap between supply and energy demand after years of underinvestment, and current global activity levels are insufficient to close this gap.
Commodity markets, Williams said, are “waking up to the fact that the world has consumed a billion-barrel excess oil inventory that we generated during the 2020 lockdown in less than 15 months.”

Despite the challenges, Williams said he remains “staunchly positive long-term. High commodity prices and E&P prosperity are starting to trickle down to the oil services industry, which has been decimated by severe downsizing to survive in recent years.

“Oil and gas is still the industry that fuels all other industries. The urgency to address the lack of investment in this space will grow from here…We are lean and mean and ready for the challenge that awaits us… “

Wellbore Technologies generated revenue of $576 million in 4Q2021, an increase of 54% year on year and 14% sequentially. This increase is due to continued growth in global drilling activity levels, market share gains in certain product lines and rising prices. Operating profit was $50 million, or 8.7% of sales.

In CPS, revenue was $549 million last quarter, up 1% from a year ago and 15% sequentially. The operating loss amounted to $16 million, or 2.9% of sales. New orders booked totaled $495 million, representing an order-to-bill ratio of 159% compared to the $311 million in orders shipped from the backlog. At the end of 2021, the capital goods backlog stood at $1.29 billion, an increase of 85% compared to 4Q2020.

Rig Technologies generated revenue of $431 million, down 1% year-on-year but up 11% from 3Q2021. Operating profit was $1 million, less than 1% of sales. New orders booked totaled $191 million, representing an order-to-bill ratio of 102% compared to the $188 million in orders shipped from the backlog. The capital goods backlog at the end of December stood at $2.77 billion.

NOV posted net losses in 4Q2021 of $40 million (minus 10 cents/share) versus losses of $347 million a year ago (minus 90 cents). Total revenue increased year over year from $1.33 billion to $1.52 billion. For 2021, losses totaled $250 million (minus 65 cents/share), compared to 2020 losses of $2.54 billion (minus $6.62).