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Good day, and thank you for standing by. Welcome to the Second Quarter 2026 NOV Inc. Earnings Conference Call. At this time, participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star-1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Amie D'Ambrosio, Director of IR. Ma'am, please go ahead.
Welcome everyone to NOV's Second Quarter 2026 Earnings Conference Call. With me today are Jose A. Bayardo, our Chairman, President and CEO, and Rodney Reed, our Senior Vice President and CFO. Before we begin, I would like to remind you that some of today's comments are forward-looking statements within the meaning of the federal securities laws. They involve risks and uncertainty, and actual results may differ materially. No one should assume these forward-looking statements remain valid later in the quarter or later in the year. For a more detailed discussion of the major risk factors affecting our business, please refer to our latest Forms 10-Ks and 10-Qs filed with the Securities and Exchange Commission. Our comments also include non-GAAP measures. Reconciliations to the nearest corresponding GAAP measures are in our earnings release available on our website. On a U.S. GAAP basis, for the second quarter of 2026, NOV reported revenues of $2.13 billion and a net income of $112 million or $0.31 per fully diluted share. Our use of the term EBITDA throughout this morning's call corresponds with the term adjusted EBITDA, as defined in our earnings release. Later in the call, we will host a question-and-answer session. Please limit yourself to one question and one follow-up to permit more participation. Now let me turn the call over to Jose A. Bayardo.
Thank you, Amie. Good morning, everyone, and thank you for joining us. NOV executed exceptionally well during the second quarter. Our team successfully navigated continued logistical challenges in the Middle East, while capitalizing on improving demand for the critical technologies and equipment NOV provides to the global energy industry. We also realized additional benefits from the operational improvements we have been making across the organization. NOV generated revenue of $2.13 billion during the second quarter, an improvement of 4% sequentially. Adjusted EBITDA totaled $283 million. Excluding the approximately $40 million AIPA tariff benefit recognized during the quarter, adjusted EBITDA was $243 million, reflecting approximately 80% incremental EBITDA conversion on our sequential revenue growth. The strong incremental margins reflect excellent execution on several large projects nearing completion, a more favorable sales mix, improved deliveries into the Middle East, and operational initiatives that are beginning to outpace inflationary pressures.
Compared to the second quarter of last year, revenues declined 2.5%, while decremental margins were limited to 17%. Excluding the impact of the one-time AIPA benefit, we achieved this low decremental margin despite quarterly tariff expense that increased approximately $20 million year over year from roughly $10 million during the second quarter of 2025 to $30 million in the second quarter of 2026. I want to thank NOV's employees for the outstanding execution and the pride they demonstrate every day in taking care of our customers, pursuing operational excellence, and keeping each other safe. As I mentioned last quarter, pride in what you do, accountability and ownership translate directly into stronger operational and safety performance. During the quarter, our total recordable incident rate and lost time incident rate both improved from a year ago, marking a second consecutive quarter of improvements and record safety performance in the first half of the year, further reinforcing the culture we have worked hard to build throughout NOV.
Before moving on, I also want to extend a special thank you to our colleagues in the Middle East who continue to operate through an extraordinarily difficult environment. Their resilience, professionalism and commitment to one another and our customers have been exceptional. Over the past several quarters, we have consistently talked about two priorities: driving operational efficiencies and positioning ourselves for the next industry investment cycle. This quarter, we began realizing more of the benefits of those efforts. At the same time, we are becoming increasingly confident that the longer-term market trends we discussed last quarter are beginning to emerge. We are seeing our operational improvements translate into stronger margins. Our differentiated technologies continue to gain market share, and conditions are improving across our largest end markets. While the underlying fundamentals continue to improve, geopolitical uncertainty and commodity price volatility are causing some customers to remain cautious.
As a result, and as expected, capital equipment orders in our Energy Equipment segment remained below 100% book-to-bill. But we continue to expect a pickup in orders later this year and a more significant increase in 2027. Additionally, orders for our shorter-cycle capital equipment offerings in our Energy Products and Services segment, including drill pipe and fiberglass, remain strong. Moving on to what we saw across our major markets during the second quarter. In the Middle East, activity remained below pre-conflict levels. But when the bulk of the kinetic activity ceased during the quarter, conditions stabilized and customers adapted their operations to what seemed to become a new norm. Even so, logistics remained less predictable and more costly. Our supply chain and operational teams responded exceptionally well. We successfully delivered orders that had been delayed during the first quarter and continued supporting our customers despite a much more complex operating environment.
While our operator customers worked diligently to safely preserve activity, certain operations, particularly offshore, were curtailed, resulting in some orders being deferred and lower overall activity levels. Notably, activity related to unconventional resource development generally continued unabated. The environment created both challenges and opportunities. Logistical constraints limited our ability to secure commitments from suppliers, affecting certain deliveries and our ability to bid on some projects. At the same time, those same constraints created opportunities where NOV's global supply chain capabilities and operational flexibility allowed us to win work that competitors were unable to execute. Overall, the impact to our business during the second quarter was largely consistent with to modestly better than the expectations we outlined on our last earnings call. Looking ahead, given the uncertainty in both our customers' and suppliers' business activities due to the conflict in the Middle East, it remains difficult to predict how conditions in the region will evolve.
Operators have been preparing to quickly restore activity once confidence and the reliability of takeaway capacity improves. Until then, our priorities remain unchanged: keeping our employees out of harm's way, supporting our customers and continuing to execute safely while hoping for a lasting return to peace throughout the region. Outside the Middle East, we are seeing encouraging momentum across most markets as global oil inventories are depleting and concerns related to energy security escalate. In North America, activity improved modestly. Public operators mostly continued to emphasize capital discipline, while private operators became more active. More importantly for NOV, customers continued to prioritize technologies that improve efficiency, enhance reliability, increase production and lower total well costs. Those priorities play directly into NOV's strengths, and we continue to gain market share as a result.
Internationally, we continue to see unconventional development gain momentum and expand into new markets, including Algeria and Pakistan, where we sold several multistage frac sleeve systems for development of tight gas resources. We have always asserted that economically developing unconventional resources outside North America would require a lot of the same high-spec equipment and technologies that NOV developed during the U.S. shale revolution. This is exactly what we are now beginning to see and it helped drive 20% sequential and 33% year-over-year revenue growth in Argentina for NOV during the second quarter. Demand in Argentina is broad-based. We are supplying pressure pumping and coiled tubing equipment, helping customers reactivate and upgrade high-specification U.S. drilling rigs that will be redeployed in Argentina; assisting customers drill and complete extended lateral wells more efficiently with our drilling and completion tools; helping developers of major infrastructure projects with our pumps, chokes and composite pipe; and supporting LNG exports by supplying submerged swivel and yoke systems to moor and load FLNG vessels.
Customers are also increasingly adopting NOV's digital solutions to improve workflows and accelerate operational decision-making. During the quarter, we were awarded a significant contract to provide real-time drilling and completion data acquisition, visualization and analytics across a leading Argentine operator's development program. Outside of unconventional markets but also in Latin America, opportunities in Venezuela continue to develop faster than we originally anticipated. For us, demand has expanded beyond progressive cavity and reciprocating pumps into fishing tools and completion technologies, and we are quoting an increasing range of drilling and production equipment as customers evaluate longer-term redevelopment opportunities. There are a growing number of international markets in early stages of development and we see heightened energy security concerns accelerating growth which should create meaningful additional demand for a broad range of NOV technology and equipment.
Turning to the offshore markets, where our outlook for deepwater activity continues to grow increasingly constructive: it is important to remember that the offshore recovery began prior to the conflict in the Middle East, and will be one of the clearest beneficiaries of the industry's heightened focus on energy security and plateauing production in North America. Operators continue advancing brownfield expansions, ramping exploration programs and sanctioning new deepwater developments. While continued geopolitical tension and resulting commodity price volatility creates uncertainty and delays, industry forecasts continue to call for approximately 10 FPSO awards this year, a meaningful increase from the six sanctioned during 2025. Projects continue moving forward despite today's uncertainty, reflecting the attractive economics of offshore development. We also remain encouraged by how the mix of mid- to longer-term offshore developments is expected to evolve.
Operators are increasingly favoring the development of gas-rich reservoirs, which require more of NOV's sophisticated processing equipment. We also see the pipeline of anticipated projects shifting toward deeper water, harsher and more technically demanding environments, which plays into NOV's strengths. Overall, we believe the future project mix is becoming increasingly favorable for NOV and should continue to support healthy demand for our subsea flexible pipe, gas and water treatment systems, spread and turret mooring technologies, offshore cranes, production chokes and lightweight composite pipe and tanks. Naturally, as demand for offshore production continues to increase, conditions in the offshore drilling market are also improving. Offshore contracting activity increased 32% sequentially, and if published tenders remain on schedule, our customers should see a sizable pickup in project start dates in late 2026 and early 2027.
As a result, demand for our aftermarket services and spare parts remain healthy, driving our fourth straight quarter with an increase in our backlog for spare parts. As rig utilization improves and contract durations extend, drilling contractors are increasingly focused on preparing assets for additional work. That drives demand for aftermarket spare parts, recertifications, automation upgrades and capital equipment modernization — all high-value areas where NOV has established technology leadership, a large installed base, and longstanding customer relationships. If we step back and look across the markets NOV serves, what is particularly encouraging is that we are seeing improvement almost everywhere, suggesting that the recovery is broadening beyond isolated pockets of activity into a more synchronized investment cycle. That is the type of environment where we believe NOV's operating leverage and the structural improvements we have made in our business over the past several years become increasingly evident.
One of the questions we often hear from investors is: what does NOV look like in this type of market environment? To assess the answer to that question, it is important to understand our recent results. Over the last several years, our financial performance has been resilient. Revenue has generally remained between $8.5 billion and $9 billion per year, while EBITDA has been around $1 billion with high levels of free cash flow conversion. That stability might suggest that the performance of our underlying businesses has been relatively stable. The reality is almost the opposite. The resiliency of our intentionally diverse portfolio has masked meaningful shifts occurring beneath the surface. Individual businesses have experienced very different performance over the last several years. When one part of our portfolio has faced headwinds due to things such as multi-year declines in U.S. activity or a large number of rigs being suspended in a key international market, another has often performed exceptionally well.
The result has been a business that has appeared stable from the outside even though there are often meaningful shifts in the performance of underlying components. During periods of uneven and generally soft market environments, our portfolio allowed stronger businesses to offset weaker ones and deliver resilient cash flow, allowing us to continue investing in advancing technology leadership across our portfolio and better positioning all of our businesses for the future. Over the past decade, we have not experienced an environment in which all our businesses can perform well at the same time. As a result, we believe the earnings power embedded within NOV's portfolio remains underappreciated. So back to the question: what is the earnings capacity of NOV when we have a more synchronized global recovery? A simple way to analyze that question is to look at the strongest quarterly performance each of our businesses has delivered over the last several years.
If you take a conservative approach and exclude the seasonally stronger fourth quarters, you arrive at an annualized revenue level of approximately $9.8 billion and EBITDA of roughly $1.5 billion. Keep in mind that individual business unit peaks did not occur during an exceptionally strong industry environment. In many cases, they occurred while inflation, including tariffs, was driving significant cost pressure, supply chains remained constrained, activity levels were declining and pricing power was limited. In other words, those results were achieved despite a difficult operating backdrop, not because conditions were favorable. We believe the high-water mark analysis represents a conservative illustration of our earnings capacity. It is based on what our businesses have already demonstrated they can achieve and does not fully reflect the structural improvements we have made over the last several years.
We have been working to simplify the organization, consolidating facilities, improving manufacturing efficiency and optimizing our portfolio by focusing on areas where we believe we have a durable competitive advantage. NOV today is a fundamentally stronger company than it was just a few years ago. While we still have more work to do, we are beginning to see our efforts translate into improving productivity and better margins. Our portfolio also continues to migrate towards higher-value technologies. Digital solutions are growing rapidly, international unconventional development is expanding, offshore production markets are strengthening, and we believe aftermarket demand is positioned for recovery as suspended rigs return to work and customers prepare equipment for the next phase of the cycle. The timing of our earnings progression will ultimately depend on how the market unfolds. Historically, NOV has been viewed as a later-cycle company because demand for capital equipment generally accelerated only after activity increased and readily available service capacity became fully utilized.
We believe this cycle will be different. After a decade of capital discipline and underinvestment, the industry is not starting from a position of excess capacity. Equipment attrition, the export of underutilized North American equipment into international markets, and years of limited reinvestment have materially tightened the global service complex. As a result, we believe customers will need to begin investing in equipment much earlier this cycle, allowing NOV to more meaningfully participate earlier in the market recovery than investors have traditionally expected. None of this suggests that results will improve in a straight line. Markets rarely work that way. Geopolitical uncertainty, commodity price volatility and customer caution will continue to influence the timing of investment. But when we look at the operational improvements we have implemented, and the market conditions we believe are beginning to emerge, we are increasingly confident that NOV has substantially greater earnings power than we have been able to demonstrate over the past decade.
Our portfolio helped make NOV a more resilient company through one of the most challenging operating environments our industry has experienced. We believe that same portfolio, combined with a fundamentally stronger organization and a broadening investment cycle, positions NOV to deliver materially stronger financial performance as more of our businesses begin performing well at the same time. That is the opportunity we see ahead. While the exact timing will ultimately depend on how the market environment and customer spending unfold, we are confident we are taking the right actions to position NOV for the future. And I am even more confident in this team's ability to execute and deliver materially stronger results. I am proud of what the team has accomplished and excited about what lies ahead. With that, I will turn the call over to Rodney Reed.
Thank you, Jose. Consolidated revenue for the quarter was $2.13 billion, an increase of 4% sequentially and down 2% year-over-year. Net income was $112 million or $0.31 per fully diluted share. Operating profit was $193 million, which included $17 million pretax other items, primarily related to severance and facility closures, and $20 million in gain on sales of fixed assets. Adjusted operating profit was $190 million or 9% of sales and adjusted EBITDA totaled $283 million or 13.3% of sales. During the quarter, we recorded a benefit of approximately $40 million related to AIPA tariff refunds, which is included in adjusted operating profit and adjusted EBITDA. On a segment basis, our Energy Products and Services segment received approximately $26 million of the benefit, while our Energy Equipment segment accounted for the remainder. The net benefit from tariff refunds on year-over-year financial results is slightly more than $20 million as our overall tariff expense has increased from the second quarter of 2025.
We collected approximately $17 million of these refunds during the quarter. As Jose mentioned, second quarter results for our Middle East operations were generally consistent with our expectations. For the third quarter, our guidance assumes that the operating environment remains consistent with the conditions during the second quarter. During the quarter, we repurchased 3.2 million shares for $63 million and paid dividends of $64 million which included a supplemental dividend of $0.09 per share related to the true-up of our 2025 return of capital program. Since implementing our return of capital program during the second quarter of 2024, we have returned over $1 billion to shareholders through share repurchases and dividends, while cash has increased approximately $700 million. Free cash flow for the quarter was negative $64 million, impacted by the timing of certain milestone billings and slightly elevated inventory as our supply chain teams implemented more buffers given the ongoing conflict.
We expect working capital to benefit cash generation during the second half of the year, consistent with trends experienced in both 2024 and 2025, and we still anticipate converting between 40% to 50% of 2026 EBITDA to free cash flow. We continue to expect capital expenditures to be between $340 million and $370 million and our annual effective tax rate to be between 34% to 36%. Stepping back, our team's second quarter operational performance was excellent. We are advancing efforts to simplify and standardize business processes to drive efficiencies that reduce operating cost, improve customer experience, and support on-time delivery. Sequentially, we delivered strong EBITDA incrementals of 130% or 80% excluding tariff refunds. For the third quarter, we expect sequential and year-over-year revenue growth and we expect to deliver healthy free cash flow in the second half of the year. Moving to our segments, starting with Energy Equipment.
Second quarter revenue was $1.22 billion, up 2% sequentially and up 1% year-over-year. Adjusted EBITDA increased $42 million year-over-year to $200 million or 16.4% of sales, representing the highest quarterly EBITDA margin since the segment was established. Excluding the second quarter tariff benefit, margins still reached a record level, driven primarily by operational excellence across several business units, favorable pricing and mix, and cost reductions. The segment also delivered its fifth straight quarter of year-over-year revenue growth. Capital equipment sales accounted for approximately 63% of the segment's revenue in the second quarter of 2026, improving 2% year-over-year, led by continued strength in our offshore production-related businesses, including subsea flexible pipe, marine and construction, and process systems. Aftermarket sales and services accounted for the remaining 37% of segment revenue and improved 3% sequentially as our teams continue to navigate the operating environment in the Middle East.
Compared to the prior year, aftermarket revenue was down 2% primarily reflecting the effects of the Middle East conflict. Capital equipment orders for the second quarter were $474 million, a 13% increase year-over-year, resulting in a book-to-bill of 74% for the quarter. Backlog at the end of the quarter was $4.1 billion. Orders during the quarter were led by subsea flexible pipe and offshore production equipment. First half 2026 orders exceeded the first half of 2025, and strong operational execution resulted in shipments improving almost 10%. Similar to 2025, we expect order intake in the second half of the year to meaningfully outpace the first half, supported by our discussions with key customers and a strong pipeline of projects. Our subsea flexible pipe business delivered another outstanding quarter, achieving record EBITDA performance. Margin expansion reflected exceptional execution, favorable project mix and progress of higher-margin backlog, supported by relentless focus on quality, safety, and on-time delivery.
Demand outlook for flexible pipe and bookings remain strong. On a trailing 12-month basis, book-to-bill was 135% and quarter-ending backlog was 28% higher than 12 months ago. Second quarter orders primarily included various projects in the North Sea. Our team recently celebrated a significant milestone delivery of a cumulative 1,000 km of flexible pipe from our facility in Brazil. Our process systems revenue increased mid-single-digit percent year-over-year, reaching another quarter of record EBITDA performance, reflecting strong demand in offshore production and international gas markets. Margins improved year-over-year supported by strong operational execution on projects nearing completion. During the quarter, the business booked orders supporting an offshore gas project in Indonesia and a gas dehydration package for an operator in West Africa. Also leveraging our NOVMAX platform, the business deployed an AI model supporting a North Sea operator's program to optimize their sulfate removal unit.
Outlook for gas processing applications, produced water treatment, and brownfield applications remains robust. Revenue from our drilling capital equipment business declined versus the prior year, but improved in the mid-single-digits sequentially, driven by strong performance from our Saudi manufacturing facility and improving bookings activity. Orders during the quarter included robotics packages, offshore BOP, and NOVOS automation packages. Bookings in the first half of 2026 exceeded the first half of 2025 by over 40%. Looking forward, we continue to have a constructive outlook on the offshore drilling market with floater utilization and day rates improving, providing an opportunity for stronger capital equipment orders in the second half of 2026 and into 2027. Our marine and construction business revenue improved in the mid-teens percentage range year-over-year driven by higher demand for lifting and handling equipment as well as mooring and fluid transfer systems.
The market outlook for marine and construction remains constructive, supported by strong offshore development activity with the value of offshore FIDs in 2026 already around full year 2025 levels and further growth expected in 2027. These industry trends drive demand for turret mooring systems, offshore cranes, subsea construction equipment, and pipeline equipment as well as providing positive demand for several other NOV business units. Revenue for intervention and stimulation equipment declined year-over-year reflecting lower overall demand in North America, but was up mid-single-digit sequentially led by Middle East wireline and coil tubing equipment deliveries. Interest in coiled tubing and frac equipment in the Middle East and Argentina remains strong, supported by expanding unconventional developments. In the U.S. land market, quoting activity has also improved driven by higher frac utilization.
Turning to the aftermarket portion of the Energy Equipment segment: revenue from parts and services for drilling equipment was impacted by the Middle East conflict due to suspended rig operations, logistical challenges, and delays in upgrade projects. While activity was down year-over-year, sequentially revenue was higher as spare parts shipments improved. Service utilization increased and bookings and backlog for spare parts and repair grew reflecting higher customer demand. Increasing offshore floater utilization and improving day rates will continue to drive stronger demand for our rig aftermarket business which we expect to grow meaningfully in the second half of 2026 compared to the first half. Intervention and stimulation equipment aftermarket revenue was effectively flat sequentially and down mid-single-digit year-over-year. The drop year-over-year was led by lower activity in North America and the Middle East.
Customer inquiries and quoting activity have increased in North America and Argentina and stabilized in some areas of the Middle East. For the third quarter, we expect Energy Equipment segment revenue to be between 1% to 3% lower year-over-year as growth in our drilling, capital equipment and aftermarket businesses is offset by certain projects nearing completion during the second quarter. We expect EBITDA to be in the range of $160 million to $190 million. Moving to the Energy Products and Services segment: our Energy Products and Services segment generated revenue of $974 million, down 5% compared to the second quarter of 2025, while sequentially revenue improved 9%. Adjusted EBITDA totaled $144 million or 14.8% of sales. Year-over-year growth in drill bits, digital services, and artificial lift, supported by improving demand across many of our key markets, did not fully offset lower composite pipe shipments partially impacted by the conflict in the Middle East.
Compared to the prior quarter, the segment experienced increased demand across nearly all of its businesses. In the second quarter, the sales mix of Energy Products and Services was 53% services and rental, 30% capital equipment, and 17% product sales. Revenue from services and rentals remained resilient, declining just 1% year-over-year as market share gains across several of our product lines largely offset lower U.S. and Middle East drilling activity. Sequentially, revenue for services and rentals improved 4% with a significant majority of our business units and regional markets experiencing growth, especially U.S. land. Our drill bit business gained market share across the U.S. and Canada, supported by continued innovation in our cutter technology that is improving rates of penetration, extending bit life and driving operational efficiency. In the U.S., these gains drove record quarterly revenue and marked the eighth consecutive quarter of year-over-year revenue growth.
Likewise, our downhole tools business delivered a strong quarter, with higher activity in the U.S., Europe and Africa, while demand in the Middle East remained below prior year levels. Drilling motor rentals achieved their strongest U.S. revenue in over six years, with market share gains of our slim-hole power sections supporting drilling efficiencies and longer laterals. The business also saw increased adoption of our Agitator RAGE friction reduction tool across U.S. land as well as our Positrac torsional vibration mitigation technology expanding in offshore applications. Our artificial lift business also benefited from higher activity and market share gains of our electric submersible pump technologies across the Permian and Bakken, posting strong revenue growth as the number of installs during the quarter increased over 20% compared to the prior two quarters. Customers are increasingly adopting technologies to improve run time such as our integrated gas processor and centrahelical pump, which improves system performance for wells with high gas-to-liquid ratios.
Within our well site services business, higher rentals of our ALPHA shakers across the U.S. drove double-digit growth in the region year-over-year, while adoption of our InnovaTherm thermal treatment technology continued. NOV Digital Services continued its trend of four straight quarters of year-over-year revenue growth. Revenue from our wired drill pipe services nearly doubled, and during the quarter we deployed our MAX completions remote service rig monitoring solution for a supermajor, providing centralized oversight of workover operations through real-time monitoring and improved reporting capabilities. This award, along with the win Jose mentioned for a leading Latin American operator, reflects growing customer demand for NOV's digital technology that improve operational efficiencies and decision-making. Capital equipment revenue for the Energy Products and Services segment declined 15% year-over-year, primarily reflecting strong deliveries of composite solutions for FPSOs in the prior year that did not repeat, lower demand in the Middle East, and reduced deliveries of conductor pipe connectors.
Sequentially, capital equipment revenue increased in the low-teens percentage range as shipments recovered from first quarter delays related to the Middle East conflict. Bookings remained healthy across the segment's capital equipment businesses. Our drill pipe business achieved its strongest first half bookings in over 10 years, and our drill pipe backlog is roughly doubled from 12 months ago. Our fiberglass business also recorded healthy bookings during the quarter, despite reduced demand in the Middle East, resulting in 20% year-over-year growth in backlog. Strong bookings, increasing customer demand for differentiated technologies, and increased backlog position these businesses for improved performance during the second half of the year. Our fiberglass systems business continued working through the effects of the conflict in the Middle East and the timing of certain infrastructure projects reduced manufacturing absorption during the quarter.
Demand across most other end markets remained resilient. Our underground composite fuel handling tank business matched record quarterly revenue as continued investment in domestic fuel infrastructure drove strong customer demand. Reflecting that momentum, bookings for fuel handling tanks have doubled over the past 18 months compared to the preceding 18-month period. The business also sees growing opportunities to support a rising number of FPSO projects. Additionally, the continued adoption of larger diameter composite pipe for produced water projects in North America and the Middle East provides long-term demand for the business. Turning to product sales: revenue remained relatively stable, declining 3% year-over-year reflecting lower drilling activity in the Middle East, partially offset by bulk drill bit deliveries into Algeria. Sequentially, improved demand for drill bits and artificial lift equipment in the U.S. along with second quarter deliveries of drill bits and downhole tools in the Eastern Hemisphere resulted in mid-single-digit revenue growth.
Looking to the second half of the year, we expect seasonal downhole tool sales into the Eastern Hemisphere, increased shipping from improved backlog across our Drill Pipe and Composite Solutions businesses, and market share gains of our differentiated technologies to drive strong top-line growth compared to the first half of 2026. Continued structural cost initiatives should further improve margins. For the third quarter, we expect Energy Products and Services segment revenue to increase between 5% to 7% year-over-year with EBITDA in the range of $130 million to $150 million. With that, I will turn the call back to Jose.
Thank you, Rodney. As we have discussed this morning, we are encouraged by what we are seeing across the business. Our operational initiatives are translating into stronger execution and improving margins. At the same time, we are seeing encouraging signs that customer investment is beginning to broaden across the markets we serve. While uncertainty remains and we continue to expect volatility from quarter to quarter, we believe the underlying fundamentals are moving in the right direction. We spent the last several years improving our operations, investing in technologies across our portfolio and positioning the company for the type of market that is emerging. We believe NOV is well positioned to drive earnings much higher over the coming years and create meaningful value for both our customers and our shareholders. I would like to once again thank all members of the NOV team around the world for their continued commitment to safety, operational excellence and taking care of our customers. With that, we would like to open the call to questions.
Thank you. Star 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1 again. In fairness to all, we ask that you please limit yourselves to one question and one follow-up. Our first question comes from the line of Arun Jayaram with JP Morgan Securities. Arun Jayaram, your line is open. Please go ahead.
Hey, Arun.
Are you there?
分析師問答
Hi, Arun. Your phone might be on mute.
Yeah, sorry about that. I was on mute. Sorry about the delay. No worries. Good morning. It's been a few calls today. I was wondering if you could help us think about how you see things progressing in the Middle East over the back half of the year. A couple of your big cap oil service peers noted how they would expect, call it, in the fourth quarter, top line to be down, call it, 5% to 10% year-over-year. Just wanted to see if you had any thoughts on how the Middle East could trend for NOV in the second half.
Sure thing, Arun. Thanks for the question. Obviously, there is a lot of uncertainty related to the Middle East right now. As I mentioned in the prepared remarks, we certainly hope and pray for a quick resolution to the conflict and lasting peace. A little commentary to help frame how to think about operations in the Middle East: we had a significant impact in Q1, about a $30 million impact in EBITDA. Conflicts began in late February and significantly impacted March, but then early in the second quarter, we began to see the kinetic activity stop, though tensions remained high. Logistics remained extremely constrained in and out of the strait, which limited our ability to move logistics and constrained our customers' ability to get takeaway of commodity out of the region. Nevertheless, operators in the region started adapting to what was starting to feel like a new normal and began bringing activity back.
First, land-based activity was relatively stable throughout the entire period, particularly in unconventional gas plays. Offshore activity was more materially impacted for a period of time. Things slowly started resuming during the second quarter, which gets us to where we are today. As I mentioned in the prepared remarks, the impact in the second quarter was in line to maybe just slightly better than what we were anticipating, with stability in the Middle East but still very challenged from a logistical standpoint. As we noted in our press release, our outlook reflects a scenario in which conditions on the ground in the Middle East during the third quarter remain consistent with what we saw in the second quarter. That does not mean activity remains exactly the same; it means the trends we saw emerging during that time period continue, with gradually higher levels of activity and more rigs coming back to work.
When we did our bottoms-up roll-up of our forecast for the third quarter, that translated into roughly a 10% to 15% increase from Q3 to Q2. As another data point, Q1 to Q2 we saw about a 5% sequential increase. So that gives you a planning scenario. Middle East currently is approximately 15% of total company revenue. If you assume more disruption, it's hard to determine how severe, but if the 10% to 15% increase does not materialize, then you are looking at an impact of roughly $20 million to $25 million of EBITDA. It could, of course, be better than that, and that is what our guidance reflects, or it could be significantly worse depending on what happens in the Middle East. I hope that gives you some data points to think through as you develop your own scenarios.
Okay, that is helpful, Jose. My second question: in Energy Equipment you had a 0.74 book-to-bill. You and Rodney both mentioned optimism on second-half order trends in energy equipment. Can you help frame any expectations around book-to-bill? Do you still expect to approach one for the full year, and any color you can unpack there?
Sure thing, Arun. When we came into the year, we set expectations based on project timelines and expected FIDs developed in coordination with our discussions with customers. We anticipated Q1 bookings to be fairly light and then picking up pretty significantly in the second half. That remains our expectation. If you look at first half bookings, specifically the last quarter, bookings were up $54 million year-over-year. Year-to-date bookings are up 16% year-over-year, so directional trends are positive. But more importantly, we have had success with things materializing the way we anticipated. We've seen six FPSO FIDs year-to-date, and we have had meaningful bookings associated with those FPSOs on half of those. Looking back over the last 24 FPSO FIDs, we've had sizable bookings on 11 of those 24. Encouragingly, the FPSOs we expect to reach FID are slated for higher gas-condensate markets, deeper waters and harsher environments, which play to our strengths.
Offshore production is not the only component of our business; our Energy Products and Services segment also includes capital equipment businesses with strong bookings. As Rodney noted, our Grant Prideco business had its best bookings quarter since Q1 2023, our fiberglass backlog is up 24% year-over-year, and other components of our portfolio show encouraging signs. We don't get too worked up over a single quarter or two of bookings. We look at the whole picture and, more importantly, where the market is headed. 2027 and beyond look bright. As it relates to full year 2026, orders are big and chunky, and commodity price volatility and geopolitical uncertainty can push timing around. Our current expectation is still to get at least close to 100% book-to-bill, but more likely in the vicinity of 90% to 100% for 2026 and meaningfully above that in 2027 and beyond.
Thanks, Jose.
Thank you. One moment for our next question. Our next question will come from the line of Marc Bianchi with TD Cowen. Marc Bianchi, your line is open. Please go ahead.
Good morning, Marc.
On the outlook for the second half here: Rodney, you mentioned that the rig aftermarket business starts to pick up in the back half of the year. I'm curious why it looks like Energy Equipment revenue is guided to be pretty much flat quarter-over-quarter. Are there some crosscurrents with offshore activity in the Middle East driving that? Also, could you remind us what kind of drawdown we've seen in the rig aftermarket business from prior peak and how much room it has to recover?
Sure. I'll give some color on moving parts sequentially, particularly Q2 to Q3. Our Energy Products and Services segment shows really strong revenue growth quarter-to-quarter — up 5% to 7%. Much of that is driven by capital equipment backlog conversion in the second half, especially in composite pipe, composite tank, drill bit and drill pipe businesses, which should lead to strong incrementals. When you normalize for the tariff benefit in Q2, Q2-to-Q3 incrementals for EPS are strong at roughly 40%. For the Energy Equipment business, revenue looks essentially flat Q2 to Q3 and that's largely mix-related. We expect a meaningful pickup in the rig equipment and rig aftermarket businesses in the second half: rig count is increasing, utilization is increasing and day rates have improved. That should translate to a mid-teens percentage increase first half to second half for the rig business. Another point: we had very strong operational performance in Q2 and strong progress on several production equipment projects that were nearing completion. As new projects pick back up, timing effects and mix can mute sequential revenue growth in EE. Also, with smaller denominator changes, any small mix shift or freight cost timing can impact incrementals. Fundamentally, the equipment side has good momentum into the second half of the year and into 2027.
Thanks, Rodney. Quick follow-up: does the guidance for Q3 include any tariff refund?
No, it does not.
No.
Great. Also, Jose, you laid out that high-water mark analysis implying a margin around 15%. When things turn and we get into the up cycle more meaningfully, what is the margin opportunity? Is it really just volume that gets you there given the actions you've taken, or are there other steps you need to take?
Great question, Marc. The framework we provided is conservative, reflecting high-water marks across the last several years. Volume helps, but it's not the only lever. We will continue driving margins higher through operational initiatives, simplification and standardization, facility consolidation and manufacturing efficiency improvements. Pricing also matters — over the last several years we faced inflation and tariffs during a period of declining activity, which made offsetting costs through pricing difficult. As activity recovers, pricing should improve margins. Our goal is to get to mid-teens EBITDA margins and, more importantly, stronger returns on capital employed. The high-water mark analysis likely points to low-teens margins, but our objective is a minimum of mid-teens. We are actively working to get there.
Thanks, Jose. I'll turn it back.
Thank you. One moment for our next question. Our next question comes from the line of James Rollyson with Raymond James. James Rollyson, your line is open. Please go ahead.
Hey, good morning. I wanted to follow up on Marc's question. Given the outlook you laid out today, do you think a realistic potential timeline exists to get to this $9.8 billion revenue and 15% EBITDA profile? Is that something we could see as a run-rate late next year, early 2028, or is it two to three years down the road?
I won't pinpoint a precise timing. There are many variables in the macro environment. But our confidence level is high. We see this cycle as different: after years of underinvestment, the service complex is tightened. Demand for energy is robust and likely to accelerate in the near term. The supply side is challenged: significant barrels are off the market, strategic petroleum reserves are depleted, and North American production has plateaued. Restoring production and replacing SPR barrels will create demand. Deepwater offshore appears to be the low marginal cost source of new supply, and we're seeing operators ramp exploration and FIDs. Offshore drilling contractors are seeing the demand with a high percentage of the marketed deepwater fleet effectively under contract, substantial tender activity and more FIDs. International unconventionals are emerging and will drive demand for capital equipment and proprietary technologies. So, while I won't give a specific date, it's hard to see how we do not get to those levels over the coming years. This cycle is different and should call demand to NOV sooner rather than later.
Got it. One follow-up on subsea flexibles: you've talked about this opportunity for a while and noted record EBITDA in the business today. Are you running up against capacity limits from an EBITDA-generating standpoint before additional expansion is completed, or do you still have room to run?
Jim, we are running up against capacity constraints in certain areas. There are pockets to drive things a bit higher, but sizable orders at this point are largely 2028 deliveries. We have additional capacity expected to come online, and we're targeting early 2029 for more expansion. The outlook for future tenders and opportunities remains very promising for subsea flexible pipe.
Appreciate your thoughts. Thanks.
Thank you. One moment for our next question. Our next question is from the line of Douglas Becker with Capital One. Douglas Becker, your line is open. Please go ahead.
Coming into the year, you were talking about $100 million of annualized cost reductions. Your comments today suggest there might be more to come. Where do you stand relative to the $100 million target? At a high level, what might the next iteration of structural cost savings include?
Thanks, Douglas. I'll highlight the team's efforts over the last 12 to 15 months since we initially put out the $100 million cost savings target. When we set that target, we laid out factors for how it would be driven and noted headwinds such as tariffs and other inflationary pressures. We expected that, at some point during 2026, cost savings would begin to overlap some of that inflation. As we made it through the second quarter, we started to get slightly more positive, in terms of the cost savings outrunning some of the inflation we've seen over the last 12 months. The team has done very good work: operational efficiencies are driving better results across many parts of the business. Incremental to that, through facility utilization analysis over the last 6 to 12 months, we sold about $45 million worth of real estate and buildings. As we look to the second half of the year, we still have room to run. We will continue simplifying and standardizing business processes, better leveraging scale, and improving operational efficiency. We're not at a point where we are setting a new public target today, but driving efficiency is in our DNA and we will continue to find more savings into the second half of the year and into 2027.
Sounds encouraging. Thank you.
Thank you. I would now like to hand the conference back over to Jose A. Bayardo for closing remarks.
Thank you, Michelle, and thank you, everybody, for joining us this morning. We look forward to talking to everyone again in October. Stay safe, and thank you for your interest in NOV.
This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.