Energy Sector Q3 2025: Contradictions Emerge on Backlog, Offshore Demand, and Market Activity

Date of Call: October 28, 2025

Financials Results

• Revenue: $2.18 billion, down less than 1% year-over-year and sequentially
• EPS: $0.11 per fully diluted share (net income $42 million)
• Operating Margin: 4.9% of sales (operating profit $107 million)

Guidance:

• Q4 Energy Equipment: revenue expected to decline 2%–4% YOY; EBITDA $160M–$180M.
• Q4 Energy Products & Services: revenue expected to decline 8%–10% YOY; EBITDA $120M–$140M.
• Q4 tariff expense expected around $25M; ongoing supply-chain and sourcing actions to mitigate tariffs.
• Programs on track to deliver >$100M of annualized cost savings by end of 2026.
• Company expects to return >50% of excess free cash flow to shareholders in 2025; sees free-cash-flow conversion near 50%+ as sustainable.

Business Commentary:

* Energy Equipment Revenue and Orders: - NOV's Energy Equipment segment reported revenue of $1.25 billion, with an 2% increase year-over-year, and orders of $951 million, which more than doubled sequentially. - The growth was driven by strong demand for offshore production equipment, such as subsea flexible pipe and monoethylene glycol processing modules.

• Backlog and Contractual Strength:
• NOV's backlog reached $4.56 billion, the highest since the segment started reporting, with a book-to-bill ratio of 141% for the quarter.

• Strong execution on projects and favorable contractual terms contributed to this increase, indicating positive future demand.

• EBITDA and Margin Improvement:

• The company's EBITDA was $258 million or 11.9% of revenue, despite higher tariff expenses, due to strong operational execution and cost controls.

• The improvement in margins was aided by a rise in offshore production equipment's contribution to revenues, which expanded segment margins for the 13th consecutive quarter.

• Unconventional Resource Development and Global Expansion:

• There's a strong global demand for unconventional shale development, with notable activity in Saudi Arabia, Argentina, and the UAE.
• NOV is well-positioned to capitalize on this trend due to its extensive product portfolio, including drill pipe, coiled tubing, and wireline equipment, which are essential for international shale development.

Sentiment Analysis:

Overall Tone: Positive

• Management emphasized strong execution and cash generation: “Revenues of $2.2 billion were down just slightly... EBITDA was $258 million... increasing free cash flow to $245 million.” They highlighted record backlog, record subsea flexible pipe/process systems revenue and bookings, and a multi-year opportunity from international shales and deepwater driving optimism for late‑2026/2027 recovery.

Q&A:

• Question from James Rollyson (Raymond James): With your energy equipment business' trending capital equipment growth versus aftermarket weakness, and given the backlog, can you continue to put up decent year-over-year growth through 2026 even in a softer near-term market?
  Response: Backlog should support capital-equipment growth, but near-term aftermarket/spares will be cautious due to OPEC overhang; meaningful pickup anticipated late 2026 as deepwater activity recovers.

• Question from James Rollyson (Raymond James): On Energy Equipment margins into 2026 given mix shifts to capital equipment/production-related sales, tariffs and cost offsets — is 2025's margin profile repeatable in 2026?
  Response: Higher-quality backlog and embedded pricing support stronger EE margins, but timing uncertainty and aftermarket weakness make near-term margin trajectory dependent on when recontracting and aftermarket demand return (more constructive in 2H‑2026/2027).

• Question from Marc Bianchi (TD Cowen): After a strong quarter of orders in Energy Equipment, can you sustain a ~1.0+ book-to-bill into Q4 and beyond?
  Response: Orders are lumpy; current expectation is Q4 slightly below 1.0 book-to-bill unless a potential large order closes, but multi-quarter trend and backlog remain strong.

• Question from Marc Bianchi (TD Cowen): The $65M of other items included write-downs of long-lived assets and inventory — how much was inventory and did it benefit margins this quarter or going forward?
  Response: Charges arose from facility consolidations and product exits; inventory charges were scrapped, are non-recurring and have no ongoing impact on future margins.

• Question from Arun Jayaram (JPMorgan): You mentioned Argentina, UAE and Saudi — can you elaborate on the international unconventional build-out and demand patterns (coiled tubing, wireline, etc.)?
  Response: International unconventionals are broadening (Argentina, Saudi, UAE mature; Algeria, Turkey, Oman, Bahrain, Pakistan earlier stage), driving initial coring and infrastructure demand then rapid pickup in coiled tubing, wireline, fiberglass/pipe and other intervention/stimulation equipment.

• Question from Arun Jayaram (JPMorgan): How many FPSO FIDs did you see in 2025 and how might that progress in 2026–27?
  Response: Year-to-date three FPSO awards with a couple more possible by year-end; management expects FID activity and FPSO demand to pick up meaningfully in late 2026 into 2027 as the OPEC overhang clears.

• Question from Stephen Gengaro (Stifel): How should we think about the margin impact of the current, higher‑quality backlog into 2026 and beyond?
  Response: Bookings concentrated in offshore production (higher margin and high barriers to entry) should drive margin improvement in 2026, partly offset by aftermarket declines; further margin upside expected as offshore recontracting materializes (likely 2H‑2026).

• Question from Stephen Gengaro (Stifel): Do you see U.S. production plateauing and could that drive stabilization/recovery in U.S. land activity?
  Response: U.S. shale growth is decelerating (EIA 2026 forecast ~0 growth); Tier‑1 exhaustion and efficiency gains mean international shale and deepwater become more important drivers, supporting eventual recovery dynamics.

• Question from Doug Becker (Capital One): Q3 EBITDA-to‑FCF conversion was 95% — outlook for CapEx and free cash flow in Q4 and do structural working‑capital changes add upside to FCF conversion in 2026/27?
  Response: Working-capital and collection improvements drove Q3 conversion; Q4 working‑capital may improve slightly, CapEx modestly up for high-return projects; sustainable free‑cash‑flow conversion targeted around ~50%+ going forward.

• Question from Doug Becker (Capital One): If offshore drilling picks up in late‑2026/early‑2027, would that drive book‑to‑bill consistently above 1.0?
  Response: Yes — a sustained offshore drilling recovery late‑2026 into 2027 should add demand and support book‑to‑bill above 1.0.

Contradiction Point 1

Energy Equipment Backlog and Market Activity

It involves differing perspectives on the energy equipment backlog and market activity, which could impact operational forecasting and investor expectations.

Can you discuss energy equipment business growth and 2026 margin expectations given the current backlog? - James Rollyson (Raymond James & Associates, Inc., Research Division)

2025Q3: Energy equipment backlog is growing, with favorable pricing and margins. The timing of aftermarket recovery is uncertain. The strong setup for 2027, when market cycles align, could lead to increased earnings amplitude. - Jose Bayardo(CFO)

What key indicators will signal market improvement over the next 2-4 quarters? - Stephen Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q2: Market improvement indicators include increased offshore drilling demand, new equipment projects, and stabilization of activity levels. NOV's backlog and fourth-quarter seasonal bulk tool purchases support these indicators. - Clay Williams(CEO)

Contradiction Point 2

Offshore Drilling Demand and OPEC Overhang

It highlights differing views on the timeline and impact of offshore drilling demand and the OPEC overhang, which are critical for demand forecasting and strategic planning.

Can we expect book-to-bill to exceed 1 with an increase in offshore drilling? - Doug Becker (Capital One Securities, Inc., Research Division)

2025Q3: Offshore drilling pickup expected late 2026 will add to production equipment demand. OPEC overhang clearing is expected to improve overall equipment demand. - Clay Williams(CEO)

Is the deepwater market the larger opportunity over the next 5-10 years? - James Rollyson (Raymond James & Associates, Inc., Research Division)

2025Q2: FIDs and FPSO demand are impacted by OPEC overhang. Outlook improves late in 2026 as OPEC supply normalizes. Expect demand to rise in 2027. - Clay Williams(CEO)

Contradiction Point 3

Energy Equipment Segment Growth and Market Demand

It highlights differing viewpoints on the growth trajectory and demand for energy equipment, which is critical for revenue projections and investment decisions.

What are expectations for energy equipment orders in Q4 and beyond? - Marc Bianchi (TD Cowen)

2025Q3: Orders can be lumpy. Expect a slight dip below 100% book-to-bill for Q4 due to lower large order visibility. Long-term trend shows strong order performance with record backlog. - Clay Williams(CEO)

Can you provide insights on capital equipment order activity and potential at a book-to-bill ratio of one? Are there any updates on FPSO orders? - Arun Jayaram (JPMorgan Securities)

2025Q1: We are confident in offshore deepwater market investment decisions as we mentioned, with up to 12 potential FPSO opportunities this year. - Jose Bayardo(COO)

Contradiction Point 4

Margins and Revenue Growth Expectations

It involves changes in financial forecasts, specifically regarding revenue growth and margin expectations, which are critical indicators for investors.

How do you expect the energy equipment business growth and margin profile for 2026 to be affected by the current backlog? - James Rollyson (Raymond James)

2025Q3: Energy equipment backlog is growing, with favorable pricing and margins. The timing of aftermarket recovery is uncertain. The strong setup for 2027, when market cycles align, could lead to increased earnings amplitude. - Jose Bayardo(COO)

Given the weaker H2 guidance, how do you expect 2025 margins to compare to 2019, and how does this align with the prior 50-150 bps range? - Connor Jensen (Raymond James)

2025Q1: Consolidated revenue is expected to grow 1% to 2%. EBITDA margins are projected to be about flattish first half to second half. - Rodney Reed(CFO)

Contradiction Point 5

Offshore Demand and Drilling Activity

It involves differing expectations regarding offshore demand and drilling activity, which impacts revenue projections and investment decisions.

What are the order expectations for the energy equipment segment in Q4 and beyond? - Marc Bianchi(TD Cowen)

2025Q3: Offshore demand is increasing late in 2026 as OPEC overhang clears. - Clay Williams(CEO)

How do you assess the offshore market and the white space in drilling schedules? - Roger Read(Wells Fargo Securities)

2024Q4: Offshore is a bit more challenged probably in the very short -- early part of this year. And it could take another quarter to 6 months for the offshore segment to stabilize. - Clay Williams(CEO)