NOV Inc Q1 2026 Earnings Call Transcript

NOV Inc (NYSE: NOV) Q1 2026 Earnings Call dated Apr. 28, 2026

Presentation

Operator

Good day and thank you for standing by. Welcome to the first quarter 2026 Nov. Inc. Earnings Conference call. At this time all participants are in a listen only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during the session, you’ll need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised to withdraw your question. Please press star 11 again. Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Amy d’, Ambrosio, Director of Investor Relations. Please go ahead.

Amie D’Ambrosio — Director, Investor Relations

Welcome everyone to Nov’s first quarter 2026 earnings conference call. With me today are Jose 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 10k and 10q for 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 US GAAP basis. For the first quarter of 2026, Nov reported revenues of $2.05 billion and a net income of $19 million or $0.05 per fully diluted share. Our use of the term EBITDA throughout this morning’s call corresponds with the term adjusted EBITDA and 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.

Jose A. Bayardo — Chairman and Chief Executive Officer

Thank you Amy Good morning everyone and thank you for joining us. The first quarter of 2026 unfolded against a rapidly changing backdrop due to the conflict in the Middle east and I’d like to start by thanking our team, particularly those in the region, for keeping each other safe while doing everything possible to support our customers in a very chaotic environment. Despite the disruption, Nov achieved its lowest ever total recordable incident rate and lost time incident rate during the quarter.

As I mentioned on our last call, HSE performance reflects pride, accountability and ownership in operations, which translates into higher quality, reduced downtime and better service for our customers. The actions of our people and the results they achieved demonstrate how deeply These values are embedded in our culture. Turning to our financial results, Nov generated revenue of $2.05 billion and adjusted EBITDA of $177 million during the first quarter of 2026. As previously disclosed, we estimate that the conflict in the Middle east negatively impacted revenue by approximately $54 million and EBITDA by 32 million.

Bookings in our energy equipment segment for the quarter totaled 520 million. While this resulted in a book to bill of 80%, orders improved by $83 million year over year and represented our strongest first quarter order intake since 2019. We also had strong bookings in our fiberglass and drill pipe businesses within our energy products and services segment where we do not report book to bill and backlog figures. As the conflict escalated during the quarter, the most pronounced impacts were felt across our capital equipment and aftermarket oper, where the movement of goods, access to customer sites and overall logistics became increasingly constrained, significantly affecting quarter end deliveries.

Our service and rental businesses, particularly those supporting land based operations, experienced substantially less disruption. For our capital equipment businesses, the primary challenges were associated with shipping finished equipment into and out of the region. As shipments were rerouted through alternate ports, transit times were extended and freight costs increased materially. In addition, safety concerns and access limitations prevented customers from visiting facilities or project sites to participate in typical factory acceptance, testing and inspections for manufactured equipment and goods, resulting in delayed delivery schedules.

Supply chain constraints became more pronounced as we progressed through the month of March. We experienced delays in receiving raw materials and critical components, and the unpredictability of logistics introduced additional costs and complexity. These disruptions impacted manufacturing throughput, thereby reducing absorption and contributing to higher costs in our aftermarket operations. The challenges were somewhat different but equally impactful. We experienced difficulties getting spare ports into the region, while safety concerns affected customers willingness to pick up or accept orders.

At the same time, customer activity was curtailed and certain projects were suspended, deferring demand for ports and limiting service and repair activity. Offshore projects in particular faced disruptions and rig related slowdowns. Together, these factors created meaningful disruption in the final month of the quarter. Importantly, much of this impact was timing related and in many cases deliveries have now occurred and others have been delayed rather than canceled. Freight costs increased significantly during the quarter, at times by as much as three to four times normal levels and combined with lower manufacturing absorption contributed to higher operating costs outside of the affected region.

Our business has performed well and in line with expectations. We remain focused on improving operational efficiency in what continues to be an inflationary environment that may be further pressured by the ongoing supply chain disruptions and knock on effects to the petrochemical complex. Rodney will cover second quarter guidance which assumes conditions in the Middle east remain consistent with where they are today, meaning the ceasefire holds, but the strait remains closed, which continues to constrain logistics and increase both the time and cost of doing business.

While that is our current assumption, the situation remains extremely fluid. Logistics have improved since the height of the conflict, but trade routes are more complex, more costly and carry higher risk of delays. While we cannot predict how conditions will evolve, our supply chain and operations teams have significant experience managing through disruption and they’re taking action to mitigate risk and serve our customers. Our operations in the Middle east serve not only as a regional hub, but also support customers across both Eastern and Western hemispheres.

One of the actions we’re taking is to reroute manufacturing for customers outside the region to facilities elsewhere in our global network. While this helps mitigate risk, it may not necessarily improve delivery times and it adds additional cost. No one can predict when the conflict will end, so we cannot reliably forecast the second half of the year. What we can say is the market is increasingly primed for a recovery and if the conflict ended and the strait reopened in the near term, we could still conceivably achieve our prior expectation of full year 2026 results that are broadly in line with 2025.

With that context, let me now step back and talk about what we’re seeing more broadly in the market. Coming into the year. The prevailing view was that the global oil market was oversupplied by 2 to 3 million barrels per day. This was driven by a wave of non OPEC production growth from projects sanctioned during the COVID period combined with the unwinding of OPEC production curtailments. As a result, we expected 2026 would be another challenging year as the industry worked through the supply overhang.

Against that backdrop in North America, operators were expected to remain disciplined and focused on maintaining production levels efficiently while returning capital to shareholders. In the Middle east, activity was expected to gradually improve, supported by the reactivation of suspended rigs in Saudi Arabia and and continued momentum in the uae, Kuwait and Oman. Offshore momentum was expected to build steadily with an increasing need for long cycle deep water developments to offset plateauing short cycle North American supply as the primary source of incremental production in the coming years.

That was the setup just a few months ago. Today the world looks dramatically different and the market outlook has shifted materially. The conflict in the Middle east has resulted in approximately 10 million barrels per day of shut in production and damaged key energy infrastructure, shifting the market from a modest surplus to a meaningful deficit and requiring drawdowns of strategic reserves worldwide. While there’s no clear timeline for when trade flows will normalize or when production can fully return, it is increasingly clear that even after the conflict is resolved, the market will remain undersupplied for an extended period of time and will require significant increase in investment.

One industry analysis suggests that approximately 10,000 wells across the region are currently offline, with up to 3,000 requiring meaningful intervention to return to normal operations and roughly 1,000 potentially requiring major workovers or recompletions following extended shut ins. Not all this production may return. Depending on the duration of the disruption, there is the potential for permanent capacity loss ranging from approximately 500,000 to as much as 2.5 million barrels per day. Restoring this production will require meaningful activity, beginning with intervention and workover operations, followed by incremental drilling to replace lost capacity.

In addition, depleted strategic reserves will need to be refilled and energy security concerns are likely to reinforce the need for exploration, development and production capacity. Many countries are likely to expand or build new reserves over time, creating an additional source of demand. At the same time, reserve lives have declined meaningfully during the last decade, and current conditions likely serve as an additional catalyst for operators to replenish and increase reserves, reinforcing the need for increased exploration and development activity.

While the conflict has clearly created near term disruption, we believe it will also accelerate and amplify a meaningful new recovery cycle. The work required to restore production alone will drive elevated levels of activity over multiple quarters and potentially longer, depending on how conditions evolve. However, the implications extend well beyond the Middle East. We we believe the combination of supply disruption, tighter market conditions and a renewed focus on energy security will increase the urgency for investment across the industry, not only to restore production, but to also secure reliable and diversified sources of supply.

For much of the past decade, the industry has operated with constrained investment, limited exploration and reduced greenfield development. The industry became highly efficient and focused on doing more with less. As a result, reinvestment in assets declined and attrition occurred across the global equipment base. Even prior to the conflict, we saw areas where we expected that a modest increase in activity would require a disproportionate increase in investment in the service complex. However, with a prevailing view just a few months ago, it appeared that the industry would have time to gradually increase investment over the coming years as markets rebalanced.

That is no longer the case, and for Nov, this change is particularly meaningful. As a provider of capital equipment and technologies used to drill, complete and produce oil and gas. Our business is directly tied to the level of investment across the industry. Industry after years of underinvestment, the industry is not starting from a position of excess capacity. Demand will not inflect overnight, but the events of the past two months have accelerated and amplified the need for investment, and we are beginning to see early indications of this in our customer conversations.

In North America, operators remain disciplined, but some are accelerating plans to complete drilled but uncompleted wells that they had previously planned to defer, while others are backing away from plans to release rigs and some will add rigs. The North American service complex is already tight, having experienced significant attrition and the export of excess equipment to international markets. While pricing will need to improve before service providers and drilling contractors materially increase capital spending, the conditions for that to occur are increasingly falling into place.

In international land markets, investment had already begun to increase, driven by the emergence of unconventional development and a growing focus on energy sector security. As mentioned, a healthy amount of the equipment supporting this growth has come from underutilized assets in North America, but the availability of these underutilized assets has largely been exhausted, meaning new build equipment will be required for higher levels of activity. Once conditions normalize in the Middle east, we expect a meaningful increase in activity associated with restoring curtailed production, followed by a resumption of longer term development programs including unconventional resource development.

We also expect continued growth in other international markets including Argentina where our revenue increased 14% year over year, and Venezuela where we have already seen a step change in demand for our progressive cavity pumps and are now fielding an increasing number of customer inquiries for additional tools and equipment. In offshore markets, we continue to see the early stages of sustained upcycle supported by improved project economics driven by standardization, industrialization and technology.

These factors have materially lowered breakeven costs, making long cycle offshore developments increasingly competitive and positioning them as key sources of incremental supply. We have seen steady growth in demand for offshore production related equipment and we expect and are preparing for that trend to accelerate. Consistent with that view and our focus on leaning into high return growth opportunities, we recently approved a $200 million expansion of our subsea flexible pipe manufacturing facility in Brazil.

This investment is intended to address what we believe is a developing capacity shortfall in the industry as offshore activity increases. Bookings for offshore production related equipment remained healthy in the first quarter, supported by a large subsea flexible pipe order for Brazil and a large feed study associated with the complex harsh environment FPSO reflective of increasing confidence in the long term Market Outlook in offshore drilling Our customers are seeing an increasing pace of contracting activity along with a meaningful increase in the duration of those new contracts.

We now expect the number of drillships under contract in 2027 to reach the highest level since 2015. Higher levels of future activity drive reactivations and upgrades, such as the large reactivation project we recently received for a rig going to the North Sea and drives additional recurring spare parts sales. While offshore project timelines are longer and more complex, we believe the outlook for increased activity has become even more compelling. Energy security concerns are increasing the urgency to advance offshore developments which offer scale, longevity and better economics.

Additionally, we are seeing operators beginning to increase exploration budgets and accelerate development activities, including brownfield expansion that leverage existing infrastructure to efficiently increase production. And our pipeline of opportunities is expanding, consistent with improving industry forecasts for new project fids. As a result, we expect an acceleration in deep water investment and project activity over the coming years. Looking Ahead While near term conditions remain fluid, the broader setup is becoming increasingly constructive.

We remain focused on disciplined execution, improving operational efficiency, expanding margins and delivering for our customers. As we navigate a dynamic environment, the near term will continue to be influenced by the situation in the Middle East. However, when conditions stabilize, we expect delayed activity to resume and underlying demand trends to become more evident. The industry is entering a period of increased activity and reinvestment to restore production, rebuild capacity and meet future demand.

Nov is extremely well positioned for this environment. Our global footprint, intentional and diverse portfolio, and strong market positions will provide meaningful earnings leverage to improving market conditions over time. With that, I’ll turn the call over to Rodney.

Rodney Reed — Senior Vice President and Chief Financial Officer

Thank you, Jose. Consolidated revenue for the quarter was $2.05 billion, a decrease of 2% year over year. Net income was $19 million, or $0.05 per fully diluted share. Operating profit was $47 million, which included $37 million in other items primarily related to a non cash stock compensation charge, severance and facility closures. Adjusted operating profit was $85 million, or 4% of sales, and adjusted EBITDA totaled $177 million or 9% of sales. The conflict in the Middle east resulted in delayed shipments of capital equipment and spare parts and increased operating costs through higher freight expenses and less absorption at our manufacturing facilities, impacting our first quarter revenue and EBITDA by an estimated $54 million and $32 million, respectively.

As we move into the second quarter, our focus remains on the safety of our team and supporting our customers as we work through the delivery of key equipment, parts and services, adjusting for the estimated impacts from the Middle east conflict that I just mentioned above, year over year revenue would have been flat, supported by strong demand for our offshore production equipment, high performance drill bits and increasing adoption of our digital services offset by lower global drilling activity levels.

First quarter margins were negatively impacted by a $30 million increase in tariff costs year over year and a lower mix of aftermarket revenue due to the completion of certain large reactivation projects. In the first quarter of 2025, we’re focused on improving margins both through accretive top line growth with our energy equipment segment achieving four straight quarters of year over year revenue growth and reducing our cost structure. Let me focus on cost reductions by highlighting our strong efforts to streamline our businesses, increase efficiency and drive better margins and profitability.

Since the first quarter of 2025, we’ve reduced global headcount by 8%, exited over 40 facilities, established a global service center in Kochi, India to better leverage the use of shared services, and increased our investment in IT systems to improve efficiency of operations and support functions. As we mentioned previously, through the first few quarters of these initiatives, tariff cost, upfront IT investments and inflationary pressure in areas like medical cost and certain raw materials are largely offsetting these cost reductions.

As we progress through our cost out program, we will realize additional cost savings and excluding impacts from the Middle East. Expect our efforts to begin to more than offset the tariff and other inflationary costs beginning in the second half of 2026, we continue to execute on our return of Capital program. During the quarter, we repurchased 3.5 million shares for $67 million and paid dividends of $33 million, which reflected our announced 20% increase in the quarterly dividend. We also extended our $1.5 billion revolving credit facility by one year through 2030.

Over the past eight quarters, we’ve returned over $900 million to shareholders through dividends and share repurchases. During the second quarter, we plan to provide shareholders with a supplemental dividend to true up our 2025 return of capital program where we committed to returning at least 50% of excess free cash flow. Additionally, we filed a claim for a refund associated with the Supreme Court’s ruling on IPA tariffs. Our first quarter results do not reflect the benefit for this potential refund and we have not factored the refunds into our guidance.

Capital expenditures for the year, including our investment in our flexibles facility in Brazil, should be between $340 million and $370 million. We continue to expect to convert between 40% to 50% of 2026 EBITDA to free cash flow, with generation of cash ramping through the remainder of the year. Moving to our segments, starting with energy equipment, first quarter revenue was $1.19 billion, an increase of 4% from a year ago, led by continued strength of our offshore production related businesses.

EBITDA for the first quarter was $131 million, or 11% of sales. EBITDA margins compared to the first quarter of 2025 were negatively impacted by a lower mix of aftermarket revenue, which I’ll cover in more detail, and higher costs from disruptions in the Middle East. Capital equipment sales accounted for 63% of the segment’s revenues in the first quarter of 2026, growing 16% year over year, led by strength in our subsea flexible pipe process systems and marine and construction businesses. Aftermarket sales and services, which accounted for the remaining 37% of energy equipment revenue, experienced a 12% reduction year over year, primarily the result of certain large reactivation projects completed in the first quarter of 2025 and the negative impact of disrupted deliveries and reduced offshore rig activity in the Middle East.

Capital equipment orders for the first quarter were $520 million, resulting in a book to bill of 80% for the quarter and an ending backlog of $4.23 billion. Orders during the quarter were led by subsea flexible pipe awards in Brazil and Europe, a semi submersible rig reactivation project in the North Sea and a large feed study for a harsh environment turret system. Offshore activity Outlook Bid pipelines and customer conversations remain constructive and we continue to expect full year 2026 book to bill to be near 100%.

Our subsea flexible pipe business continued its outstanding performance, achieving record quarterly EBITDA for the third consecutive quarter. Margins improved, driven by strong operational execution and progress on higher quality backlog, and our quarterly book to Bill was over 100%, reflecting the strength of offshore development. Demand for subsea flexible pipe has been exceptionally strong, exceeding 100% annual book to bill for each of the past four years and extending our backlog into 2028.

Our process systems revenue was slightly below last quarter’s record level and up more than 50% compared to the first quarter of 2025, reflecting robust activity in offshore production and onshore international gas markets. Record EBITDA for the quarter was supported by healthy backlog and solid execution. Orders during the quarter included offshore processing equipment and two CO2 treatment projects involving gas dehydration and membrane separation. The Middle east is an important region for this business and FIDs for several projects could see some temporary delays.

However, we expect demand for gas processing systems to remain strong in the region as well as in other international and deep water markets where four FPSOs have reached FIDs so far this year with the industry forecasting six to eight additional FIDs through the remainder of 2026. Revenue from our drilling capital equipment business declined around 10% year over year resulting from high progress in the prior year on a large 20k psi BOP project that was not fully offset by higher revenue from new build land and jackup rigs in Saudi Arabia.

During the quarter the business was awarded a contract to support a semi submersible reactivation including MUD systems, a crane and a BOP stack. Our marina construction business revenue increased in the high teens percentage compared to the first quarter of 2025 driven by higher revenue from cranes as well as pipe and cable A systems partially offset by lower activity related to wind turbine installation vessels. Demand for cranes from multi purpose support vessels remains high which should drive additional orders over the coming quarters.

Tendering activity for K Balla vessels also remains active and we still see the potential for a second half WTIV order. With the industry forecast continuing to suggest a shortage of future installation capacity. We believe that the disruption to energy markets tied to the conflict in the Middle east is renewing urgency around energy security and supply diversity which will drive demand for all sources of energy revenue for intervention stimulation. Capital equipment declined approximately 20% year over year due in part to delayed wireline and coiled tubing equipment deliveries to customers in the Middle east where we were awarded coil tubing data acquisition hardware and software packages and continue to see broad based opportunities for our pressure control products.

While North America related demand was soft through 2025 and the first quarter of 2026. Quoting activity has recently increased for pressure pumping capital equipment and during the quarter we booked several coal tubing equipment orders supporting more efficient operations for longer laterals. Turning to the aftermarket portion of the energy equipment segment, revenue from our drilling equipment aftermarket business was most acutely impacted by the Middle east conflict due to suspended rig operations, logistical challenges and delays in upgrade projects.

Revenues were down mid teens percentage year over year and down 12% sequentially. In addition to the impact from lower Middle east activity, the year over year decrease is partially related to lower service and repair work due to timing of active projects. Encouragingly, spare parts bookings remained robust during the quarter higher than their four quarter rolling average. Given the logistics delays in booking activity, spare parts backlog is the highest level it has been for the last seven quarters.

The business is also executing on roughly 35% more projects compared to this time last year. We expect aftermarket activity to pick up slightly in the second quarter and more materially in the second half of the of 2026, partially dependent on the timing of the resolution of the Middle east conflict. Revenue from aftermarket parts and services for intervention stimulation equipment was essentially flat sequentially and down mid to upper single digit percentage year over year compared to the first quarter of 2025.

Wireline and coil tubing related aftermarket rose slightly more than offset by lower North America pressure pumping activity. However, we’re seeing increased increase related to reactivations consumable parts. For the second quarter, we expect energy equipment segment revenue to be down 2 to 4% year over year with EBITDA in the range of $135 million to $155 million. Moving on to the Energy Products and Services segment, our energy product and services segment generated revenue of $897 million, down 10% from the first quarter of 2025.

Results were negatively impacted by disruptions in the Middle east that delayed deliveries of capital equipment. Beyond those delays, segment results reflected lower levels of global activity which more than offset market share gains in our drill bit business and increasing adoption of our digital services. Adjusted EBITDA was $96 million or 10.7% of sales. Lower volumes combined with the absorption impacted our manufacturing facilities. Higher tariff cost and inflationary pressures affecting raw materials drove larger than normal decrementals.

As I previously mentioned, we remain focused on growing market share and reducing cost through rightsizing operations and consolidating facilities to improve profitability. For the first quarter, the sales mix within energy products and services was 54% service and rentals, 29% capital equipment and 17% product sales. Revenue from services and rentals declined in the mid to upper single digit percentage range year over year as lower global activity more than offset drill bet market share gains in North America and growing adoption of Nov’s wired drill pipe services including Downhole broadband solutions.

Our REIT hike a log business continued to gain market share in the US growing revenue 8% compared to a 7% decline in US rig count since Q1 2025. The business remains focused on supporting our customers and advancing bit performance while also mitigating higher tungsten carbide costs which have increased by approximately 400% since the end of 2025. In addition to drill bits, our downhole tools, ESPs and production chokes have components that include tungsten carbide. Our teams are focused on mitigating higher costs through sourcing, pricing and operational actions.

Revenue from our digital services business expanded significantly compared to the first quarter of 2025 with strong operational performance from our wired pipe services. Based on customer interest, we expect to see continued growth and adoption of our services that provide real time broadband data transmission from the bottom of the drill string. Rentals of our downhole technologies were impacted by lower activity in North America and Saudi Arabia but remained mostly steady across other markets as softer activity was offset by adoption of our new technologies including our Agitator Rage and Positrac torsional vibration tools in Asia, the Middle east and offshore Brazil.

Within our Wellsite Services business, increased rentals of our Tundra Max mud chiller systems and solids control equipment were offset by lower activity in the Middle east and Latin America. Additionally, the business was awarded a contract to deploy its ANOVA Therm thermal treatment technology in Guyana supporting more efficient drilling cuttings management. This will be our first deployment of the technology in Latin America. Our tubular inspection business decreased mid single digit percentage from lower level of activity in North America and a temporary slowdown in our Tuboscope operations as activity in Argentina shifts from Camodoro to the Vaca Muerta.

Further development of our TK Dracon Premium Thermal Insulated Coating partly offset lower coating activity in international markets which we expect to pick up in the second quarter. Sales of capital equipment declined in the low double digit percentage range year over year primarily due to the Middle east conflict that delayed deliveries of composite pipe. These delayed deliveries along with lower industrial activity and the timing of composite projects for FPSOs resulted in a significant decline in revenue versus the prior year for our fiberglass business.

While these headwinds weighed on the quarter, the business achieved record quarterly bookings driven by demand of our produced water transport projects, fuel handling and FPSO related applications. Given the strong bookings along with production and delivery delays related to the Middle east conflict, backlog is at the Highest level in 10 quarters. We expect second quarter results to meaningfully improve and revenue in the second half to further increase compared to the first half supported by robust demand and execution on the strong backlog.

Drill pipe orders were also strong outpacing the average quarterly bookings for the past three years with offshore demand leading the bookings mix. These bookings follow strong orders in the second half of 2025 which contributed to drill pipe sales increasing in the mid teens percentage range year over year. Backlog for the business sits at its highest level in two and a half years and we expect strong backlog conversion in the second quarter the segment’s product sales declined in the mid teens percentage range year over year as reduced drilling activity in the Middle east and Asia decreased demand for certain drilling tools for the quarter.

However, we did receive a sizable order for drilling motors destined for Turkey that should support sales later in the year and we have good visibility into bulk shipments that typically happen in the second half of the year. For the second quarter, we expect energy products and services segment revenue to decrease between 6 to 8% year over year with EBITDA in the range of $100 million to $120 million. With that, I’ll turn the call back to Jose.

Jose A. Bayardo — Chairman and Chief Executive Officer

Thank you, Rodney. In closing, while the first quarter presented challenges, it also marked a significant shift shift in the market environment. We believe a meaningful new capital equipment cycle is unfolding which will cause Nov’s technology, equipment and expertise to be in great demand over the coming years. We are confident in how we are positioning the company for the future and remain intently focused on delivering long term value for our shareholders. To the nov employees listening today, thank you for your dedication and commitment to safety and execution. With that, we’ll open the call up to questions.

Question & Answers

Operator

Thank you. Ladies and gentlemen. If you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered, you wish to move yourself from the queue, please press star 11 again. We will pause for a moment while we compile our Q and A roster. Our first question comes from arun Jayram with JPMorgan securities. Your line is open.

Arun Jayaram — Analyst, JPMorgan Securities

Good morning, Jose and Rodney. I was wondering if you could maybe talk a little bit about the flexibles business at nov. You mentioned how you’re doubling capacity over the next several years in Brazil, but I’d love to get a little bit of thoughts on where that business is today, perhaps from a top line basis and how you see that kind of progression over time as you are increasing capacity there.

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, Good morning Arun. Thanks for the question. Yeah, our subsea flexible pipe business has had extremely strong performance certainly coming out of the pandemic and really, you know, as Rodney touched on in his prepared comments, continues to crank out really good results, really strong bookings. The outlook is very, very favorable. And you know, as we sit here today and we’re taking in orders, we’re looking at lead times that are already extending into 2028 for some projects and some of our customers.

And then if we look further into the future in terms of what we see related to future opportunities, Brazil will continue to have a tremendous amount of growth. Their pretty transparent in terms of providing directive guidance to the public in terms of what they see forthcoming related to their future activity. And if anything, things continue to ramp up. So it’s not only just continuation with new project development, but we’re also entering a time period in which the existing infrastructure that’s out there is aging.

And we’re on the cusp of a big replacement cycle for offshore Brazil in addition to more new capacity that’s needed. Additionally, we’ve talked about the solution that we’ve been working on for CO2 corrosion resistance that we’re feeling very good about. We think we’ll need some incremental capacity for that. And then as we look elsewhere around the world, as we’ve touched on, you know, we can, you know, coming, you know, even last quarter, we were talking about steady improvements and building momentum in the offshore space as sort of a logical source of incremental supply to displace what North America has done over the last year in terms of supplying that incremental barrel of supply to meet demand that continues to grow.

All the stores are aligning as it relates to economics, need, opportunity in the deep water environment. And it’s consistent with what we’re hearing from our customers. And, you know, not only is it Brazil that has this replacement cycle that’s forthcoming, you have some of that in other markets. But more importantly, you also have a number of markets where you have the combination of both greenfield development as well as big plans related to infill projects to leverage existing infrastructure from a production facility standpoint.

But they’re going to need a lot of additional pipe in order to connect new wells, step out wells into that infrastructure. So everything looks really good from a demand perspective. And as we sort of map out our own capacity as well as our competitors, it’s pretty clear to us that in a few years the industry is going to be short on capacity. And we see a great opportunity to step into that and support our customer base.

Arun Jayaram — Analyst, JPMorgan Securities

Yeah, makes sense. Jose, the guidance was quite clear, but I was wondering if maybe you could just help us understand what you and Rodney are embedding in terms of 2Q. In terms of the Middle east impact, in 1Q, you highlighted $54 million of revenue impact, and I believe is it $32 million of EBITDA? What are you guys kind of assuming as your base case, understanding this uncertainty in 2Q?

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, good question, Arun. So as we look at Q2, it’s not a matter of taking March times three for us. There’s a number of puts and takes, including in the Third month of the quarter. We tend to have a lot of deliveries that happen towards the end of the quarter for some reason. That’s just the nature of the business, that people just want to take everything in the last couple weeks of the quarter. But also, and more importantly, the disruption, while it’s still meaningful and significant in terms of its impact on the timelines and the costs associated with logistics, things are much improved from the height of the conflict.

Right. What we’re primarily contending with right now is the closure of the strait. And so our assumption in Q2 is that the strait remains closed. However, conditions on the ground otherwise are in line with what we’re seeing right now, which again is the resumption of trade activity kind of getting a bit more steady and a little bit more of a constructive environment that we saw at the, at the peak of the conflict. And so you put all those pieces together and what we’re Looking at in Q2 is a slightly larger impact than we saw on all of Q1, but not a huge difference.

Operator

Great, thank you.

Jose A. Bayardo — Chairman and Chief Executive Officer

Thank you.

Operator

One moment for our next question. Our next question comes from Jill Rallison with Raymond James. Your line is open.

Jim Rollyson — Analyst, Raymond James

Hey, good morning guys. A lot of interesting commentary to open there, Jose. I guess as you see it from a. Stepping back to a high level here, as you see things unfolding now and what conversations you’ve had with customers so far. How are you mentioned? Increased activity, higher, amplifying that activity, kind of falling out of all this once it settles down, maybe just a little color around. What conversations are you having? How broad is that and just how are you expecting this to translate? Because one of the things you’ve mentioned over the last several quarters is just the fact that Nov has not been firing on all cylinders. It’s kind of shifted around from one market to another. And it sounds like what you’re saying and what others are saying kind of implies maybe a more broad based recovery over a period of time. And I’m just trying to, you know, fit Nov into that equation.

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, thanks for the question, Jim. I think all of that was really well phrased and to your point. You know, you back up a quarter ago and as we were sitting here, we were feeling very good about the mid to long term outlook. You know, we anticipated that 2026 was going to be another somewhat rough year with the supply overhang that was in place. But we’ve seen several years now of improving fundamentals within the deep water space that has driven the growth and the improvement in margins within our EE segment.

And that’s really just been the primary component of a very diverse portfolio that has been in a healthy market environment. The other big chunk of our EE business, which is our rig business, has been in a little bit of a difficult environment over the last 12 to 18 months as our primary customers in that space were contending with the white space in the offshore environment. As the industry was a little bit backed up, waiting on FPSOs to come out of shipyards and get put in place in order to commence drilling campaigns.

We saw a wave of those FPSOs launch at the end of the year with about 15 of those coming into the market. And that has now resulted in what we were expecting, which is a massive increase in the number of tenders to those offshore drilling contractors and a substantial increase in the average duration of those contracts. So that was sort of the setup for later this year in the 27 that we were really excited about. You know, in the interim, we were expecting North America to remain kind of flattish with significant discipline and actual potentially for some downward flow due to the supply overhang.

You fast forward to today, that supply overhang is completely gone. We’re in an extreme deficit. There is going to be a massive need to accelerate activity in the Middle east to bring things back online, plus to get back on with the plan that they originally had, which was to steadily bring production back up and bring activity back up, particularly in Saudi with bringing back the suspended rigs. We already had and continue to have really good momentum as it relates to development of unconventional resources within the broader Middle east as well as in Latin America.

That is continuing and we expect it to be amplified and move forward with more of a sense of urgency once things settle down. So look, first and foremost, we hope for a very quick resolution to the conflict in the Middle east, most importantly so that our employees, our customers, our vendors, our other partners and stakeholders can get back to life as usual in a safer environment. But whether we like it or not, I think the world is very different today than it was three months ago. And that’s actually a much more constructive market for nov being primarily a provider of capital equipment and efficiency enabling tools to enable the production of energy around the world.

It’s going to be very, very high demand. And I think late this year and into 2027, as you touched on, we could finally be in that environment where all 8 cylin of Nov’s engine can fire and we can demonstrate significantly higher earnings power than what we’ve been able to show in a really limited market over the last several years. So we’re looking forward to demonstrating that capability. The team has worked incredibly hard over the last several years to position us for that environment and I think that’s getting very close.

Jim Rollyson — Analyst, Raymond James

Got it. I appreciate all that color and if I kind of transition that into the cost and margin outlook. You guys have faced a lot of different things over the last few years and still been able to kind of ramp up margins up until we hit the kind of air pocket here. And in the Middle east conflict you mentioned, and Rodney mentioned normalizing tariffs with your cost out program in the second half of the year. But we also face now this Middle east impact. I’m just curious how many lingering impacts might fall out from that. And as we get into 27 and beyond, how you think about margin progression given all the kind of moving changes around the cost side of the equation.

Rodney Reed — Senior Vice President and Chief Financial Officer

Yeah, thanks Jim. This is Rodney. So really wanted to highlight what the team has done and the hard work from the team on cost reductions throughout the last 12 months. So we mentioned in the prepared comments some of that hard work. So headcount reduction down 8%, facilities down about 40. The number of facilities we’ve been working through some business process improvements including some shared service center opportunities in India. And so all that has really improved our, our cost structure.

Now some of the headwinds that we’ve faced over the last 12 months have offset most of that in terms of tariffs and some of the other inflationary items that you mentioned. So margins, as we look out to the second half of 26 and into 27, let me take the EE segment to start with. So four straight years there, 21 to 25 of top line growth and margin improvement and that’s really reflective of the strong portfolio there. So if you look at some of those areas with the business units with technological differentiation that have the ability to have some more pricing leverage in the markets that they serve has really lifted the margins of that business.

Jose mentioned in 2025, like our rig aftermarket business with some of the white space in the market, did not have as much margin impact in 25. As we look at that going into the second half of the year and into 27, we see a meaningful impact from our rig aftermarket business going forward and then from an EPS side of the segment similar. So some good market share gains there. When you look at our REIT hike a log business, 8% up on drill bits in North America versus a 7% decline in the rig activity and some of the highlights we mentioned on our digital services over the last 12 to 18 months as the US market has declined from an activity perspective about 15%.

That’s not been as much of a pricing rich environment there. But I think as we look at the new technologies and what we’re putting into the market to create more efficiencies on longer laterals, those are the areas that we have the ability to get some better pricing leverage. So the cost out, good hard work by the team, that’s what we can control. And then I think the setup from the market, from what we’ve seen already on the EE side on production equipment, what we’re seeing in the aftermarket business and where EPS is heading leads to better margins in the second half of 2016 and then 27.

Jim Rollyson — Analyst, Raymond James

Thank you, Roddy. Appreciate it.

Rodney Reed — Senior Vice President and Chief Financial Officer

Thanks.

Operator

One moment for our next question. Our next question comes from Mark Bianchi with TD cow and your line is open.

Marc Bianchi — Analyst, TD Cow And

Thank you. Rodney, when you were talking about the tariffs, you didn’t mention the new proclamation from the administration that’s going to sort of change the way 232 works. Is that, should we take that to mean that you guys don’t see that being being a big change for you?

Rodney Reed — Senior Vice President and Chief Financial Officer

Well, let me give a couple of comments on tariffs, starting with the positive news. So in terms of the opportunity for the IPA refund, as you know, during February the Supreme Court ruled the IIPA tariffs unlawful. And so we’ve started to file some claims there with respect to that part of the process. So that’s not in our Q1 numbers and not in our Q2 guidance, but kind of round numbers for what we paid in for AIPA, that’s about $40 million. Now the administrative process of filing those returns or those claims, working through that process, we’ll see what the end result ends up being.

But that’s kind of a general ballpark. The other two changes, as you mentioned during the quarter mark that happened were some of the exclusions from a 232 perspective, which has kind of a mixed impact to some of our businesses. Some of our business that’s a benefit. For a couple of our businesses that’s a detriment. And replacing some of the IPA tariffs, as you know, is the section 122 tariffs. So I think when you put those together from a go forward perspective, we mentioned in Q4 our tariff expense was about $25 million.

We mentioned in Q1 we expected that to slightly increase, which is what we saw. And I think going forward tariffs being in that sort of $30 million range, which is reflected in our Q2 guidance is a good marker. So kind of some of those changes that you referred to during the quarter, one on the refund and then two on the changes in 232. The 232 has probably got just a touch of a slightly incremental cost there.

Marc Bianchi — Analyst, TD Cow And

Okay, that’s very helpful, thank you. The other one was just on second quarter here. So the war impact we’re saying is a little bit more than on a dollar basis than it was in 1Q. Recognize that we’ve got sort of three months of disruption. So on a run rate basis it’s less. But is there. There were some deferral of shipments from 1Q into 2Q and then I think you mentioned there’s maybe some further deferral of some other shipments from 2Q into 3Q perhaps. But just what’s sort of the run rate of the business looking like? Is there a certain amount of help that 2Q is getting from those deferrals or is it sort of a wash because there’s some more stuff getting deferred into 3Q?

Jose A. Bayardo — Chairman and Chief Executive Officer

Mark? I would say it’s effectively a wash because yes, as you’ve astutely assumed, you know, you do have the benefit of some of those delayed deliveries from late Q1 that then fall into Q2 and then we’re going to see delays from a logistics standpoint of a lot of things going forward. And you know, in prepared remarks also talked a little bit about how we were rerouting some of the manufacturing to reduce risk to other facilities around the world, which actually extends lead times in many situations.

And so there’s some things that we’re just looking at a knock on to where there’s a couple areas where things will kind of continue to slide out quarter to quarter. And so overall should. Should effectively be a wash. But hopefully we’ll find a way to start catching up a little bit as. As things improve on the ground.

Marc Bianchi — Analyst, TD Cow And

Yep, Great. Thanks, Jose. I’ll turn it back to

Jose A. Bayardo — Chairman and Chief Executive Officer

Thanks, Mark. Thank you.

Operator

One moment for our next question. Our next question comes from Doug Becker with Capital One. Your line is open.

Douglas Becker — Analyst, Capital One

Thank you. Jose, on the last call you mentioned leaning harder into M and A and organic growth. We saw the announcement about the manufacturing expansion in Brazil, but now we have this underlying shift in the industry. So curious if some of these changes, does that make you more aggressive either on allocating growth capital or for MA going forward?

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, good question, Doug. Thank you for it. Look, I think as you highlighted last quarter, one of the messages that we wanted to convey is that we were sort of really shifting from a mindset that has been somewhat conservative and somewhat defensive given what the market environment has presented to us over the last several years. And with what we were seeing in front of us, we wanted to move on toward more of an offensive mindset. And therefore we talked more about leaning into growth opportunities that we saw in front of us, particularly organic growth opportunities, which we saw some in front of us that were.

That were very compelling, including the opportunity to expand that subsea flexible manufacturing facility in Brazil, which we are very encouraged about. So look, you can probably tell the way that the market is laying itself out, it’s doing nothing but spurring additional confidence in terms of our outlook and the opportunity set. So we’re going to continue to remain extremely disciplined, particularly from an M and A standpoint. But we want to be opportunistic and certainly lean in hard to those organic growth opportunities that are out there.

And we expect more to emerge as the market continues to tighten. So very encouraged on that front.

Douglas Becker — Analyst, Capital One

Sounds good. And I thought it was very encouraging that the full year book to Bill still expected to be near 100%. Curious if you think there is any impact to orders in the first quarter from the Middle east conflict. I know, tough to gauge, but just trying to get a sense for how orders might progress as the year goes forward, assuming the conflict ends relatively soon.

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, another good question. I think there are always puts and takes right when you have something that is kind of a shock to the system as war breaking out. Always is, that always lends a little bit of uncertainty, at least for a short period of time. But I think that our customer base has quickly gotten over that shock and awe of this major disruption. And I think confidence just continues to build into the system related to being an environment in which we’re going to see a similar sustainably higher oil price that will drive more activity, more urgency, and I think we’ll start pulling FIDs forward.

So as we touched on in the prepared commentary, I think Rodney mentioned that industry outlooks have gone from maybe 10 FPSOs coming into the year in terms of expectation for 2025-26, that on average has gone up by a factor of two or not a factor by a count of two. Additionally, as we look at the number of opportunities that we are pursuing, at least offshore opportunities, you know, we’re seeing a much wider set of customers that we’re talking to this year versus a year ago. We’re seeing more LNG opportunities in Asia.

We’re seeing timelines get a little bit more firm. So look to be determined exactly how things play out. But hopefully you’re getting the sense that we’re getting more confident about the order outlook going forward.

Douglas Becker — Analyst, Capital One

Yeah, that comes across. Thank you, Jose,

Jose A. Bayardo — Chairman and Chief Executive Officer

Thanks.

Operator

One moment for our next question. Our next question comes from David Anderson with Barclays. Your line is open.

J. David Anderson

Hi, Good morning, Jose. Good morning. You talked about a new capital equipment cycle starting up here. It’s been a long time since we’ve seen a capital equipment cycle. The last one, I suspect looks a lot different than the one we’re about to enter into here. You talked about orders, orders. You gave the guidance for this year. So I guess I’m really kind of thinking about 27 and 28 as we kind of get in there. What does a new capital equipment cycle mean to Nov? Where are kind of the drivers here that you really see?

You mentioned FPSOs, but aside from that kind of, what are the kind of real drivers here in terms of orders over the next few years from a new capital equipment cycle as you described?

Jose A. Bayardo — Chairman and Chief Executive Officer

Yeah, good question, Dave, and thanks for that. Look, it’s always hard to predict the future, but look, you look around the world, I think it’s pretty clear to see that there has been limited investment across the industry, particularly across the asset base of the service complex. And you know, we’ve effectively been in a market that went from a market that had excessive investment to one where the market had slowly been getting back into balance and as activity has declined. So really it’s been a 10 year process of the market effectively normalizing and getting into balance.

And as I mentioned quarter two, three quarters ago, we were starting to point out that, hey, the market for equipment is tighter than I think most people appreciate. And we thought that with the oil supply overhang that the industry would have ample time to sort of get its legs underneath it and really recognize the issue and start making the appropriate investments. But I think what’s happened here has accelerated that process and has also amplified the process. So look, it’s going to start in the way that it usually does.

You know, we’re going to see pricing and utilization go up for our service company and drilling contractor customers. They will start realizing the benefit of that in terms of cash flow and they will start reinvesting in their asset bases and understanding where activity is going and what their needs will be. So look, I don’t think it’s going to be constrained to any one market. As I touched on, this is an environment where all eight cylinders get to fire and all of our businesses are, that includes all the capital equipment components as well as a lot more demand for all the efficiency enabling tools and technologies that we bring to bear.

Whether it’s our digital services and solutions or all of what we do across our EPS segment, they’re going to greatly benefit from this as well. So certainly continuation and amplification of what’s been happening from a deep water standpoint, acceleration amplification of what’s happening within the unconventional markets in terms of pull through need for modern drilling and completion and efficiency enhancing tools and equipment. And then as we look at offshore drilling, that’s going to be needed in order to support what is happening from an offshore development standpoint.

Look, you know the marketed utilization of the deep water fleet is ready at around 95%. If you look forward, that’s as tight as it has been since that prior cycle. We’re going to see customers continue to do what they can to bring other assets back to bear, but there’s a very, very limited opportunity set there. The cost to do that is very high and that’s going to allow them to get more pricing leverage, improve their day rates. And I think there’s a chance here that operators could start getting nervous in terms of availability of equipment.

I don’t want to speculate on a new build cycle offshore, but it’s certainly not off the table because there are limited opportunities. I mean that’s going to be a few years away but. But that conversation is coming up more frequently. In the interim there are more upgrade and reactivation opportunities, even upgrades of rigs that are already turning to the right in terms of our latest and greatest in terms of digital capabilities or automation and robotics, things like a rapid emergency disconnect systems that significantly reduce BOP shear times.

And also a lot of talk with customers about upgrading other rigs to have 1,400 ton hoisting capacity. So really long way of saying there’s material upside to all of our operations. Exactly how far that goes to be determined. But the outlook is pretty good

J. David Anderson

In terms of kind of desperation and discussions. What does that look like in North America right now? It looks to us like things are very, very tight from kind of the attrition and equipment moving out of the us. Are you having those conversations yet or is it still a little bit too early on the. You mentioned the unconventionals. I’m just wondering if you’re starting to see those having those conversations yet or is that kind of to be in the coming quarters or whatnot.

Jose A. Bayardo — Chairman and Chief Executive Officer

Yep, it’s early days, Dave, but The conversations are taking place. Right. So certainly more conversations related to reactivating the limited stacked equipment that’s out there that can come back. Some talk about new capital equipment orders. As Rodney touched on, we saw some demand for coil tubing equipment within the North American marketplace this last quarter. So large diameter, extended reach coil tubing already has a little bit of legs to it and there’s certainly more and more talk, a little bit more actually translating or a little bit of that actually translating into orders.

But as I mentioned, this is a geography in the global marketplace that has undergone some really difficult conditions. We’ve been in a market environment where everybody has been incredibly focused on being as disciplined as possible. Pricing for the service complex has not been good. They’re going to do what they’re saying they’re going to do. As you’ve heard during their earnings call so far, they’re going to focus on getting utilization up, getting pricing up before they do a massive expansion of their capacity. But I believe that’s coming.

J. David Anderson

Thank you Jose.

Jose A. Bayardo — Chairman and Chief Executive Officer

Thank you Dave.

Operator

Ladies and gentlemen, does conclude the Q and A portion of today’s presentation. I’d like to turn the call back over to Jose for any further remarks.

Jose A. Bayardo — Chairman and Chief Executive Officer

Great. Thank you everybody for joining us this morning. Appreciate the time. Just a couple comments I want to make in closing one. First and foremost, we really hope and pray for a very quick resolution to the conflict so that our friends, colleagues can get back to life as normal across the Middle East. But we’re very optimistic about the longer term, the mid to longer term outlook for here. We remain very confident in terms of how we have positioned the company for the future and think that will present the opportunity for us to demonstrate meaningfully higher earnings power over the coming years. So again, appreciate everybody joining us this morning and look forward to visiting with everybody again in late July.

Operator

Thank you. Ladies and gentlemen, that concludes today’s presentation. We thank you for your participation. You may now disconnect and have a wonderful day.