NOV (NYSE:NOV) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
NOV, Inc. reported third-quarter 2026 revenues of $2.23 billion, a 4% increase sequentially and 2% year over year, with net income of $90 million and adjusted EBITDA of $281 million.
The company emphasized strategic priorities of improving profitability and capitalizing on growth opportunities, with improved margins and operational efficiencies across segments.
The future outlook includes strong potential in offshore and international unconventional markets, with expectations of significant investment in high-specification equipment and technologies.
Operational highlights included over 20% growth in the Middle East despite logistical challenges, strong orders in Argentina’s Vaca Muerta, and increasing adoption of digital technologies in North America.
Management expressed confidence in achieving $1.5 billion in annual EBITDA, citing favorable market conditions and operational improvements, with expectations of strong bookings in 2027 driven by offshore FIDs.
Full Transcript
OPERATOR
Good day, and thank you for standing by. Welcome to the third quarter 2026 NOV, Inc. earnings conference call. At this time, all 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 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 that 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. Ma’am, please go ahead.
Amy D’Ambrosio (Director of Investor Relations)
Welcome everyone to NOV’s third 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 10-K and 10-Q 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 third quarter of 2026, NOV reported revenues of $2.23 billion and a net income of $90 million, or $0.25 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.
Rodney Reed (Chief Financial Officer)
Thank you, Jose. Consolidated revenue for the quarter was $2.23 billion, an increase of 4% sequentially and 2% year over year. Net income was $90 million, or $0.25 per fully diluted share. Operating profit was $142 million, which included $28 million in pre-tax other items and an $18 million net write-down of fixed assets, primarily related to facility closures. Adjusted operating profit was $188 million, or 8.4% of sales, and adjusted EBITDA totaled $281 million, or 12.6% of sales.
During the quarter, we paid dividends of $32 million and repurchased 800,000 shares for $15 million, bringing our total shares repurchased over the past 10 quarters to 44.5 million shares for $689 million, over 10% of shares outstanding. For the full year, we’ve returned $242 million to shareholders excluding the $32 million supplemental dividend in the second quarter. Free cash flow for the quarter was a use of $47 million as the ongoing conflict in the Middle East delayed certain milestone billings and collections, and our supply chain teams continue to maintain inventory buffers.
Given ongoing disruptions to logistics, we expect a significant improvement in free cash flow, with working capital as a percentage of fourth quarter annualized revenue to be around 25%. We also anticipate our conversion of EBITDA to free cash flow in 2027 will return to the 50% range. Full year capital expenditures should be between $340 million and $360 million, and we forecast our annual effective tax rate to be around 30%. We delivered 35% sequential incremental EBITDA margins in the third quarter, and after delivering 80% incremental margins in the second quarter due to our improving cost structure and operational efficiencies, including our fourth quarter guidance, we expect the team will deliver around 7% revenue growth from the first half to the second half of 2026 with strong incremental EBITDA margins in the mid-40% range, excluding tariff refund benefits.
Moving to our segments, starting with Energy Equipment, third quarter revenue was $1.22 billion, flat sequentially and down 2% year over year. EBITDA increased to $187 million, or 15.3% of sales, a year over year improvement of around 90 basis points, driven by strong operational execution and improved margins and backlog. Capital equipment sales accounted for 63% of the segment’s revenue, with increased demand for drilling and production equipment partially offsetting the higher contribution of certain offshore projects in the prior year that have been completed.
Aftermarket sales and services were 37% of segment revenue, essentially flat compared to the prior year as improving drilling aftermarket activity offset lower aftermarket revenue from our Intervention & Stimulation Equipment business. Capital equipment orders for the third quarter were $577 million, a 22% increase sequentially, resulting in a book-to-bill ratio of 91%. Orders reflected solid demand for offshore production and marine construction equipment.
We continue to expect our order intake in the second half of the year to outpace the first half, but anticipate our book-to-bill ratio will remain below 1x. However, as Jose discussed, given the robust outlook for offshore FIDs, we expect 2027 bookings to meaningfully exceed 2026 and 2025. Our subsea flexible pipe business achieved its seventh straight quarter of year over year revenue, EBITDA, and margin growth, supported by strong execution on a higher-margin backlog. Outlook for the business remains bright, and we continue to anticipate industry demand for flexible pipe to exceed supply through the end of the decade. Additionally, the business is expanding solutions for customers, booking the first award of our proprietary subsea automated pig launcher, which enables remote automated pipeline inspection, or pigging, without a vessel.
As subsea tiebacks lengthen and vessel availability tightens, we see future opportunities for these systems. Revenue in our Process Systems and Marine Construction business declined year over year, reflecting higher prior-year contribution from projects that were recently completed. Strong execution on higher-margin backlog resulted in improved EBITDA margins. We continue to see strong demand for our processing technologies, mooring and gas offloading equipment, and offshore construction cranes, which drove the majority of the segment’s orders this quarter.
Looking ahead, as Jose mentioned, we see very positive trends in the offshore development pipeline with deeper, higher gas and gas condensate reservoirs and, in some cases, harsh metocean conditions. These trends expand the need for advanced and larger gas processing equipment, turret mooring systems, and subsea flexible pipe, all of which are critical technologies where NOV has strong competitive advantages. Our Production and Midstream business unit achieved double-digit year over year growth, reaching its highest quarterly revenue ever. The business also recorded record orders supporting the buildout of pipeline capacity in Argentina and production optimization projects in Oman, Nigeria, and Venezuela. The team also realized over 20% growth in North America from higher sales of production chokes and pumps. Our drilling capital equipment revenue increased double digits both sequentially and year over year, led by strong execution from our Saudi rig manufacturing team and improving demand for our latest drilling equipment and automation technologies.
Turning to our aftermarket business, revenue from drilling aftermarket increased in the low single-digit percentage range both sequentially and year over year, supported by improved spare parts sales and higher service and repair work. Improving day rates and floater utilization are supporting demand for services, repairs, and upgrades. After two straight quarters of year over year double-digit growth in spare parts bookings, backlog for spare parts increased in the high-teens percentage range compared to the third quarter of 2025.
In summary, Energy Equipment continues to deliver strong financial results with margins expanding for four straight years, and given what we anticipate through year end, we expect that to extend to five years. Additionally, with offshore FIDs in 2026 and 2027 expected to exceed 2024 and 2025 by around 50%, we anticipate strong bookings in 2027 and 2028, which, combined with driller floater utilization that should reach a 12-year high, positions the segment well for growth.
For the fourth quarter, we expect revenue in our Energy Equipment segment to decrease 4% to 6% compared to the fourth quarter of 2025, as growth in drilling aftermarket will be more than offset by the completion of certain offshore production-related projects. We expect EBITDA to be in the range of $175 million to $205 million. Moving to the Energy Products and Services segment, our Energy Products and Services segment generated revenue of $1.06 billion, an increase of 9% both sequentially and year over year. Adjusted EBITDA totaled $153 million, or 14.5% of sales, excluding tariff refund benefits. Third quarter EBITDA incrementals were 39% sequentially, led by strong performance from our drill pipe, drill bits, fiberglass, and artificial lift businesses. For the third quarter, the sales mix within Energy Products and Services was 50% service and rental, 32% capital equipment, and 18% product sales.
The segment’s service and rental revenue increased mid-single digits both year over year and sequentially. NOV Digital achieved record quarterly revenue, increasing by double-digit percentage year over year and sequentially from market share gains and growing adoption of our digital completion technologies. Our ReedHycalog drill bit business delivered another strong quarter, with revenue growing over 20% year over year. Growth was led by additional market share gains in U.S. land, where revenue grew 30% year over year, in addition to greater adoption of higher-performance cutters in international unconventionals.
With revenue growing in Latin America and the Middle East, our downhole tools business followed similar trends, delivering low double-digit percentage growth year over year and sequentially. The business unit benefited from strong year over year revenue growth in Latin America and the Middle East from increased rentals of drilling motors supporting our customers’ focus on efficiency developing their unconventional resources. Our Wellsite Services business had essentially flat revenues; however, EBITDA margins improved both sequentially and against the prior year. The higher margins were the result of accelerating adoption of our INOVA Therm processing technology, which provides more efficient handling of drilling cuttings, and increased utilization of TundraMax temperature control systems, as well as exiting lower-margin markets.
Capital equipment revenue for the segment increased mid- to high-single-digit percentage range year over year and sequentially. Revenue from our Fiberglass Systems business increased mid-teens percentage year over year and low double digits sequentially, led by strong demand from oil and gas markets and record sales for our fuel handling products. In the Middle East, we realized strong growth in demand for our spoolable pipe for the buildout of production infrastructure, while in the U.S. we significantly increased deliveries for larger diameter composite pipe for produced water systems.
In West Texas, strong bookings momentum continued, with the business unit achieving its fourth straight quarter of book-to-bill greater than 100%, with a backlog 30% higher than last year, and demand increasing. We expect to see continued growth for this business. Our drill pipe business also had a strong quarter, with revenue up around 20% year over year. Trailing 12-month book-to-bill exceeds 120% with increasing demand for offshore and larger diameter pipe, and backlog improved 50% year over year.
Product sales increased 5% year over year and low-teens percentage sequentially. Growth was led by increased sales of drill bits and drilling tools into the Eastern Hemisphere and ESPs in the U.S. In summary, increasing adoption of our digital solutions, higher-performance technologies that enable efficiencies and longer laterals, and improving manufacturing throughput on a growing backlog of capital equipment led to strong top-line growth with solid incremental margins.
For the fourth quarter, we expect Energy Products and Services segment revenue to be up 6% to 8% year over year and EBITDA in the range of $140 million to $160 million. With that, I’ll turn the call back to Jose.
Jose Bayardo (Chairman, President and CEO)
Thanks, Rodney. Before we open the call for questions, I’ll leave you with a few thoughts. We’re seeing a broad recovery across many of our key markets, particularly in areas NOV has strong technology positions and significant opportunity to participate, and we are pleased with the progress we’re making against the two priorities I mentioned at the beginning of the call: improving profitability and positioning NOV to capitalize on attractive growth opportunities.
That combination gives us increasing confidence in our ability to deliver materially stronger earnings, cash flow, and return on capital over the coming years. Our focus remains on execution, serving our customers well, and converting the opportunities in front of us into long-term value for our shareholders. With that, we’ll open the call for questions.
OPERATOR
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In fairness to all, we ask that you please limit yourselves to one question and one follow-up. One moment while we compile our Q&A roster. Our first question will come from the line of Arun Jayaram with JPMorgan Securities. Your line is open. Please go ahead.
Arun Jayaram (Analyst at JPMorgan Securities)
Yeah, good morning. Yeah, good morning, Jose and Rodney. I wanted to see if we could kind of zero in on thoughts around energy equipment as we approach 2027. We see two kind of trends. Jose, as Rodney mentioned, you know, book-to-bills have been trending, you know, below one for just a few quarters. But you did highlight expectations around strong order momentum in 2027 with Flexibles and offshore production equipment. Can you just talk us about how you think those two kind of forces will play out as we think about 2027?
I know we ourselves are modeling low single-digit growth in energy equipment next year, but just want to get your thoughts on that.
Jose Bayardo (Chairman, President and CEO)
Yeah, appreciate the question, Arun. Look, you know, as we spent a bit of time there, prepared commentary really talking about the outlook for 2027 and kind of what we see in the pipeline and short takeaway is it looks fantastic to us and really wanted to spend a little bit of extra time this morning highlighting what we see and why we and quite frankly I think the rest of the offshore equipment community is so optimistic about the outlook for 2027.
So you know, really as it relates to the overall performance of this segment and of the business as a whole, offshore production is just one component, but it has been and continues to be a large component of our bookings and our revenue base going forward. So probably helpful to talk just a little bit more about sort of the bookings cadence, not just 27, but kind of what we’ve seen year to date and where we see it going. You know, first of all, you know, as we anticipate and as we’ve been communicating for really since the end of last year, we saw a nice step up in bookings from the rate of intake that we saw in the first half of the year.
So 91% book-to-bill in Q3. The question is, and as we kind of touched on that, we really see a lot of excitement around 27. Let’s talk about Q4 a little bit because I know it’s top of mind for a lot of folks. You know, for us to hit the range that we’re talking about previously, the 90 to 100% range, we’d need to hit—obviously, it’s simple to do the math—around 750 million or so in bookings in Q4. And with what we’re seeing in terms of timing of certain projects at this point, we think that range is probably a little bit ambitious.
So the best estimate right now is that we’ll finish the year with a book-to-bill of between, call it, 85%, and we obviously see that moving considerably higher in 2027. Look, I don’t want to downplay the importance of bookings, but one of the things I want to remind folks of is that we currently have $4 billion in backlog, so we’re in great shape. Also, keep in mind that only about 28% of our revenue comes from the formerly reported capital equipment backlog. And as we’ve tried to highlight, we obviously have other parts of the business that don’t formally report backlog, but those are still capital equipment businesses and they’re doing great right now.
Right. So rig aftermarket, also within the energy equipment segment, five straight quarters of a building backlog. Our fiberglass systems business, four quarters in a row with a book-to-bill of greater than 100%, backlog up 30% versus last year. And our drill pipe business, 120% book-to-bill over the last 12 months and backlog up over 50% year over year. Put those three components together and that’s effectively more than another billion dollars of backlog and so feel really good about the direction of the business going forward.
And I think specifically as it relates to the EE segment in 2027, we have seen really good performance from that segment over the last four years with improving margins over that time frame, improving backlog, improving revenue, improving throughput through our manufacturing operations. And obviously, if, as Rodney highlighted, we meet the midpoint of our guidance for Q4, it will be five straight years of margin improvement. You know, as we get into 2027, we certainly see order intake picking up significantly with what we see in the pipeline.
And we try to cast a light on that. You know, how much the growth in revenue out of backlog improves during the course of 2027 will depend on the timing of when those orders land. And usually there’s a slow startup on projects, so anticipate momentum to continue to build through the second half of the year. But really as we look at EE’s upside potential for 2027 versus 2026, the thing that we’re most excited about is what we’re seeing in our drilling aftermarket business where, as we highlighted, backlog has been improving steadily and, as you’ve heard from our customers, including one yesterday, the pace of deepwater drilling tenders has accelerated significantly. Day rates have reached $500,000 a day leading edge. That’s driving a lot more rigs that will be turning to the right in the second half of 2027.
More opportunities for just routine spare part sales, more opportunities for upgrades, and probably a few large reactivation projects. And you know, really if we look at our rig project backlog, it’s been growing at a pretty healthy clip and right now I think it’s the highest level of project-related backlog that we have since 2024. So feel really good about the outlook for the EE segment in 2027 and sorry for providing probably more detail than you wanted.
Arun Jayaram (Analyst at JPMorgan Securities)
We always appreciate the color, Jose. We’ve observed from a number of different OFS conference calls, maybe a different perspective on how the Middle East will move forward thinking about 4Q and maybe into 2027. Can you maybe just highlight what you’re seeing on the ground? You did mention that there are some impacts to drilling activity from the security situation, but love to hear what you’re seeing and embedding in terms of your 4Q outlook.
Jose Bayardo (Chairman, President and CEO)
Yeah, first and foremost, hope and pray for a very quick resolution to all the tensions in the region. But secondly, I wish I had a crystal ball to where I could tell you exactly what’s going to happen, Arun, but it’s really not possible right now. You know, I was in the Middle East the last week of September visiting with customers and it’s an interesting environment and, frankly, a very constructive environment from the operators in the region. Look, they understand the importance of what they do for the global community and they are obviously struggling right now from a logistics standpoint, both in terms of getting what they need into the region, but also very importantly getting commodity out of the region to provide that energy flow that the rest of the world really needs.
But they are intent on making sure that they can quickly and efficiently respond when conditions present themselves to when they can ramp up production activity and the flow of oil and gas out of the region. So one of the things I wanted to emphasize in the prepared commentary is just the importance of and the long-term value of the region to the world and to NOV’s business, you know, specifically to us. Short term, as we touched on, is embedded within the guidance, you know, due to rigs that have been suspended and customers that have adjusted their drilling programs here near term. What we’re currently seeing is that we expect the Middle East to be down in the mid-single-digit range for Q4 and hard to predict what happens beyond that at this point.
Arun, thank you very much.
Rodney Reed (Chief Financial Officer)
Thanks, Arun.
OPERATOR
Thank you. And our next question will come from the line of Jim Rollingson with Raymond James. Your line is open. Please go ahead.
Jim Rollingson (Analyst at Raymond James)
Hey, good morning everyone. Jose, when we were on the road last month, you know, you talked a bit about aftermarket, rig aftermarket, and you just in answering Arun talked about it a little bit more. You know, my math is you’re probably on track to be down about 400 million or so of revenues this year versus 24, which is when the offshore rig count last peak. And when you kind of look at what some of your, you know, customers are saying, what you guys have said, Rodney, talking about getting back to a 12-year high in the floater market, just maybe help us understand a little bit how we should think about the timing of aftermarket ramping back up as the offshore activity ramps back up.
Jose Bayardo (Chairman, President and CEO)
Yeah, good question, Jim. And directionally you’re right with kind of where we sit today. And that really presents the opportunity for the upside that we’re talking about. And as I tried to convey in the response to Arun, you know, we’re seeing this gradual improvement and Rodney gave some specifics in terms of the percentage increase, five straight quarters in a row of effectively continued modest improvements in that backlog that have set us up really well for the coming year.
But expect that to continue to move forward as more and more rigs come online. Right. So the number of rigs that will be turning to the right in the second half of the year will be a bit higher than certainly where we sit today. So we think we’ll continue to see a steady progression in terms of demand for spare parts. And over time, as those day rates continue to tick up, that will create more incentive for people to not only drive more upgrade opportunities to us, but also some of the last remaining and, frankly, somewhat sizable reactivation projects.
So there’s already more talk of those taking place. But basically we expect to continue to see a steady ramp with second half of the year being a good improvement over the first half.
Jim Rollingson (Analyst at Raymond James)
Appreciate that color. And as a follow up, and I don’t know if you have an easy answer to this, but you talked a lot about this kind of unconventional opportunity that’s blossoming internationally and kind of following on all the technologies that you’ve developed in North America over the past decade plus, how do you put the scale of that international unconventional opportunity maybe relative to what you’ve been able to generate over time through the North American side of things?
Jose Bayardo (Chairman, President and CEO)
Yeah, to be determined exactly how large that becomes, Jim. But it’s going to become an increasing mix of the energy market going forward. Right. As we look forward, our best view is that there are going to be two primary drivers of incremental production to meet the world’s growing demand for oil and gas. And you’ve got deepwater offshore, which has incredibly compelling economics, but those are huge investment opportunities and longer-cycle barrels.
And then you have international unconventional resources, which are still, quite frankly, in the very early days, but ramping pretty quickly. You know, right now, obviously a lot of momentum in international unconventionals has been down in Argentina with Vaca Muerta, which is full speed ahead and continuing to accelerate. The other most mature area and rapidly accelerating area was the Middle East. To be determined how things evolve within that region, given what we just discussed with Roon’s questions.
But over the long run, that will continue to ramp, I think, in a pretty meaningful way. And as we touched on other areas of the world, North Africa, Australia, there will be more in Asia that will move forward. So, you know, over time, I wouldn’t be surprised if that sort of supply base started to get in line with what we’re seeing in North America over the distant future. Now, we’ll see exactly how that, how that, how that works. Obviously, North America came online first and most quickly and efficiently for an important reason that we have to keep in mind, and that’s ownership rights, entrepreneurship, and the amazing efficiencies that the industry in North America brings to the table. And that’s hard to replicate in other parts of the world, but a lot of good progress is being made ultimately.
How much market share unconventionals gain overseas will ultimately depend on the adoption of incredibly efficient, leading-edge, high-spec equipment, which will be in their favor because we’re getting better and better every single day at what we do. And then the cultural element, which I think the wheels in motion to make significant improvements on both those fronts. So we’re obviously optimistic about that opportunity for us and for the global community to continue to have more sources of reliable and economic sources of energy.
Jim Rollingson (Analyst at Raymond James)
Appreciate your thoughts.
OPERATOR
Thank you. And our next question will come from the line of Mark Bianchi with TD Securities. Your line is open. Please go ahead.
Mark Bianchi (Analyst at TD Securities)
Thank you. First question. Hey guys, good morning. First question on EE and on this guidance here for fourth quarter. If I look at sequentially, revenues up a little bit, and if I kind of strip out the tariff recovery there in third quarter, it looks like you’re not getting a ton of margin leverage. I guess perhaps that’s mix, but I don’t know if there’s anything else going on there. I would have thought that maybe you get better margin leverage on that revenue increase.
Jose Bayardo (Chairman, President and CEO)
Yeah, it really is mix. I mean, obviously things shift from quarter to quarter, and we obviously saw a favorable mix and also, frankly, really good execution here over the last few quarters to drive really healthy incremental margins across the board, not just in EE, but in both segments. As we go into Q4, we anticipate that that will be a little bit less favorable. And also, while we do have a big pickup in our aftermarket business, it tends to be more service and repair, which is a little bit lower margin than what we get from just a large ramp up in terms of spare parts sales.
Those are the couple pieces. I think, Mark, one, you typically have a little bit more Eastern Hemisphere product sales into the fourth quarter. However, with this fourth quarter, for some of the reasons that Jose laid out earlier, that’s probably a little bit more moderated Q3 to Q4. And also the other thing that we’re seeing still is high freight cost. So freight cost year over year are up about 20%. And just with our anticipation on where things are right now, we think that sort of Q3 to Q4 costs are probably a little bit more elevated too.
Mark Bianchi (Analyst at TD Securities)
Okay. And maybe building on that, as we think of it as perhaps a, you know, a starting point for thinking about 2027, you know, do you think mix changes a lot? You know, we’ve got this, the offshore stuff that you guys have been talking about so much already on the call, like how does that contribute? And then do you get recovery of the freight costs at some point? Is there a lag in pushing price through to recover that? Maybe just try to talk about how much of a good reflection of the normal business this is and how we should think about it, building up to 27.
Jose Bayardo (Chairman, President and CEO)
Yeah, Morgan, I think we talked a bit on one of the prior answers related to the expectation in 2027 and the pace of improvement and the general mix. As we mentioned, you know, capital equipment will continue to grow. Some of that growth will be dependent on the timing of when orders come in. But what we see is more of the growth opportunity in EE segment into 2027 is the aftermarket business, which should drive margins higher. Right now, as it relates to inflationary forces — so broadly speaking, outside of the Middle East — we’ve gotten to a point where the severe headwinds that we saw over the last few years from inflation as well as tariffs hopefully are behind us, and we are now at the point where we’re starting to outpace that inflation and drive margins higher for the most part.
Pricing is the next leg. Right. We think about the state of the industry today. While things are much improved and the outlook is really fantastic, I think whether it’s us in the equipment space or the more traditional service space, there really hasn’t been much in the way of pricing yet. And while I hate the compressed-spring type analogy, I can’t think of a market environment that applies to more than it does today. So, as I’ve mentioned a couple of times, I think we’re nearing a point where excess supply of the type of desirable equipment that’s out there is at its limit.
That’s going to require our service company and contractor customers to invest more in their asset bases, but they’re not going to do so without good improvement in pricing. I think we’re very close for the market to see that. Nobody wants to speculate on the precise timing of that. But I’ll be very surprised if we don’t see material improvement in 2027. Specifically related to the Middle East, obviously more challenged from an inflationary standpoint due to the logistics element that you’re asking about. And obviously, in an environment in which activity levels are coming down due to those changes in drilling programs that we touched on, all of a sudden that market has a little bit of excess capacity.
So that hurts demand and it also hurts the ability to continue making progress on pricing and makes it difficult to offset some of the inflationary costs associated with logistics. However, we are making progress on it and have been pleased with how constructive the dialogue has been with certain customers related to them absorbing those additional logistics costs. But in general, still a headwind right now, but feel pretty good about the direction things are headed.
Mark Bianchi (Analyst at TD Securities)
Great. Thanks for that, Jose. I’ll turn it back.
Jose Bayardo (Chairman, President and CEO)
Thanks, Mark.
OPERATOR
Thank you. And one moment for our next question. Our next question will come from the line of Alexis Barrino with Goldman Sachs. Your line is open.
Alexis Barrino (Analyst at Goldman Sachs)
Hey, good morning team, and thanks for taking our question. We just wanted to ask about free cash flow. Can you talk about some of the moving pieces there? And then as we look into 2027, how should we think about that normalized conversion rate and is there any opportunity for that to structurally improve?
Rodney Reed (Chief Financial Officer)
Yeah, thanks for that, Alexa. This is Rodney. So, yeah, I’d say free cash flow impact for Q3 and really for the first nine months of the year has really been affected by two discrete items. Number one is milestone billings. So that really relates to some projects that are ongoing in the Middle East. So if you look at our free cash flow, that was really a reflection of some working capital build. This sort of contract asset/contract liability piece is about a third of that.
And I think that starts to turn around and improve in the fourth quarter, quite frankly. Number two, the other discrete item is really related to inventory. And we’ve talked about this one before — just with the ongoing logistical challenges where there’s more variability in on-time delivery, our teams have built in a little bit more of a buffer into safety stock levels and just into the supply chain overall. So that will continue to take a little bit more time to moderate. You know, I think we’ll see a little bit of improvement in Q4, but that will continue into the first half of the year.
And then the other part on inventory is, as Jose mentioned earlier, if you look at our Grant Prideco drill pipe business, backlog is up about 50% year over year. Our fiberglass business is up 30% year over year. So a little bit more inventory levels there as Q4 and Q1 have higher revenue growth. So it’s really those two discrete items — I’d call them more transitory than structural. Nothing structurally changed with our business. It’s really the milestone billings and inventory.
As we look into 2027, which is the other part of your question, we do think we get back to that 50% range on EBITDA to free cash flow conversion. So as I mentioned, I think most of the milestone billings start to make some progress in Q4, a little bit more in Q1, inventory levels start to normalize. And then the other thing that helps in 27 is what Jose had laid out earlier in terms of some bookings opportunities. And that means that along the way on some milestones, you’re typically pretty cash flow positive throughout those projects, in particular in the first part.
So that’s where we kind of stack up, 27.
Alexis Barrino (Analyst at Goldman Sachs)
Okay, that’s very helpful. And then just as a follow up, understand it’s tricky to make a call on Middle East activity from here, but would just love to dig deeper on some of the other regional commentary as we kind of think ex-Middle East. How are you thinking about 2027 shaping up? You’ve talked about some key regions including Latin America and elsewhere. Just curious. Any other thoughts?
Jose Bayardo (Chairman, President and CEO)
Yeah, Alexis, look, obviously there’s been a lot of commentary by our peers related to 2027 outlook and I think our messaging will be somewhat similar, which is that it’s really premature to talk about that overall. However, you know, we can talk about things with the framework that others have applied, which feels like consensus for the space seems to be shaking out around mid-single-digit growth for next year. Obviously there’s some puts and takes to that and I think related to, you know, your question, it’s hard to provide any sort of real visibility into Middle East.
So I think that mid-single-digit is implying sort of flattish activity within the Middle East region, meaning more healthy activity elsewhere around the globe, which makes sense based on what we’re seeing around the world. We obviously spent a lot of time talking about the deepwater environment which is going to continue experiencing very robust growth, but also anticipate we’ll continue to see North America move higher as well as really all other producing regions of the world. And in that environment, again, premature to talk about specifics related to 2027, but with what we see in terms of the tightness of the market on the capital equipment side ex-Middle East right now, we think we should be able to outpace that sort of general industry rate.
But it will be, as we touched on within several of our businesses, steady improvement, second-half weighted higher than the first half, and we expect to continue to drive more process improvement efficiencies across the organization and drive margins a little bit higher. So I think that’s really all we can say at this point. I mean generally the industry backdrop is very constructive and next quarter you’ll obviously receive our Q1 guidance and probably some more detailed commentary related to 2027.
However, as you guys know, we don’t typically provide full-year guidance. We’ll turn it back.
OPERATOR
Thank you, thank you, thank you. And one moment for our next question. Our next question will come from the line of Stephen Gingaro with Stifel. Your line is open. Please go ahead.
Stephen Gingaro (Analyst at Stifel)
Thanks. And good morning, everybody. I think two things for me. The first, this follows up, I think, on Mark’s question earlier. You mentioned pricing, I think, Jose, in your response to Mark’s question on margins. Can you give us just kind of an overview of where pricing currently sits versus the recent troughs and maybe in some context historically on just some of the bigger product lines?
Jose Bayardo (Chairman, President and CEO)
Gosh, Stephen, it’s impossible to answer that with perfect precision given the explosive inflation that we’ve seen over the last five years or so. Right. So obviously today as we sit here, we are at meaningfully higher pricing than when we were in the past. However, as has been reflected in our margins, particularly within our EPS segment, what you have seen is that we have not—things have changed so quickly, not just from an inflationary standpoint, but also the emergence of tariffs—that over the last couple of years, you know, the inflationary forces combined with deterioration in terms of overall industry activity levels have eroded our margins not because we haven’t moved our pricing up, but just because we haven’t moved pricing up quickly enough.
Given the market environment here over the last couple of quarters, I think you’re starting to see our pricing and, frankly, our internal efficiencies beginning to outpace those inflationary forces. So feel really, really good about where things are headed and really good about our ability to get back to the type of margin levels that we saw in the past. I know your Mark questions seem to be revolving around the EE segment, which is obviously important. However, EE has been doing fantastic, right? I mean we’re about to hit five straight years of improved margin performance and certainly see the potential to drive that higher, with higher aftermarket activity into 2027 and beyond. You know, the real opportunity for us, though, to drive things—to drive some more meaningful improvement—is within our EPS segment.
We’re starting to demonstrate that capability. But look, you know, you go back to the 24-type timeframe and we were at an upper-teens margin in that business. So the segment’s currently at 14 and a half percent margins. If we’re able to drive that up 300 basis points back up to 17 and a half, to be a little bit lower than sort of the recent peak, you know, that’s another $120 million of EBITDA that we can drive. And so, you know, one of the reasons why we are so optimistic related to our ability to hit that $1.5 billion in EBITDA—there’s really three primary components and buckets to think about there.
One is certainly the rig aftermarket opportunity, which is probably roughly $100 million of EBITDA that we can drive if we get back to recent high-water marks; $120 million from the EPS segment, which will really come in the form of, yes, some pricing, but also some more volume, better mix as we’re seeing more and more growth from the capital equipment components of that segment; and then continued operational efficiencies. And so we don’t really need any one single component to get us there.
But they all seem to be moving in the right direction right now. So it gives us a lot of confidence there. And then there’s an additional $180 million on top of today’s current run rate that we need to achieve and think we can do that through some modest improvement in volume, driving more efficiencies in other components of the business and, again, more pricing across the portfolio. And so we feel really good about our ability to drive earnings, margins, and return on capital meaningfully higher over the coming years.
Stephen Gingaro (Analyst at Stifel)
Thanks, Jose. You basically answered my second question because one of the things we hear is can you get to a billion five of sort of that basically target you’ve laid out? And it sounds like you can get there without kind of anything heroic from an activity level perspective.
Jose Bayardo (Chairman, President and CEO)
That’s absolutely right, Stephen. That’s the scenario that we tried to build for everybody last quarter. And every quarter, every month, every week, every day that goes by, we’re getting increasingly confident about our ability to hit it.
Stephen Gingaro (Analyst at Stifel)
Great. Thank you, Jose.
Jose Bayardo (Chairman, President and CEO)
Thanks, Stephen.
OPERATOR
Thank you. And this will conclude today’s question and answer session. And I would now like to hand the conference back over to Jose Bayardo for closing remarks.
Jose Bayardo (Chairman, President and CEO)
Thank you, Michelle. And thank you, everybody, for joining us this morning. Appreciate your participation in the call and look forward to talking to you again in about three months.
OPERATOR
This concludes today’s conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.
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