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National Oilwell Varco (NOV) is without a doubt one of the strongest, if not the strongest, oil services companies in world. The company's share of the oil service market is about 60% and National Oilwell has one of the best heritages and reputations in the business.

But how does the company stack up financially?

On closer inspection it appears that National Oilwell Varco has one of the strongest balance sheets around, with strong cash flows, low levels of debt and well covered liabilities. Additionally, the company's revenue and earnings are both growing at a rapid rate.

Revenue

$US Millions

2009

2010

2011

2012

4-Yr Compounded growth rate

Revenue

$12,690

$12,150

$14,650

$20,040

YoY Growth

-5%

-4.4%

17%

26%

36.6%

NOV has managed to improve its turnover on average 9% each year, for the past four years. Unfortunately, this is only an average figure and the company did suffer during 2009 and 2010 due to falling CAPEX spending by oil companies after the credit crunch.

Still, even with the declining spend by oil companies, NOV's revenue only fell by 5% in 2008-2009 and 4.4% 2009-2010 - these declines were soon recovered in the years after.

Indeed, while the majority of companies suffered rapidly falling earnings during the credit crunch, NOV remained strong and its repetitive aftermarket revenue streams and market leading position carried the company; indicating that the company should be able to drag itself through any future global recessions - unless we run out of oil.

The Gross Line

National Oilwell does not have to pay much to be able to manufacture its products. The nature of its goods means that they can be highly priced, giving the company a solid gross margin. This gross margin has remained constant from 2009-2011.

Having said that, this margin was eroded to some extent last year, contracting by about 4%. Although, this falling gross margin has been offset by the company's revenue growth.

Averaging 29% over the past four years NOV's 11% lower in 2012, which could be a red flag for investors.

$US Millions

2009

2010

2011

2012

4-Yr Average

Gross Income

$3800

$3840

$4450

$5310

Gross Margin

29%

31%

30%

26%

29%

Expansion/Contraction

-1%

2%

-1%

-4%

-11%

Little Surprises

One of the biggest surprises that lurk in income statements are unusual items and debt interest. Both can be highly indicative of a company's financial situation. For example, a company that has high, recurring unusual expenses could be trying to hide poor results, or attempting to camouflage losses as one-offs, without reveling to investors the true extent of its failings.

In addition, interest expenses and interest cover ratios can influence the company's future performance. In particular, rising interest expenses can constrict net income and a falling interest cover can signify rising debt and falling income - both of which could indicate that the company is heading for trouble in the future.

$US Millions

2009

2010

2011

2012

4-Yr Average

Unusual Expenses

$160

$4

-$9

-$51

Interest Expense

$53

$50

$40

$49

$48

Pre-tax Income Interest Cover (Times)

41

47

72

72

58

NOV's unusual expenses are recurring but as a percentage of total revenue they are almost non-existent. Furthermore, they are both positive and negative - indicating that the company has nothing to hide (note, I say indicating).

On the interest front, interest expenses have remained relatively static, declining slightly during 2011 but reaming at about $48 million for the four year period. However, taking into account the falling pre-tax income interest cover and rising revenues, it would appear that the company is increasing its borrowing. That said, with an interest cover of 58 times the company looks to be in no real trouble.

The Bottom Line

$US Millions

2009

2010

2011

2012

4-Yr Average

Net Income

$1470

$1670

$1990

$2490

Net Margin

12%

14%

14%

12%

13%

Net Income Growth

-32%

13%

19%

25%

69%

NOV has managed to grow its net income every year since 2009. However, during 2008-2009 there was a slight fall in the company's income. The company has managed to maintain its net margin over the four year period.

It is interesting to note that over the four year period, the company's revenue grew by a compounded 36.6%, meanwhile, its net income grew a compounded 69%, which shows that the company has improved its efficiency and been working to reduce costs.

The average net income margin for the past four years was 13%.

Cash Flows & Balance Sheets

$US Millions

2009

2010

2011

2012

4-Yr Average

Operating Cash Flow

$2,290

$2,100

$1,540

$2,140

Investing Cash Flow

-$552

-$743

-$1,460

-$3,430

13%

Financing Cash Flow

-$491

-$102

-$464

$2580

Free Cash Flow

$1,390

$1,140

$1,470

-$172

69%

Free Cash Flow as a % of Revenue

10%

9.4%

10%

-1%

Up to 2012 National Oilwell had solid cash flows.

2012 was influence by acquisitions and movements of working capital, which gave the company a negative free cash flow but this should not be a recurring situation. Overall, the company has managed to convert about 10% of its revenue into free cash flow, which allows the company to maintain its solid balance sheet as shown below, despite high levels of capital spending.

$US Millions

2009

2010

2011

2012

4-Yr Average

Current Ratio

2.3

2.3

2.2

2.8

2.4

Quick Ratio

1.3

1.4

1.4

1.5

1.4

Short Term Debt

$7

$373

$351

$1

Long Term Debt

$876

$514

$159

$3150

69%

Cash

$2620

$3330

$3540

$3320

Net Debt

-$1737

-$2443

-$3030

-$169

An average current ratio of 2.4 over the past four years further supports the financial strength of NOV, after striping out inventories the quick ratio has been 1.4 on average - still solid considering inventories make up 50% of the company's current assets.

National Oilwell has a strong cash balance that is only boosted by its free cash flow. The company increased debt during 2012 to pay for acquisitions, however, even after borrowing an additional $3 billion, the company still had a net cash balance, with minimal interest costs.

Shareholder Returns

$US Millions

2009

2010

2011

2012

4-Yr Average

Buybacks

0

0

0

0

Dividends

$460

$172

$191

$209

$258

As a % of Net Income

31%

10%

9.6%

8.4%

14.7%

NOV only returns a very small amount of its net income to share holders - although this does leave plenty of room for cash returns to shareholders in the future or expansion of the business/growth in shareholder equity.

Overall

So overall, National Oilwell Varco appears to be in a very good position financially. The company's revenue has been slowly growing over the past four years and net income has followed suit as the company's profit margins have remained steady.

Free cash flow is strong and this has given the company a strong balance sheet as it saves its earnings rather than spending them. The company increased its borrowing during 2012 but this was to purchase an additional business, which should be earnings positive this year - the company still has a net cash balance.

Finally, shareholder returns are small but the company's solid growth, free cash flow and strong balance sheet, in my opinion, more than outweigh the low shareholder returns.

Source: A Quick Look At National Oilwell Varco's Finances