Is National Oilwell Varco A Good Buy Over Schlumberger And Halliburton?

| About: National Oilwell (NOV)


Strong investment from the entire energy sector is generating demand for oilfield services companies.

Schlumberger, National Oilwell Varco and Halliburton are well positioned to capitalize on demand.

National Oilwell Varco is trading at a discount when compared to its peers.

Oil and gas drilling and exploration companies have been strong investments over the past two years. Unstable natural gas prices forced many companies to find liquid plays. That shift in the energy sector forced companies to invest heavily and, as a result, demand for oilfield services companies increased. Oilfield services companies provide the engineering, products and services that are necessary to complete complicated drilling and exploration activities. These companies also provide infrastructure, equipment and intellectual property to develop, explore, extract and transfer natural gas and oil.

With steady growth in the economy, oilfield services companies have realized record growth over the past two years. Further, economic indicators show more stability in the coming days. The entire energy sector is making massive investments to find new sources of production while enhancing existing assets. This, in turn, increases the demand for oilfield services companies like Schlumberger NV (NYSE:SLB), National Oilwell Varco (NYSE:NOV) and Halliburton Company (NYSE:HAL).

Where Does National Oilwell Varco Stand?

National Oilwell is spinning off its low performing distribution and transmission segment into a separate company on May 30, 2014. In my opinion, this spin off will reduce excessive operational inefficiencies and result in better profitability. It will be interesting to see if the company will be able to focus on its other two industry leading business segments after the spinoff: rig technology and petroleum services and supplies. Both segments generated massive growth in past quarters. In the fourth quarter, the Rig Technology segment generated revenue growth of 16% over the third quarter and 14% over the fourth quarter of 2012. The Petroleum Services and drilling segment is also thriving - in the fourth quarter it grew revenues by 6%.

National Oilwell recently split its remaining two business segments into four different segments: rig system, the new rig aftermarket segment, the new wellbore technology segment and the new completions and production solutions segment. I hope and believe that the new simplified business model will allow it to more easily execute its business strategies and fully promote and execute its products and services. Sometimes companies fumble and take too long to resettle. But, in the case of National Oilwell, it has organized its business so that it can continue to capture demand arising from drilling and exploration activities all over the world.

The company is looking to capitalize on rising demand. It invested heavily in both segments to increase and improve products, technology, facilities and services. These investments include strategic acquisitions of CE Franklin, Wilson and NKT Flexibles. These acquisitions enhanced its portfolio, with products such as composite tubulars, downhole drilling motors, progressive cavity pumps, flow line, sucker rod services and chokes. These acquisitions set up the company for future growth arising from deepwater drilling rigs, floating production technologies, jack-up rig fleet retooling and shale technology expansion. The company has also sold non-core assets to support payments for growth investments.

Where Do The Other Players Stand?

Halliburton Company with its innovative products and services is also benefiting from momentum in the oilfield services industry. The company has realized impressive growth over the past two years. In the first quarter it generated 13% revenue growth in the Middle East and Asian regions. In Europe, Africa and CIS, revenue growth was higher by 7%, and operating income was higher by 21%. Its products and services like perforating and testing, wireline technology, Multi-Chem service, completion tools, Boots and Coots activity and software sales led to record results. Overall, its strategic investments, innovative new technologies and operational efficiencies were the catalysts behind the success of the company. Going forward, Halliburton is expecting to generate single-digit growth on its top line and up to 20% margin expansion on its bottom line.

Schlumberger is among the top rated companies operating in the oilfield services industry. The company has generated revenue growth of about 15% in the past three years with its technology, integrated project management and information solutions products and services. Schlumberger's software and multi-client license sales in the Middle East, Australia, Asia, Ecuador, Argentina and North America are very strong. Further, the company is well positioned to continue growing. Schlumberger's cash position is also very strong. In 2013, its free cash flow was $5.8 billion, with dividend payments of only $1.6 billion.

Which Is the Better Buy?




Industry Average

Price/Earnings TTM










Price/Sales TTM





Forward PE




Rev Growth (3-Yr. Avg.)





Net Income Growth (3-Yr. Avg.)










Dividend Yield






All three companies have momentum and have generated strong growth. Halliburton has high multiples, but Schlumberger is still trading at attractive multiples. In addition Schlumberger is set to generate strong growth in 2014. Its dividends are also quite strong and the company has potential to sustain its returns.

National Oilwell, however, is trading at a discount when compared to its peers. It had generated very strong revenue and earnings growth. The demand for its drilling and petroleum products and services continues to be strong as demonstrated in recent quarterly results. The company has an order backlog of $16.35 billion, representing an increase of 27% from the past year quarter.

Amid all this, I make the buy call for National Oilwell. I think now is a good time to invest in this company while it is trading at a significant discount. Further, after the spinoff, I believe it will be able to produce much better results by focusing more on its core businesses. Its new simplified business model will also help it enhance operational efficiencies.

Further, its operating cash flows were at $3.3 billion when capital expenditures were only $669 million, and dividend payments are only at $389 million. Consequently, free cash flows are high at $2.7 billion. NOV has doubled dividends in 2013. However, its ability to pay dividends not only looks safe, it has significant potential for future dividend increases as both operating and free cash flows increase and continue to provide adequate cover to NOV's dividend payments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.