National Oilwell Varco: A Good Buy After Spin-Off And Gigantic Dividend Increase

Jun. 4.14 | About: National Oilwell (NOV)


Oilfield industry is on momentum.

National Oilwell Varco spin-off will make it a better company going forward.

National Oilwell Varco announced a gigantic increase in dividend, which looks sustainable.

National Oilwell Varco is trading at attractive multiples and offers the highest yield compared to the peers group.

National Oilwell Varco (NYSE:NOV) is one of the best companies operating in the oilfield services industry. It has completed the recently announced spin-off of its low performing distribution and transmission segment into a separate company, NOW Inc (NYSE:DNOW). Shareholders of NOV will receive one share of NOW against four shares of NOV as a result of the spin-off. This spin-off will allow National Oilwell to focus more on its other two high performing business segments. These two segments have generated strong growth for the company over the years. In the fourth quarter, its Rig Technology segment had generated revenue growth of 16% over Q3 and 14% over the Q4 of 2012. The Petroleum Services segment is also thriving - in the fourth quarter it grew revenues by 6%.

In the first quarter of this year, its rig technology segment continued momentum as the company has received more than $2.3 billion of drilling capital equipment orders. In total, NOV's rig technology segment has a record order backlog of $16.3 billion. NOV won drilling equipment orders for 17 jack-up newbuilds and three floaters in the latest quarter, representing strong offshore demand. On the other hand, its Petroleum Services segment has produced 5% revenue growth over the past year quarter. Petroleum Services business is expected to generate mid single digit growth in revenues in this year as demand for its downhole technologies, including downhole motors and agitators is increasing. Further, demand for composite pipe, coiled tubing and four and five inch drill pipe is very encouraging.

After the spin-off of its distribution and transmission segment, NOV's business model looks simplified. But, NOV has further simplified its business model by splitting 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. The new business model will allow it to focus in-depth on each segment, and this will enhance its operational efficiencies and allow it to easily execute its strategies.

In addition, recently, NOV has made significant investments in both old 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 NOV's 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.

Overall, NOV management looks confident on its strategies, and thus it has announced a huge increase of around 75% in its quarterly dividends. This increase took its dividend yield to 2.42% from 1.37%. The company has strong cash generating potential which allowed it to make a significant increase in dividends. In the past year, it has generated operating cash flow of $3.3 billion, capital investment was at $669 million, and thus free cash flows were very high at $2.7 billion, when dividend payments are only at $389 million. Huge gap in free cash flows and dividend payment offered a lot of room for that increase.

Where Do Other Players Stand?

National Oilwell Varco's main industry peers are Halliburton Company (NYSE:HAL) and Schlumberger (NYSE:SLB). Both companies have generated impressive growth in the previous years with the strong demand for oilfield services and products. Halliburton with its innovative product and services like perforating and testing, wireline technology, Multi-Chem service, completion tools, Boots and Coots activity and software sales led to generate record results. In this year, it is expecting to generate single digit increase in revenues and double digit growth in earnings. On the other hand, Schlumberger has generated a 15% increase in its top-line in the past three years, and with its software and multi-client license sales momentum, it is well set to generate healthy profits in this year. HAL and SLB have been generating massive cash flows which are in excess of their dividend payments and capital requirements.

In Conclusion

National Oilwell Varco is setting strong footholds for future growth. Its strategy of separating its distribution business will allow it to focus more on remaining business, which are already generating record growth for the company. Its strategy to further simplifying these segments will give more strength to its business. The company's initiative of creating more value for shareholders makes it a better pick for the long-term investors. In the past five years, NOV has been able to make dividend increases of 360%, and the latest dividend increase of around 75% makes it a good buy for dividend investors. Its new dividend yield of around 2.42% make it an interesting pick for dividend investors. I believe its dividends are safe as the company has potential to generate strong cash flows. On the other hand, SLB and HAL are offering lower dividend yields and are trading at high multiples compared to NOV. NOV is trading at only 13.5 times to earnings and offers a dividend yield of 2.42%, while SLB is trading at 19 times and HAL is trading at 21 times with a dividend yield of around 1.4% and 0.9%.

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.