Oil prices have continued to fall sharply, and no sign of recovery fundamentally or technically has been seen yet, as shown in the charts below. Nevertheless, I recommend some energy companies that have better chances to continue to make profits in the current low oil prices environment, have low debt to equity ratio and continue to pay a generous dividend. Although no sign of oil price recovery has been seen yet, oil prices will eventually recover sooner or later, creating an opportunity for those companies to achieve high capital gains.
Brent Crude Oil, February 2016 Leading Contract
WTI Crude Oil, February 2016 Leading Contract
Charts: TradeStation Group, Inc.
National Oilwell Varco (NYSE:NOV) is a worldwide leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production operations and the provision of oilfield services to the upstream oil and gas industry. NOV has seen its earnings and shares price falling sharply as a result of the crash in oil prices. Since the beginning of 2015, NOV's stock is down 54.3% while the S&P 500 Index has decreased 8.7%, and the Nasdaq Composite Index has lost 5.2%. However, considering its compelling valuation, its leading position in the industry and the generous dividend currently yielding 6.14%, the drop in its price creates an excellent opportunity to buy the stock at an attractive price.
Chart: TradeStation Group, Inc.
Last Quarter Results
On October 28, 2015, National Oilwell Varco reported its third quarter 2015 financial results which beat EPS expectations by $0.05 (8.9%). The company showed an earnings per share surprise in its last six quarters, as shown in the table below:
Data: Yahoo Finance
Excluding other items and non-recurring charges from all periods, third quarter net income was $232 million, or $0.61 per fully diluted share, compared to $0.77 in the second quarter of 2015 and $1.62 in the third quarter of 2014. Revenues for the third quarter of 2015 were $3.31 billion, a decrease of 15% from the second quarter of 2015 and a decrease of 41% from the third quarter of 2014.
In the report, Clay C. Williams, Chairman, President and CEO of National Oilwell Varco, stated:
The sharp decline in oil prices and activity since late last year has impacted each of our segments, and will drive activity lower in the fourth quarter. We believe our strong financial resources will enable National Oilwell Varco to invest in the extraordinary opportunities that will arise from this downturn, and we expect to emerge with greater capability and efficiency. In the meantime, with limited visibility into the timing of a recovery, we remain focused on managing costs and improving performance, while continuing to develop technologies that help our customers to improve their returns in a lower commodity price world.
NOV is scheduled to report its fourth quarter 2015 financial results on Wednesday, February 03, before market open. According to 36 analysts' average estimate, NOV is expected to post a profit of $0.45 a share, a 73% decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.54 a share while the lowest is for a profit of $0.23 a share. Revenue for the third quarter is expected to decrease 46.7% year-over-year to $3.04 billion, according to 29 analysts' average estimate. There was one EPS up revision during the last thirty days and six down revisions. Since NOV has shown an earnings per share surprise in its six last quarters, there is a good chance that the company beats estimates also in the fourth quarter.
On December 29, 2015, NOV announced that it agreed to terminate its contract with EAS in Brazil to deliver seven deepwater drilling equipment packages. The terms of the agreement were not disclosed, but NOV does not expect to take any charges as a result of the terminations since the company remained cash ahead on its contracts. The agreement would result in a $1.1 billion reduction in its backlog. However, the cancellations are not a negative development for the company since it removes a significant risk from National Oilwell Varco. The company had a solid backlog of $9.19 billion at the end of 3Q15.
Currently, most North American producers and OPEC countries are producing existing fields close to maximum levels, trying to offset lower revenues due to oil price declines with higher volumes while sharply reducing drilling activity. According to the company, this is not sustainable, and production will begin to decline as it has started to in the United States, and therein lies the seeds for a recovery. However, with swollen inventories moderating demand growth with economic weakness in Asia and elsewhere around the globe and an uncertain trajectory for incremental oil exports from Iran, NOV does not expect a recovery any time soon. Nevertheless, it will come, and the company's plan is to manage what it can, namely costs, through the downturn while continuing to position and strengthen its franchise for the inevitable upturn. NOV expects to accomplish this through a combination of organic investment in new technologies and capabilities, as well as extraordinary acquisition opportunities that it expects to emerge. According to the company, as the downturn has lengthened, values of potential target companies will become more and more compelling. As we move into 2016, NOV believes sellers are likely to reduce their expectations and better capital returns on M&A will follow. Consequently, its capital deployment strategy is shifting from share buybacks to an external focus on potential acquisitions. Already in the third quarter of 2015, NOV closed small four acquisitions.
In my view, NOV's focusing on acquisitions that will increase its market leadership in selected subsectors within oilfield services and manufacturing makes sense. It is estimated that NOV owns more than 80% of the market for offshore drilling rig equipment, and its market share is very high in other sectors like onshore rigs. Thus, with the recovery of oil prices the company will become stronger than it has ever been.
NOV's valuation is very good. The stock is trading way below book value, price to book is only 0.63, its debt to equity ratio is low at 0.22, and the trailing P/E is very low at 9.10. The price-to-sales ratio also is very low at 0.63, and the enterprise value/EBITDA ratio is extremely low at 4.35.
National Oilwell Varco has been paying dividends since 2009, the forward annual dividend yield is very high at 6.14% and the payout ratio is at 55.6%. The annual rate of dividend growth over the past three years was very high at 53.9%, and over the past five years also was very high at 75%.
NOV Dividend data by YCharts
During the third quarter of 2015, the company completed its share repurchase program repurchasing and retiring 10.85 million shares of its common stock at an average price of $40.98 per share for a total purchase price of $444 million. Since initiating the share buyback program in September 2014, the company repurchased 55.6 million shares, or 13 percent of its shares outstanding.
According to Portfolio123's "ValueRank" ranking system, NOV's stock is ranked third among all 40 S&P 500 energy companies.
The "ValueRank" ranking system is quite complex, and it is taking into account many factors like five-year average yield, sales growth, trailing P/E, price to book, price to sales and return on equity, as shown in Portfolio123's chart below.
Back-testing over 16 years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.
Although crude prices have continued to fall sharply, and no sign of recovery fundamentally or technically has been seen yet, in my opinion, at the current price NOV is an excellent long-term investment. First for the generous dividend yielding about 6.14% and second for a significant price appreciation when oil prices recover. In my view, NOV's focusing on acquisitions that will increase its market leadership in selected subsectors within oilfield services and manufacturing makes much sense. It is estimated that NOV owns more than 80% of the market for offshore drilling rig equipment, and its market share is very high in other sectors like onshore rigs. Thus, with the recovery of oil prices the company will become stronger than it has ever been. Moreover, NOV has compelling valuation metrics, the stock is trading way below book value, price to book is only 0.63, and its EV/EBITDA ratio is extremely low at 4.35.
Disclosure: I/we 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.