National Oilwell Varco - Bulls' Worst Nightmare Could Be Confirmed

| About: National Oilwell (NOV)

Summary

The diminution in Rig Systems has hurt NOV's revenue, earnings and cash flow.

NOV's cash balance fell $1.5B in 2015 to $2.1 billion.

A nightmare for bulls would be a cut in the dividend pay out.

Management faces a trade off between preserving cash and maintaining $700MM in dividends.

In 2016 bulls worst fears could be confirmed. Kiss the dividend goodbye.

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Source: elektronix.no

National Oilwell Varco (NYSE:NOV) is known as one of the best-managed oilfield services companies in the business. Management's cost containment efforts and pristine balance sheet have buoyed the company amid the rout in oil prices. I have been an NOV bear for over year now, claiming the stock was overvalued given its earnings prospects. However, bulls have ignored me given [i] the company's consistent dividends and [ii] an eventual rebound in oil prices.

A commenter on my previous article had this to say:

It's a great company over the long haul. I'm just concerned that it will get spanked so badly that they will have to cut the dividend ... At some point, drilling will start to increase (no clue when) and NOV will be there to reap the rewards. Until then, I'm trying to be cautious.

In my opinion bulls' worst fears -- a dividend cut -- could be confirmed this year. Management practically has to cut the dividend in order to keep liquidity from falling further.

Diminution In Rig Systems Has Caught Up With NOV

Rig Systems sells land rigs, offshore drilling equipment and components. At 37% of revenue it is the company's largest operating segment. It is also its worst performer. With oil prices sub-$50 drilling projects have not been economical for certain clients. The company has delayed delivery of rigs in order to help clients stem cash burn. Rig Systems' revenue has free fallen in the process.

Rig Systems revenue was down 32% sequentially in Q4, versus an 18% decline for total revenue. Y/Y Rig Systems is off an eye-popping 60%, versus a 52% decline in total revenue.

Cash Flow From Operations Is Down 60% Since 2013

In turn, that has hurt National Oilwell's earnings and cash flow.

  • The company's cash flow from operations fell from $3.4 billion in 2013 to $1.3 billion last year.
  • Cash out flow from investing declined from $3.0 billion to $514 million over that time frame. 2013 included a $3.4 billion acquisition. Capex fell from $614 million in 2013 to $453 million in 2015. I expect management to take a scalpel to capex in 2016.
  • Cash out flow from financing increased from $304 million in 2013 to $2.2 billion last year. Management increased the dividend from $389 million in 2013 to $710 million in 2015.
  • Share buybacks were non-existent in 2013; however, management repurchased $779 million worth of stock in 2014 and $2.2 billion in 2015.

And Liquidity Has Become A Concern

Meanwhile, National Oilwell Varco's cash balance has fallen from $3.5 billion at 2014 to $2.1 billion in December.

Maintaining liquidity should be paramount for the company as oil prices are expected to remain "lower for longer," and 2016 financial results could be worse than last year's.

  • 2015 cash flow from operations less cash out flow from investing was $818 million. The dividend was $710 million. Something has to give; either the company must increase cash flow from operations or cut the dividend.
  • National Oilwell has been monetizing its liquid assets (accounts receivable and inventory) to stay afloat. Combined liquid assets fell from $10.4 billion in 2013 to $7.6 billion in December.
  • The decline in liquid assets (ex-cash) and falling revenue and earnings means cash flow from operations will likely fall further.

Given a trade-off between maintaining cash or the dividend pay out, I believe it would be prudent to preserve cash. Bulls should wave goodbye to the dividend. Once it's cut, NOV could fall as its major catalyst evaporates.

Disclosure: I am/we are short NOV.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.