National-Oilwell Varco: Way to Play $140 Oil

The financials are in free fall, construction is stagnant, the airlines are trying not to crash and the automakers are hitting the skids – there is no denying the overall market really sucks right now. But, enough with the doomsday predictions and cough cough, the possibility that the US Government could lose its AAA credit rating! Let’s focus on what is working – deepwater drilling.

Oil at over $140 per barrel has opened up a lot of oil sources that, at lower oil prices, would not have been economically feasible. A lot of these reserves are deep underwater – like Petroleo Brasileiro's (PBR) Tupi field find. In order to get at these vast undersea reserves oil companies are going to need highly specialized rig equipment. That is why PBR recently contracted out 85% of the world’s offshore rigs, an event that drove up rig day rates.

Enter National-Oilwell Varco (NOV) which has its name on some part of 90% of all offshore rigs. The rig market is booming, evidenced by the fact that NOV added 2.2 billion dollars of orders to its backlog in the 4th quarter of 2007. (More interesting is 88% of these order came from outside the US.) There is no denying that the business of building deepwater rigs is hot right now, and here is why it is going to stay that way:

• Current offshore rigs are old (average rigs age globally is 25 years), which means that either new ones need to be built or existing rigs must be renovated. Good news, NOV is a big part of both of those businesses.
• As more and more of the low hanging fruit is picked oil companies are going to have to look harder for more oil – which means offshore exploration.
• PBR just made a huge offshore find – tens of billions of barrels of oil – which puts a floor on rig demand.
• The demand for oil is not going away anytime soon.
• There is a possibility (albeit slight) that the Democrats are going to let us drill in the Gulf and that would mean a lot of new orders for NOV.

A Look at the Numbers

The numbers are solid. NOV is trading at about 18 times next year’s earnings with is not bad for a company that the S&P predicts will enjoy a EPS CAGR of 42% over the next three years.  Operating margins are a nice 21.2% and profit margins are a plump 14.15%. In addition to that, the company has 2.14 billion dollars in cash and only 743 million in long term debt (one of the many reasons that S&P has given them an A- credit rating). NOV also sports a very healthy 9 billion dollar backlog, which means the company is going to be plenty busy for a long time to come.

Conclusion

NOV is a great addition to your portfolio; you get exposure to the booming oil industry with the safety of a 9 billion dollar backlog. NOV is the industry leader in deepwater drilling, and I think the rise in offshore demand will more than make up for the onshore weakness.

Disclosures: At the time of this article I have no positions, but am planning to be long NOV in the near future.
 

Comments

[Brian Pursley:]

NOV for the win: oilismastery.blogspot..../

2008 Jul 15 12:27 PM

[Pauly B:]

NOV has delivered time after time for me in my portfolio over the years. They have a good "Moat" on the business and is a well run company.

2008 Jul 16 08:12 AM

[einstein p ...:]

70-72 should be a great opportunity to add to positions or buy NOV --- but I'm concerned. Not about the stock, but about the market in general. RIG is another powerhouse in the oil business. Like NOV, it has very little to do with the price of a barrel of oil. If anything, lower oil prices would probably increase demand, so either scenario works for these stocks. RIG has received billions in new business during the last two months and the stock continues to go down. RIG is dirt cheap with earnings visibility to boot. Both stocks are best of breed --- although NOV is closer to a monopoly. If we solved the food and energy problems of the world in the past few weeks, I must not have gotten that memo. Other than profit taking, is there any reason for these stocks to keep getting pummeled?

2008 Jul 24 12:58 PM