National Oilwell Varco: More Upside Ahead

Sep. 18, 2016 5:45 AM ETNOV Inc. (NOV)8 Comments
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Summary

  • The improvement in oil and gas prices and a subsequent increase in the rig count have led to a rally in NOV shares of late, a trend that could continue.
  • NOV’s service and repair revenue has increased due to the reactivations of rigs across the U.S., while Wellbore Technologies revenue will increase along with a mid-30% incremental EBITDA margins.
  • NOV has identified $400 million of annualized savings for the next couple of quarters, with its annual personnel costs being reduced by over $2 billion from levels seen in 2014.
  • NOV’s cost reductions have allowed it to improve its operating cash flow, which now exceeds its capital expenses, as a result of which it can pay down its obligations.

Oil and gas equipment and services provider National Oilwell Varco (NYSE:NOV) has made an impressive comeback on the market in the past five months, gaining close to 20%. In fact, National Oilwell has recovered approximately 32% of its value from its 52-week lows in February this year. This improvement in National Oilwell's stock price performance is despite weakness in the company's financial results of late, which means that slight improvements in the end-market are acting as catalysts for National Oilwell.

For instance, the North American rig count, on an average, has increased 34% to 642 rigs in the current quarter from the 480 rigs at the end of the second quarter of 2016. Coupled with this improvement in the rig count and National Oilwell's forecast that it will generate higher EBITDA in the second half of the year, investors have become bullish about the stock.

As such, in this article, we will take a closer look at the reasons why National Oilwell Varco's performance can continue improving.

An increase in the rig count bodes well for the company

Driven by the rally in oil and gas prices, rig counts have started picking up pace. According to Baker Hughes, the rig counts comprising of land, inland, and offshore rigs in the U.S. have accelerated 17% to 508 rigs for the week ending September 9 th as compared to 497 rigs in the preceding week. Outside the United States, the rig counts have increased by 8 rigs in the Gulf of Mexico to 18 rigs in just a week.

As a result, the North American rig counts have climbed to 642 rigs for the reported week from the previous week's close of 634 rigs. The point to note here is that both oil and gas rigs have started increasing, with crude oil rigs growing by

This article was written by

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Dhairya Mehta is pursuing the CFA course. I hail from Indore, India. I look for investments that generate strong value in the long run. I also help investors avoid pitfalls through my analysis. My style of investing is contrarian.

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.

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