The Bottom May Be In For National Oilwell Varco

Summary

• Company Financials Continue to Improve.
• Low Crude Prices Resulted in New Equipment Cancellations.
• Orders for Drilling Operations Equipment and Technologies Increased.

NOV data by YCharts

National Oilwell Varco (NYSE:NOV), headquartered in Houston, provides equipment and components for oil and gas drilling, and operations, oilfield services, and supplies. The company has four divisions: Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion and Production Solutions. Rig Systems manufactures both land and offshore drilling rigs. Rig Aftermarket supports those units with spare parts, repair and leasing. Wellbore Technologies provides equipment used in drilling operations, as well as technologies that help optimize wellbore performance. The Completion and Production Solutions segment integrates technologies for well completions to oil and gas production.

Quarterly Update:

For its most recent quarter, the company had $1.84 billion in revenue, which was in-line with expectations, while EPS, at -$.07/share was a penny better than consensus. Sequentially and YoY revenue continues to improve as do earnings, as the company posted EPS of -$.14/share in Q2-17, and -$.34 in Q3-16.

However, it's where those revenues break out that tells the story. Here's how each of the segments performed as of the most recent quarter-end

Segment	Q3-17 Revenue	Q2-17 Revenue	Q3-16 Revenue	% Change YoY Revenu	% Change QoQ Revenue
Rig Systems	$330	$340	$470	-29.8%	-4.6%
Rig Aftermarket	$311	$341	$322	-3.4%	-8.8%
Wellbore Technologies	$693	$614	$526	31.7%	12.9%
Completion & Production Solutions	$682	$652	$543	25.6%	4.6%
Eliminations	-$181	-$194	-$215	-15.8%	-6.7%
Total	$1,835	$1,759	$1,646	11.5%	4.3%

Click to enlarge

As you can see, revenue related to capital equipment in the Rig Systems and the Rig Aftermarket segments have declined both YoY and sequentially, while the operation support segments of Wellbore Technologies and the Completion and Production Solutions segments showed strong growth.

So what happened here? Well, as oil prices started to decline in April, rig reactivations slowed, with domestic rig count peaking in July at 958 and declining to just over 900 active rigs by the end of the third quarter. As a result, Rig Systems had customer cancel two rig order representing $100 million in revenue. At the same time, the Completion & Production Solutions segment booked a record large order for coiled pipe from a Saudi customer and the Wellbore Technologies group received strong orders for pressure pumping equipment.

The good news is that U.S. crude inventories have declined 23 of the past 29 weeks, pointing to steadily tightening supply, and oil prices have now moved back up above $50 just as clients are developing their budgets for 2018, which should at least stem the bleeding in the Rig and Rig Aftermarket segments. While oil price improvement needs to be sustained before significant commitments can be made for long term capital expenditures, even a slight improvement is welcome. As CEO, Clay C. Williams remarked in during the earnings call:

"Nevertheless, the recovery narrative right now seems tepid and visibility into 2018 is limited"

In the meantime, existing wells need the equipment and technology that NOV provides, to get the most out of each well drilled. Indeed nascent demand from three years of underinvestment and cannibalization has resulted in a rising scarcity of parts and equipment fueling demand for certain areas like frac equipment. Evolving newer technologies have placed more demand on equipment as drill length and pressures are increasing - providing opportunities with downhole, and completion tools such as NOV's Tuboscope business which uses military technology developed for the inspection of cannon barrels, to inspect pipe casings. Other tools and technologies supplied by NOV, such as sophisticated physics, including magnetic flux leakage, eddy current, and ultrasonic technology, continue to be in high demand.

Balance Sheet

Currently the company has $1.7 billion in cash vs. $3.2 billion in debt which, if my 3rd grade math skills are up to par, works out to $1.5 billion in net debt. with consensus forward EBITDA of $915 million the net debt to EBITDA ratio is a healthy 1.6x.

Valuation

On the strength of continuing improvement in the company's WellBore Technology and Completion and Production Solutions segments as well as an improving oil demand environment which should benefit the Rig Systems and Rig Aftermarket segments, earnings should continue to improve going forward, especially as we get into the 2nd and 3rd quarters of F2018. In fact, I would not be surprised to see positive earning as soon as Q1-18. Current consensus has the company earning $.34/share in F2018 and as much as $1.25 of F2019 Applying a 30x multiple to that number yields a price target of $37.50 which is almost 12% higher than current share pricing but just in line book value. Of course, a lot can happen in that time frame including fluctuations in commodity pricing, so while I'm confident that better days are ahead for NOV, investors are going to have to be patient before the market is likely to reward such forbearance.

Analyst’s 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.