National Oilwell Varco Will Thrive Where Crude is Hard to Find

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Includes: CLB, FTI, NOV
by: TraderMark

National Oilwell Varco (NYSE:NOV) is part of my trio of favored oil service stocks along with Core Laboratories (NYSE:CLB), and FMC Technologies (NYSE:FTI). While these stocks seem to get hit every time crude drops, at some point people are going to realize they have moved from cyclical plays tied to price of crude to secular plays. But judging from the past week, that has not happened yet. Anyhow it gives us opportunities to add, as I did in large scope on all 3 names in the past week. I've been pounding the table on this group since day one.

National Oilwell Varco came out with earnings Wednesday, and all they do is continue to execute. And they will continue to execute at crude $55, $65, $75, $85, or $95. Think of these guys as the arms merchants in a world where crude is harder to find and extract. Just stay away from those service/drillers tied to national gas and the US Gulf like Nabors (NYSE:NBR) (did you see their gosh awful earnings?) I realize for longer time readers I sound like a broken record on these names, and I expect these guys will be around for the next half decade or until I get my real mutual fund up and running, so get used to hearing about them!

Reuters

  • National Oilwell Varco Inc (NOV), which makes oil and gas drilling equipment, on Wednesday said its third-quarter profit doubled,topping Wall Street estimates, on strong demand from international customers and national oil companies.
  • Profit in the third quarter was $366 million, or $1.02 per share, compared with $176.6 million, or 50 cents per share, a year earlier. Analysts on average had expected a profit of 94 cents a share, according to Reuters Estimates.
  • Revenue jumped 45 percent to $2.58 billion.
  • In a note to clients, Simmons & Co. characterized the results as "strong."
  • "International demand for our equipment and services continues to build, particularly from national oil companies, while North American operators appear to be adopting a more cautious stance as we enter the fourth quarter," Pete Miller, the company's chief executive, said in a statement.
  • The company's rig technology segment posted a 72 percent jump in revenue from a year ago to $1.52 billion.
  • Backlog for capital equipment orders for the company's rig technology unit increased to $8 billion from $7.2 billion in the prior quarter.
  • New orders during the quarter were a record $1.9 billion. The company's backlog for capital equipment continued to increase, fueled by strong demand for its drilling equipment, particularly for international offshore rigs.
AP
  • "We performed well in the third quarter, as orders for our capital drilling equipment remained strong," Chairman, President and Chief Executive Pete Miller said in a statement. "Efficient execution of our business, along with the continued strong demand for our oilfield products and services, are driving solid operating margins through each of our business segments."
CBSMarketwatch
  • Brian Niemiec of Susquehanna Financial Group said the company's earnings, "look solid as profit more than doubled on increased demand for drilling equipment." Recent declines in the sector "may have been an overreaction" with share prices poised for a rebound with oil prices remaining above $80 per barrel.


Rising backlog - record new orders - doubling profits. Sounds familiar eh? A lot like the infrastructure names. Find secular growth. Invest in it. Period. We are going to a world of shortages even as the US goes into recession. Last, remember the "Street" likes to treat groups as monoliths. Why were these stocks down so much? Aside from crude dropping a whopping $5, Schlumberger had weak North American outlook (but wonderful international growth) - therefore sell 'em all! Fire sale! This is when we get our opportunities and the market presents them a few times a year. I'm sure we will get another in this group, soon enough.

So at $77, NOV is now trading at a whopping 17.6x 08 estimates. And the $4.36 08 estimates are again, too low. Analysts had them at $4.16, before last earnings 3 months ago, so expect north of $4.50. Which makes NOV even cheaper. And if you saw these growth rates (Doubling of profits folks?) in a Chinese company the PE ratio would be 100000000000. If it was an American tech company PE would be 150. Why only 17? Because there is still that belief we are going back to crude $45. Even at crude $65, it does not change the fact exploration companies cannot keep finding enough new supply to keep up their reserves. That doesn't change at crude $20. So NOV is still cheap despite this huge run this year.

Disclosure: Long all 3 names in fund; no personal positions

NOV 1-year stock chart