National Oilwell Varco Is Risky Right Now

National Oilwell Varco (NOV), the oil and gas equipment provider, has taken a huge hit in 2015 due to low oil prices. When the company had announced second-quarter results, its revenue was down 26% year-over-year from the second quarter of 2014 and a decline of 19 percent from the first quarter of 2015.

National Oilwell declared second quarter of 2015 net income of $289 million, or $0.74 per share as against the first quarter net income of $310 million, or $0.76 per share. Its net income was $619 million, or $1.42 per share, during the second quarter of 2014.

The drilling equipment manufacturer has reported a year-over-year and sequential decline in both its top and bottom lines primarily due to the lowering in demand for oil and gas drilling equipments.
This is due to a weak global demand and commodity pricing environment that has led oil drilling companies to postpone their investments in purchasing equipment.

Positives vs. negatives

However, National Oilwell’s orders for Rig Systems increased 33% sequentially last quarter. The key orders for second quarter comprised of an innovative production platform rig and a boost package. But, the backlog for Rig Systems fell 13% on a sequential basis to $9 billion. Going forward, National Oilwell expects orders to be somewhat flat during the third quarter but would begin picking up during the fourth quarter, led by significantly strong demand for land rigs, and growing inquiries for capital parts.

The recovery for offshore orders is expected to be several quarters away with NOC-enabled jack-up demand forecasted to pick up ahead of floaters. The top line growth for National Oilwell is well-distributed across each of the company’s key operating segments. However, orders for new Rig Systems remained flat for the quarter and it’s expected to remain constant for the next quarter as well.

But, demand for new Rig Systems is forecasted to get better over the long-term with significant demand-supply gap for key liquids encouraging the oil companies to setup new drilling systems and cater to the prospective rising demand.

National Oilwell is expected to benefit from the emerging trend of oilfield service companies gradually running out of stock that would make them devoid of opportunities to cannibalize their currently active fleets and thus lead to new orders. This is because oil & gas is a hugely capital-intensive business and National is expected to be a major technology provider and key capital manufacturer.

However, the company is estimated to suffer continued losses in the near future till the global commodity demand and pricing environment recovers from the current downturn and thus the company’s expectation of the existing oil players turning to it again for new orders does not hold true. Still, National Oilwell is keenly focused on retuning a majority of the invested capital to its key stakeholders through strategic share repurchase programs, which seems beneficial for the investors who hold the stock.


I think it will be prudent for investors to wait on the sidelines and wait for a turnaround at National Oilwell. The company’s growth prospects are poor at present with a huge debt of $4.30 billion, which could restrict the company from making investments in the business. So, investors should wait for a turnaround before going long on National Oilwell.
Published on Oct 20, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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