National Oilwell Varco: Buy This Winner

National Oilwell Varco (NOV) is losing orders and is unable to add new contracts for its rig system that accounts nearly 50% of its total revenue. Moreover, on account of these order cancellations, its backlog value for the quarter decreased 51% to $6.09 billion year-over-year and about 24% sequentially. The worst part is that NOV is not able to materialize the backlog into revenue. For instance, the company’s realized revenue out this backlog came in at $843 million during the fourth-quarter, down 35% sequentially and about 63% year-over-year.

Facing a lot of weakness

Thus, it is not surprising that its rig system revenue for the fourth-quarter fell 60% to $1.01 billion as compared to $2.5 billion in the fourth-quarter of 2014.
In fact, the revenue for the rig system slumped approximately 32% on the sequential basis, primarily driven by sharply lower shipments out of the backlog as stated above.

Unsurprisingly, the company expects its rig system revenue in the first-quarter 2016 to further decline in the high single-digit percentage range and revenue out of the backlog to decrease to around $775 million. Overall, it anticipates its revenue to be down by more than 20% from $2.7 billion in the fourth-quarter of 2015.

However, all was not bad for the company, as National Oilwell Varco in an effort to restructure the company to the extended low oil and gas prices is taking various other steps to strengthen its financial position. These steps include a reduction in debt, cut in dividend and reduction in costs that should improve its cash flow going forward.

For instance, the company throughout last year reduced the global workforce, including contract labor by 21%, and closed 75 facilities since mid-2014 to retrench to a smaller, more efficient footprint. In total the company reduced its SG&A cost by 28% year-over-year that now translates into an annualized cost savings of about $600 million.

What next?

More importantly, it expects the restructuring to continue in the first-half of 2016. Therefore, it is actively scaling facilities to single shifts, consolidating locations, and implementing other cost-control initiatives that should have some positive impact on the margin going forward. In fact, the company has recently announced to reduce its quarterly dividend to $0.05 per share going forward in response to challenging market conditions from the dividend of $0.45 per share, it paid to the shareholders in the fourth-quarter of 2015. National OilWell expects this reduction in dividend to improve its cash flow by approximately $615 million per year going forward.

In addition, NOV during the final quarter of 2015 reduced its net debt position by $287 million. The most important thing is that the company during the ongoing quarter has additionally reduced its total debt by approximately $500 million. This is a good move as it will reduce its net interest, supporting its cash flow at the end. The company has an operating cash flow of $1.33 billion for the last twelve months and its fee cash flow of $1.08 billion for trailing twelve months with a total cash position of $2.08 billion that now bodes well with its debt position.

Conclusion

Although, National Oilwell Varco has experienced a noteworthy drop in its financial performance in the last couple of quarters, but its restructuring and cost reduction efforts will help the company to improve its margins going forward. In fact, the company with these initiatives will be in a better position to deliver returns upon the recovery in the rig markets.
Published on Apr 21, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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