Is National Oilwell Varco Going to Crash?

National Oilwell Varco (NOV) reported its fourth quarter and full year 2015 results on February 3rd. They reported a net income of $85 million, or $ 0.23 per fully diluted share, excluding other items that included pre-tax charges of $1,634 million for goodwill and other intangible asset write-downs, $139 million for restructuring and other charges and $7 million in FX losses due to currency devaluation in Argentina. The net income was down from $0.61 in the third quarter of 2015 on a comparable basis.

The company’s gross margin declined 210 basis points to 19.1%.
EBITDA stood at $308 million or 11.3% of sales. The company’s working capital, excluding cash and debt, totaled $5.5 billion at the end of year 2015, down $422 million from the previous quarter. The company generated a total of $ 614 million in cash flow from operations during the quarter.

Cash flows and Balance Sheet:

The company certainly did have a challenging year in 2015. Market uncertainty, falling energy prices, declining drilling activity, and reduced customer spending were some of the highlights of the year for everybody associated to the oil and gas industry at the upstream. Despite these turbulent conditions, the company was able to generate $1.3 billion of cash flow from operations in 2015. Apart from this, the company invested over $450 million in organic growth opportunities, bought back $2.2 billion of shares, paid out cash dividends of $710 million to the shareholders, and completed seven acquisitions for approximately $85 million, while preserving a very strong balance sheet.

During the last quarter, the company paid dividends of $173 million and reinvested $ 136 million into its business. After considering the impact of foreign exchange rates on its cash balances and other items, the company was able to decrease its net debt by $287 million during the quarter. At the end of the fourth quarter, the company had a cash balance of $2.1 billion, and a net debt of $4 billion. Further, its net debt to capitalization ratio was 11.2%. It also had an undrawn capacity of $3.6 billion on a revolving credit facility at the end of 2015.

With $ 2.1 billion of cash on hand, NATIONAL OILWELL VARCO has the resources to meet its near term obligations without any external aid. The company has only $ 2 million in debt maturing this year, while operating lease obligations are at $ 202 million which is meager in comparison to the cash it is still generating.

With a turnaround not in sight, the company has been undertaking aggressive cost-reduction moves. The company reduced its global workforce, including contract labor, by 21% through the last year. Further, it has closed down about 75 facilities since mid-2014 (the start of the downturn) to retrench to a smaller, more efficient footprint. The decremental operating leverage was 32% from 2014 to 2015, excluding charges from both years.  As a result of these cost cutting measures, the company has been able to maintain a healthy cash flow from operations that will prove to be instrumental in withstanding the turbulent environment.

Orders drying up:

The worry for National Oilwell Varco at this moment should be that it is not getting enough new orders. For Rig Systems, National Oilwell Varco received just $89 million of new orders in the fourth quarter. The book to bill ratio has fallen to an alarming level of just 10%. Making the life tougher for National Oilwell Varco are the order cancellations, which have further damaged the backlogs. As far as rig systems business is concerned, the total backlog has fallen 24% from the third quarter and 52% from the same quarter last year to $6.1 billion.

Conclusion:

With the industry analysts not expecting a turnaround soon, 2016 is going to be even tougher than 2015 for companies like National Oilwell Varco. Hence, the company will have to rely on cost control and capital discipline even more as growth has halted. The strength of National Oilwell Varco is its balance sheet which has ample cash on it and a healthy cash flow from operations which has been coming to the company. Thus, National Oilwell Varco has a certain upper hand among the peers. But it must concentrate on getting and retaining enough orders because cost cutting too has a limit.
Published on May 5, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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