National Oilwell Varco: Buy or Sell?

National Oilwell Varco (NOV) released its first quarter 2016 results on 28th April, 2016. The company incurred a net loss of $ 21 million, or $ 0.06 per share on revenue of $ 2.19 billion. The revenue was down 20 % compared to the fourth quarter of 2015 and down 55 % from the first quarter of 2015. The Adjusted EBITDA for the period was $ 127 million i.e. 5.8 % of sales revenue. That was a 37 % decline in Adjusted EBITDA margin compared to the preceding quarter.

This clearly reflects the stress on the oil and gas industry to which the customers of National Oil Varco belong.

“Oil prices and oilfield activity continued to plummet during the first quarter of 2016, causing our customers to cut spending to bare minimum levels,” stated Clay C. Williams, Chairman, President and CEO of National Oilwell Varco.

The collapse of backlog:

The backlog that National Oilwell Varco was hit hard during the last quarter due to the bankruptcy of one of its customers Sete Brasil. There were orders comprising 15 Brazilian floater contracts from Sete Brasil which now stand cancelled. The total write-off in backlog due to this event was approximately $ 2.1 billion including certain other orders that have not been paid for. Only if Sete Brasil later receives funding to complete the drill ships, it will take the construction work forward and the contracts will materialize.

But for now, the National Oilwell Varco’s backlog has fallen down 39 % from $ 7 billion at the end of 2015. The backlog for Rig Systems now stands at $ 3.3 billion while the company’s total backlog has fallen to about $ 4.3 billion over the first quarter of this year. Thus, the company is now in the danger zone since the remaining backlog represents only about two quarters' worth of revenue. This doesn’t bode well for the future of this company unless new orders flock in.

The continuing drought of new orders:

There is indeed a drought of new orders. The company’s highest revenue generating segment, the Rig Systems segment, which contributed about 42 % of the total revenue, deals with the sales of land rigs, offshore drilling equipment packages, and drilling rig components. And it is no surprise that the segment has been hit hard due to the extended downturn still on-going in the oil and gas industry.

Further, this segment has not received any orders for the second straight quarter. As a result, the company expects the full year total revenue to decline further by 30 %.

However, this segment has also shown some recovery in a way. Its revenue fell only by 9 % compared to the preceding quarter while in the preceding quarter it fell 32 % compared to its preceding quarter. Also, the revenue decline for the Rig Systems segment was the least out of all the four segments the company operates through.

The company’s other segments have been more severely hurt. The Rig Aftermarket segment that deals with spare parts and repair and rental services suffered because its customers have many idle rigs now. So, spare parts of those rigs can be used to service the running rigs. And since many new projects have been put on hold by its customers, the Completion & Production segment didn’t get enough orders to top the previous quarter’s performance. Overall, the fall in Rig Aftermarket, Wellbore Technologies and Completion & Production segments was 31 %, 17 % and 25 % respectively.

Liquidity:

In contrast with its operating performance National Oilwell Varco proved to be the cash flow growth leader in the oilfield services (or OFS) space last quarter. From a negative FCF of the year-ago quarter, to the positive $ 537 million in Q1 2016, NOV’s FCF growth was the highest among the four prominent names in the oilfield services (or OFS) space, the other three being Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI). That was a result of a four times increase in cash flow from operations in tandem with a 35 % reduction in CAPEX.

However, cash in hands on the company’s balance sheet reduced by $ 300 million during the quarter and stands at $ 1.8 billion now. On the other hand, one relief in the context of liquidity was provided by the reduction in total debt by $ 535 million. The net debt as a result decreased by $ 214 million compared to that at the end of the preceding quarter.

Market outlook and Conclusion:

The market outlook is indeed much better than it was a year and even a quarter ago. According to EIA, the oil demand and supply are likely to balance towards the end of this year due to the excessive budget cuts of all the oil producers.

Hence, oil demand and prices are certainly going to head north for the long time to come. And once the inventories start to fall, more and more new orders will come to all the segments of NOV. That should take another year or so from now. And that is the period to buy NOV because after that you may again find yourself buying very close to a peak.

Published on Jul 5, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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