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National Oilwell Varco, Inc. Message Board

  • barmy_madeoff barmy_madeoff Oct 25, 2012 12:13 PM Flag

    M-Star commentary

    Analyst Note 10/25/12

    National Oilwell Varco NOV reported strong third-quarter results. Revenue increased 12% sequentially to $5.3 billion while operating profit (excluding transaction charges) improved 4% to $946 million. Rig technology turned in a very strong performance, with revenue of $2.55 billion, a 6% sequential increase, and margins improved to 23.9% from 23.7% in the prior quarter, which we think shows some early progress on integrating the initially margin-dilutive NKT Flexibles deal as well as price improvements on the firm's more typical rig equipment. New orders of $2.29 billion were down from $2.73 billion in the prior quarter, but not enough for us to consider it anything other than the inherent lumpiness of the business. The deep-water and ultra-deep-water rig economics for the offshore drillers still remain highly compelling with the credit markets being wide open, rig prices still below $650 million, and day rates rapidly increasing, which is a combination that we think indicates capital returns in the mid- to high teens for the drillers. Therefore, we think the stars are still aligning for National Oilwell Varco to generate healthy levels of rig equipment orders over the near term.

    The star for us this quarter was the petroleum services and supplies segment. The segment provides many of the consumables used in North American tight oil drilling, but unlike onshore equipment peer FMC Technologies FTI, which saw significant margin contraction this quarter in its surface segment (20.3% to 15.8%), National Oilwell Varco's PS&S segment's margins actually improved modestly sequentially, to 22.3% from 22.1%. We think the difference in performance is for a couple of reasons. First, FMC's surface segment is more heavily weighted toward North America, whereas NOV's revenue split is closer to 50/50 North America and international. Second, FMC's product line is more directly exposed to the well-known negative trends in pressure pumping, such as surface trees, frac pumps, and rental equipment. In contrast, NOV's largest product lines in PS&S are downhole tools such as drill bits and drilling motors, solids control equipment, drill pipe, and tubular inspection services. The differing product makeups means that National Oilwell Varco is much less exposed to the difficulties in pressure pumping and more exposed to simple changes in North American drilling activity. Granted, drilling activity trends in North America are also negative (segment revenue was down 3% sequentially), due to weak natural gas and liquids pricing, but the diversity of the segment's operations lets National Oilwell Varco turn in a better performance than its peers. We expect National Oilwell Varco to continue to deliver differentiated performance versus its onshore equipment peers.

    Sentiment: Strong Buy

35.20+0.15(+0.43%)Aug 25 4:02 PMEDT