NOV Board OKs Distribution Spin-Off

Zacks

Global large-cap energy equipment maker National Oilwell Varco Inc. (NOV) announced that its board of directors has approved the separation of the company’s distribution business from its remaining businesses, thereby creating two independent, publicly traded companies. National Oilwell expects to complete the spin-off – contingent on market conditions and regulatory approvals – by the first half of 2014.  

Last year, with a view to expand business related to distribution, National Oilwell took over CE Franklin and Schlumberger Ltd’s (SLB) Wilson distribution business segment. Schlumberger was the major share holder of CE Franklin, the distributor of oil and gas drilling equipment.

National Oilwell believes that post acquisitions, its distribution business have got the size and scale to operate as a separate and efficient distribution firm. Following the spin-off, National Oilwell expects the distribution unit to operate in roughly 26 countries with locations at more than 415 sites.   

Houston, Texas-based National Oilwell Varco organizes its operations in three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution & Transmission.  Out of the three units, Rig Technology represents the core operations of the company and accounted for 71.1% of the total operating profit during the second quarter of 2013. However, the segment’s operating margin dipped to 20.7% from 23.7% in the year-ago comparable quarter.

On the flip side, the Distribution & Transmission unit, contributed only 8.6% of the entire operating profit during the second quarter of 2013, and hence is not representative of the company’s core operation. Moreover, the operating margin from this segment came in at 5.5%, down from 6.9% in the second quarter of 2012.

Keeping those facts in account, we believe that the spin-off will allow National Oilwell to focus more on its core business, while giving the distribution unit a major scope to expand on its own.

National Oilwell currently retains a Zacks Rank #3 (Hold), implying that it is expected to significantly underperform the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at oil field machinery and equipment suppliers like Dril-Quip Inc. (DRQ) and Profire Energy Inc. (PFIE) that offer better prospects. Both the stocks sport a Zacks Rank #1 (Buy).

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