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National Oilwell in Neutral Lane

Zacks Equity Research

We are maintaining our long-term Neutral recommendation on National Oilwell Varco (NOV), reflecting its strong drilling equipment base, healthy balance sheet and an impressive business model. These positives are partially clouded by the gas/oil price instability, costs inflation and geo-political risks.

Houston, Texas based National Oilwell Varco is a world leader in the design, manufacture, and sale of comprehensive systems, components, products and equipment used in oil and gas drilling and production worldwide.

During the first three months of 2012, the company performed impressively and posted earnings per share (excluding transaction costs) of $1.44, comfortably beating the Zacks Consensus Estimate of $1.39 and above the year-ago adjusted profit of $1.00 per share. The result was supported by robust activity levels, as well as good project execution skills and manufacturing efficiency.

During the quarter, National Oilwell Varco also received total bookings of $1.91 billion, 15% higher than the previous quarter. We remain confident that the company will be able to supply technologically advanced production equipment on schedule.

Additionally, with the acquisition of Denmark-based firm NKT Flexibles, National Oilwell Varco expanded its Floating Production, Storage and Offloading vessels (FPSOs) product line. The company will also reap benefits from NKT Flexibles’ advanced technical design capability and skilled manpower. The collaboration will place National Oilwell Varco in a commanding position in the offshore production market, as well as expand its global foothold by venturing into the developing sectors of the energy industry.

However, we remain somewhat cautious about the company’s performance in the coming months as oilfield service stocks are extremely unpredictable and the correlation of their movement with underlying business fundamentals is sometimes difficult to establish. As such, the shares of National Oilwell Varco may not be suitable for investors who are not comfortable with day-to-day volatility.

National Oilwell Varco conducts operations in many countries, with a major portion of its total revenue coming from international markets. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment.

Hence, we do not see any obvious catalyst in the company’s business to significantly push the stock price higher. National Oilwell, which operates with other players such as Cameron International Corp. (CAM) and Weatherford International Ltd. (WFT), currently retains a Zacks #3 Rank (Hold rating) for the short run.

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