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National Oilwell (NOV) Hits 52-Week High: More Growth Ahead?

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National Oilwell Varco, Inc.’s NOV shares have scaled a 52-week high of $40.92 in yesterday’s trading session, before eventually closing at $40.64, generating a healthy year-to-date rate of more than 12.8%. Notably, the stock has had a good run on the bourses over a year with its shares moving up 7.7%, handily outperforming its industry’s decline of more than 11.6% in the same time frame.

This Zacks Rank #3 (Hold) stock has the potential for further price appreciation with long-term earnings growth expectation of 6% and looks poised to touch new highs in the coming period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The company fared much better in 2017 compared with 2016, reporting a net loss of $237 million last year, significantly narrower than net loss of $2,412 million in 2016. National Oilwell Varco has also managed to post an average positive earnings surprise of 6.88% in the trailing four quarters. The Houston-based energy equipment supplier expects to deliver year-over-year growth of 12% and 162% in its revenues and earnings, respectively, in 2018.

Let’s delve deeper to analyze what’s driving the stock.

Crude Recovery to Aid

Oil prices have finally recovered from their historic lows, settling at $60.46 per barrel at the end of 2017, up about 12.5% year over year. The improving energy landscape is attributed to tightening supplies, brighter demand outlook and OPEC-deal extension talks. The energy equipment supplier is likely to realize the benefit of recovering commodity price environment.

Since the start of this year, with crude prices comfortably trading more than $60 and drilling activities on the mend, we expect to witness National Oilwell Varco's revenues, earnings and cash flow to grow gradually.

In particular, strong demand for the company's land-related businesses in North America bode well for the energy equipment maker. With majority of its revenues generated from onshore markets, the company expects to return to profitability in 2018.

Efficiency Strides Fuel Earnings

Solid execution and cost-cut initiatives helped the company to deliver $289 million increase in its Adjusted EBITDA, which stood at $611 million in 2017 compared with $322 million in 2016. We believe that National Oilwell's aggressive cost reduction and improved efficiencies, which have helped it wade through tough industry environment over the past few years, will continue to boost the company’s results in the coming period.

Wellbore Technologies Segment Set for Growth

Wellbore Technologies generated strong revenues of $2,577 million in 2017, driven by robust demand for the unit’s services, products and technologies. The unit’s adjusted EBITDA surged to $305 million in 2017 compared with $90 million in 2016.

Robust performance from onshore-levered Wellbore Technologies segment is likely to buoy the company’s top line and earnings in the future as well. Notably, the Zacks Consensus Estimate for the EBITDA of the Wellbore Technology segment for the to-be-reported quarter stands at $117 million compared with $107 million and $38 million in the prior quarter and year-ago quarter, respectively.

Cutting-Edge Technology to Drive Performance

National Oilwell is one of the biggest manufacturers of drilling equipment in the world, with an impressive business model. It is a global leader in solids control technology and waste management. Of late, the company embarked on a series of acquisitions including Remacut and Fjords Processing among others, expanding its directional drilling and diversifying the range of completion tools offering.

National Oilwell is well positioned to deliver fluids processing technologies, as the production shifts to unconventional basins. The company is also uniquely positioned to bring automation and big data solutions to the oilfield.

The company's joint venture with Saudi Aramco is also expected to support NOV's drilling technology franchise and contribute to earnings.

Strong Cash-Flow Generation Bodes Well

National Oilwell’s debt-to-capital ratio stands at around 16%, which is much lower than most of its peers including Weatherford International plc WFT, NOW Inc. DNOW and Exterran Corporation EXTN among others. The company’s current ratio also stands at 3.07, higher than most of its peers. Low leverage and high liquidity metrics increase National Oilwell’s financial flexibility, helping the company to tap on various growth opportunities.

Free cash flow for the company was around $641 million in 2017. The newly enacted tax reforms will also help it to lower its cash taxes, boosting cash flow further.

Offshore Segment: A Spoiler?

Notably, late last year, National Oilwell combined two of its offshore-levered segments, Rig Systems and Rig Aftermarkets, into a single unit named Rig Technologies. The strategy has enabled the company to reduce administration burden and better align the company with evolving market conditions.

However, we remain concerned about the offshore market that will likely lag the U.S. land-related market. Declining backlog associated with the Rig Technologies segment, due to lower activities and order cancellations, is a cause of concern.

Final Thoughts

While National Oilwell is facing a few challenges in its Rig Technologies segment, we expect the company to tide over this limitation on the back of its strong onshore-focused Wellbore segment, superior technologies, robust financial metrics and operational efficiency.

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