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NOV's 2Q Earnings Miss, Sales Beat

Zacks Equity Research

Global large-cap energy equipment maker National Oilwell Varco Inc. (NOV) reported weak second quarter earnings, hamstrung by seasonal decline in Canada and a choppy North American market.

Earnings per share (excluding transaction costs) came in at $1.33, a penny below the Zacks Consensus Estimate and considerably lower than the year-ago adjusted profit of $1.46.

The latest miss marks NOV’s second underperformance in as many quarters. It is also as per our expectation, due to the combination of NOV’s Zacks Rank #3 (Hold) and -0.75% ESP (Read: Zacks Earnings ESP: A Better Method).

However, quarterly revenue jumped 18.3% year over year – from $4,734.0 million to $5,601.0 million – and was also above the Zacks Consensus Estimate of $5,452.0 million amid rising international demand.

Segmental Performance

Rig Technology: Revenue in the Rig Technology segment increased 17.8% year over year to $2,833.0 million, while revenue out of backlog was up 17% from the corresponding period last year. The segment’s operating profit was up 2.8% year over year to $587.0 million.

Rig Technology’s profitability during the quarter was helped by higher demand for capital equipment used for newbuild offshore rigs. Operating margin, at 20.7%, however, dipped from 23.7% in the year-ago period due to price cuts.

Petroleum Services & Supplies: The company’s Petroleum Services & Supplies segment achieved revenues of $1,749.0 million, down 1.5% from the year-ago period, while operating profit declined 22.7% from the second quarter of 2012 to $304 million. Operating margin was 17.4% versus 22.1% in the year-ago quarter. The negative comparisons were due to the seasonal downturn in Canada.

Distribution & Transmission: Distribution & Transmission revenues climbed 66.0% year over year to $1,295.0 million. Operating profit was $71 million, compared with $54 million in the year-earlier quarter. The segment results were helped by a full quarter’s contribution from the Robbins & Myers acquisition and rising international demand. However, operating margin came in at 5.5%, down from 6.9% in the second quarter of 2012 due to Canada breakup.

Backlog

Backlog for capital equipment orders for the company’s Rig Technology segment was a record $13,950.0 million at Jun 30, 2013, up 24% from the previous quarter level.

Balance Sheet

At the end of the second quarter, the company had cash on hand of $2,327.0 million and debt of $4,120.0 million. The debt-to-capitalization ratio stood at approximately 16.4%.

Zacks Rank & Stock Picks

NOV, which ranks ahead of Cameron International Corp. (CAM) as the biggest U.S. maker of oilfield equipment, currently retains a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at Dril-Quip Inc. (DRQ) and Natural Gas Services Group Inc. (NGS) as good buying opportunities. These energy equipment service providers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

Read the Full Research Report on NOV

Read the Full Research Report on DRQ

Read the Full Research Report on CAM

Read the Full Research Report on NGS

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