National Oilwell Varco (NOV, Financial) released its second-quarter earnings last week, revealing that the company’s business is still in a slump. Regardless, Mr. Market gave National Oilwell Varco’s shares a 7% boost post-announcement.
(Google Finance screenshot)
National Oilwell Varco
The company is a worldwide provider in the design, manufacture and sale of equipment and components used in oil and gas drilling, completion and production operations and the provision of oilfield services to the upstream oil and gas industry. In May 2014, National Oilwell Varco spun off its distribution business into an independent public company named NOW Inc. (DNOW, Financial). According to National Oilwell Varco, NOW's distribution business had sales of $231 million prior to spinoff.
The company has several business segments. These are Rig Systems, Rig Aftermarket, WellboreTechnologies and Completion & Production Solutions.
Rig Systems
The Rig Systems segment makes and supports the capital equipment and integrated systems needed to drill oil and gas wells on land and offshore. The business segment provides several different types of equipment and technology to function and serve its purpose. Also, Rig Systems supports land and offshore drillers.
(National Oilwell Varco Rig Systems, Company Website)
Rig Systems contributes the most in National Oilwell Varco’s overall sales. In 2015, the business segment contributed 47% to the company’s total sales while recording a 17% profit margin. The business segment, however, lost 29% in that fiscal year secondary to the oil industry bust.
Rig Aftermarket
The Rig Aftermarket segment provides comprehensive aftermarket products and services to support land and offshore rigs and drilling rig components manufactured by National Oilwell Varco’s Rig Systems segment. The Rig Aftermarket contributed 17% to National Oilwell Varco’s overall sales and represented a 24% profit margin, highest among the different business segments. The segment lost 21.9% in the fiscal year.
Wellbore Technologies
The Wellbore Technologies segment designs, manufactures, rents and sells a variety of equipment and technologies used to perform drilling operations and offers services that optimize their performances.
(National Oilwell Varco Wellbore Technologies, Company Website)
In 2015, Wellbore Technologies contributed 25% of National Oilwell Varco’s total sales but delivered poor profit performance as National Oilwell Varco had to book a $1.6 billion impairment charge in the business segment. This resulted in Wellbore Technologies delivering -$1.6 billion in operating losses.
To boot, Wellbore Technologies still had $2.87 billion of goodwill value or 33% of its total valued assets of $8.77 billion as of December 2015. The segment lost 35% in the fiscal year.
Completion & Production Solutions
The Completion & Production Solutions segment integrates technologies for well completions and oil and gas production. The business segment contributed 22.8% to National Oilwell Varco’s 2015 total sales but delivered just 5% in profit margin. The segment lost 27.6% in the fiscal year.
(National Oilwell Varco Completion & Production Solutions, Company Website)
National Oilwell Varco’s business seemed to have suffered terribly given the findings above. Accordingly, National Oilwell Varco’s share price had a total return of -52.91% since the oil price collapse in September 2014. In contrast, Standard & Poor's 500 returned 12.77%.
Further, the company cut its dividend by 89% in the first quarter to preserve capital and keep its business afloat. Accordingly, $615 cash flow would then be allocated elsewhere in the company’s operations.
National Oilwell Varco also was identified as the top job cutter in the first half of this year with 17,850 layoffs through May. The company employed 50,197 workers in 2015.
(National Oilwell Varco workers near its oil duct reels, Wall Street Journal)
Obviously, National Oilwell Varco is trying its best to survive this oil downturn. It is not the only oil and gas company that has been struggling. According to the New York Times, more than 150 oil and gas companies have filed for bankruptcy, and about 150,000 workers have been laid off in North America since early 2015. Also, about $150 billion of exploration and production budgets were shelved through 2017, which had been translating to poor sales performances of the surviving companies.
Nonetheless, Brent Crude price hovered between $100 and $110 per barrel in 2014 but trades at $43.36 per barrel today. This is the result of excess in refinery production as discussed in an earlier article about Philips 66 (PSX). "Phillips 66: Time to Bail Out?"
Sales and profits
In the second quarter, National Oilwell Varco reported another decline in sales and profits. Here are some encouraging words from Clay Williams, National Oilwell Varco’s chairman, president and CEO:
“Our second-quarter results reflect further declines as global oilfield spending again fell sharply following the crude oil price bottom we saw in February.
“We are responding by aggressively reducing costs and restructuring our operations to match this market reality. I am grateful for our experienced team, which continues to focus relentlessly on costs and efficiencies. Importantly, our team also continues to invest in our future, leveraging our global resources and installed base of equipment to expand our considerable technology portfolio. National Oilwell Varco has a long history of delivering innovative solutions and crisp execution to the oil and gas industry. We will continue to help drive our industry to better economic returns and a brighter future.”
National Oilwell Varco’s sales declined 56%, compared to the same quarter last year, to $1.7 billion. National Oilwell Varco’s operating profits became a loss of $270 million compared to $438 million a year ago. The company has been in the red since the fourth quarter of 2015.
Cash, debt and book value
As of June 30, National Oilwell Varco has a total cash of $1.66 billion and a total debt of $3.28 billion found in its unaudited financial statements. The company had a debt-to-equity ratio of 0.20. National Oilwell Varco also had a book value of $16.19 billion in contrast to its ongoing market capitalization of $12.2 billion. Nonetheless, National Oilwell Varco is carrying 66% or $10.7 billion of its assets as goodwill and intangibles.
Cash flow
In fiscal year 2015, National Oilwell Varco had $1.3 billion in cash flow from operations despite having negative profits. This was primarily brought by the $1.69 billion impairment charge the company had to file that year. The company spent just $453 million in capital expenditures leaving it with $879 million in free cash flow.
National Oilwell Varco also borrowed $11.38 billion. The company reduced its debt by $10.62 billion that year. National Oilwell Varco also provided $2.9 billion to its shareholders primarily through share repurchases (76% of total) and dividends.
Conclusion
National Oilwell Varco’s business operations seem to have been surviving because of its amazing balance sheet. Primarily, National Oilwell Varco can and has borrowed to support its declining business operations. With most inefficient oil and gas-related companies going bust, National Oilwell Varco still fights quarter after quarter.
A prospecting investor must consider that National Oilwell Varco has undergone extensive cost-cutting measures and heavy impairment charges to also keep the business afloat. A recent report about an ongoing refinery products glut raises another concern in the already badly battered industry (see Philips 66 article "Phillips 66: Time to Bail Out?").
On the other hand, some professionals are turning a bit optimistic by year end and saying that demand will eventually offset the ongoing glut in oil. A poll of 29 analysts revealed that the group expects Brent crude futures to average $58.63 per barrel in 2017, rising to $66.28 in 2018.
Further, the survey forecast U.S. WTI crude futures to average $44.12 a barrel in 2016. Also, the world’s two largest providers of oilfield drilling and fracking services, Schlumberger (SLB, Financial) and Halliburton (HAL, Financial), have now declared that the worst may be over in the two-year-old oil market crash
Despite "only" having losses of about 12% in my National Oilwell Varco investment so far, I have sold out my entire investment. I would rather have some cash set aside than wait for things to turn around in what seems the oil industry's never-ending volatility. I do not see National Oilwell Varco as a hard sell at this point, but if one can find another worthy business that is of good value and is oriented in a nonoil services and equipment business for the mean time, maybe that is where he should put his money instead. I may also be myopic in this case as I have not really read into either Halliburton's or Baker Hughes' (BHI, Financial), two big oil services giants, current condition.
I initially bought National Oilwell Varco shares thinking that it is the best oil and gas service sector because of Warren Buffett’s buying and selling of its shares years ago. Its current balance sheet did not fail this assumption. Also, I thought that it was at its bottom when it hit the low 50s sometime last year. As it turned out, there was more to learn from understanding a company’s business and its environment than optimistically hoping to get Buffett-like investment results by following his previous equity investments and developing my own "floor price" assumptions.
As a prospective investor, I would still specifically observe National Oilwell Varco’s Wellbore Technologies segment on whether it will go back in the black after sustaining heavy losses over the recent quarters. This would mean that oil companies are again seeking to dig wells and the like and asking National Oilwell Varco's help. On the other hand, there are signs of oil price bullishness, too. Halliburton, a competitor, looks forward for its operations in North America to hit break even again by first quarter of 2017.
Disclosure: I sold my National Oilwell Varco shares not more than 12 hours ago.
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