National Oilwell Still Has Energy

8/3/2009


  Recent Price
$37
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
8
  Shares (millions)
418
  Long-Term Debt as % of Capital
6%
  52-Week Price Range
$83.00 - $17.60

National Oilwell Varco ($37; NOV) builds and outfits drilling rigs, while also providing parts and equipment covering the length of the energy supply chain.

The shares are sensitive to oil prices and quite volatile. In the last year, National Oilwell shares have been as low as $18 and as high as $83. Volatility will likely persist as long as investors anticipate continued spending cutbacks by oil and natural gas producers.

However, while some producers have downsized their capital investments, the spending cutback has not been as bad as many predicted. Even if the environment worsens in coming months, National Oilwell appears cheap based on pessimistic profit estimates for 2010. Moreover, many of the world’s rigs are past their expected lifespans. As one of the largest rig suppliers, National Oilwell should benefit from a long-overdue overhaul once the global financial picture starts to improve. National Oilwell is a Buy and a Long-Term Buy.

Business overview

The rig technology segment (56% of sales in the past 12 months) manufactures capital equipment, such as rigs, derricks, and cranes. Petroleum services and supplies (32% of sales) provides consumable drilling supplies, such as motors, bits, and pipe. Distribution systems (12%) sells replacement parts and smaller consumables.

In the June quarter, profits excluding unusual items decreased 13% to $0.90 per share, $0.03 above the consensus estimate. National Oilwell has topped Wall Street expectations in each of the past nine quarters. Revenue fell 9% to $3.01 billion in the quarter. Rig-technology sales were roughly flat at $1.92 billion, while revenue from services and supplies fell 27% to $913 million on a 36% lower global rig count. The capital-equipment backlog fell to $8.7 billion, down 9% from March-quarter levels. The company estimates 4% of the backlog is at risk of cancellation.

Oil-price picture brightens

In recent years, many energy producers seeking to take advantage of high oil prices embarked on unusually difficult and costly projects. After the pullback, some of those projects have become prohibitively expensive. But many others remain economically viable. Oil prices have held above $60 per barrel for most of June and July. While those levels can’t match last summer’s highs, they represent a solid rebound from February lows, and futures markets project a rise above $72 by the end of the year.

Petrobras ($42; PBR), Brazil’s state-owned energy giant, says most of its major oil projects are profitable at $45 a barrel. Petrobras plans to invest $174.4 billion in development from 2009 through 2013, including 28 new rigs. National Oilwell expects $3 billion to $4 billion in new orders this year, counting on Petrobras for about 60% of those orders.

At eight times trailing earnings, National Oilwell trades 45% below its five-year average trailing P/E ratio. Moreover, the company’s finances are solid. National Oilwell has no debt coming due until 2011.

The consensus anticipates per-share profits will fall 30% to $3.48 this year and drop 16% to $2.93 in 2010. An annual report for National Oilwell Varco Inc. is available at 7909 Parkwood Circle Drive, Houston, TX 77036; (713) 346-7500; www.nov.com.

 

NATIONAL OILWELL VARCO
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $0.90 vs. $1.04 - 9% $40.69 -

$27.52

8 - 6
Mar '09 1.13 vs. 1.12 + 30% 34.48 - 22.19 7 - 5
Dec '08 1.41 vs. 0.05 + 43% 49.48 - 17.60 11 - 4
Sep '08 1.32 vs.

1.02

+ 40% 92.70 - 42.78 22 - 10
           
Year
(Dec.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2008 $13.43 $4.90 $0.00 $92.70
-
$17.60 19 - 4
2007 $9.79 $3.76 $0.00 82.00
-
26.88 22 - 7
2006 $7.03 $1.94 $0.00 38.80
-
25.81 20- 13
2005 $4.64 $0.88 $0.00 34.17
-
16.54 39 - 19
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
96 73 98 98 90 8 40

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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