Source: National Oilwell Varco
National Oilwell Varco (NOV) reports quarterly earnings February 6th. Analysts expect revenue of $2.11 billion and EPS of $0.16. The revenue estimate implies a 1% decline sequentially. Investors should focus on the following key items.
Stagnant Revenue Growth
Oil markets could be key indicators on the direction of the economy. North America land drilling has been the best-performing sector over the past few years. That puts National Oilwell’s short-cycle businesses in focus. In Q3, the company generated $2.1 billion in revenue, flat sequentially.
Completion/Production revenue rose by double digits. Every other segment reported a decline in revenue. Wellbore Technologies revenue of $793 million fell 7% sequentially, as demand for short-cycle products and services in North America softened. Completion/Production benefited from increased shipments of subsea flexible pipe and other products related to international and offshore markets. Rig Technologies revenue fell 3% as after-market business improved, yet equipment sales into North America faltered.
Wellbore Technologies and Completion/Production are a proxy for National Oilwell’s North America operations. They represented about 66% of total revenue. Halliburton’s (HAL) Q4 revenue from North America fell by double digits; it implied an oversupply of the gas market may have amplified the decline:
Turning to North America. The U.S. shale industry is facing its biggest test since the 2015 downturn with both capital discipline and slowing leading edge efficiency gains weighing down activity and production. As expected in the fourth quarter, customer activity declined across all basins in North America land, affecting both, our drilling and completions businesses. The rig count in U.S. land contracted 11% sequentially and completed stages had the largest drop we have seen in recent history.
While holidays and weather were the usual factors, other reasons for this air pocket in activity included our customers’ free cash flow generation commitments and an oversupply of gas market.
National Oilwell could face similar headwinds in Q4. Having such a large percentage of its revenue exposed to a declining segment could be foreboding. The rig count in U.S. land contracted 11% sequentially during the quarter, another indication that E&P in the oil patch remains stagnant. A loss of pricing power in the oil patch could await.
Cost Containment Efforts
In Q3, National Oilwell reported EBITDA of -$40 million. This was an improvement compared to the -$201 million reported in Q2. Gross profit was $151 million, more than double the $62 million reported in Q2. Gross margin was 7%, up 400 basis points sequentially. SG&A expense of $293 million was down 30% Q/Q, yet was still impacted by severance costs. Management has been cutting costs to offset stagnant revenue growth.
In Q4, National Oilwell expects to realize an incremental $40 million in annual cost savings. In December, the company announced it was suspending operations at a facility in the Houston suburbs:
Struggling oil field service company National Oilwell Varco plans to suspend operations at a facility in the Houston suburbs and lay off 85 people.
In a letter Nov. 22 letter to the Texas Workforce Commission, NOV Vice President of Human Resources Jeff Dodd said the company’s Galena Park plant would cease operations by Jan. 21 and that the layoffs would be permanent.
Superior Energy (SPN), Halliburton, and Schlumberger (SLB) have also been cutting costs. The oil industry is cyclical in nature; sans more OPEC supply cuts, I believe oil markets will falter long term. National Oilwell must cut costs and generate consistent positive EBITDA to prove it can service its $2.5 billion debt load.
NOV Remains Overvalued
NOV has an enterprise value of $9.1 billion and EBITDA of $146 million over the last 12 months (“LTM”). NOV trades at over 60x LTM EBITDA, yet EBITDA likely contains noise from cost cuts and severance charges. I would be keen to hear from management what it thinks normalized EBITDA is. For now, the valuation appears untenable given stagnant revenue growth and depressed margins.
NOV is down over 25% Y/Y, and its valuation remains untenable. Sell NOV.
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