Morningstar | National Oilwell Varco Posts Weak First-Quarter Results (Per Prior Management Guidance)
National Oilwell Varco posted very weak first-quarter results, as management had previously guided. Revenue fell 19% sequentially (although it remained up 8% year over year), driven chiefly by about 25% drops in both the Rig Technologies and Completion & Production segments. Adjusted operating margin fell to negative 1.9% from 4.5% in the prior quarter, marking a two-year low. Although these are very weak results, they are mostly attributable to short-term factors, therefore our fair value estimate is unchanged for now.The Completion & Production segment experienced the worst results, with segment adjusted operating margin falling to negative 4.1% (from 7.7% in the prior quarter), marking the worst quarter on record for the segment. Management described the segment's drop as a "perfect storm," and indeed the decline was broad based. North America revenue fell 17% as customers responded to the U.S. shale completions slowdown by curtailing their purchases. In particular, the firm's U.S. pressure pumping sales fell 58%. Meanwhile, international (especially offshore) revenue fell precipitously after a very strong fourth quarter. Management believes the first quarter will mark the trough level of offshore C&P revenue. At the very least, overall segment results should rebound in coming quarters thanks to strong order flow and recovering U.S. shale activity.
Although the Wellbore segment only saw an 8% drop in revenue, we were disappointed that segment adjusted operating margin fell to 2.1% from 7.4% in the prior quarter (a large drop compared with historical incrementals). The key reason for this was likely weakening pricing in certain project lines, which was confirmed by management commentary. The segment was also hurt by an abrupt drop-off in drill pipe sales (which accounted for one half of the segment's fall in revenue), which was particularly harmful to the bottom line given the business' relatively high operating leverage.
National Oilwell Varco is an independent provider of equipment and technology to the upstream oil and gas industry. The company's segments include: Wellbore Technologies, which designs, manufactures, rents, and sells a variety of equipment and technologies used to perform drilling operations; Completion and Production Solutions, which designs, manufactures, and sells equipment and technologies for hydraulic fracture stimulation, well intervention, onshore production, and offshore production; and Rig Technologies, which designs, manufactures and sells land rigs, offshore drilling equipment packages, and drilling rig components that mechanize and automate the drilling process and rig functionality.
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