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Morningstar | National Oilwell Varco's 3Q Disappoints Slightly Relative to Guidance; Our FVE Is Unchanged

National Oilwell Varco's third-quarter results fell slightly below prior management guidance, with revenue up 2% sequentially and adjusted operating margins improving to 3.4% from 2.5% chiefly due to lower corporate-level costs. For now, our fair value estimate and no-moat rating are unchanged.

The sequential revenue increase was driven by the wellbore technologies segment, which saw a 7% increase in revenue on broad-based improvement in drilling products and led by a "double-digit" increase in drill pipe sales. Still, wellbore segment operating margins actually fell slightly, to 4.7% from 4.8%, as NOV failed to recoup input cost inflation (particularly steel) via pricing increases on its products. Drill pipe pricing and margins have remained lackluster; however, global drill pipe inventories are still very low, and we expect this to eventually provoke a reversal in the market with improved sales volume and pricing for NOV.

Completion and production segment revenue was flat, falling short of management's previous guidance for 6%-7% revenue growth. The disappointment was broad-based, but a large contributor was slowing sales of U.S. shale completions-related equipment, such as pressure pumping units. This slowdown stems from the Permian oil takeaway constraints, which should alleviate after mid-2019.

Rig technologies segment results were essentially flat, but management is sounding increasingly optimistic about the business's outlook (albeit without quantifying any of these sentiments). However, we still remain pessimistic about the long-term outlook for offshore drillers, once NOV's most lucrative customer base.