EUR 850.00 For Business Accounts Only

Morningstar | NOV Updated Forecasts and Estimates from 12 Oct 2018

National Oilwell Varco experienced an excellent second quarter, with revenue surging 17% and adjusted operating margins improving to about 2.5% from negative 0.5% previously. Encouragingly, the long-beleaguered rig technologies segment drove the majority of the revenue improvement, as well as a good deal of the operating profit increase. For now, our fair value estimate and no-moat rating remain unchanged.

Each segment contributed to the uplift in results. In wellbore technologies, growth was driven by both increasing U.S. shale activity and a sharp seasonal rebound in Eastern Hemisphere markets. The drill pipe business finally delivered a solid quarter. Management reported that customers’ drill pipe inventories have been approaching record low levels (after several years of destocking), setting the business up for a rebound over the next several years. Even without substantial pricing increases, the impact of operating leverage alone means that drill pipe will offer a source of revenue improvement with very strong incrementals.

The completion and production segment saw solid improvement driven by sales to U.S. pressure pumping customers, somewhat offset by continued weakness in offshore-focused business lines within the segments. As the latter business lines will likely improve in the second half of the year, the segment’s bottom line should continue to improve. However, we are more skeptical about continued strong revenue growth, given strong signs that pressure pumping is reaching overcapacity. Still, National Oilwell Varco could drive continued growth via improved market share, and it has reported strong uptake of its recently introduced completion and production offerings.

The strong rig technologies segment improvement came off of a first quarter that was the segment’s worst in years, as progress improved on previously stalled offshore rig building projects. The booking of $2 billion in orders from the Aramco rig-building joint venture is encouraging, although revenue from the deal will not materialize until 2021 and will be spread over at least a 10-year period. Rig technologies was the star of NOV during the company’s 2010-14 heyday, but we wonder whether investors are now overrating the prospects for a return to those conditions, with National Oilwell Varco’s share price now trading over 20% above our fair value estimate. No feasible oil price scenario will be sufficient to compel a widespread return to rig building, in our view, limiting the possible recovery for this segment.