Stacking Cash and Taking Names in the Oil Patch

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Last quarter, we saw National Oilwell Varco (NYSE: NOV) taken down a notch following a 9% sequential contraction in its backlog. With not a single order coming in for a "floater" (i.e. deepwater rig) this time around, the company had a similar tale to tell in its third-quarter conference call yesterday.

Revenue for the period came in at $3.1 billion, representing a small sequential uptick. The big-ticket rig technology segment racked up $2 billion in sales, with $1.6 billion coming out of backlog. NOV delivered seven offshore rigs in the quarter, taking this cycle's total to 66. The firm is busily rigging up another 33, so this rig-building game is hardly played out. A glance at the fleet status reports of deepwater drillers like Transocean (NYSE: RIG) or Ensco (NYSE: ESV) will confirm that.

There were 12 new rigs awarded term contracts in Brazil in 2008 that NOV is still holding out for. Financing is just tough right now. Banks are now requiring 25% to 30% equity in these projects. If you're trying to build a rig without a contract in hand, you can forget about a loan guarantee from your local government or trade finance institution. No wonder, then, that NOV's factories are running at 50% to 70% of 2008 levels.

Long-term deepwater demand is clear enough. Just look at the likes of CNOOC (NYSE: CEO), ExxonMobil (NYSE: XOM), and BP (NYSE: BP) jostling for a place at the table in Ghana. As frontiers open up, the world will need a lot more deepwater rigs. What we have on our hands is a lull within a long-term fleet overhaul.

In the meantime, NOV has more breathing room to perform at a very high level on its current orders. The rig technology group posted record margins in the quarter, and the firm overall is generating copious free cash flow. As for taking names, the oil services sponge is looking at $600 million in acquisitions this year, barring a breakthrough with one of the $1 billion-range offers that have so far been rebuffed.

NOV will come out of this downturn in very fine shape. I have to reiterate my call that there's no reason to cry for this rig builder.