In the third quarter of 2008, rig equipper National Oilwell Varco (NYSE: NOV ) drew $2.4 billion worth of net order additions, taking its equipment backlog to $11.8 billion. It has been a steady slide since then, with billings exceeding new bookings every quarter since.
Two years later, the streak has been broken. In its third-quarter release, National Oilwell Varco reported $1.18 billion of net order additions -- a 78% increase from the second quarter. This was enough to keep the backlog steady, at $4.9 billion.
So where are the pockets of strength today? We hit on one of them last quarter, and that's North American shale plays. National Oilwell Varco says it "dominated the landscape" during the period, but with a twist. Whereas in the early days of the shale boom there was mostly gas-directed drilling in places like the Fayetteville and the Haynesville, many operators are now scrambling to target oily plays like the Niobrara.
Whether operators are targeting oil or gas, National Oilwell Varco sells a lot of the equipment needed to drill shale wells. From top drives to automatic pipe handling systems, and from drill bits to drill pipe, the company has it covered. When international shale plays start to blossom, this company will be very well positioned to cash in on that trend.
As for the offshore business, orders for new deepwater rigs are still muted following the credit crisis, and the Macondo disaster didn't help that situation any. If there's a silver lining for National Oilwell Varco, it's that there has been a scramble by Gulf of Mexico drilling contractors to get their rigs up to new regulatory standards. Specifically, companies like Noble (NYSE: NE ) and Diamond Offshore (NYSE: DO ) need to get their blowout preventers recertified, which typically involves some upgrading or augmentation of current pressure control capacities.
National Oilwell Varco did book two Brazilian rig packages in the quarter, and expects to land more when the new, long-anticipated tender by Petrobras (NYSE: PBR ) is opened this quarter (maybe). As for new rig orders outside of Brazil, management expressed optimism, even with regards to jackups. While there has been a concern over the past few years about excess capacity hitting the global jackup fleet, there has been a strong bifurcation between low-capacity rigs and the sort of rigs that Rowan Companies (NYSE: RDC ) brings to the table. We shouldn't be surprised to see more orders for high-end jackups, in other words.
Long-term macro forces continue to support a positive outlook for the king of rig outfitters. Investors can clearly see this, and I would probably wait for a more pessimistic moment to initiate a position here.