This article is part of our Rising Star Portfolios series.
By now, loyal readers are familiar with how I roll here at the real-money, multivitamin portfolio. I normally buy partial positions in companies, watch things for a quarter or two, and buy more as long as conditions warrant.
After studying National Oilwell Varco's (NYSE: NOV ) third-quarter results, and listening to management on the conference call, I'm convinced it's time to add more of this oil-field services giant to my portfolio.
It's never too oily
I'm very impressed with the earnings results and the company's prospects going forward (what other direction can it go?). The basics are a 30% and 24% year-over-year increase in EPS and revenue, respectively. All segments saw healthy growth, especially Rig Technology, which had a record level of capital-equipment orders and the largest single order in the company's history.
The conference call was extremely interesting and dealt with a few different themes:
Shale -- Shale and other unconventional drilling now accounts for more than half of all North American activity. "What is striking to me about the evolution of the shale plays," says CFO Clay Williams, "is the shortening of the time requirements across so many operations." Wells are being drilled, cased, and fracked faster, and Williams says this accelerates demands for NOV's products because of its position in the supply chain of critical components. "This evolving, unconventional shale energy system with its efficiency-obsessed, time-shortening, consumption-accelerating drumbeat will continue to drive NOV's performance."
The same can be said, of course, about competitors such as Schlumberger (NYSE: SLB ) , Weatherford International (NYSE: WFT ) , and McDermott International (NYSE: MDR ) . But only Schlumberger can match National Oilwell Varco in size, and I prefer NOV's stronger balance sheet and higher margins.
Deepwater -- Thanks to an advantageous melding of two key ingredients -- technology and oil price -- deepwater drilling is also driving strong results. Williams says the third-quarter Rig Technology group's performance demonstrates that NOV is "uniquely positioned to benefit from this trend."
This performance included the landing of 28 offshore rig packages. Considering that Brazilian giant Petrobras (NYSE: PBR ) will be adding 21 more new floating rigs soon, the future looks bright.
M&A -- NOV has built its dominant position in this industry through mergers and acquisitions. The Ameron International purchase closed earlier this month, just one of 12 acquisitions for nearly $1.5 billion over the past year. We'll see the M&A strategy continue for the foreseeable future.
This strategy can be tough to execute, and has led many a company to mundane mediocrity, or worse. But NOV's management has executed so well for so long because, as CEO Pete Miller puts it, "We are not going to do M&A just to do M&A." He emphasizes prudent spending toward the strategic goal of giving customers the ability to use the more efficient and cost-effective "just-in-time" inventory strategy.
I've followed National Oilwell Varco for a long time, and have personally owned shares for over three years. I believe the company will be a dominant player for years to come, and is one of the best ways to gain exposure to the energy sector. I'll be adding another half position to this portfolio, or roughly $600 worth, tomorrow.
- Add National Oilwell Varco to My Watchlist
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