Varco's Still As Strong As They Come

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In the energy industry, earnings season is far more than a time to discover corporate results for the quarter just past. For those companies willing to describe macro trends, post-release calls can provide a host of information about big-picture trends onshore and offshore, in North America and internationally.

There was a time, before his retirement, that Schlumberger's (NYSE: SLB  ) Andrew Gould was a font of information on the big picture in energy. Today, it seems that the top spot for providing energy industry information has been claimed by National Oilwell Varco (NYSE: NOV  ) CFO Clay Williams. I therefore urge Fools with a taste for energy to carefully peruse a transcript of the Varco call.

A soft beat
Before noting some of Williams' key comments, let's briefly note Varco's primary results for the quarter, along with its progress in consummating its latest significant acquisition. Clearly, the company posted yet another solid quarter. Net income was $612 million, or $1.43 per share, compared with $532 million, or $1.25 per share, a year ago. If you back out items, however, the per-share line was $1.52, a touch higher than the analysts' $1.51 consensus. Revenue was up a strong 42% year over year to $5.32 billion.

National Oilwell Varco operates through three primary segments: rig technology, petroleum services & supplies, and distribution & transmission. Revenues for the first two units were up 29% and 18%, respectively, year over year, while the distribution & transmission top line was a whopping 174% higher. The last-named segment was buoyed in large part by the substantial number of acquisitions that occurred during the second quarter of this year.

During the first month of the quarter, Varco announced the agreed-upon purchase of Robbins & Myers (NYSE: RBN  ) , a Houston-based oil-field services company. The $2.5 billion acquisition will add substantial pump technology and flow control capacity to Varco's operations. While it is still expected to be completed this year, federal regulatory requests for additional information from the two companies could conceivably push consummation of the combination into 2013.

Key company comments
Now, for a clearer picture of the current world of oil and gas exploration and production, along with trends that appear to be developing therein, let's consider some of Williams' key call comments:

On geographic differentials: "This was a complicated quarter. The crosscurrents and divergent trends are rising across many of our major market areas. While demand for deepwater offshore drilling rigs is high and rising, and most international markets are steadily pushing activity higher, headwinds intensified in North America..."

More detail on activity on our continent: "Canada is usually up big in the third quarter, thus this year's seasonal recovery out of breakup was pretty tepid. All across North America, it seems everybody is hesitating. Large cap E&Ps are laying down rigs and a new parsimoniousness is sweeping through the North American oilfield complex."

On the international picture: "...we are simultaneously hearing a clear chorus of 'drill, baby, drill' from overseas in Spanish, Russian, Portuguese, Arabic, Bahasa, and Mandarin voices. Tenders are picking up as drilling contractors increasingly adopt modern AC power and electronic controls, and as overseas operators increasingly employ horizontal well pads and hydraulic fracture stimulating techniques refined in North American laboratories."

On a possible reduction in fourth-quarter petroleum services and supplies (PS&S)margins: "Although 1,839 rigs drilling in the U.S. last week is a solid level...our customers can cut purchases and use their own inventories of consumables (primarily drill pipe) for a time...Price pressure has now emerged and will take a toll on margins in the fourth quarter..."

On the deepwater: "We believe that the strength of deepwater day rates in 2012, despite several years of meaningful fleet growth and highly visible capacity additions, supports our thesis that the world has, and will continue to build out a large deepwater capability well into the 21st century to exploit new deepwater frontiers..."

Looking ahead to probable fourth-quarter results, Williams expressed an expectation that rig technologies' revenues are likely to expand by 1% to 2% (sequentially), with margins "about flat with third quarter 2012 results." PS&S sales are expected to be "about flat to down slightly compared to the third quarter due to declining North American sales." And management expects distribution and transmission group revenues "to decline in the mid-single-digit range, owing to North American headwinds."

I must conclude with a comment from Williams that I consider to be especially telling about the potential for a strengthening in North America: "With oil relatively stable around $90 per barrel through the quarter...and with gas in the $3.40 range and trending up, we are surprised that North American activity isn't more robust." I concur, and am inclined to point once more to the often unpredictable cyclicality that characterizes the quest for oil and gas, especially in the U.S.

The Foolish conclusion
With Varco activities as a backdrop, I'll eagerly await results from the company's primary rival, Cameron International (NYSE: CAM  ) , on Wednesday and from Weatherford International (NYSE: WFT  ) in mid-November. Come what may, however, I remain convinced of the strength and long-term attractiveness of National Oilwell Varco, and urge Fools to put the company on your Watchlist.

David Lee Smith has no positions in the stocks mentioned above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services recommend National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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