National Oilwell Varco: Bigger and Better Than You Thought

Especially in the currently soft global economy, it's difficult to find a company, regardless of industry, that is more solid than National Oilwell Varco (NOV 0.05%). And while there obviously is some concern regarding its short- and medium-term future, especially as it relates to the North American onshore market, it appears likely that Varco will retain its spot as one of the more compelling companies in the energy sector.

Looking at its results for the fourth quarter of 2012, Varco earned $668 million, or $1.56 per share, up from $574 million, or $1.35 per share for the comparable quarter a year earlier. Eliminating special items, earnings would have come to $638 million, or $1.49 per share. The latter figure topped the consensus expectation of analysts by $0.05. Revenue was up by a third to $5.69 billion, versus $4.26 billion for the final quarter of 2011.

Looking ever so quickly at each of Varco's three individual sectors, the largest, rig technology, recorded a 25% hike in year-over-year revenues to $2.90 billion. Next came petroleum services and supplies, which checked in with $1.77 billion in revenues, or 13% higher than a year earlier. And distribution and transmission's $1.27 billion in revenues represented a 126% year-over-year jump, due mostly to the effects of mergers on the segment.

One big dude
Before continuing, it appears appropriate to clear up a misconception about National Oilwell Varco: The company is not, as is frequently assumed, a mid-sized oil-field services company looking up at what has long been thought of as the four largest members of the group. As typically lumped together, those companies are Schlumberger (SLB 0.43%), Halliburton (HAL -0.71%), Baker Hughes (BHI), and Weatherford International (NYSE: WFT). But take a gander at the table below, with the five biggest services company ranked in descending order of market capitalization:

Sources: Yahoo! Finance and TMF calculations

Obviously, Varco is not the small kid on the block, hankering to play with the big boys. Indeed, by market capitalization, it's nearly three times the size of Weatherford. Given its combination of strong operating margin and a debt-to-equity ratio that comfortably leads the pack, it must trade at a premium to the group, right? Wrong. Its forward price-to-earnings ratio, at just below 10 times, makes it the lowest of the five.

Growing the backlog
Before moving to what may lie ahead for Varco, it's worth noting that the company continues to perform admirably in the all-important expansion of its capital equipment backlog. At the conclusion of the quarter, the figure was a record $11.86 billion, up 2% from the level at the close of the third quarter.

As I've noted to Fools in the past, Clay Williams, who was promoted to president and chief operating officer of the company in December, is unusually adept at relating industry macro conditions to the likely future of National Oilwell Varco. As he said on the company's post-release call: "As we enter 2013, we see cross-currents in the markets we serve. Demand for offshore floating rigs and equipment is strong and constructive, but markets for land equipment and services across North America remain hesitant."

Is the deepwater dropping?
Focusing on the all-important deepwater, he said: "Our outlook for continued strong deepwater orders is a view that appears to be out of step with Wall Street's conventional wisdom, which seems to have convinced itself that deepwater rig ordering will slow." He then proceeded to substantiate his opposition to that conclusion by noting several trends. For instance, he cited recent payment terms being offered by shipyards, "particularly new Chinese yards" that are offering terms of 10% down, and 90% upon delivery.

He also cited substantially reduced risk of cost overruns or late deliveries from "established suppliers like NOV." In addition, he noted Brazil's commitment to order and build rigs in country, the record number of deepwater discoveries in 2012, and the high utilization and day rates for "scarce deepwater rig assets."

There's no question that U.S. land activity continues to slow. But trends in energy are seldom, if ever, perpetually linear. In fact, it wasn't long ago that North American activity was compensating for a tepid international sector. And without regard to how quickly our continent's land activity becomes reinvigorated, it's nevertheless informative to consider comments made by CEO Merrill Miller during the call:

I really do think you are going to see an escalation of shale drilling internationally. It's gone slow. I think a lot of people are of the opinion that maybe it's not going to ramp up as rapidly as you think, but I think that will change.

The Foolish takeaway
National Oilwell Varco's results for the December quarter did absolutely nothing to alter my feeling that the company is as solid as any member of the energy sector. I'm obviously in a majority there, since all but five of the 30 analysts who follow the company rate it at least a buy. It's therefore a company that I urge Fools with even the slightest taste for energy to monitor carefully.