National Oilwell Varco's Welcomed Pause

One of my favorite expressions (admittedly homemade) is that almost nothing in life is ever linear. No matter how ineluctable a trend appears to be, it's likely to be characterized by a two-steps-forward-one-back, or vice versa, tendency.

So it appears to be with National Oilwell Varco (NYSE: NOV  ) , of late the darling of the oilfield services sector. On Friday, however, it was the purveyor of news that its first-quarter 2013 results had fallen well below the consensus expectations of those who watch it most closely.

For the quarter, the company checked in with per-share earnings -- excluding one-time baggage -- of $1.29 per share. The analysts had pegged the number at about $1.36 or $1.37 a share, depending on whose assessment you're monitoring. Perhaps even more importantly, the number was $0.15 below the comparable year-ago metric. At $5.31 billion, revenues also slid in under expectations, which had lined up at $5.42 billion.

A mixed quarter
These shortfalls did not occur in a quarter in which the services group has languished and generally disappointed at earnings time. Indeed, the figurative chieftain of the group, Schlumberger (NYSE: SLB  ) , reported precisely a week earlier that it not only had topped the forecasts of the Wall Street seers, but in fact had also outdone the prior year's results. Baker Hughes (NYSE: BHI  ) didn't accomplish the latter feat, but it topped the analysts' prognostications and even managed to radiate an air of optimism about the North American onshore picture, recently the bane of the group's existence.

Does this mean National Oilwell Varco is done for? Washed up? Hardly. We're still talking about a company that sits amid a vital portion of the energy industry and that will continue to enjoy bright prospects unless mankind summarily discontinues the production and consumption of oil and natural gas. The company's simply displaying the two-steps-forward-one-back thing.

The individual units
Turning to the company's three operating units, rig technology recorded more than a 16% revenue increase, year over year. At the same time, its operating profit was up a minuscule 1.1% from the first quarter of 2012. As such, the operating profit for the segment slid to 21.2%, from the year-ago 24.4%.

Revenues for the petroleum services and supplies segment were virtually flat, while its operating profit dipped by just under 25%. That combination caused its operating margin to tumble to 18.8%, from 22.8% as recently as the last year's initial quarter.

The smallest of the three units, distribution and transmission, turned in a more than doubling of its revenues -- 118%, to be precise -- thanks to bevy of completed acquisitions, while its contribution to operating income was up slightly by more than 50%. As a result, that metric was about 43% lower year over year.

The metric that really counts
Now, having regurgitated all of those numbers for you, I'll venture that they're all of far less importance -- except as they imply long-term trends, which they clearly don't yet -- than the backlog for the rig technology segment. That's the true measure of what probably lies ahead for National Oilwell Varco. At the close of the quarter, the backlog stood at $12.92 billion, an 8% increase from its level at the immediately prior December quarter.

Varco President Clay Williams put some meat to the bones of the backlog trend when he said on the company's call:

Rig technology capital equipment orders totaled $3 billion, or second-highest quarterly total ever. We received orders for 17 drilling equipment packages for jack-up rigs and eight ... for floating rigs, including three for Brazil in the first quarter. We also had a significant increase in orders for FPSO [floating production, storage, and offloading] equipment. Our outlook for the second quarter remains very strong, as we expect even more FPSO orders, plus another great quarter for jack-ups.

It's also noteworthy that, as Williams said, "we are very cautious about North America and continue to see headwinds here as pricing and volumes remain under pressure, and demand for pressure pumping and drilling equipment remains weak." That puts him in Schlumberger's camp, but in opposition to Baker Hughes and Halliburton (NYSE: HAL  ) , which joined together in proclaiming a brightening picture for our continent.

A Foolish takeaway
After 51 acquisitions
in the past four years -- including its biggest, Robbins & Myers, which closed during the quarter -- National Oilwell Varco appears to be catching its breath. Beyond that, it's noteworthy that Cameron International (NYSE: CAM  ) , a competitor of Varco in some areas (blowout preventers, for instance) also reported results last week that came in under expectations.

In all, I remain every bit as optimistic about National Oilwell Varco as I was a week or a month or a year ago. I actually welcome the company's pause to dust itself off.

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