National Oilwell Varco Is Still Hitting on All Cylinders

Shares of National Oilwell Varco (NYSE: NOV  ) , a five-star Foolish favorite and leader among many oil-field services investors, slid backwards by about 4% Tuesday. The culprit? Quarterly results that, while generally solid, saw margins in its all-important rig technology segment slide by three percentage points. But we're navigating in a bouncy market, and by Wednesday all seemed well as the company's shares resumed their ascent.

For the quarter, the company reported earnings of $531 million, or $1.24 per share, up from $502 million, or $1.17 a share sequentially from the first quarter of this year. Backing out $57 million in pre-tax transactions charges, however, boosted the most recent quarter's per-share number to $1.33, in line with analysts' consensus expectations. Revenues for the quarter were $5.60 billion, up 6% sequentially and 18% year over year.

Thinner marginally
While, as noted, margins in the rig technology unit dipped to 20.7%, from 23.7% a year earlier, the decline is not devoid of what are acceptable explanations. At the same time, the unit, which provides key components and parts for the bevy of rigs being constructed for use virtually around the world, was responsible for metrics indicating overarching strength at the expanding company.

For instance, the segment's revenues reached $2.83 billion, more than half the corporate total, 8% higher sequentially, and 18% above those of the comparable quarter of 2012. Further -- and more importantly -- the rig technology backlog jumped by 24% year over year to $13.95 billion, an all-time record. The countervailing forces that chipped away at margins included ongoing softness in the U.S. onshore market, unusually severe seasonality in Canada, and tighter delivery schedules for rig technology, which hiked freight and personnel costs.

A fearsome foursome
Taking a more broadly based overview of the company's progress, Clay C. Williams, its president and chief operating officer, noted on his call with analysts four positive developments that were especially noteworthy during the second quarter and that bode well for subsequent periods:

  • Williams first noted the "very strong order flow continued for new offshore rigs, both floaters and jack-ups. FPSO (floating production, storage, and offloading) production equipment orders also surged."
  • Second, the company made excellent progress on the integration of the several significant acquisitions made recently. "Each of these acquisitions strengthened NOV's market leadership position in a particular product or market."
  • Third was solid progress on "several organic expansion initiatives under way..." (My editor would surely crucify me, were I to repeat the entire litany of such developments. But as Williams warned listeners on the call prior to providing the details, "... get ready, because this is a really long list.")
  • And finally, the company "made continued sustained investments in new products and technologies to make oil and gas extraction safer and more efficient."

An order jack-up 
While the rapidly increasing activity in deepwater and ultra-deepwater in places like the Gulf of Mexico and Angola continues to receive major attention, it's also worth noting that new or upgraded jack-up equipment continues to be added globally. One result for Varco has been the receipt of orders for 17 jack-up packages during the first quarter, another dozen in the June period, and expectations that the strong flow will continue through the current quarter and beyond.

Going up by going down
I've recently discussed the exponential growth in subsea production and its benefits for the likes of Cameron International (NYSE: CAM  ) and Schlumberger (NYSE: SLB  ) -- through the formation of OneSubsea, their new joint venture charged with developing and providing sophisticated technology, equipment, and systems for working on the sea floor. Ditto General Electric (NYSE: GE  ) , which has also achieved a leadership position in facilitating subsea completions and production.

But don't get the idea that National Oilwell Varco is a bystander as offshore production dives deeper. Given a "strong order intake for subsea production products", the company now sports a more than $800 million backlog for subsea products.

Foolish takeaway
So, while there were some weaknesses for Varco "at the margin", their causal factors are almost certainly transitory. However, the conditions that have powered the companies substantial strengthening and expansion are far more likely to linger, making its shares a sagacious choice for investors with a preference for the oil-field services sector. 

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