National Oilwell Varco Inc. Earnings: Does the Future Look Bright?

On Monday, National Oilwell Varco (NYSE: NOV  ) will release its quarterly report, and investors have been pleased about the oil services company's ability to keep taking advantage of the boom in oil and gas exploration and production. Even as oil field services giants Schlumberger (NYSE: SLB  ) and Halliburton (NYSE: HAL  ) have sought to capitalize on the popularity of hydraulic fracturing and deepwater offshore drilling, National Oilwell Varco has its fingers in just about every facet of the energy industry and has found lucrative ways to profit from it.

National Oilwell Varco has done an amazing job over the years of convincing oil and gas producers that its equipment is the best in the business, and as a result of its efforts, many of Varco's products have become standard issue on everything from deepwater drilling rigs to onshore horizontal-drilling equipment. Yet Varco goes beyond simply supplying big-picture needs, also focusing on oil-field staples like pipe, drill bits, and other basic parts that tend to wear out much more quickly than the higher-priced rigs themselves. As oil prices have remained high, can Varco continue to build on its competitive advantage? Let's take an early look at what's been happening with National Oilwell Varco over the past quarter and what we're likely to see in its report.


Source: National Oilwell Varco

Stats on National Oilwell Varco

Analyst EPS Estimate

$1.38

Change From Year-Ago EPS

7%

Revenue Estimate

$5.79 billion

Change From Year-Ago Revenue

9.2%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance

Will National Oilwell Varco earnings rise higher?
Analysts have cut their views on National Oilwell Varco earnings in recent months, reducing first-quarter estimates by $0.06 per share and cutting full-year 2015 projections by twice that amount. The stock, though, has remained strong, rising 8% since mid-January.

National Oilwell Varco's fourth-quarter earnings report gave investors a hint of both the opportunities and the challenges that the company has right now. Revenue climbed almost 9% from the year-ago quarter, but net income fell by about 1% due to a substantial rise in income taxes. Varco's rig-technology segment saw the biggest revenue gains, but the company's distribution and transmission segment experienced a slight drop in sales. Overall, operating margins fell by a full percentage point, with Varco pointing to the difficulties in the onshore North American market despite huge levels of exploration and production activity domestically.

Source: National Oilwell Varco

Yet as much activity as there is in North America, National Oilwell Varco realizes that the true opportunity for growth lies elsewhere. In a recent interview with the Motley Fool, CEO Pete Miller said that international markets represent Varco's best long-term opportunities, pointing to the waters off the coast of Africa as well as the Russian Arctic. Just as Schlumberger and Halliburton have built up expertise in developing U.S. projects, so too has Varco successfully acquired the skills necessary to take its vast experience across the globe for use in a wide variety of different situations.

In order to help focus on its most promising segments, National Oilwell Varco is preparing to spin off its equipment-distribution business. Although the business is world class, its margins are much lower than the rest of Varco's divisions. Once the spinoff is complete, investors hope that the surviving Varco entity will see share-price gains as investors reward the entity with higher multiples.

The bigger-picture success story for National Oilwell Varco, though, remains helping its customers cut their costs. By standardizing equipment and infrastructure, Varco can make replacement parts more efficiently, not having to customize parts for particular proprietary needs. If it can keep driving more standardization, then Varco might be able to help the industry whenever the next downturn for energy occurs.

In the National Oilwell Varco earnings report, watch to see if the company gives more specifics on when it will complete its spinoff. The sooner Varco can move forward, the sooner investors will see if they can reap the rewards of splitting up Varco's divisions to maximize growth potential.

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