National Oilwell Varco Inc's Future Is Bright

National Oilwell Varco sold off after releasing its first quarter results but the long-term investment case remains intact.

May 18, 2014 at 10:14AM

When National Oilwell Varco (NYSE:NOV) released its first quarter earnings report last week, the market didn't like what it saw.

National Oilwell Varco's stock slumped following the report as investors panicked over the fact that the company was expecting a fall in rig technology equipment orders by the end of the year. Management stated that although the backlog of orders for rig technology equipment hit a high of $16.4 billion during the first quarter, this backlog could end the year at $14 billion to $15 billion -- a low estimate that shocked some analysts.

However, while this is bad news for short-term traders on Wall Street, National Oilwell Varco's weakness is great news for long-term investors. Looking over the long term, National's Oilwell Varco's management remains upbeat, highlighting two key trends currently emerging within the industry that should boost long-term profits.

Firstly, National Oilwell Varco's management notes that the majority of "easy oil" has already been discovered, and future conventional sources will become increasingly challenging to find. Nevertheless, oil consumption will continue, so exploration and production companies will have to use more advanced technologies to search for reserves. The majority of this exploration is expected to be on deepwater and shale plays; both of which are not cheap.

National Oilwell Varco produces equipment for both of these plays, and it would appear that the trend toward more high-spec equipment is already benefiting the company.

Overlooked factor 
The second point is a seriously overlooked issue that is very important. One of the most important factors currently facing the deepwater drilling space is a lack of experience as new rigs come online. Specifically, a lot of new deepwater rigs have been launched recently with new crews, and these are operating under tighter operational requirements post-Macondo.

So, in order to both profit from this trend and assist the industry, National Oilwell has developed a first-rate training department to offer hands-on simulation and on site training. But not only does the company provide training it also offers students educational material for easy reference after the course is completed. The whole process is designed to be intensive and minimize time spent away from work.  

Aside from the offshore market, National Oilwell's order book for onshore rigs continues to expand. The company is now seeing North American onshore drillers resume buying equipment, along with sales to the Middle East, Russia, and Latin America.

There are also trends that show drillers around the world are retooling the land rig fleet to newer, more modern levels of capability.

An interesting trend
National Oilwell's results reveal a trend currently gaining traction within the oil services industry. It would appear that the industry is now transitioning toward a more high-specification nature, favoring bespoke projects and more services-orientated skills such as mapping and training over the traditional industrial side of the industry.

For example, National Oilwell's sector peer Schlumberger (NYSE:SLB) reported in its first quarter results that the company's technology division is now one of the fastest-growing parts of the business. 

Schlumberger CEO Paal Kibsgaard is focusing on driving sales of the company's patents and technology, services that allow oil companies to increase production at a lower cost.

These services include mapping the ground to find oil reserves, and the company is making investments in this portfolio. It has more than doubled the number of technologies patented for use within the U.S. during the past nine years.

Even better, the technology side of the business is higher margin than the traditional oil services market. Schlumberger's margins have ticked up as a result, in spite of sliding revenue and operating profit. Schlumberger's operating margin stood at 22.4% during the fourth quarter of 2013, but ticked up slightly to 22.7% during the first quarter of this year despite a 5.4% decline in revenue.

Foolish summary
Overall, it would seem as if National Oilwell Varco is set to profit over the long-term. Despite short-term headwinds, the company still has a record order backlog and is a leader in its field. This means that companies will continue to look toward National Oilwell Varco for its experience and technology for use within harsh drilling environments.

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Rupert Hargreaves owns shares of National Oilwell Varco. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of 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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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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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