Foolish Forecast: National Oilwell Varco's Virtues

National Oilwell Varco (NYSE: NOV) is pretty much a one-stop shop for the oil drilling market. From top drives to tubing to tongs, NOV sells just about any equipment a wildcatter could want. Before the company reports third-quarter earnings tomorrow morning, let's size up the sizable supplier.

What Fools say:
Fools love their oil and gas equipment and services companies. The more exposure to the deepwater market, the better, but enthusiasm stretches across the entire spectrum:

	Market Cap (billions)	CAPS Rating	Bull Ratio
National Oilwell Varco	$25.9	*****	97%
Weatherford International (NYSE: WFT)	$21.5	*****	94%
Smith International (NYSE: SII)	$14.0	****	94%
Cameron International (NYSE: CAM)	$11.2	*****	98%

Data taken from Motley Fool CAPS and Capital IQ on Oct. 23, 2007.

What management says:
NOV management has already given us a heads-up when it comes to quarterly performance. Last quarter, it definitively stated that backlog will grow. Backlog reveals quite a lot about this company's ferocious growth. In rig technology, the largest segment, about two-thirds of revenue comes out of backlog orders. Management's comments, then, are about as close as you'll get to a guarantee of ongoing growth.

What management does:
Forgive NOV for swaggering -- its margins just keep chugging higher. For all the skeptics of growth via acquisition, this firm might lead you to reconsider your position. After 140 acquisitions over 10 years, there's no arguing with the success of the strategy:

Margins	3/06	6/06	9/06	12/06	3/07	6/07
Gross	22.0%	22.8%	23.8%	25.1%	26.4%	27.5%
Operating	12.0%	13.4%	14.4%	15.9%	17.5%	18.9%
Net	7.0%	7.9%	8.6%	9.7%	10.9%	12.0%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Remember when Schlumberger (NYSE: SLB) would sneeze on a Friday, and the rest of the oil patch caught a cold? I couldn't help but think how absurd it was for Varco to take a pasting, considering it will be cranking out rigs as fast as it can for years, not mere months or fiscal quarters.

As was the case with Transocean (NYSE: RIG) back in May, investors look unreasonably skittish when it comes to mighty NOV. Transocean took on this problem by merging with GlobalSantaFe (NYSE: GSF) and monetizing the backlog via special dividend. Varco certainly has some leeway when it comes to returning cash to shareholders due to its tidy balance sheet, and I look forward to seeing how it tackles this "problem" of being more valuable than the market gives it credit for.

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