Going into any matchup, it's important to know and respect your opponent. Imagine if Coach K hadn't studied Belmont's tapes in advance of the first round of the Big Dance. The Dukies probably would have gone home even earlier than they ultimately did.
I'm fortunate to have studied and written favorably about Canadian National Railway (NYSE: CNI ) . CN may be an underdog, but it doesn't have many fleas. That said, I'm still confident that it'll be ridden out of town on a rail. That's because CN is no match for National Oilwell Varco (NYSE: NOV ) .
NOV is a drilling equipment powerhouse. From massive derricks to simple spare parts, this company has the oil patch covered. Folks like ExxonMobil (NYSE: XOM ) , Petrobras (NYSE: PBR ) , and Transocean (NYSE: RIG ) have serious drilling to do, in increasingly deep and harsh water environments. As global exploration has picked up in recent years, NOV's greatest challenge hasn't been booking business so much as getting product out the door fast enough. That's one way to make a lot of money.
Spoiled by oil?
There's no question that NOV's fortunes are tied to high oil prices. But railroads like CN have been major beneficiaries of the very same trend. Rail rivals like UPS are so beleaguered that they're begging the government to tap the Strategic Petroleum Reserve. An oil drop would damage CN's competitive advantage over other modes of transport. No matter the direction of oil, no one stands to gain an edge over NOV in the realm of rig fabrication.
Lest you be concerned over NOV's exposure to the price of oil, consider the global circumstances that would lead to a meaningful decline in oil demand. How do you think coal, steel, ethanol, and other commodities will fare in such a slowdown? Yeah, I wouldn't want to be a railroad under such circumstances, either.
There will be drilling
The big-ticket items in the drilling equipment game are the offshore "floaters" -- rigs that operate in water so deep that it's not practical to prop them on legs reaching down to the seabed. With all the bells and whistles, we're talking about a $750 million construction job. NOV has the pleasure of contributing a bundle of the equipment going onto most new deepwater rigs worldwide. The firm can supply more than $250 million of the equipment for a floating rig.
These big rigs are having a bigger and bigger impact on NOV's overall order book. The company's backlog at year-end was 85% offshore. So let's take a closer look at the supply/demand dynamics there.
The average age of the world's offshore rig fleet is 25 years, and 73% of floaters are more than 20 years old. While major refurbishment is an option for some operators (a service which NOV will happily render), not all of these aging rigs will be reborn.
Rigs under construction add up to a little more than one-quarter of the existing fleet. That's a brisk buildout, but it's nothing compared to the deluge of dry bulk vessels set to hit the water over the next few years. Combining this pace with the age of the fleet, shipyard bottlenecks, and multiyear construction periods, I don't see a flurry of floaters around the corner.
That leaves the opposite scenario, a decline in demand for new rigs. With international oil companies -- a conservative bunch -- planning their budgets with significantly lower oil prices in mind, it would take a collapse in prices to derail these companies' projects.
Who's running this ship?
NOV CEO Pete Miller spent 15 years with Helmerich & Payne (NYSE: HP ) before joining the NOV organization more than 10 years ago. He also has a finger on the pulse of the North American onshore landscape thanks to his position on the board of Chesapeake Energy (NYSE: CHK ) . Finance chief Clay Williams has also put in more than a decade with the company, and he was recently recognized by an Institutional Investor survey as one of the top three CFOs in the sector. This coaching staff has what it takes to guide NOV to champion status.