Times are tough in the oil patch. Persistently weak oil prices sapped the cash flow of producers, forcing them to cut spending to bare-bones levels. That spending reduction cut deeply into oil-field equipment maker National Oilwell Varco's (NYSE:NOV) financial results over the past few quarters, and will likely impact its earnings again in the second quarter. That said, muted optimism is starting to flow back into the sector after oil rallied sharply during the quarter. Here's what to look for in National Oilwell Varco's results to see if that nascent confidence is starting to have a positive impact.
Check out the rig systems' backlog
Of the company's four segments, its rig systems segment held up the best last quarter. Revenue was down just 9% sequentially to $926 million, while it remained moderately profitable, which is better than National Oilwell Varco as a whole after revenue plunged 20%, leading it to report a loss. Driving rig systems' outperformance was its strong project backlog. Unfortunately, the company worked through much of its backlog during the downturn, pushing it down to just $3.31 billion. Last quarter alone it shipped $770 million in orders out of its backlog, and only replaced those sales with $97 million in new orders.
That result led to a very concerning book-to-bill ratio of just 13% (which is the ratio of new orders to sales from the backlog). In an ideal world, that ratio would be north of 100%, suggesting future revenue growth. While a return to that level won't happen for quite some time, an improvement in the book-to-bill driven by a rebound in new orders would be a welcome sign.
Keep an eye out for additional investment or acquisition announcements
One thing that National Oilwell Varco CEO Clay Williams has hammered home during the downturn is that the company's "strong financial resources enable us to continue to invest in new technologies, products and acquisitions that better position us for the inevitable upturn." The company has been active in pursuing this goal, announcing several strategic transactions over the past couple of months geared toward the future.
However, with $1.76 billion in cash and $4.29 billion in available credit as of the end of last quarter, along with a declining debt level, National Oilwell Varco has a war chest to go on the offensive. Given its financial resources and desire to invest, keep an eye out for additional acquisitions or signs that the company is about to go on a buying spree. A major acquisition at the low point of the cycle would be a significant sign that the company does see better days ahead.
Has the outlook improved?
Last quarter, Williams noted that the company's customers "cut spending to bare-minimum levels," forcing National Oilwell Varco to intensify its cost reduction efforts. However, while he noted that the market was "very tough" on its business he also said that "better days lie ahead."
According to oil-field service leaders Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB), those days could be right around the corner. For example, last week Schlumberger CEO Paal Kibsgaard said, "We now appear to have reached the bottom of the cycle." Meanwhile, Halliburton CEO Dave Lesar stated that he believes "the North American market has turned." Giving what peers are saying, investors should pay attention to whether National Oilwell Varco's CEO is also starting to see signs that its business conditions are improving.
National Oilwell Varco's second-quarter financial results will likely remain under pressure due to the continued weakness of the oil market. Instead, what's more important at this point is to see tangible signs that conditions are beginning to improve. That would shift the focus from how low its results will go to how quickly it can capture upside in an improving market.
Matt DiLallo owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends National Oilwell Varco. The Motley Fool owns shares of Halliburton. 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.