Image source: Getty Images.
While the oil market seemed to bottom in February, that bounce off that bottom did not provide any boost to National Oilwell Varco's (NOV 0.42%) second-quarter results. Instead, the company's revenue continued to decline after its customers proceeded to cut spending. Because of those harsh operating conditions, the company continues to reduce its costs. However, it remains optimistic that it will see a brighter tomorrow when conditions finally do improve.
Drilling down into the numbers
They say it is always darkest before the dawn, which is certainly the hope when drilling down into National Oilwell Varco's second quarter results. Revenue slumped 21% from just the prior quarter to $1.72 billion and is down 56% from the year-ago quarter. That significant decline drove the company to report a net loss of $217 million, or $0.58 per share. About half of that, though, was due to several special items during the quarter such as facility closures, severance charges, and the write-off of assets. After adjusting for these items, loss improved to $114 million, or $0.30 per share. That said, even on an adjusted basis the company's loss widened significantly from last quarter's $0.06 per share loss and is well off the $0.77-per-share profit the company reported in the year-ago quarter.
Given those numbers, it's no surprise to see that all four of National Oilwell Varco's business segments weakened sequentially:
| Segment |
Revenue |
Operating Profit | ||
|---|---|---|---|---|
|
2Q16 |
1Q16 |
2Q16 |
1Q16 | |
|
Rig systems |
$564 million |
$926 million |
$7 million |
$119 million |
|
Rig aftermarket |
$364 million |
$391 million |
$62 million |
$77 million |
|
Wellbore technologies |
$511 million |
$613 million |
($146 million) |
($53 million) |
|
Completion and production systems |
$538 million |
$558 million |
($33 million) |
($4 million) |
Data source: National Oilwell Varco.
The rig systems segment was hit the hardest with revenue slumping 39% over the prior quarter and a whopping 71% from the year-ago quarter. Meanwhile, that segment's operating profit plunged 94% from last quarter. That said, it would have been worse if it was not for the segment's strong backlog heading into the downturn. That backlog provided the company with $441 million of revenue during the quarter. Unfortunately, National Oilwell Varco only replaced that revenue with $66 million of new orders, which was a decline from last quarter's $74 million and suggests that this segment could be under even more pressure in the future once it uses up the bulk of its $2.94 billion backlog.
The revenue decline across the company's three other segments was a bit more modest with rig aftermarket and completion and production systems only down by the mid-single digits sequentially. That said, the operating losses in both wellbore technologies and completion and production solutions widened significantly over the prior quarter.
A look at the outlook
With sales still in decline National Oilwell Varco CEO Clay Williams said that the company was "responding by aggressively reducing costs and restructuring our operations to match this market reality." However, while the company focuses on matching its activity to the current market, it is still investing in the future to position itself for the eventual upturn. Those investments, according to Williams, will "continue to help drive our industry to better economic returns and a brighter future."
The question that remains is when conditions will finally begin to improve. While Williams did not specify any timing to the eventual upturn, his peers have been very clear about when then think conditions will improve. Oil-field technology service company Core Labs (CLB +0.00%), for example, said that it "continues to anticipate a "V-shaped" worldwide commodity recovery beginning in the second half of 2016." Core Labs noted that declining supplies were expected to create a "tight crude oil supply market for the second half of 2016, and result in increased crude prices and industry activity levels worldwide." Meanwhile, oil-field service giant Halliburton (HAL 2.62%) said that it believed that "the North America market has turned" while rival Schlumberger (SLB +1.80%) noted that "in spite of the continuing headwinds we now appear to have reached the bottom of the cycle." In other words, it would seem that the second quarter could have marked a bottom in National Oilwell Varco's results, with an uptick possible in the third quarter.
Investor takeaway
There's no way to sugar coat it, National Oilwell Varco's second-quarter results were not good and didn't show too many positives signs. That said, there is growing optimism within the industry that the worst is over and that conditions will begin not just to improve in the third quarter, but could improve by a meaningful amount. Given how deeply National Oilwell Varco cut its costs in response to the downturn, its profitability could vastly improve with even the slightest rebound in oil and gas activities.
