With oil prices stabilizing and rig counts on the rise, NOW (NYSE:DNOW) delivered its best quarter of sequential revenue growth since before the oil market downturn began. Furthermore, while the oil equipment distributor hasn't yet returned to profitability, its loss continues to narrow. Those trends show no signs of abating given the accelerating momentum of the shale drilling rebound.

NOW results: The raw numbers

Metric

Q1 2017

Q1 2016

Year-Over-Year Change

Revenue

$631 million

$548 million

15.1%

Adjusted net Income

($16 million)

($38 million)

N/M

Adjusted EPS

($0.15)

($0.35)

N/M

Data source: NOW Inc.

What happened with NOW this quarter? 

Rising rig counts fueled a big spike in sales:

  • Revenue was not only up sharply versus last year, but it was up 17% versus the fourth quarter, marking the largest sequential gain in revenue in years. Those surging sales, as well as the company's ability to keep a lid on costs, helped narrow the net loss, which was also lower versus both last year's first quarter and last quarter.
  • Sales in the U.S. jumped 23% versus the year-ago period, and 15.8% sequentially, to $439 million due to a rise in drilling activities. Meanwhile, Canadian sales were $96 million, a remarkable 52.4% increase versus the year-ago quarter and 31.5% sequentially, as a result of improving oil and gas activities north of the border. Finally, international sales were also $96 million, which were 25% lower year over year but 11.6% higher sequentially.
Storage tanks and treater for separating water from crude or condensate from natural gas.

Image source: Getty Images.

What management had to say 

CEO Robert Workman, on what fueled growth during the quarter, pointed out, "We are excited that rig count improvements from late last year materialized into tank battery facility construction in the quarter, driving our largest sequential revenue gains since before the downturn."

Workman notes that rising drilling activity drove demand for tank battery facilities, which is a system of storage tanks that hold several days of production from wells. These facilities are connected to a well via a pipeline and contain valves and vents to help separate oil, natural gas, and water. As shale drillers expand their drilling budgets and drill in new areas, they need to build more of these facilities to support development. For example, leading Permian Basin driller Pioneer Natural Resources (NYSE:PXD) is ramping up spending on tank batteries this year because it's developing five new areas across its acreage position as a result of the improving oil market. Because of that, 40% of the wells Pioneer Natural Resources drills this year will flow into newly constructed tank batteries versus just 16% last year.

Looking forward 

Given the relative stability of oil prices thanks to OPEC, Workman anticipates that drillers in the U.S. will continue to add more rigs, which should fuel sales next quarter, partially offset by the typical seasonal slowdown in Canada. That said, the rise in output from shale could backfire later this year should OPEC stop supporting the market, which is something to keep an eye on because it could slow the company's momentum in the back half of the year.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends NOW. The Motley Fool has a disclosure policy.