The oil industry has been slowly pulling out of its tailspin this year thanks to a more stable oil price environment. Because of those higher prices, oil producers are spending more money on drilling new wells, which is driving demand for more equipment. That trend has had a noticeable impact on National Oilwell Varco's (NYSE:NOV) financial results, which continued their slow grind higher in the first quarter.
CFO Jose Bayardo expected that upward momentum to continue in the second quarter, which was evident from his comments on last quarter's call, where he provided detailed guidance for the company's upcoming report. Here's what he foresaw in each of its four segments this quarter, which investors should keep an eye on when results are reported this Thursday evening.
Rig systems: Expect more of the same
While Bayardo expects National Oilwell Varco's second-quarter results to show some improvement versus the first quarter, he still sees some headwinds in the company's rig aftermarket segment. He noted on last quarter's call that "for the second quarter, we expect rig systems segment revenues to decline another 5% to 10% with revenue out of backlog falling to approximately $260 million." That result would continue the trend from last quarter when revenue declined 8% sequentially to $393 million after the company only shipped $285 million in orders out of the backlog, though that was a bit better than expected. One of the issues driving down this segment's results was the continued weakness in new order bookings, which were only $118 million last quarter. Given this forecast, investors should watch to see if results matched expectations and if new order bookings picked up.
Rig aftermarket: Look for evidence that the bottom is in
One of the other laggards last quarter was the rig aftermarket segment, where sales fell another 5% to $321 million. That said, Bayardo noted:
We're seeing a steady improvement in near-term market conditions for land and offshore and in the mid to long-term fundamentals for the land market. As a result, we're increasingly confident that our Rig Aftermarket segment bottomed in Q1, and we expect to see steady improvement over the foreseeable future. In Q2, we expect Rig Aftermarket revenues to increase slightly.
Ideally, the company will indeed report a sequential sales increase in this segment, while also confirming that market conditions continue improving. Those two factors would suggest that this division has finally hit bottom.
Wellbore technologies: Expect the rebound to continue
Sales in the wellbore technology segment have already started to improve, and were up 5% last quarter to $555 million, thanks to robust demand for the technologies and services the company offers to shale drillers. According to Bayardo, the company expects "wellbore technologies to realize another 5% to 7% top line growth" in the second quarter. Driving this growth, according to Bayardo, will be "the impact of the recovery in North America," which he expects "will be partially offset by headwinds in the offshore market, by international markets which are trying to regain their footing and by the impact of Canadian spring breakup." Given that forecast, investors should look to see not only if revenue growth materialized as expected but if some of those headwinds have started to abate.
Completion and production solutions: Will the star lose its luster this quarter?
The star last quarter was the company's completion and production solutions business, which generated $684 million in sales, up 8% from the prior quarter, thanks to strong sales to North American shale drillers. Those sales trends should continue in the second quarter, with Bayardo noting on last quarter's call that "we anticipate continued growth in demand for completions related capital equipment, consumables and aftermarket service and repair, as well as an increase in our production-related businesses serving onshore projects." That said, he also warned that "we expect this to be mostly offset by the segment's offshore-oriented businesses as they continue to suffer from deteriorating backlogs, increasingly competitive pricing and a lack of final investment decisions on major projects." Given those factors, the company only expects revenue in the segment to "pick up slightly" in the second quarter.
In addition to seeing if sales in the segment kept rising, investors should also keep an eye on new orders. Last quarter, the company booked $323 million in new orders against $359 million of orders shipped out of the backlog. Ideally, it would be great to see higher new orders than those shipped out in the second quarter.
Baby steps toward a full recovery
Given National Oilwell Varco's guidance, its second-quarter results should show that three of its four operating segments are now in recovery mode. The hope is that its actual results not only confirm that guidance but show an acceleration in demand by customers. That would give investors confidence that its recovery is gaining steam.