National Oilwell Varco's (NOV 1.45%) financial results continued showing signs of improvement during the second quarter. Revenue crept up both sequentially and year over year while its net loss kept shirking. Driving that improvement was the combination of increased activity in the oil market, which is boosting demand for its products, as well as the company's conscious efforts to improve its fortunes. That was evident from the comments by CEO Clay Williams on the accompanying conference call, where he noted three areas that are driving the company's recovery from one of the deepest market downturns in decades.
No. 1: We're going where the action is
The CEO started his prepared remarks by noting that the company's financial results improved sequentially:
Much of our business continued to rise with higher oilfield activity, particularly in North America, leading our land business 7% higher sequentially in the quarter. But this was largely offset by reductions offshore (and in certain sluggish international markets like Asia and Africa) that pushed our consolidated offshore mix down to 39% and our land mix up to 61%. So, NOV continues to pivot to where the action is.
One thing Williams points out is that the company is pulling in more revenue from the land market than offshore, which is a shift that started in the fourth quarter when the company's land revenue exceeded offshore sales for the first time in many years. While this change is partially due to continued weakness offshore, Naitonal Oilwell Varco has made a deliberate effort to pivot its business to support the growing shale drilling market, which is starting to pay off.
Image source: Getty Images.
No. 2: We're why shale drilling has become so efficient
This shift onshore is not only paying off for National Oilwell Varco but its customers as well. As Williams noted on the call:
Most of you are probably familiar with the industry's recent gains in reducing days required to drill wells. What this means is that the more capable higher-tech rigs we've provided are manufacturing more borehole per rig day than ever before. In fact, the super-spec land rigs in highest demand today boast a third mud pump to push more drilling fluid downhole to drill larger diameter, longer laterals, all of which combine to create more borehole volume created per rig day.
As Williams references, one of the trends in the shale sector has been a dramatic improvement in drilling rig productivity, which enables companies to drill more wells per rig, therefore reducing costs per well. In that same vein, producers are finding that drilling longer wells is a key to improving well productivity and returns, which enables them to get more out of their capital dollars. These step changes in efficiency are due in part to National Oilwell Varco's ability to develop innovations that solved challenges that were holding the industry back.
These improvements are driving noticeable advancements for companies like EOG Resources (EOG 0.67%). For example, the leading shale driller has reduced its average drilling days in the Bakken shale from 12.4 in 2014 to 7.8 last year, which has helped drop its completed well cost from $7.2 million to $4.8 million. Because of that, EOG Resources now has 330 premium drilling locations in the Bakken, which it defines as wells that can earn a 30% direct after-tax return at $40 oil. Meanwhile, EOG's ability to drill longer wells enabled it to expand its premium drilling inventory in the Eagle Ford Shale from 1,900 to 2,400. To put that into perspective, the additional Eagle Ford shale locations alone gives the company an extra year's worth of high-return drilling locations at its current pace.
Image source: Getty Images.
No. 3: We're ready for the rebound
Williams concluded his prepared remarks on the call:
Amid challenging offshore drilling conditions, NOV is pivoting to new markets and new opportunities... we've steadily and smartly applied capital, both organically and through M&A, to build global leading franchises that are capable of generating strong through-cycle returns. It's what we do. NOV remains exceptionally well positioned for the inevitable upturn.
National Oilwell Varco has been quietly making acquisitions to position for the coming rebound in the oil and gas market. During the second quarter, for example, the company closed five purchases. Meanwhile, it signed a joint venture deal with Saudi Aramco to manufacture high-specification land rigs and other equipment. Supporting that venture is a contract with a partnership between Aramco and Nabors Industries (NBR 6.12%) to purchase 50 rigs over a 10-year period. These strategic moves, as well as internally develop innovations, have the company optimistic that it can deliver robust growth as market conditions turn upward in the future.
Not the National Oilwell Varco of old, but that's OK
National Oilwell Varco used to make a mint building equipment for the lucrative offshore drilling sector. However, those heydays are in the rearview mirror, and it could be quite some time before that area improves and drives a rebound in the company's offshore sales. Given that forecast, the company has made great strides to pivot back onshore where the action is these days. That decision is already starting to pay off and should continue to do so as the market recovery gains steam.
