National Oilwell Varco (NYSE:NOV) recently reported another quarter of improving financial results. That came in spite of several headwinds, including a decline in the price of oil, which caused drilling activities in the U.S. to fall, taking equipment spending with it. As a result, two of its segments unexpectedly stepped backward last quarter.
Given that backdrop, CEO Clay Williams spent some time on the accompanying conference call giving investors a glimpse at what the company sees up ahead. Overall, he made five points about the industry's direction and what that means for the company.
Oil has improved, but customers remain cautious
While slumping oil prices had an impact on the third quarter, Williams pointed out that,
Oil prices have moved back up above $50 lately, which is timely as our customers are launching their budgeting processes for 2018. Nevertheless, the recovery narrative right now seems tepid and visibility into 2018 is limited. Customers seem to be waiting for sustained oil price improvement before ramping up land spending or pulling the trigger on long-awaited offshore FIDs (Final Investment Decisions).
After getting burned by several temporary price improvements in recent years, oil companies are much more cautious this time around. Because of that, the company doesn't anticipate that industry activity levels will reaccelerate in the near-term.
We see pockets of demand
That said, Williams did note that,
We continue to see pockets of demand emerging with three years of underinvestment and cannibalization and, lately, rising scarcity fueling demand for certain areas like frac equipment. Other pockets of demand arise from technologies changing the landscape and providing opportunity, think closed-loop drilling, downhole tools and completion tools.
Oil service giant Halliburton (NYSE:HAL) confirmed this view on its third-quarter call. Halliburton's CEO Jeff Miller pointed out that, "equipment is being used harder and maintenance costs are higher. As a result, there will be a greater call for new equipment, just to replace the active equipment that's being worn out more quickly." While Halliburton builds its own equipment and isn't ready to produce more just yet, the demand for spare parts to keep the industry's current equipment running should continue fueling demand for National Oilwell Varco's products.
We're investing where we see our customers growing
For years, National Oilwell Varco had made the bulk of its money supplying equipment to outfit expensive offshore drilling rigs. However, the industry has shifted its investment focus onshore, which is driving a shift in where the company invests money so it can capture new opportunities. Williams remarked that,
Strategically, NOV continues to pivot into these areas with smart organic investments and rifle-shot M&A. Capital deployment in NOV is guided by our conviction that unconventional shale technologies are the most important development in energy in a generation.
Williams noted that the company would increasingly spend capital on building or buying the technologies necessary to support shale drilling. He stated that oil companies want to drill "gun-barrel-straight" wells that they steer toward the most hydrocarbon-rich spots of a shale formation. Because of that, National Oilwell Varco wants to have the proprietary tools to sell to oil service companies so that they can deliver those wells.
We believe these four characteristics define where the industry is heading
Williams then drilled down a bit more specifically into four areas that the company believes will be crucial for the industry in the coming years. He stated that:
We believe that composite technologies will defeat corrosion in the oilfield, the most expensive production problem that many of you probably never think about.
We believe that big data and predictive analytics will drive efficiency and that as the largest OEM of drilling equipment, NOV is uniquely positioned to bring automation and big data solutions to the oilfield.
We believe that as production shifts to unconventional basins, the industry will need more fluids processing technologies that NOV is well positioned to deliver.
And we believe the industry will adopt a more efficient industrial model to construct the floating production facilities needed to develop the planet's immense deepwater resources.
To summarize, National Oilwell Varco intends on delivering the cutting-edge technology the industry needs to solve expensive problems and develop energy resources more efficiently. By doing so, the company will assist oil producers with cutting costs so they can produce more oil and gas per dollar invested, which will keep them coming back for the company's equipment and services.
We have the flexibility to hit the gas when the recovery accelerates
Finally, Williams concluded by saying that,
We continue to execute our business plan around these perspectives while reducing costs and monitoring fundamentals that are slowly but steadily improving... NOV's optionality into a more vigorous recovery continues to be enhanced by our actions through the downturn.
Because the near-term outlook for the industry is tepid at best, National Oilwell will focus on keeping a lid on costs while still pursuing growth initiatives to capture both current and future demand. That said, with oil supplies tightening, and prices heading higher, the need for oil services and equipment should eventually accelerate. When that materializes, National Oilwell Varco has the financial flexibility to pounce on opportunities as soon as they emerge thanks to the actions it took during the downturn to put itself in a position of strength.
In a prime position to thrive as conditions improve
The overarching theme of William's remarks is that National Oilwell Varco has transformed itself into the oil equipment company of the future. It made the strategic investments necessary to give it the portfolio of products required to meet the needs of the industry in the coming years. While it might be several quarters before demand accelerates, the company will be ready when it does.