After steadily improving for several quarters, National Oilwell Varco's (NOV 1.11%) recovery hit a speedbump in the first quarter of 2018. Revenue declined 9% from the previous quarter and missed its forecast due to several issues. However, one thing the company's management team made clear on the accompanying conference call was that while the quarter was a disappointment, they're increasingly optimistic about what they see ahead.
1. We made some mistakes, and we're fixing them
CEO Clay Williams led off the call by saying:
Our performance was disappointing and less than we expected, leading us to announce preliminary results several days ago, specifically calling out some of the challenges we faced in the quarter. While some of these were outside our control, many were not.
One issue of its own making that Williams pointed out was that the company completed some equipment orders but didn't get them off its loading dock by quarter end. Williams made it clear that operational issues like that weren't acceptable and that the company is "focused intently on improving execution." He noted several ways it plans to do that, including making additional cost reductions such as closing more locations.
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2. After a rough start to 2018, we see better days ahead
Williams didn't want the company's tough start to the year to cloud the fact that it "made good progress during the first quarter of 2018," which was the key message he wanted to get across on the call. He also said "there is a great deal to be encouraged about" even if the "first-quarter results are a reminder that this industry is not yet healed."
He stated that:
With the stronger, synchronized global economic growth, with oil inventory levels normalized and still declining, with customers running out of spares and consumables, and with technology proving demonstrably that horizontal drilling and hydraulic fracture stimulation can change the energy equation for the world, NOV is positioned well for the coming upturn and stronger performance as this year progresses. I'm confident our second-quarter results will be much better.
3. With oil at $75, we're starting to see some green shoots offshore
Later on during the call, an analyst asked whether the company noticed an uptick in offshore-related orders now that crude was in the mid-$70s. Williams answered and said that while the company is having more conversations with customers, it's "not seeing the purchase orders flowing yet." However, "what is encouraging is the number of conversations that we're having," in particular for new FPSO (floating production storage and offloading) packages, which enable oil companies to process and ship oil produced offshore. Because of that, he said, "I think we are seeing some green shoots and $75 a barrel is precisely the thing that we need to start turning those into purchase orders."
4. Don't expect to see an increase in cash returns in the near term
With industry conditions improving, National Oilwell Varco is generating more cash flow than it needs to grow its business. Because of that, CFO Jose Bayardo stated that the company initially thought that it would "would likely return excess capital to shareholders in the event that attractive investment opportunities did not materialize," either through higher dividends or a share buyback. However, Bayardo now believes that the company will "likely defer an increase in return of capital to shareholders" for now, though it will reevaluate the potential to return more cash to investors later this year.
Image source: Getty Images.
5. Instead, we have our eye on M&A
The reason the company is holding off on returning more cash to investors right now is that "we expect to close several transactions during the second quarter, and we continue to see other attractive M&A targets in the market," according to Bayardo.
Clay Williams further elaborated:
The company has been busy on the M&A front, and we continue to see a lot of attractive opportunities out there. We had three closings in the first quarter, and we've got several companies now that we're in the middle of discussions with. And so it continues to be a pretty interesting market for M&A.
National Oilwell Varco currently has a big war chest with which to make deals after ending the quarter with $1.24 billion in cash and $3 billion available to it on its credit facility.
Optimism abounds
While National Oilwell Varco got off to a slow start in 2018, the company is growing more bullish on the future because it's starting to see some green shoots offshore and has attractive acquisition opportunities in the pipeline that should help drive growth going forward. While some of that optimism reflects in the recent rebound in the stock, which is up more than 10% this year, shares are still half of what they were at the peak a few years ago, suggesting that there's plenty of recovery potential up ahead as the oil market kicks into another gear.
