National Oilwell Varco (NYSE:NOV) initially anticipated that it would begin 2018 with a strong showing in the first quarter. Instead, its results took a step back due to a slower-than-expected intake of equipment orders and some internal issues, which snapped a streak of six straight quarters of steadily improving financial results. While that sluggish start caused shares to sell off at first, National Oilwell Varco's stock quickly reversed course and was one of the best-performing energy stocks in the first half of 2018 due to growing optimism that the company's performance would bounce back sharply.
We'll find out if that was the case later this week when the company unveils its second-quarter results. Here's what to watch in that report.
See if rig technologies turned around as expected
One of the culprits behind National Oilwell Varco's poor start to 2018 was its rig technologies segment, where revenue declined 21% sequentially and 17% year over year due to the continued sluggishness in the offshore drilling sector. However, on the company's first-quarter conference call, CFO Jose Bayardo offered a bullish outlook for the second quarter, stating that "we anticipate top-line growth of roughly 20%, with incremental margins in the low to mid-teens for our rig technologies segment."
Several factors drove that view. For starters, Bayardo noted on the call that the company booked sales for two rigs destined for Latin America early in the second quarter, which is further confirmation that pent-up demand is beginning to yield purchase agreements. In addition to that, the company was "encouraged by what we are seeing in demand for spare part bookings," which it believes will continue increasing in the second quarter.
Given that forecast and those comments, investors should see if this segment has finally started making its long-awaited turnaround. However, there are some concerns now that it could miss the mark given what rival Baker Hughes, a GE Company reported last week. For the quarter, revenue from Baker Hughes' oil-field equipment business fell 9.4% to $617 million, which missed analysts' expectations for sales of $648.2 million.
Watch whether wellbore technologies delivered the anticipated improvement
National Oilwell Varco's wellbore technologies segment also underperformed expectations to start the year, with revenue falling slightly due to lower demand for drill pipe. However, the company noted that while drill pipe revenue declined sharply in the quarter, bookings for future sales exceeded expectations. As a result, it was growing confident that business fundamentals were rapidly getting better and would drive "material improvement in revenue during the second quarter."
This view led Bayardo to forecast that revenue in the wellbore technologies segment would grow at a high-single-digit percentage with strong margin improvement. If National Oilwell Varco delivers on these expectations, rig technology turns around as hoped, and it achieves the 4% to 5% anticipated revenue growth from its completion and production solutions segment, then its second-quarter results will be its best in quite some time.
Look for any change to its capital allocation preference
Heading into 2018, National Oilwell Varco thought its improving financial results would enable it to start returning to shareholders some of the excess cash it built up during the downturn, either through a higher dividend or a share repurchase program. However, on the first-quarter call, its CFO stated that it would "likely defer an increase in return of capital to shareholders" because it saw some attractive investment opportunities on the horizon.
National Oilwell Varco recently announced a couple of deals, including forming a joint venture with the national oil company of Saudi Arabia to make land rigs and drilling equipment for that market, as well as buying a Dutch rig design and engineering company. With those deals now signed, investors should see if the company has more in the pipeline or if it now plans to begin returning additional cash to investors.
High expectations heading into the quarter
National Oilwell Varco's guidance suggests that it will report strong second-quarter results later this week. Investors are certainly banking on that to happen given the stock's gains this year. So another disappointment -- which is possible given Baker Hughes' report -- could cause investors to sell the stock off after earnings, especially if the company doesn't announce a plan to begin returning at least some of its excess cash to shareholders.