National Oilwell Varco (NYSE:NOV) recently reported its best quarter in years as improvements in the oil market enabled the oilfield equipment marker to finally return to profitability in the second quarter. However, as good as those results were, the company is just beginning to benefit from the upturn in the oil market, which was evident from management's comments on the accompanying conference call. Here are five things they said that investors won't want to miss.
We're bullish on oil
One reason National Oilwell Varco is optimistic about what lies ahead is that it believes industry fundaments support higher oil prices. CEO Clay Williams laid out his case for crude by saying:
We believe that three-and-a-half years of E&P underinvestment; depletion-driven well declines; strengthening, synchronized global economic growth; and geopolitical flashbang events are all conspiring to drive the worldwide excess production capacity cushion down, and oil prices up.
He's not the only one who thinks oil could have more upside from here. The International Energy Agency recently cautioned that the oil market is "stretched to the limit" due to the issues Williams pointed out. That tightness leads some analysts to believe that crude could hit $90 a barrel as soon as the second quarter of next year.
We're calling a bottom offshore
The improvement in oil prices this year has given oil companies the cash to boost spending, with several finally making investments in new offshore developments. Because of that, CFO Jose Bayardo stated:
We expect our offshore businesses to find a bottom in the second half of 2018, and we believe current market dynamics are setting up an environment in which our well-positioned offshore business units will see substantial improvement in 2019.
With the long-awaited offshore drilling recovery coming soon, it should provide a big boost to National Oilwell Varco's financial results going forward since it's a major player in that sector.
Our growth engine is revving up
One of the recurring themes on the call was that the oil industry has underspent what's necessary to maintain operations for the last three and a half years. Because of that, there's going to be some pent-up demand as the recovery takes hold. Williams explained:
This is a very capital-consumptive sector. And the activities that our oilfield service customers undertake consumes a lot of capital. A resumption of buying that's meaningful and material will drive top line growth at NOV. I think [it's] very realistic that, that's going to be a powerful engine for our revenues in 2019 and beyond.
In other words, the replacement cycle as customers begin to replace worn-out equipment will be a big growth driver for the company over the next few years.
Our M&A pipeline is starting to dry up a bit
On last quarter's call, National Oilwell Varco's CFO Jose Bayardo said that the company would "likely defer an increase in return of capital to shareholders" via a higher dividend or stock buyback in the near term because it "expect[ed] to close several transactions during the second quarter, and we continue to see other attractive M&A targets in the market." Overall, the company completed four deals during the quarter, investing $244 million.
This quarter, though, Bayardo stated that "our M&A pipeline is not as robust today as it was last quarter." Though, he did note that the company "continue[s] to see interesting possibilities in the M&A market and we remain well positioned to opportunistically pursue compelling transactions." In fact, Williams noted that, "very recently we had another opportunity to sort to reemerge that we thought disappeared." However, the overall feel from the company seemed to be that the near-term window for deal-making might have closed.
Increased cash returns could be coming soon
With National Oilwell Varco's M&A pipeline shrinking, it could allow the company to return some of its cash to shareholders. Bayardo said as much on the call:
We're optimistic about finding some good opportunities to deploy capital. But in the event they do not emerge, the balance sheet is in great shape right now. And we're heading toward a point of where we might view ourselves as being overcapitalized. And if we see that scenario playing out, we'll look to return that capital to shareholders.
The company ended the quarter with $1.1 billion in cash, leaving it with lots of money that it could send back to investors.
Happy days are here again
The central theme running through National Oilwell Varco's second-quarter call is that the recovery in its financial results is about to accelerate. One of the main drivers of that view is the upcoming rebound in the offshore drilling sector, which should be a big boon for the company. Because of that and other factors, the company might soon reward investors for their patience during the downturn by sending more money their way in a move that could add some extra fuel to the stock's recent rally.