After a tough slog through the oil market downturn, National Oilwell Varco (NYSE:NOV) finally returned to profitability in the second quarter thanks to the steady improvement in the oil market. It's an uptick that the company expects will continue in the third quarter, given the outlook CFO Jose Bayardo provided on last quarter's call. Here's what he said investors should keep an eye on when the company reports those results later this week.
Expect rig technologies to lose some luster
One of the drivers of National Oilwell Varco's strong showing in the second quarter was the surge in revenue from its rig technologies segment, which jumped 35% versus the first quarter and 19% year over year. On top of that, the company reported strong new order bookings, which rose 12% sequentially thanks in part to a joint venture to build new drilling rigs in Saudi Arabia, as well as some rig orders for a customer in Argentina.
Unfortunately, Bayardo doesn't believe the company's third-quarter results in this segment will be quite as robust. He stated on the call that the company "expect[s] margins to be pressured from our recent focus on converting inventory that has been slow to move during this prolonged downturn into cash while rewarding first-mover customers." Because of that, National Oilwell Varco's CFO only expects 1% to 3% sequential revenue growth in the rig technologies segment and that margins will shrink a bit. He also said he thought that quarterly bookings would be volatile because the industry is near cyclical lows.
Investors should pay the closest attention to margins. If they contract too much, earnings could follow them lower.
See if wellbore technologies maintained momentum
National Oilwell Varco's wellbore technologies segment was also strong in the second quarter, posting a 12% sequential revenue increase thanks to the ongoing recovery in drilling activities across the U.S. due to higher oil prices. Its drill pipe business was particularly strong, with new orders improving thanks to demand from international markets.
Bayardo expects this strength to continue in the third quarter. He noted on the call that the company anticipates that the segment will "again outpace global activity, which should lead to mid- to upper-single-digit percent top-line growth" versus the second quarter. Still, he did warn that margins would be flat due to inflationary pressures. However, that would appear to be a temporary blip since the CFO also stated that "notwithstanding near-term inflationary pressures, we continue to see a multiyear time horizon in which this segment can deliver attractive top-line growth with strong incremental margins."
Again, investors should keep a close eye on margins. If they dip due to inflation, it could cause the company's bottom line to contract.
Look for completion and production solutions to continue improving
The company's completion and production solutions segment also delivered healthy second-quarter results. Revenue rose 10% sequentially thanks to an improving market for capital equipment. That enabled the oil-field equipment maker to expand its margins and overcome continued weakness in the offshore drilling market.
Bayardo anticipates that this segment will continue its upward momentum in the third quarter. He said that "we expect to see an additional 6% to 7% sequential improvement in segment revenue, with incremental margins ticking up to the mid-30% range as the rate of decline in our offshore businesses begins to moderate."
Ideally, the company will deliver on that margin improvement, which would help offset the anticipated weakness in its other two segments.
Expect the upward momentum to continue
National Oilwell Varco's CFO anticipates that the company will build on its strong second-quarter results to report even better numbers in the third quarter. For that to happen, the company's completion and production segment must deliver on the anticipated margin increase, which would help it overcome the expected weakness elsewhere. If that's not the case, investors should take a closer look at the cause to see if it's just a minor setback or is due to a bigger issue that could impact future results.