National Oilwell Varco (NOV 0.61%) had high hopes as it entered the third quarter, anticipating that the upward momentum it experienced in the second quarter would continue. While the oil-field equipment maker did report a 2% uptick in revenue, profitability evaporated due to a slowdown in activities in North America late in the quarter as pipelines in the Permian Basin filled to the brim. Adding to that headwind was the continued weakness in offshore markets, which offset most of the positives during the quarter. However, the company does believe these headwinds are temporary, with it anticipating that the oil industry will experience higher activity levels in 2019, which should boost its sales and profitability.
Drilling down into the results
National Oilwell Varco reported $2.15 billion in revenue, which was up 2% from the second quarter and 17% higher than the year-ago period. Earnings, however, flatlined as the company posted a mere $1 million, or exactly $0.00 per share of net income. While that's an improvement from the year-ago loss of $26 million (a loss of $0.07 per share), it's a step back from the profit of $24 million, or $0.06 per share it posted in the second quarter.
Contributing to the lackluster quarter was the weakness in the company's rig technologies and completion and production system segments:
On National Oilwell Varco's second-quarter call, CFO Jose Bayardo anticipated that revenue in the rig technologies segment would rise by 1% to 3% sequentially. Instead, sales went in reverse, falling 2% from the second quarter. While the company did report improving aftermarket sales and better progress on offshore projects, that wasn't enough to offset lower land rig sales. As a result, segment profitability slipped 7% from the previous quarter.
Meanwhile, Bayardo also anticipated sequential gains from the completion and production systems segment, expecting an additional 6% to 7% revenue improvement. Instead, sales fell by slightly less than 1%. Driving this segment's decline was slowing demand for pressure-pumping equipment in North America, -- which helps frack wells -- and sharper-than-expected declines in its offshore-focused businesses. Those two factors offset strong growth in demand for land-production equipment. However, despite those weaker sales, earnings in the segment rose 5% from the second quarter.
The lone bright spot in the quarter was the company's wellbore technologies segment, where sales rose 7%, which matched the CFO's expectations for "mid- to upper-single-digit percent top-line growth." This segment was able to capitalize on opportunities in the U.S. market as well as those associated with an early recovery in drilling activities in the Eastern Hemisphere. However, inflationary pressures from higher steel and labor costs weighed on margins, resulting in just a 2% uptick in segment profitability.
A look at what's ahead
CEO Clay Williams had this to say in the company's earnings report:
We believe the industry is poised to achieve higher levels of activity in 2019 as it works through near-term logistical challenges in North American unconventional [shale] basins, navigates end-of-year budget constraints, and sanctions more offshore projects.
Several factors drive that view. For starters, Williams noted:
... during the third quarter we saw rising demand for conductor pipe connections -- a leading indicator of future offshore wells -- as well as increased inquiries around offshore rig reactivations, pointing to more offshore activity ahead.
Further, Williams noted that "we also see pockets of demand strengthening in certain international land markets, as operators respond to generally higher commodity prices."
Other oilfield service and equipment peers agree with Williams' view. Paal Kibsgaard, CEO of oilfield service giant Schlumberger (SLB 0.66%), said on that company's third-quarter call that "the momentum we have seen in the past couple of quarters, we expect to continue into 2019, and we are still very confident about the north of 10% revenue growth for our business internationally in 2019." Further, the Schlumberger CEO stated, "I would still believe that the strength of the international going forward beyond Q4 should outweigh any further challenges that we have in North America land."
Meanwhile, Halliburton (HAL 1.77%) CEO Jeff Miller stated on the company's third-quarter call that: "I'm excited about 2019. The catalysts are there for a strong activity rebound." The Halliburton CEO pointed out that budgets will reload based on higher oil prices, and that the industry will work through its backlog of uncompleted wells caused by pipeline constraint in the next year. That leads the Halliburton CEO to believe that "the market will get better in the first quarter of 2019 and sets up for continued momentum throughout the year." He further stated:
I believe this, because I see it. I'm already seeing demand from our customers for 2019. They're eager to get back to work. I hear it. I'm hearing this from our business development organization who are busy responding to inbound 2019 demand. I feel it. I'm feeling customer urgency come back as operators want reassurance our crews will be back out working for them when budgets reset and they restart their full completions programs.
Just a bump in the road
There's no doubt that National Oilwell Varco's third-quarter results were disappointing since the company missed its expectations due to a faster-than-expected slowdown of activity levels in North America. However, the company and its peers expect those headwinds to abate in 2019 at the same time as a tailwind from increased offshore and international activity picks up speed. Those factors lead the company and its peers to believe that the oil market rebound will reaccelerate in 2019.