Higher oil prices continue to incentivize oil companies to ramp up their drilling activities, which is driving the need for additional equipment. That demand growth propelled NOW Inc.'s (NYSE:DNOW) results in the third quarter, which was one of its best in years. However, the company does see a speed bump up ahead as several near-term headwinds will likely impact its fourth-quarter results, though they should abate in 2019, which the company believes should be an even better year.

NOW results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$822 million

$697 million

17.9%

Adjusted net income

$17 million

($3 million)

N/M

Adjusted earnings per share

$0.15

($0.03)

N/M

Data source: NOW Inc.

What happened with NOW this quarter? 

The continued improvement in industry activity levels drove the quarter:

  • NOW's revenue surged versus the year-ago period and rose nearly 6% from the second quarter due to higher drilling activity levels thanks to improving oil prices.
  • Driving the revenue growth were sales to customers in the U.S., which grew 24.5% year over year and 5% sequentially to $630 million, fueled by the continued rebound in shale drilling.
  • That helped offset slightly mixed sales to customers outside of the U.S. Revenue from customers in Canada dipped 3% versus the year-ago period to $93 million due mainly to foreign currency fluctuations, though sales did rocket 24% sequentially because the second quarter is a seasonally weaker one because of the weather. Meanwhile, sales to other international customers rose 4% year over year to $99 million but dipped 3% from the second quarter.
  • The improvement in market conditions, along with the higher revenue, helped boost NOW's profitability, which not only went up year over year but increased from the $0.10 per share it earned in the second quarter.
A tank battery and treater system used to separate water and natural gas from crude oil.

Image source: Getty Images.

What management had to say 

As CEO Robert Workman said about the company's results, "We're pleased to announce the highest levels of quarterly revenue, operating profit and EBITDA excluding other costs since early 2015, with working capital turns nearing five and positive free cash flow posted again in the third quarter of 2018." Driving those strong results was the continued rebound in drilling across most U.S. shale basins. That enabled the company to distribute more equipment such as tank batteries -- which collect, measure, and test oil from a well before it flows into the pipeline system -- as well as fabricated production equipment and pumps that customers use to move oil from wells to the nation's pipeline system.

Looking forward 

While the third quarter was NOW's strongest in years, Workman warned that "as we move into the seasonally slower fourth quarter due to holidays and budget exhaustion, exacerbated by temporary regional takeaway capacity issues in the Permian and Canada, conditions could portend a softer than normal close to the year." However, Workman said that "we remain encouraged... by the stable land rig count and continued growing inventory of drilled but uncompleted wells, which provide a runway of future work for DNOW and therefore should enable us to achieve higher levels of activity in 2019."

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NOW. The Motley Fool has a disclosure policy.