National Oilwell Varco Overcame Crashing Crude in Q4 to Continue Growing

Oil prices crashed 40% from their peak early in the fourth quarter, which caused some oil producers to abruptly change their plans. While that impacted National Oilwell Varco's (NOV 1.45%) financial results, it wasn't as bad as analysts feared as the company managed to beat revenue expectations while remaining profitable.

Drilling down into the numbers

Data source: National Oilwell Varco.

National Oilwell Varco's revenue rose 11% from the third quarter and 22% versus the year-ago period and was $220 million ahead of analysts' expectations. Earnings, likewise, improved versus both periods, though the company did miss the consensus estimate by $0.05 per share.

Driving the overall solid result was across-the-board growth in all three of the company's segments:

Data source: National Oilwell Varco. Chart by the author.

Wellbore technologies' sales rose 4% sequentially and 24% year over year, driven in part by double-digit growth in solids control equipment and drill pipe. Adjusted EBITDA in the segment, meanwhile, climbed 15% sequentially and 45% year over year due to an improved mix of business and higher volumes.

Completion and production solutions revenue went up 7% from the third quarter and 14% year over year due to improving progress and deliveries on projects and continued demand growth for coiled tubing and wireline equipment. Those stronger sales helped drive adjusted EBITDA up 13% sequentially and 41% from the year-ago quarter. However, earnings would have been even stronger if it weren't for resin supply shortages, which impacted its fiberglass systems business and the effect of holiday slowdowns on manufacturing.

Finally, rig technologies sales jumped 26% sequentially and 31% from last year's fourth quarter, driven by better progress on projects, the delivery of two land rigs, and improved aftermarket sales. Those factors helped boost the segment's adjusted EBITDA 31% from the third quarter and 46% year over year, though a change in product mix negatively impacted earnings growth.

For the full year, National Oilwell Varco generated $8.45 billion in revenue, an increase of 17.3% from 2017. However, the company reported a net loss of $31 million, or $0.08 per share, though that was an improvement from 2017's $237 million, or $0.63 per share, loss. Underlying profitability, in the meantime, improved significantly as adjusted EBITDA increased 49% year over year to $910 million while the company generated $521 million in net cash from operating activities and ended the year with a $1.43 billion cash balance.

Check out the latest National Oilwell Varco earnings call transcript.

Image source: Getty Images.

A look at what's ahead

"The sharp, fourth quarter pull-back in commodity prices heightened uncertainty surrounding 2019 capital budgets and led to an abrupt slowdown in orders, while some of our customers chose to accelerate deliveries prior to year-end," stated CEO Clay Williams in the earnings press release. Because of that, Williams said that "we anticipate that lower orders in December, combined with equipment sales that were pulled forward near year-end, will lead to lower sequential revenue during the first quarter 2019 in all three segments."

However, Williams did note that oil prices have improved in recent weeks from a bottom in the low $40s up to near $55 a barrel. As a result, "some of our customers have recently signaled their intent to increase activity, particularly in certain international and offshore markets," which could provide a boost to the company's results later in the year. Furthermore, he emphasized that "while the near-term outlook remains uncertain, NOV's portfolio of critical technologies to support the oil and gas industry, together with our track record of adapting quickly to changing market conditions, positions us well for any market environment."

Heading for another rough patch

As a key supplier to the oil industry, National Oilwell Varco benefits when oil companies increase spending on new wells, which tends to happen as the market environment improves. However, given that the opposite has occurred in recent months, it's negatively impacting the company's business, which could continue until conditions show signs of stabilizing. Consequently, financial results may head in reverse until oil companies feel confident enough to boost spending again.