Oil price volatility returned with a vengeance in the fourth quarter as crude prices plunged 40%. While those lower prices, as well as the impact from seasonality, caused NOW (NYSE:DNOW) to report slightly weaker results than it did in the third quarter -- which was its best since early 2015 -- the oil-field equipment distributor's quarter was much improved compared to the year-ago period.

That renewed weakness in the oil market, however, will likely mute the company's results in 2019, though it continues to take steps to expand amid the market's bumpy recovery.

NOW results: The raw numbers

Metric

Q4 2018

Q4 2017

Year-Over-Year Change

Revenue

$764 million

$669 million

14.2%

Adjusted net income

$11 million

$1 million

1000%

Adjusted earnings per share

$0.11

$0.01

1000%

Data source: NOW.

What happened with NOW this quarter? 

The drilling recovery in the U.S. continues to lead the way:

  • Revenue from U.S. customers tallied $597 million during the quarter, which was up nearly 19% year over year thanks to the continued recovery in drilling activities across major shale plays. Sales, however, did slip 8% sequentially due to the impact from lower oil prices as well as from seasonality since the industry slows down during the holidays. Full-year sales to U.S. customers, meanwhile, surged nearly 24% to $2.4 billion due to the rebound in drilling activities in the country.
  • Canadian revenue was $88 million during the quarter, an increase of 3.5% year over year despite a decline in drilling activities. Sales, however, did slump 5% sequentially due to a 27% drop in drilling activities. For the full year, sales from Canada tallied $358 million, which was about 1% higher than in 2017.
  • Other international revenue came in at $97 million, a 1% year-over-year increase due to higher offshore activity in Europe, Asia, and Latin America, though sales were down 2% from the third quarter because of the impact of lower oil prices. Full-year international sales were $398 million, a boost of 5% based on the improvement in offshore drilling activities.
  • Total revenue for 2018 was $3.1 billion, an increase of 18%. In the meantime, the company generated $39 million, or $0.36 per share, of adjusted net income, which was a significant improvement from 2017's adjusted loss of $29 million, or $0.27 per share.
Storage tanks and a treater for separating water from crude oil and natural gas.

Image source: Getty Images.

What management had to say 

CEO Robert Workman commented on the company's results, stating: "We are encouraged about delivering solid top line, bottom line, and free cash flow results in 2018, in a market that has seen, for the most part, an uneven recovery. During the fourth quarter, we were able to sustain gross margin percent gains, improve operating efficiencies, generate $69 million in free cash flow, and reduce net debt to $16 million."

NOW was able to help offset the impact of lower oil prices by keeping a lid on costs so that it could continue expanding its margins during the fourth quarter, which enabled it to post strong year-over-year earnings growth. Those factors also helped the company generate free cash flow, further improving its financial profile. 

Check out the latest NOW earnings call transcript.

Looking forward 

Those weaker oil prices will likely continue to have some impact on the company's results in 2019. According to Workman, "For 2019, many in the industry are forecasting a year softer than last, especially in Canada. However, we expect the investments we made in completions and LNG-levered acquisitions during the downturn will help us offset these declines with 2019 revenue levels near our 2018 results to down slightly in the low single-digit range." On a more positive note, he pointed out that, with a strong balance sheet, the company is well positioned to capture opportunities that may arise amid the current uncertainty in the oil market.