Oil price volatility continues to plague the oil industry. This unsteadiness is causing oil companies to remain cautious with capital spending, which is affecting the demand for oilfield equipment. That hurt National Oilwell Varco's (NYSE:NOV) sales in the third quarter. The energy company, however, is dealing with those turbulent conditions by reducing costs, which paid off during that period by boosting its underlying earnings and cash flow.

Drilling down into National Oilwell Varco's third-quarter results

Metric

Q3 19

Q3 18

Q2 19

Revenue

$2.126 billion

$2.154 billion

$2.132 billion

Net income

($244 million)

$1 million

($5.4 billion)

Earnings per share

($0.64)

$0.00

($14.11)

Data source: National Oilwell Varco.

National Oilwell Varco's third-quarter revenue slipped about 0.3% sequentially while falling about 1.3% year over year, due mainly to the continued challenges in the oil market. The company's net loss, meanwhile, improved from the second quarter, when it recorded a significant writedown. Further, were it not for the $314 million of restructuring charges the company took during the quarter, it would have reported a profit. The company's underlying earnings, as measured by adjusted EBITDA, reflected this improvement in its profitability. Overall, National Oilwell Varco produced $262 million of adjusted EBITDA during the period, up 34% sequentially and 7% year over year thanks in large part to its cost-cutting initiatives. Meanwhile, cash flow hit its highest level in more than three years.

Still, the challenging conditions in the oil market led to somewhat mixed results across the company's three operating segments:

National Oilwell Varco's revenue by segment in the third quarter of 2019 and 2018 and 2019's second quarter.

Data source: National Oilwell Varco. Chart by author.

The highlight during the third quarter was National Oilwell Varco's completion and production solutions business, where revenue jumped 10% from the second quarter while declining only 1% year over year. It was this segment's second straight quarter of double-digit revenue growth, fueled primarily by the sales of fiberglass pipe, processing equipment, and subsea flexible pipe to international and offshore drilling markets. Adjusted EBITDA in the segment, meanwhile, surged 58% to $82 million due to those higher sales and the company's cost-cutting initiatives. The division also booked $535 million of new orders during the quarter, which was 124% of orders shipped from the backlog, implying that revenue should keep growing.

The rig technologies segment, meanwhile, was mixed as revenue slumped 3% sequentially while improving 2% year over year. It benefited from increased contributions from its aftermarket business thanks to a pickup in the offshore drilling market. However, weakness in the U.S. shale drilling market more than offset those gains. On a more positive note, this segment's adjusted EBITDA soared 42% sequentially to $102 million thanks to a more favorable product mix and excellent progress on its cost-saving programs.

Finally, wellbore technologies' sales declined 7% from the second quarter and 6% from the year-ago period. Driving the weaker result was softening demand for its products from the North American shale market. Adjusted EBITDA, on the other hand, was $133 million, down slightly year over year and sequentially, buoyed by the company's cost-cutting efforts.

An offshore drilling rig with the sun rising behind it.

Image source: Getty Images.

What National Oilwell Varco's management had to say about the third quarter

"In the third quarter, adjusted EBITDA improved significantly relative to second-quarter results," stated CEO Clay Williams. That was "due to accelerating cost reductions, a favorable revenue shift toward higher-margin offshore and aftermarket businesses, and positive project close-out variances." Williams also noted that "while third-quarter revenue was essentially flat with the prior quarter, margins improved as sales growth in international and offshore markets helped offset sequential declines from North American operations where our customers are reducing their spending." The company's ability to deliver stronger profitability even though sales declined proves that its restructuring efforts are paying dividends.

Williams also commented that he was "pleased to see NOV post its strongest cash flow quarter in more than three years, as our concerted efforts to more efficiently manage working capital are making an impact." Thanks to that strong cash flow, the company ended the quarter with $1.31 billion of cash against $2.48 billion in debt. That gives it the financial flexibility to continue investing in its business to meet its customers' needs amid the market's persistent challenges.

Doing the best it can

National Oilwell Varco continues to adjust to the seemingly ever-changing conditions of the oil market. With the U.S. shale sector cooling off, the company has realigned its cost structure so that it can make more money even as sales slip. Its ability to keep evolving will enable it to deliver better performance in the future, especially when the oil market finally starts bouncing back in a meaningful way.