Houston-based international oilfield services company National Oilwell Varco (NYSE:NOV) has been playing defense with its cash position since 2016's dividend cut. While most of its customers are slashing capital spending for 2020, the cash position NOV has built up will likely help make it through these cuts. That said, investors will still want to pay attention to several key factors.  

IMAGE SOURCE: GETTY IMAGES

IMAGE SOURCE: GETTY IMAGES

How NOV spends its cash

NOV is perhaps the most integral part of upstream oilfield equipment sales and leasing. NOV manufactures, sells, and leases drilling and hydraulic fracturing equipment wordwide to most exploration and production firms, and to companies that service those firms. The company's market position is enviable to any equipment manufacturer out there. 

In 2019, NOV booked a $6 billion loss thanks to a $5.8 billion non-cash charge in intangible assets and goodwill. But despite that huge paper loss, it booked cash flow from operations of $714 million that same year. Investors may see these huge losses and think the company isn't well-positioned. It's important to view companies in terms of cash position, though. Non-cash charges on an income statement may cloud an investor's vision. Paying attention to the different cash flows a company has may help fill in some holes left behind by the income statement.

The company made $315 million in capital investments in 2019, including $180 million in acquisitions and $233 million in capital expenditures. Even though the company had borrowings under its revolving credit agreement, it ended the year having reduced its debt burden by $1 billion. This debt repayment was part of its $647 million financing cash outflow for the year 2019. All of these cash flows, along with an $8 million outflow for currency exchange rate charges, reduced its overall cash pile by $256 million. 

What's in store for 2020?

Even though the company's revenue may take a big hit this year, NOV has been managing its cash position appropriately. The company is indirectly exposed to the price of oil and directly exposed to the plethora of capex cuts in the industry. These factors will provide headwinds for 2020 -- though it's hard to find a substitute in any industry for NOV's operations. 

Internally, the company has aligned its financing according to the volatility investors have been seeing in the industry. The cash the company needs to just sustain its financial position includes its dividend, debt servicing, lease payments, and capex for the year. 

It takes only $77 million to pay the company's common stock dividend. The company will not have to pay down principal on debt until 2022, when a $400 million bond comes due. NOV plans on spending $325 million in capex this year, mostly to develop a rig manufacturing facility in Saudi Arabia.  The company has not yet indicated it plans to scale back on that capex spending. These are the cash charges the company is facing in 2020 beyond the cash needed for operations that, in principle, should be covered by the company's revenue. 

IMAGE SOURCE: GETTY IMAGES

IMAGE SOURCE: GETTY IMAGES

There's just one problem

The company might not be able to count on all its expected revenue. Much of the company's cash flow from operations this year came from selling stale accounts to debt collectors. 

Even when a company earns revenue, it hasn't actually received the cash for that revenue until the company it invoices actually pays. The energy industry is rife with customers that either go years without paying invoices, or just don't pay them at all. At the end of 2019 and 2018, NOV had $132 million and $161 million, respectively, in allowances for bad debts against its accounts receivables. One would think it would be much higher, since the company reported $1.9 billion in accounts receivable at the end of 2019.

NOV is able to keep these amounts down because it can sell accounts receivable to financial institutions, recovering nearly all of the cash associated with those stale accounts. In 2018, NOV sold $248 million worth of stale accounts receivable for $246 million. This number increased drastically in 2019, to $327 million of stale accounts it sold for $324 million. This turned out to be a major contributor to the company's cash flow from operations. 

Investors may see more of these accounts receivable being sold to financial institutions in 2020, with similar haircuts taken on the cash coming in.

Even though there are industrywide capital expenditure and production cuts, NOV will likely make it through, thanks to its excellent positioning financially. That said, investors probably shouldn't expect any growth out of the company this year.