National Oilwell Twiddles Its Thumbs

If you're just getting to know National Oilwell Varco (NYSE: NOV), this quote from yesterday's first-quarter conference call pretty well sums it up:

"Drilling consumes an awful lot of stuff that we make."

So there you go. National Oilwell Varco is drilling. Following a long line of acquisitions, this company is the go-to provider of equipment like drawworks, mud pumps, and top drives for big rigs ordered up by contractors like Noble (NYSE: NE) and Pride International (NYSE: PDE). As for being admired, I might have to take exception to the latest rosy Forbes rankings, since other surveys have painted a very different picture of NOV's customer satisfaction. Still, NOV is certainly a fearsome competitor.

NOV's first-quarter results weren't much changed from last quarter, with revenues on the light side and margins picking up some of the slack. The rig technology segment actually reported record margins, as the firm wrung further efficiencies out of its rig manufacturing business. (It's done so for years.)

Management characterized the current state of affairs on the conference call by noting, "You're always either too small as drilling and demand rise quickly, or your operations are too big when activity plummets." Following the downturn last year, NOV finds itself a little too big. Investors' main preoccupation is thus whether demand levels, particularly for the firm's big-ticket offshore drilling rig packages, can return to anything like their former glory.

Not so long ago, NOV sported an order backlog of more than $11 billion. With rig deliveries outpacing new orders since the fourth quarter of 2008, that backlog has now been cut in half. The most visible source of future customer wins -- Petrobras' (NYSE: PBR) massive 28-rig tender -- remains a bit out of reach, as the bulk of orders probably won't hit the backlog until 2011. In the meantime, there's hope for demand from other sources, but drilling contractors really aren't looking to go naked on deepwater rig newbuilds at the present time.

These firms really need the likes of ExxonMobil (NYSE: XOM) and Total SA (NYSE: TOT) to step up and provide a drilling contract to de-risk the considerable capital expenditures involved. As I discussed last week, it's not that Ensco (NYSE: ESV) and Noble don't have the money. They're just being prudent.

To me, shares of NOV look like a fairly prudent bet on the long-term health of this industry. I happen to prefer the indispensable Core Laboratories, but you may prefer your businesses a bit beefier than I do.