When the market gets nervous, it isn't necessarily a bad thing.
Last week, National Oilwell Varco (NOV 0.64%) announced its third-quarter results which met expectations. However, in the last five trading sessions, the stock had fallen a sizable 8.6%. The reason? Mr. Market developed cold feet due to a slowdown in drilling in North America.
Not really justified
I believe this is a knee-jerk reaction that also seems to suggest that the market hasn't fully factored in the underlying fundamentals into the stock price. Needless to say, that's where value investors see opportunity.
To refresh the latest results, the largest U.S. oilfield equipment maker met expectations in the third quarter with an EPS of $1.52 per diluted share. Revenues from all the three segments in which National Oilwell operates have gone up. Rig technology revenue rose a solid 29% from last year's third quarter, while petroleum services and supplies grew a corresponding 18%. However, what took the cake was the distribution and transmission whose revenue grew a whopping 174% to $1.32 billion – thanks to the Wilson and CE Franklin acquisitions this year.
The real McCoy
National acquired Wilson, the distribution business segment of Schlumberger (SLB 0.67%), which specializes in pipe, valves, fittings, and safety products and services. National's distribution segment provides maintenance, repair, and operating supplies, as well as spare parts to drilling locations around the globe. This is a segment which has been under management's focus for some time, and with good reason. Drillers have a lot of maintenance and upgrades to undertake, especially at offshore sites. The recent boom in drilling is fueling the aftermarket sales and there's huge potential in this area. Looks like Wilson and Canada-based CE Franklin should prove to be a solid value-add in the coming years.
Another huge opportunity
The international drilling market is also heating up. Which is why a slight drop in North American rig-count does not really warrant a lot of management's attention. Demand for deepwater drilling continues to top the charts as far as backlog orders are concerned, with Brazil and the Middle East leading the way. Brazil's state-owned Petrobras (PBR 1.43%) has ambitious plans for the Santos Basin. Demand for well stimulation equipment has gone up in the Middle East, China, and Russia, signifying growing drilling prospects. Management also has its eyes on Australia, one of the biggest natural gas producers in the Eastern Hemisphere.
The diversity afforded by the international markets, I believe, is where National Oilwell Varco is going to capitalize. This diversity of services provided should last for years, if not decades. And that actually turns out to be the crucial difference when compared to the North American drilling industry where shale plays have been the only area of much interest. Unfortunately, lousy demand for natural gas has played spoilsport. As a result, companies like Baker Hughes (BHI) – which has a high number of rigs concentrated in the North American continent – failed to meet expectations last quarter.
The Foolish bottom line
National has a sound balance sheet as well with cash reserves of over $3 billion. And, that's why its growth through acquisitions isn't at all a bad thing. The next acquisition in line is that of energy equipment maker Robbins & Meyers (NYSE: RBN) for $2.5 billion. All in all, it seems that the market's yet to figure out these developments.
