Should National Oilwell Varco Fear Halliburton and General Electric?

National Oilwell Varco (NOV -0.16%) will release its quarterly report on Friday, and shareholders have been pleased to see the stock start to approach its all-time record highs over the past month. Yet as profitable as Varco has been, it faces plenty of competition in the oil and gas services industry, with domestically focused giant Halliburton (HAL 0.34%) and the conglomerate strength of new industry entrant General Electric (GE -2.11%) threatening to choke off its long record of success.

National Oilwell Varco has commanding market share in the industry, helping a wide variety of oil-and-gas production customers meet just about all of their needs. Varco provides mundane materials like drilling pipe and fasteners, but it also offers the more sophisticated exploration, monitoring, and production equipment that can turn promising wells into highly productive ones. But Varco has identified Halliburton, General Electric, and dozens of other companies as competitive threats to its business, and how it responds will be crucial in determining its future profits. Let's take an early look at what's been happening with National Oilwell Varco over the past quarter and what we're likely to see in its report.

Stats on National Oilwell Varco

Source: Yahoo! Finance.

Can National Oilwell Varco earnings stay ahead of its rivals?
In recent months, analysts have gotten less optimistic about National Oilwell Varco earnings, cutting their third-quarter estimates by a dime per share and their full-year 2013 and 2014 projections by more than double that figure. The stock, though, has risen nicely, posting a 9% gain since late July.

Varco came into the quarter on a mixed note, as an earnings shortfall sent the stock falling sharply in early August. An 18% rise in year-over-year revenue was relatively strong, but falling margins in Varco's rig-technology segment offset the rise in backlogs reported there. Overall, record-high backlog of almost $14 billion bodes well for Varco's long-term prospects.

Yet one area where Varco faces particularly strong competition from Halliburton and General Electric is in the undersea arena. With Schlumberger and Cameron International having formed their OneSubsea joint venture, both Halliburton and Varco have responded by seeking to bolster their revenue from subsea-related capabilities. General Electric is also using deepwater completion and facilitation work as an entry point to the energy-services industry and has quickly built a good reputation among its peers. Varco's focus on products doesn't give it the same opportunities as more operationally focused competitors like Halliburton, but it also limits Varco's potential liability when things go wrong.

Varco has done a good job following the money overseas for its best profit potential. International customers are responsible for 92% of Varco's rig backlog, as new finds in remote areas around the world have put Varco's expertise in high demand. Halliburton and Schlumberger have also had opportunities to cash in on their experience by working with foreign customers, but so far, there's more than enough business to go around for the entire industry.

Most recently, Varco decided it would spin off its distribution and transmission unit from the rest of its business. The spinoff will serve the dual purpose of separating out a lower-margin segment from Varco's more lucrative operations while also allowing the unit to provide essential maintenance, repair, and operating supplies both to Varco and other companies throughout the industry. Just as General Electric and Halliburton have worked hard to find the right balance in their respective businesses, Varco's move should help it focus on its best prospects going forward.

In the National Oilwell Varco earnings report, watch closely to see where the company's highest growth is coming from. As the energy business evolves, Varco has historically done a good job of adapting to maximize its profits, but it will need to continue to do so in order to hold its competitors at bay.

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