With the recently announced spinoff of its low-margin, world class oil and gas equipment distribution business, National Oilwell Varco (NYSE:NOV) is setting itself up for a serious margin boost over the next year or so.
The newly created distribution group would have over 415 locations and operations in 26 countries. Initial figures suggest that the new entity's size will be equal to approximately 85% of the revenue for of National Oilwell Varco's distribution and transmission segment for the six months ending June 30, 2013.
So, based on figures supplied by the company up to the six months ending June 30, this new company will have annualized revenues of $4.29 billion. Unfortunately, National Oilwell Varco's distribution and transmission segment has the lowest operating margin of all the divisions under the company's umbrella. In particular, National Oilwell Varco reported an operating margin of 5.5% for the fiscal second quarter. In comparison, the company's largest segment by revenues, rig technology, chalked up an operating margin of 21%.
Overall, this indicates that National Oilwell Varco's spinoff will be a low-margin business. However, these number also indicate that after the spinoff, National Oilwell Varco will be able to achieve higher margins overall. What's more, although National Oilwell Varco's operating profit will drop by an amount equal to 85% of the company's distribution and transmission segment operating profit, I estimate this will only be about $60 million per quarter, or 7% of total second quarter operating profit. All in all, the spinoff should see National Oilwell Varco's operating profit margins expand from 15% currently to 17%.
Following in the footsteps
National Oilwell Varco's spinoff reminds me of ConocoPhillips' (NYSE:COP) similar actions. Indeed, Conoco's divestment of its low-margin refining business into Phillips 66 (NYSE:PSX) propelled the share prices of both companies into the stratosphere.
Back in 2010, when ConocoPhillips was one entity, the company clocked in a full-year 2010 net margin of only 6%. However, after the spinoff ConocoPhillips, as a pure exploration and production company, reported a net profit margin of just under 16% for the third fiscal quarter -- a staggering improvement.
Phillips 66, on the other hand, reported a tiny net profit margin of only 1.2%. Still, this margin was lower than average due to pressure on refining margins around the world. Actually, all the integrated oil majors have been reporting similar problems, so in this case Phillips 66 is not totally to blame. That said, over the first nine months of the year the company reported a net margin of 2.2%.
Not being held back
This low margin has not been a stumbling block for the company's growth though. Indeed, investors have seen their Phillips 66 shares rise in value by more than 75% since the initial spinoff. Conoco's investors have seen their holding rise 27% year to date. In addition, the loss of its lower margin refining division has given the company the ability to offer the highest dividend yield of its peers, which currently stands at 3.8%. So a higher dividend payout is defiantly on the cards for National Oilwell Varco's shareholders.
However, the performance of National Oilwell Varco's spinoff depends on how the company structures the deal. Details on the deal are currently thin on the ground, so investors will have to wait to get a better idea of how they are going to benefit from the deal.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.