National Oilwell Varco (NYSE:NOV) is an industry giant. The company has over 1,200 locations in 63 countries. This kind of global presence and reliability has given National Oilwell Varco a reputation for quality of service. Now, it enjoys an estimated 80% share of the market for "floater" packages, in layman's terms, complete systems for drilling deep-sea wells.
What's more, National Oilwell recently spun off its low-margin distribution arm, essentially a supermarket for oil service firms. The new entity trades under the name NOW Inc (NYSE:DNOW).
However, this has presented an interesting opportunity for investors. In particular, NOW is actually better positioned for growth than its parent. Additionally, National Oilwell's outlook has deteriorated.
That said, I'm not saying National Oilwell Varco is in terminal decline -- the company's business model is still sound, and its group industry experience is second to none. Nevertheless, the company's margins and growth have come under pressure during the past few years.
After the spinoff of NOW, National Oilwell released historical financials recast with its four new reporting segments: Rig Systems, Rig Aftermarket, Wellbore Technologies, and Completion and Production Solutions. These revealed some interesting trends.
For example, these recast results go back to 2009, and since then, National Oilwell Varco has seen its operating margin drop from 21.5%, reported for full-year 2009, to 16.7%, reported during the first half of this year.
However, over the five-year period from 2009 to 2013, the company's growth has been impressive. Specifically, for the four new business segments, revenue has increased 62%, and operating income has increased 30%. Meanwhile, EBITDA has expanded 38%. Order backlog has risen from $6.2 billion to a record of $15.2 billion.
While historically impressive, these results have recently started to deteriorate. Specifically, during 2013, a year of record revenue and order backlog for National Oilwell Varco, the company's operating income dropped around 10% thanks to a 350 bps decline in operating margins. EBITDA also dropped 3%.
Further, after considering management's warning earlier this year concerning the outlook for the rig market, it seems as if National Oilwell's outlook, for the time being, is bleak. (The company revealed that orders fell by nearly a quarter during the first three months of the year. Moreover, management stated they expect demand for new offshore rigs to slow during the second half of the year.)
Set for growth
On the other hand, NOW looks to be set for growth. The company is an oil services superstore, and now that it has been spun off, the company can expand through acquisitions.
NOW also has a secret weapon: Executive Chairman Pete Miller. Miller transformed National Oilwell into the powerhouse it is today and is responsible for much of the company's growth over the past five years. With a clean slate at NOW, Miller is ready to start all over again.
NOW has come to the market with zero debt and currently accounts for 19% of the market across 20 countries. What's more, the company operates in a relatively fragmented industry. So, with a strong leadership team and a robust balance sheet, NOW is ready to consolidate the global distribution market. This one should be able to report a string of impressive growth figures over the next few years.
This is by no means a comprehensive analysis of either NOW's or National Oilwell's outlook; however, it does raise some interesting questions. NOW is well placed to grow through acquisitions over the next few years. The company sits in a highly fragmented industry, and has a clean balance sheet and a motivated CEO. Meanwhile, National Oilwell's outlook is deteriorating, along with the slowing offshore drilling market.