The term "blue-chip stock" is reserved for those few companies that exude stability and security. When we think of the companies that fit the mold of the blue-chip stock, we think of the Coca-Cola's and IBM's of the world because we recognize the name, but there are plenty of potential blue chippers out there that don't have that sort of name recognition, and National Oilwell Varco (NYSE:NOV) is one of them. Let's take a quick look at NOV's blue-chip candidacy.

What is a blue-chip stock anyway?
While there is no rigid definition for a blue-chip stock, all of these companies have a few characteristics in common. Traditionally they are well-established companies that have nice clean balance sheets, large market capitalizations, and have been around for a long time. Also, this group of stocks typically consists of market leaders that have a reputation for quality, reliability, and profitability, even during down cycles in their respective industry. They normally pay dividends as well.

National Oilwell Varco's case to be a blue chipper
So maybe you don't see advertisements for National Oilwell Varco on billboards or on TV, and it's not exactly a household name, even by energy standards. That doesn't mean, however, that this oil and gas equipment and services company has a very compelling case to be considered a true blue-chip stock.

Let's start with a dominant position in its industry. NOV has its fingers in many pies as a manufacturer and supplier of drill rigs and the equipment to keep them running, but it has real market dominance in one particular segment: Building the drilling equipment for offshore rigs. Today, National Oilwell Varco owns 80% of global market share in offshore drilling packages, which is anything drilling related on a ship or rig. Not only does this encourage other ship and rig builders to use NOV equipment, but it also essentially builds in a lifetime customer as those drilling packages run through consumable equipment such as drill bits. Thats a very sustainable long-term advantage.

This position gives NOV a unique position in that it allows them to keep working through up and down cycles in the overall oil and gas industry. Just look at the company's EBITDA numbers over the past 10 years compared to many of its peers.  

NOV EBITDA (Quarterly) Chart

NOV EBITDA (Quarterly) data by YCharts

Also, and possibly more importantly, the company generates free cash flow at a higher rate than many of its peers, which gives the company much more financial flexibility.

Company EBITDA Margin Net Income Margin Free Cash Flow Margin
National Oilwell Vacro 20.95% 10.44% 19.21%
Halliburton 15.6% 9.49% 6.88%
Schlumberger 22.6% 14.03% 12.21%
Cameron International 14.7% 6.98% 4.1%

Source: S&P Cap IQ

This allows the company to run with a squeaky clean balance sheet. NOV's net debt -- total debt minus cash and short-term investments -- is zero, and its free cash flow allows it to do all the things management wants. That includes making strategic acquisitions and paying out a decent dividend, which today stands at a yield of 2.5% -- and management mentioned in its recent conference calls that it intends to continuously increase it over time.

What a Fool believes
Long term, it doesn't appear that we will stop using oil and gas anytime soon. By most estimates, total oil demand alone will increase by 40% between now and 2040. So there's really no worry that the buyers of National Oilwell Varco's equipment will be going out of business in the near future. Add to this the company's dominant market position and its propensity to generate cash to both grow the business and keep shareholders satisfied, and you have the recipe for a very compelling blue-chip stock.