Later this week, National Oilwell Varco (NYSE:NOV) is expected to report third-quarter earnings. With oil prices falling off a cliff and waning demand for many of the big ticket products that National Oilwell Varco sells to the oil and gas industry, there are some investors that may be worried about the next couple of quarters. To help better understand what is going on with the company's near-term future, here are three things to look for when the company reports earnings.
National Oilwell Varco splits its business into four main segments -- Rig systems, Rig aftermarket, Wellbore technologies, and Completion and Production services -- but the real bread and butter for the company is in the rig systems business. This part of the company is responsible for just about half of all operating income, and the results in the rig aftermarket segment are pretty much dictated by the prior success of the rig systems business.
Throughout 2013 and parts of this year, rig systems have seen margins decline as the company has spent a little more than expected to push new products out the door quicker to meet customer demand. With the market starting to slow a little and the company getting better at working at this accelerated pace, investors should keep an eye out to see if the company can increase operating margins for this particular segment of the business.
Did it burn through its backlog?
So much of National Oilwell Varco's business is based on big ticket items for the oil and gas industry such as land drilling rigs or offshore drilling packages -- the term used for anything drilling related on an offshore rig. Pretty much all of these items take several months to build, and therefore the company holds a backlog of orders to work through. This past quarter, NOV posted a record backlog of orders of $17.5 billion. However, since the company has been anticipating a slowdown in the rig market, management expects that this backlog will dwindle slightly this quarter as well as into the upcoming quarters.
With this in mind it's important that investors keep an eye on what happened with the company's backlog over the past quarter. There is no way that it will burn through its entire backlog in a single quarter. In fact, the backlog was so large that it could not take a new order for close to a year without it interrupting the build schedule. That being said, it would still be encouraging if the draw-down on the backlog was minimal. The closest that NOV can keep its backlog to that $17.5 billion figure from last quarter, the better shape the company will be in.
Stock buyback update
Back in September, National Oilwell Varco's management announced that it plans to buy back about $3 billion worth of shares as a means of boosting the share price. With close to $4 billion of cash and short-term investments and an ability to generate loads of free cash flow, it would appear that paying for this big buyback would not be a problem.
There is one catch, though. A vast majority of that cash on the books is held overseas, and if the company were to repatriate that cash it would likely incur a pretty large tax bill in the process. Management has stated that it is looking at ways to get that money back to the United States so it can be used for more shareholder-friendly initiatives such as this share repurchase program, but it could prove difficult. So one interesting little nugget worth checking in on is whether the company is able to pay for its share repurchases with its cash on hand, or if needs to do something more creative to make it happen.
What a Fool believes
The business of National Oilwell Varco is a cyclical one. As oil prices slump and producers pull back their spending habits, it's only natural that NOV will see a small downturn in its revenue and profitability. However, thanks to its dominant position as an equipment manufacturer and supplier to the entire global oil and gas industry, those dips in revenue aren't as drastic as many other players in the space. Overall, there isn't a whole lot to worry about on a quarterly basis with this company, but knowing those three things above will give you a pretty clear picture of what the near-term future for National Oilwell Varco will look like.
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.