Thanks to the continued strength of both shale drilling in North America for both oil and gas, demand for new land rigs, and all the equipment needed for today's unconventional drilling program, remains very strong. This is music to the ears of executives at National Oilwell Varco (NYSE:NOV), because there are few companies out there better positioned to supply that demand.

This past quarter, North American revenue climbed 12% year over year as drillers were burning through consumable equipment at breakneck pace, and more and more companies were demanding newer generation rigs. This demand is even starting to spill over into other countries that are starting to look harder and harder at their own shale deposits.

This boom in the onshore is also helping to mask the much slower market for offshore equipment. The oversupply of both floating and jack-up equipment is starting to show its teeth: Orders are coming in much slower, and NOV is starting to draw down on its $14 billion plus backlog of orders. That being said, there's enough demand still out there that the drawdowns on that backlog should remain modest until demand picks back up again. 

Add the fact that the other business segments for the company will continue to supply those NOV-built rigs with the equipment and parts to keep them running, and you can see why this quarter was yet another strong one for the company as it posted record EBITDA and EPS numbers.

Financial highlights

  • Revenue increased 17% year over year, to $5.6 billion
  • Gross margins declined slightly on a sequential basis, but increased 100 basis points from this time last year for a margin of 27.7%
  • Operational income increased 21%, to $989 million, at a 17.7% margin
  • Adjusted EBITDA grew 23%, to $1.2 billion, with a 21.1% margin
  • Adjusted EPS was up 28%, to $1.76 per share
  • Free cash flow totaled $351 million, leaving $4 billion in cash on the balance sheet

Segments

Rig systems
The company's Rig systems segment is responsible for the design and manufacture of the big-ticket items in the oil and gas world such as land rigs, offshore drilling equipment packages, and components that help automate rig functions and processes.

  • Revenue for the quarter came in at $2.66 billion, a 29% bump over the same quarter last year
  • Operational profits increased 36%, to $533 million, but margins slipped slightly to 20% compared to last sequential quarter
  • EBITDA grew to $554 million, with an EBITDA margin of 20.8%, also a slight dip sequentially

Backlog: As expected, total backlog in the Rig Systems segment saw a slight decline to $14.3 billion, down from its all time high last quarter of $15.4 billion. The one encouraging sign here was that the company still booked more than $1.3 billion new orders in the quarter, which suggests that the drawdown on the backlog may not be too great during the next few quarters as management had previously mentioned.

Guidance

As we move into the fourth quarter, we believe that Rig Systems revenues could remain relatively flat as recent bookings of land rigs and land-related equipment ship out and convert into revenue and as we continue to execute against our offshore new-build backlog. And as stated on previous calls, we expect that operating margins will continue to remain in that 20% to 21% range for the quarter... We believe that orders for new floaters will, once again, be limited and that opportunities for jack-ups could be halved. Still demand for complete land rigs, land equipment packages and individual land components should remain strong in the U.S., Latin America and the Middle East.

Rig aftermarket
This part of the business is responsible for selling equipment and services for the rigs and drilling equipment manufactured by the rig systems segment. Most of the products sold in this part of the business are considered consumables, and its growth is largely dependent upon the expansion of the rig systems segment.

  • Revenues for rig aftermarket were $837 million, an 18% uptick from the year prior
  • Operating profit came in at $229 million, but saw margins slip by 20 basis points, to 27.4%
  • EBITDA for the quarter was $236 million, and also saw a small -- 30 basis points -- decline in margins, to 28.2%

Guidance

We feel that Aftermarket revenues could continue to improve in the mid-single-digit percentage range. However, given historical trend and a large pipeline of somewhat lower-margin repair work that will likely be executed in the fourth quarter, we could experience a slight decline in operating margins.

Wellbore technologies
The company's wellbore technologies segment makes equipment designed to improve drilling performance such as drill bits and drill pipe. Like rig aftermarket, these products are considered a consumable product, as well, and are largely affected by global drilling activity.

  • Revenues from wellbore technologies increased 14% year over year for a quarterly total of $1.47 billion.
  • Operating profit grew by 35%, to $278 million, with margins increasing sequentially by 30 basis points
  • EBITDA totaled $390 million, with a margin of 26.5%, up sequentially by 40 basis points.

Guidance

Looking into the fourth quarter of 2014, we believe that Wellbore Technologies segment revenues could be flat to slightly up as the strengthening Canadian market could be at least partially offset by a reduction in billing days due to the holidays. And as a direct result of those holidays, we believe that margins could decline slightly as we experience some seasonal under absorption in some of our manufacturing and service facilities.

Completion and production services
This business segment provides equipment to complete wells, and actually produce oil and gas. This is actually a very broad segment ranging from hydraulic fracturing equipment such as pressure pumping tools and coiled tubing all the way up to Floating Production, Storage, and Offloading -- FPSO -- systems. Any consumables related to the production of oil and gas are included here, as well.

  • Revenue here gained a modest 9% year over year, to total $1.19 billion
  • Operational profits for completion and production was $184 million, with a 15.4% margin
  • EBITDA came in at $242 million, and saw margins increase by 160 basis points, to 20.3%

Backlog: There was almost no chance that the company was going to see its new orders match last quarter's $1.1 billion; but this quarter, new orders totaled a respectable $609 million. Total backlog for this segment came in at $2.09 billion, an almost negliglble decline from last quarter, and a 39% increase from the year prior.

Guidance

Completion & Production Solutions segment could improve in the low to mid-single-digit percentage range as we continue to see increasing demand for our well intervention stimulation equipment. And for the fourth quarter, much like our Wellbore Technologies segment, we believe that margins could drift slightly lower as the holidays could lead to under absorption in our manufacturing facilities... we believe that new orders for coiled tubing units and pressure pumping equipment should continue to be strong and that orders for production-related equipment could improve, resulting in a book-to-bill for the Completion & Production Solutions segment that could approach, if not exceed, 1:1.

The big buyback plan

Back at the end of September, NOV's management announced that it would embark on a $3 billion share repurchase program to boost shareholder value. With more than $4 billion in cash on the books, it would appear that the company would have no issues making such a move.

The only problem is that so much of that cash is overseas from international operations and cannot be repatriated to the U.S. without incurring major taxes on that cash. According to CFO Jeremy Thigpen, though, the company is pursuing "mechanisms within our current structure that will permit us to return more to the U.S. in the coming months." 

What a Fool believes

Despite the fears that declining oil prices and a glut of offshore drilling equipment could hurt NOV's business, the company has cranked out yet another very impressive quarter. One of the most encouraging signs was that it only burned through about $1 billion of its backlog in the rig systems segment, while still increasing revenue in the segment.

If the company can maintain a slow backlog burn like this, then investors shouldn't worry too much about the market slowdown because the company should be able to keep itself plenty busy for several quarters to come. Hopefully, by then demand for rig systems will be back on the upswing.

Add to the fact that the business will diversify into other emerging aspects of the oil services business such as FPSOs, and there doesn't appear to be any signs that things will be slowing down at NOV any time soon.

Tyler Crowe owns shares of National Oilwell Varco. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

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