Based on the market's reaction to National Oilwell Varco's (NYSE:NOV) recent earnings announcement, you might think that it had a really rough quarter. In reality, though, it actually had a pretty strong quarter that saw revenue and operating profit margins increase compared to this time last year.
The real reason that shares have declined so sharply since its earnings announcement prior to the opening bell has a lot more to do with what is in store in 2015. With oil prices declining, management is fielding lots of calls from customers about delaying some orders, and historical downward trends suggest that things could get pretty rough in 2015.
Cyclical swings like this are just part of the life of an oil and gas equipment and service provider, so this isn't anything new to NOV's management. Let's take a look at the numbers and what National Oilwell Varco's C-suite executives had to say about this past quarter and what it expects for the year ahead.
- Revenue increased 7.7% year over year to $5.7 billion
- Gross margins declined slightly on a sequential basis, but increased 60 basis points from last year for a margin of 27.1%
- Operational income decline of 1% to $855 million after a $163 million in changes for an asset writedown and a realized loss after a divestiture.
- Adjusted EBITDA grew 8.6%, to $1.2 billion, with a 21.3% margin
- Adjusted EPS was up 12% to $1.84 per share
Here's what these results look like broken out into the company's various business segments.
The company's rig-systems segment -- by far the company's largest segment -- deals with the manufacture and sale of drilling equipment used on both onshore and offshore drilling rigs.
- Revenue for the quarter came in at $2.56, down from the previous quarter, but up 7% year over year
- Operational profits were also down from the previous quarter to $511 million, but were up 12% from last year
Backlog: While the revenue and earnings numbers don't suggest a big downturn in the market for rigs, the company's backlog sure does. This past quarter's book-to-bill ratio of just 21% meant that total backlog declined $1.76 billion to $12.5 billion. That's still plenty of work to keep the company going for a while, but that miserable book-to-bill ratio pretty much says it all when it comes to the outlook for the rig market right now.
Guidance: According to CEO Clay Williams, the company fully anticipates that new orders in 2015 will be few and far between, with most of them coming from international markets in the Middle East, Mexico, and Argentina. The company will likely burn through its backlog significantly in the first half of the year, but that will start to slow in the second half as they will scale back production. He also thinks that many of its clients are overreacting with cuts to drill maintenance, which will just mean a boom for the company further down the road.
Rig aftermarket was one of the bright spots in the earnings results. Since its sales base grows with every new rig package that comes out of the rig-systems segment, it has the benefit of selling the replacement parts to a growing base of rigs.
- Revenues for rig aftermarket were $850 million, 12% better than the year prior
- Operating profit came in at $245 million with an improving operating profit margin of 28.8%
Guidance: Very rarely will you hear a company's management say that they aren't sure what to expect, but that is exactly what CFO Jeremy Thigpen said. Because of the uncertainty related to overall drilling activity, he admitted that they aren't exactly sure what to expect in terms of revenue, but he's pretty certain it will not be another double-digit growth year.
Like the rig aftermarket segment, its wellbore technologies segment is extremely dependent on overall drilling activity since it deals with things like drill bits and pipe to improve the actual drilling process. Since drilling activity didn't really decline much in the fourth quarter, numbers for this segment were quite strong as well.
- Revenues jumped an impressive 11% year over year for a quarterly total of $1.53 billion
- Operating profit of $276 million was pretty much flat sequentially but up almost 13%, with margins improving 30 basis points
Guidance: Also, since NOV's management is uncertain what the outlook for drilling activity will be, it isn't making any promises about what to expect from its wellbore tech segment. Although, according to Thigpen, revenue in this segment declined 20%-25% in a previous market downturns from 2008-2009, so that might give a small clue for the year's results.
Completion and production services
This business segment provides equipment to complete wells, and actually produces 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 had the largest gain in the company with a near 15% uptick to $1.32 billion
- Although operations profit margins declined slightly sequentially, they were up 80 basis points to 16.2% with a profit total of $215 million
Backlog: A total of $470 million in new orders gave this segment a slightly healthier but still ghastly book-to-bill ratio of 60%. The backlog today stands at $1.8 billion.
Guidance: Since completion and production is such a wide-ranging segment, it's really hard to forecast as well considering it deals with some products with shorter turnaround times, such as pressure-pumping equipment and some super-long-tail projects such as FPSOs. The biggest hit this segment will take is in things such as pumping equipment and coiled tubing since they are closely tied to U.S. drilling activity. Because the market is so unclear, though, management is preparing itself to see revenue in this segment decline as much as 40%-50%.
Blowing through the buyback plan
Back in September, the company announced that it had the boards authorization to buy back as much as $3 billion in stock. So far, the company has bought back $779 million worth of shares to retire 2.7% of total share count. With share prices dropping and another $2.2 billion left in the program, the company has a great opportunity to boost shareholder returns during this down cycle.
What was more encouraging about that buyback, though, was that most of that buyback was completed with cash that was repatriated from its international accounts without incurring massive taxes on the repatriation. According to CEO Williams, the company will continue to look for opportunities to repatriate that cash as tax efficiently as possible to use for more share buybacks.
What a Fool believes
As expected, much of the pain from lower oil prices has not yet found its way to the bottom line for National Oilwell Varco. Now that 2015 is here and companies are starting to revise their capital budgets, though, we will likely start to see some declines as the year goes on. Its bread and butter business segment -- rig systems -- should be able to hold steady for a while longer with so many orders sitting on the backlog, but it will start to feel the pain in its other segments.
However, management at this company has now seen this business go through more than six industry cycles, and it's confident that it will be just fine as underinvestment in equipment and drilling catches back up to the market and sends demand for its equipment soaring again.