To say 2015 has been a rough year for the energy industry would be an understatement. Oil prices have been persistently weak, which has muted demand for oil-field services and equipment. That backdrop suggests that when National Oilwell Varco (NYSE:NOV) reports its third-quarter earnings on Wednesday morning, the report won't be all that great. Yet despite the muted expectations, there are a few things investors will want to keep an eye on when reviewing that report to gauge whether better days might lie ahead.

First, let's review
Before we get to that report, let's look back at the company's second-quarter results. National Oilwell Vacro reported a slightly better-than-expected quarter, with both revenue and earnings beating admittedly muted expectations. Overall results were still weak, though, after revenue slumped 19% sequentially to $3.9 billion, which was 26% lower than the year-ago quarter. Further, earnings per share fell from $1.47 per share in the second quarter of last year to just $0.77 last quarter. This weakness was felt across the board, with all of the company's segments suffering declines:

Segment

Revenue

Operating Profit

Operating Profit %

 

Q2 2015

Q2 2014

Q2 2015

Q2 2014

Q2 2015

Q2 2014

Rig Systems

 $1,930

 $2,372

 $395

 $501

20.5%

21.1%

Rig Aftermarket

 $657

 $785

 $145

 $217

22.1%

27.6%

Wellbore Technologies

 $956

 $1,446

 $47

 $269

4.9%

18.6%

Completion & Production Systems

 $873

 $1,127

 $81

 $158

9.3%

14%

Source: National Oilwell Varco press release. Dollar amounts in millions.

If there was a silver lining on the quarter, it was that the company's operating profit margin in its Rig System segment held up rather well. That was largely the result of its strong backlog, which saw some improvement last quarter after new order bookings grew by a net $77 million on the back of $313 million in new orders during the quarter. However, that failed to offset the $1.7 billion in revenue that came out of the company's Rig Systems backlog, resulting in a 13% slide in that backlog to $9 billion. Still, an improvement in bookings is better than another decline.

Here's what the market is expecting
Given the backdrop of the tough oil market, as well as National Oilwell Varco's shrinking backlog, expectations aren't very high for the third quarter. CEO Clay Williams warned investors last quarter that "2015 will continue to be challenging," and that's what the market expects to see happen in the third quarter. The current consensus expectation is for revenue to fall to $3.48 billion, which would represent a 10% decline from last quarter and a 37.7% year-over-year decline. Earnings are expected to see an even more significant decline to around $0.56 per share, which would be well off from the $1.62 per share it earned in the year-ago quarter.

Also not helping matters is that we've seen weak reports from oil-field service companies, with Schlumberger (NYSE:SLB) disappointing investors after its revenue failed to meet expectations. Further, Schlumberger warned that "the business environment deteriorated further in the third quarter," which doesn't bode well for National Oilwell Varco's sales. To make matters even worse, Schlumberger doesn't anticipate much, if any, improvement in oil-field activities until 2017, suggesting that 2016 could be another tough year for the entire industry.

What to watch
While we know that National Oilwell Varco won't report anything close to a robust quarter, there are a few things investors will want to look for in the report hinting at early signs on the horizon of an improvement in the company's business prospects. Topping that list is the company's backlog, especially in its key Rig Systems segment. As previously mentioned, last quarter the company's new order bookings increased, but the overall backlog decreased. Ideally, we'd like to see further improvement in the company's bookings to mitigate more of the expected net drawdown of the backlog again this quarter.

The other thing to keep an eye on is CEO Clay Williams' comments about the company's future outlook. Ideally, we'd like to not hear him say the word "challenging" again to describe the future, but that's a stretch given Schlumberger's outlook for the oil-field services market, which the company said is "increasingly challenging, with activity expected to be reduced further." What we're looking to see is if that was more of a Schlumberger-specific issue or if it's what National Oilwell Varco sees for oil-field equipment as well.

Investor takeaway
There is no expectation for National Oilwell Varco to knock the cover off the ball this quarter. It's right in the thick of a challenging oil market, with few signs on the horizon that conditions are improving. This is a case where our eyes need to be on what's ahead. A sign of better days to come would be evident in further improvement in the company's backlog with order bookings accelerating, coupled with comments by the CEO that its customers don't plan to reduce their orders for oil-field equipment as drastically as they are for oil-field services. It would suggest that things are improving, even if that improvement is minor.

 

Matt DiLallo owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends 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.