Image Source: National Oilwell Varco corporate website.
Typically, analyst upgrades or downgrades pass by like ships in the night, and very few individuals pay attention to them (and if they do, they shouldn't). However, when FBR & Co. recently released its upgrade of National Oilwell Varco (NOV +2.72%), its analyst team also stated that it thinks the company should put Weatherford International (NYSE: WFT) high on its list of potential acquisitions.
Apologies to those analysts, but buying Weatherford International is probably the furthest thing that National Oilwell Varco wants to do. Here's why FBR probably thinks it's a good idea, but why it doesn't really fit the business model of National Oilwell Varco.
This isn't the acquisition you're looking for
The first thing that comes to mind when you hear the possibility of National Oilwell Varco and Weatherford International joining forces is Schlumberger's (SLB +1.65%) acquisition of Cameron International (CAM +0.00%). Schlumberger acquired Cameron mostly on the premise that it could further leverage its existing OneSubsea joint venture. It will take Cameron's strengths as a manufacturer of subsea production equipment, and pair it with Schlumberger's offering as an oil service provider with lots of experience and market share in international and offshore drilling operations. This will allow Schlumberger to market its service as more of a one-stop shop when it comes to designing and installing subsea infrastructure for large offshore projects.
There is some logic there because both companies have some strengths in that specific market. By bringing them together, Schlumberger can streamline the design and procurement process of subsea infrastructure because it will have in-house manufacturing at its disposal. The one possible downside for the equipment manufacturer, though, is that it could drastically impact the company's ability to sell its equipment to other oil services companies like Weatherford.
Compare that to National Oilwell Varco, which manufactures just about everything under the sun when it comes to the oil and gas space, and has hundreds of clients ranging from the mom and pop oil producers to big names in the business like Schlumberger. If there's a potential risk that combining National Oilwell Varco with a service provider like Weatherfrod could potentially compromise sales to other companies, why would this make sense?
Because of... SYNERGIES!
As you can imagine, the first thing that FBR analysts point to as a potential benefit of merging these two companies is the potential cost synergies that could be garnered from this deal. Ah, synergies... that magical word in business and finance that helps to justify the craziest ideas.
When you go down the list of business segments for National Oilwell Varco, though, it's hard to see where those synergies could be realized, because National Oilwell Varco and Weatherford operate in very different parts of the value chain:
| Business segment | What does it do? | Who are its primary customers? | Is there overlap? |
| Rig Systems | Manufactures equipment packages for land and offshore rigs | Rig owners (via shipyards for offshore rigs) | Weatherford manufactures some drilling tools, but not to scope and scale of NOV |
| Rig Aftermarket | Provides spare parts, repairs, and service of equipment sold from its Rig Stem | Rig owners | Same as for Rig Systems |
| Wellbore Technologies | Designs, manufactures, rents, and sells equipment and technologies used to perform drilling operations, and offers services that optimize their performance. | Rig owners, oil & gas producers, oil services companies, drilling contractors, and rental companies | Weatherford is both a competitor and customer of NOV for this segment, NOV has much broader scope here. |
| Completion & Production Services | Designs, manufactures, and sells equipment and technologies needed for hydraulic fracture stimulation & onshore production, floating offshore production facilities, subsea production, and well intervention | Oil & gas producers and national oil companies | Not even listed as a competitor/customer on NOV 10-k |
Source: National Oilwell Varco 10-K.
Considering how little overlap there is between the two companies in terms of products and the different customer set each serves, it's hard to see National Oilwell Varco being able to wring out significant cost savings between the two companies via those fabled synergies.
Break the bank
Even if the company could find a strategic reason to make this acquisition work, then there comes the point of financing that sort of deal. It's here where FBR's proposal gets even fishier. FBR's analysts call for NOV to make an all-cash deal for Weatherford, and thinks that it would take a 50% premium to today's share price to make it happen. Even accounting for National Oilwell Varco's sizable cash pile, the company would need to take on a very large amount of debt to make it possible.
| Debt/cash source | Amount |
| Existing National Oilwell Varco debt | $3.98 billion |
| Assumption of Weatherford International existing debt | $7.7 billion |
| 50% Premium to Weatherford's shares | $10.6 billion |
| National Oilwell Varco cash & short term investments | ($1.84 billion) |
| Net debt load of NOV/WFT combined | $20.46 billion |
Source: S&P Capital IQ.
What would also likely make National Oilwell Varco wary of assuming that much debt is that it would instantly transform the company from one of the least-levered companies in the oil and gas equipment and services space to one of the most levered.
| Company | Net Debt/EBITDA | Total Debt to Capital |
| National Oilwell Varco | 0.69x | 16.34% |
| Weatherford International |
5.08x |
57.2% |
| NOV/WFT combined | 4.4x | 46% |
| Schlumberger | 0.51x | 23.7% |
| Cameron International | 0.54x | 34% |
| Halliburton | 1.15x | 33.7% |
| Baker Hughes | 0.71x | 18.5% |
Source: S&P Capital IQ, author's calculations for NOV/WFT combined company.
If there is one thing that has been apparent from this recent downturn in the oil and gas space, it's that oil services companies need squeaky-clean balance sheets to manage through these market downturns. It's no wonder that Weatherford sold more than $1.6 billion in assets in 2014. According to CEO Bernard Duroc-Danner, "De-levering our balance sheet is a top priority."
With the market for oil and gas where it is today, it seems unnecessary to take on that much debt for any acquisition.
What a Fool believes
National Oilwell Varco is by no means afraid of making an acquisition or two. During the past 15 years, the company has made transformative acquisitions such as bringing together National Oilwell and Varco in 2005 to the bunches of smaller bolt-on acquisitions. However, the idea of buying Weatherford International just doesn't jive with the modus operandi of the company.
Does it make sense for a company to take a chance on an acquisition where there are few competitive overlaps, marginal opportunities for cost savings, and a need to lever itself to the point where it's up to its eyeballs in debt to make it happen? No thanks; I'm sure there are better opportunities in the oil-services sector today.
