Aug 9, 2017 by InvestorDestination Team
Even though electric cars are the future, it will take decades for electric vehicles to replace all the gasoline cars on the road. Extracting oil from the ground needs continuous investment. A few decades from now, we may not need any fossil fuel to run our cars, but oil companies can’t stop investing now. That is good news for companies like National-Oilwell Varco, Inc (NYSE: NOV) which makes equipment and components for the oil and gas business.
Unless someone has been living under a rock, it is not breaking news that the oil market is facing challenges. While the market sentiments caused by many factors including geopolitical events trigger the short-term volatility in the oil prices, the long-term prices are determined by supply and demand balance. During this prolonged downturn, oil players have reduced spending and cut production. The recent downturn has weeded out many weak players. While China’s past rapid GDP growth is not sustainable, it is a much bigger economy. In emerging countries such as China, India, the middle class' desire to own cars is not slowing anytime soon. So the long-term demand for oil looks relatively bright. When the current supply/demand imbalance reverses, oil prices will start an upward trend, and oil players will increase production and capital spending.
Even before oil prices plunged, the offshore drilling industry was trying to cope with excess supply, so that industry is facing the most prolonged and toughest downturn. Offshore drilling produces oil at lower cost but needs higher initial capital investment. Oil companies are still being cautious, so they are hesitant to invest in expensive expansion. So offshore drilling will take a bit longer to recover. However, many industry experts are upbeat about the long-term demand. As oil players increase their offshore drilling activities, offshore drillers will spend on equipment and consumable parts which will benefit before National-Oilwell Varco.
The company is in the business for more than a hundred years and built a reputation by offering superior quality, high tech products. In an industry where safety is the top priority, providing quality products is essential for building a strong brand. National-Oilwell Varco has a strong brand and excellent customer relationships.
The company has expanded through acquisition and attained economy of scale and has a global presence
It is an innovative company that uses technology to differentiate itself. The recent downturn has forced this industry to be more efficient. During this downturn, the company didn’t just focus on cutting cost and surviving, but innovating products for the next upturn. It is using big data, machine learning and sensor technology to offer automation and analytical tools to customers to improve drilling safety and efficiency, and reduce drilling time and cost. For example, it provides software to gather real-time drilling data, measure drilling process, and conduct post analysis.
Companies need to follow a disciplined approach to navigate a cyclical industry like oil and gas. The company’s management knows that and practices it. We admire its management’s stewardship. Even though the current challenging environment has negatively impacted the company’s financial performances, it is still generating positive free cash flow. It is a well-managed company that has a strong balance sheet.
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | TTM | |
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue (in millions) | 13,431 | 12,712 | 12,156 | 14,658 | 17,194 | 19,221 | 21,440 | 14,757 | 7,251 | 6,838 |
| EPS | 4.93 | 3.53 | 3.94 | 4.70 | 5.58 | 5.09 | 5.70 | (1.98) | (6.53) | (6.05) |
| Revenue Growth | 37.2% | (5.4%) | (4.4%) | 20.6% | 17.3% | 11.8% | 11.5% | (31.2%) | (50.9%) | (10.0%) |
| Gross Margin | 30.3% | 29.8% | 31.5% | 30.7% | 29.3% | 26.6% | 27.1% | 20.8% | (1.4%) | 0.9% |
| Operating Margin | 14.8% | 11.6% | 13.6% | 13.6% | 13.9% | 11.3% | 11.4% | (5.2%)% | (33.3%) | 0.3% |
| Debt to Asset | 4.1% | 4.1% | 3.8% | 2.0% | 10.0% | 9.0% | 9.4% | 15.1% | 15.2% | 15.3% |
| FCF % Sale | 14.3% | 14.5% | 10.8% | 10.9% | 0.4% | 12.8% | 8.5% | 6.0% | 9.3% |
As we already mentioned it offers products for both offshore and onshore drilling. So whenever oil and gas producers are ready to spend on capital equipment, National-Oilwell Varo will get benefited.
It is worth considering for your long-term portfolio.
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