National Oilwell Varco (NOV), is a leading equipment and service provider to the oil & gas market. The company operates in both the offshore and onshore markets, with over 1,235 locations on six continents. Incorporated in 1995, the company has grown to be one of the largest oil & gas equipment manufacturers in the world, with its 2013 sales in excess of $22 billion.
The Rig technology division is the most profitable business for National Oillwell Varco. Indeed, operating margins have exceeded 20% over the last several years, driven by strong demand for higher spec rigs and ancillary equipment in the deep-water drilling markets. This segment provides highly specialized equipment for challenging well construction projects. The construction of drilling rigs, blow out preventers, derricks cranes, and products for floating production, storage, and offloading vessels (FPSO) are just a few of the offerings. Demand for its products and services is highly dependent on capital spending levels, while the aftermarket end of the business is effected by overall drilling activity.
The Petroleum Services & Supplies division provides a number of products and services used throughout the whole process, from drill pipe and casing, to flowlines. The company also manufactures pumps, valves, motors, drill bits, and other various downhole tools. The manufacturer sells its products to various E&Ps, drilling contractors, and pipeline operators across the globe. The company also performs inspection and coating services for the pipelines and tubing. This division accounted for 31% of 2013 revenue, with the operating margin topping 17%.
The Distribution & Transmission unit provides pipe, maintenance, spare parts, and pipeline services to oil & gas companies. Revenue in 2013 grew 30% year over year, largely attributable to a couple of sizable acquisitions (more below). However, the business is the least profitable, with margins generally in the mid-single digits. We believe this is one of the reasons why the Board of Directors plans to spin off this division in the coming quarters.
The company has been very aggressive on the acquisition front over the last decade. More recently, the manufacturer spent roughly $2.5 billion, 2.9 billion and $1.0 billion on acquisitions in 2013, 2012, and 2011, respectively. In 2013, National Oilwell Varco completed the $2.4 billion purchase of a notable player in the equipment and services space, Robbins & Myers. We believe this acquisition will significantly bolster its product offerings, including pumps, valves, and other ancillary tools. We also think the buyout will enhance the blowout preventer business, which should be a growing market, due to regulatory scrutiny following the Macondo explosion in the Gulf of Mexico in 2010.
In 2012, National Oilwell Varco purchased 17 companies for a total of $2.9 billion. The most notable acquisitions were of Wilson Distribution Holdings and CE Franklin, which have extensive operations in the pipe, valve, and fittings arena, and have since contributed significantly to the top line within the Distribution & Transmission unit. Consequently, due to greater economies of scale, the Board has decided to spin off this division into a separate publicly-traded company, potentially creating one of the largest distribution and transmission businesses globally.
Bookings and Backlog
The equipment provider has experienced a significant lift in orders over the last several years, thanks to stronger demand for rigs, equipment, and services for the offshore and onshore markets. In fact, backlog in 2013 rose 36% on the year, to a record of approximately $16.2 billion. The order growth was driven by the recent acquisitions and by a healthier amount of orders from deep-water projects. The order book consists of 93% related to offshore drilling projects, while 7% is destined for land-based projects. Additionally nearly 94% is slated to be delivered to the international market.
Over the next six to twelve months, there should be a slowdown in orders, thanks to a number project deferrals on the offshore oil fields and E&Ps cutting back on capital spending. Nevertheless, we are still very bullish on the longer-term prospects for the subsea and deep- and ultra-deepwater drilling markets. In fact, over 1,000 new offshore fields were discovered from 2009 to 2013, a nearly 52% increase from the 2004 to 2008 timeframe. We believe these discoveries will be a strong catalyst for equipment spending over the next decade. What’s more, Quest Offshore, a leading data provider, is projecting the global subsea market will grow over 60% in the next five years. Most of the opportunities will be in Africa, Brazil, and the Gulf of Mexico. All in all, the rising demand for higher spec drilling rigs, equipment, and services should help National Oilwell Varco grow the bottom line in the coming years.
Despite the near-term concerns within the offshore drilling industry, we believe that National Oilwell Varco is well positioned to capitalize on the stronger longer-term opportunities in the subsea market. In addition, with little debt and decent free cash flow generation, future dividend hikes appear quite likely. All told, we think these shares may be worth some consideration for investors.
At the time of this article’s writing, the author did not have a position in the company mentioned.