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Berkshire Hathaway reduces its exposure to National-Oilwell Varco

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Berkshire Hathaway and National-Oilwell Varco

Berkshire Hathaway reduced its exposure to National-Oilwell Varco (NOV) by about 1.1 million shares in 4Q14. NOV accounted for 0.31% of the fund’s fourth-quarter portfolio, down from 0.45% in 3Q14.

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About National-Oilwell Varco

Headquartered in Houston, Texas, National-Oilwell Varco (NOV) provides oilfield services and equipment used in oil and gas drilling and production. The company’s fortunes depend on energy commodities prices, which influence exploration and production companies’ inclination to drill for oil and gas.

NOV is a component of the VanEck Vectors Oil Services ETF (OIH), making up 7.56% of the ETF. Competitors Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), and Weatherford International (WFT) represent about 41% of the ETF’s portfolio holdings.

Spin-off of distribution business

In May 2014, National-Oilwell Varco spun off its distribution business into an independent public company, DistributionNOW (DNOW). The spinoff enables each company to focus on particular market segments, customers, and core businesses.

Following the separation, NOV began reporting its operations under four segments:

  1. Rig Systems
  2. Rig Aftermarket
  3. Wellbore Technologies
  4. Completion & Production Solutions

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4Q14 earnings

NOV reported revenues of $5.71 billion in the fourth quarter, up 8% from the same quarter in the previous year. The revenue growth was primarily due to two factors:

  • heightened demand for Rig Systems equipment such as high-specification land rigs
  • higher revenues from the Rig Aftermarket segment driven by its larger installed equipment base

Excluding other items, operating profit increased 10% YoY (or year-over-year) to $1.0 billion, which translates to an improvement of roughly 40 basis points in margin terms. On a non-GAAP (or generally accepted accounting principles) basis, net income came to $721 million or $1.69 per fully diluted share, reflecting a 13% increase from 4Q13.

The company ended the year with a backlog of $12.54 billion for the Rig Systems segment and $1.78 billion for the Completion & Production Solutions segment.

Downturn on the horizon

Due to a supply imbalance, oil prices plummeted in the second half of 2014. This led oil and gas companies worldwide to cut down on their capital spending and abandon low-margin projects. This translated to lower rig counts and drilling activity in the latter part of 2014.

Due to the weak oil price environment and declining rig counts, stiff challenges lay ahead for oilfield services and equipment operators, including NOV, Schlumberger, Halliburton, Baker Hughes, and Weatherford International.

For 2015, NOV believes revenues out of backlog are likely to exceed orders for new rigs and components, resulting in a book-to-bill ratio of less than one for the year. If oil prices remain below normal levels, a large number of rigs might be shut down in the long term.

Commenting on the outlook for 2015, National-Oilwell Varco CEO Clay C. Williams commented that the company’s solid balance sheet position, cash flow generation, and backlog levels are likely to provide strong support during this cyclical downturn.

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