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Does National Oilwell Varco See Recovery in 2016?

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National Oilwell Varco’s segment-wise performance

From fiscal 1Q15 to fiscal 1Q16, National Oilwell Varco’s (NOV) Rig Systems segment revenue declined 63%. This was the highest revenue drop among the company’s operating segments. Its Completion & Production Solutions segment witnessed a 41% revenue decline during the same period—the lowest among the segments.

In regards to the adjusted operating income, the Rig Aftermarket segment decreased 64% in fiscal 1Q16—compared to fiscal 1Q15. The Wellbore Technologies segment adjusted operating income switched to a $53 million loss—compared to $140 million income a year earlier. National Oilwell Varco is 0.96% of the iShares Select Dividend ETF (DVY).

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In aggregate, National Oilwell Varco’s adjusted operating income switched to a $48 million loss in fiscal 1Q16. In comparison, Weatherford International’s (WFT) fiscal 4Q15 operating income fell 90% compared to fiscal 4Q14. Weatherford International’s market capitalization stands at $7.2 billion—compared to National Oilwell Varco’s $11.9 billion.

What impacted NOV’s fiscal 1Q16 performance?

  • There was a sharp fall in spare parts sales in the aftermarket business. It had a negative impact on the Rig Systems segment’s earnings.
  • There was suspended work with SETE Brasil Participacoes SA—National Oilwell Varco’s customer in Brazil. This would have a negative impact on National Oilwell Varco’s $2.09 billion backlog related to 15 floater contracts.
  • There was demand erosion for National Oilwell Varco’s rig spare parts as offshore drilling contractor customers cut their expenditures. This had a negative impact on National Oilwell Varco’s Rig Aftermarket segment.

Partially mitigating the negative effects above was revenue per rig improvement due to Market share gain. This benefited National Oilwell Varco’s Wellbore Technologies segment. Also, restructuring efforts, including workforce reductions and facilities closing, resulted in a 28% reduction in selling and administrative costs in fiscal 1Q16—compared to fiscal 1Q15.

Will there be a recovery in 2016?

National Oilwell Varco’s management expressed optimism about crude oil production and a demand recovery in 2H16. Clay Williams, National Oilwell Varco’s chairman and CEO commented in the fiscal 1Q16 conference call that “While we are not planning for a recovery in 2016, we are encouraged by reports from some customers that they are beginning to think about a potential upturn in the second half of the year, as oil production is finally begun to rollover and demand continues to march upward.”

Next, we’ll discuss National Oilwell Varco’s returns.

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