Why National Oilwell Varco’s Free Cash Flow Is So Remarkable



Comparing free cash flow growth

In this part of the series, we’ll look at free cash flow (or FCF) growth of Schlumberger (SLB), Halliburton (HAL), Baker Hughes (BHI), and National Oilwell Varco (NOV). These are the four prominent names in the oilfield services (or OFS) space that we’re analyzing in this series. Free cash flow is defined as cash flow from operations (or CFO) less capital expenditures (or capex).

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NOV is the fiscal 1Q16 FCF growth leader

National Oilwell Varco’s fiscal 1Q16 FCF swung positive from negative FCF in the corresponding quarter last year. NOV’s FCF in fiscal 1Q16 was $537 million. The company’s fiscal 1Q16 CFO quadrupled from fiscal 1Q15 due to better working capital management. Its capex fell 35%. Higher CFO combined with the fall in capex led to FCF growth in the most recent quarter. To know more about NOV, you can read Market Realist’s series What Do National Oilwell Varco’s Fiscal 1Q16 Earnings Tell Investors?

FCF falls for SLB, HAL, and BHI

Schlumberger recorded a 43% fiscal 1Q16 FCF decline compared to the year-ago quarter. Its fiscal 1Q16 FCF was $661 million. SLB’s CFO fell 32% in fiscal 1Q16 over fiscal 1Q15, led by lower revenues. Its capex fell 9.4% during the same period. However, lower capex couldn’t offset the falling CFO, leading to lower FCF.

Halliburton’s fiscal 1Q16 FCF was -$405 million compared to $108 million in fiscal 1Q15. From fiscal 1Q15 to fiscal 1Q16, its CFO also turned negative due to sharply lower revenues. Lower CFO more than offset the 67% capex fall, leading to the FCF crash.

Baker Hughes’s fiscal 1Q16 FCF deteriorated further, falling to -$185 million compared to -$59 million in the corresponding quarter last year. BHI’s CFO turned negative in fiscal 1Q16 compared to the prior year period due to a sharp decrease in revenue. Although capex declined, it couldn’t offset the fall in CFO. FCF declined during the same period. Read the previous part to know how these companies plan to spend their capital investments in fiscal 2016. BHI makes up 7.4% of the iShares US Oil Equipment & Services ETF (IEZ).

In the next part of this series, we’ll look at these companies’ debts.


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