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Will Upstream Operators’ Capex Affect NOV’s Margins in 2017?

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Upstream operators’ capex cut

In the past couple of years, some of the major US upstream and integrated companies have reduced their capital expenditures following crude oil’s sharp price decline. From 1Q16 to 1Q17, 19 of the most prominent names in this space, in aggregate, have slashed their capex 21%. 

Lower upstream capex resulted in lower prices for oilfield services and equipment (or OFS) companies’ services and products, which reduced OFS companies’ operating revenues and margins.

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From 4Q16 to 1Q17, these companies’ capex also decreased 21%. Many of these companies have started to increase their 2017 capex budget, as crude oil prices are showing signs of stabilization. Read Market Realist’s Why Cabot Awaits the Atlantic and Constitution Pipeline Projects to learn more. Higher capex on energy drilling and production can lead to improved margins for OFS companies going forward.

National Oilwell Varco’s EBITDA margin

As shown in the graph above, National Oilwell Varco’s (NOV) EBITDA[1. earnings before interest, tax, depreciation, and amortization] margin was severely affected as upstream companies slashed their budgets and renegotiated contracts with the OFS companies. EBITDA margin is a measure of a company’s operating earnings. 

However, from 1Q16 to 1Q17, NOV’s EBITDA margin (or EBITDA as a percentage of revenues) improved to 4.5% from -0.6%. National Oilwell Varco comprises 0.05% of the iShares Dow Jones US ETF (IYY). The energy sector makes up 6.0% of IYY.

EBITDA margin for NOV’s peers

Baker Hughes’s (BHI) EBITDA margin was 13.7% in 1Q17. In 1Q17, Basic Energy Services’ (BAS) EBITDA margin was -2.3%. You can read more on BAS in Market Realist’s Can Basic Energy Services Bounce Back after Bankruptcy? 

Flotek Industries’ (FTK) EBITDA margin was 3.3% in 1Q17. The energy sector makes up 6.3% of SPX-INDEX. The SPX-INDEX increased 16% in the past year versus a 4% rise in NOV’s stock price.

Next, we’ll discuss National Oilwell Varco’s dividends and dividend yields.

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