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National-Oilwell Varco (NOV) |
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WIKI ANALYSIS
National Oilwell Varco (NYSE: NOV) is the world's leading supplier of equipment to the oil and gas industry, and its name can be found on 90% of the offshore and land drilling rigs across the globe. NOV is a provider of equipment and components used in oil and natural gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry.[1] NOV's product portfolio is so extensive that it has been called a "one stop shop" for drilling contractors, and it conducts operations in over 800 locations across six continents.[1]
Overall, NOV's performance is dependent on the demand for oil and gas drilling, the amount of well remediation activity, the price of crude oil and natural gas, capital spending by drilling contractors, and the inventory levels of oil and natural gas.
Though NOV may benefit from the demand for fossil fuel energy in emerging markets like China and India, renewable energy has become a potentially serious threat to NOV's long term business model as a supplier for oil drilling rigs. Climate change fears, political instability in oil-rich regions, and peak oil concerns all have the potential to shift energy demand from fossil fuels like oil and natural gas to renewable energy such as solar power, geothermal energy, and wind energy. Governments throughout the world are trying to make renewable forms of energy more economically viable through subsidies, grants, and carbon trading schemes.
NOV competes indirectly with larger oilfield services players like Schlumberger, Transocean, and Halliburton, but it is the smaller companies that have large rig part segments, like Smith International, Cameron Corporation, and FMC Technologies that are NOV's main competition.
Company Overview
National Oilwell Varco is an international oilfield services company specializing in the hardware needed for oil and gas exploration and production. The company generates revenue by selling hardware components to drill rig manufacturers and leasing drilling rigs to oil and gas companies. NOV supplies and services cash-rich customers such as Exxon Mobil (XOM) and CONOCOPHILLIPS (COP) as well as large drilling companies such as Transocean (RIG).[2]
NOV’s offerings include highly engineered products, consumable replacement parts, and value-added maintenance and aftermarket services.[2] Offering replacement parts and maintenance-related services positions NOV to capture high margins, receive repeat business, and secure recurring cash flow. The company has a global presence, and has adopted a one-stop-shop business model that features diversity and breadth of product and service offerings as well as the convenience of a consolidated vendor relationship for its clients.[2]
| 2009 | 2008 | 2007 | |
|---|---|---|---|
| Rig Technology | 8,093 | 7,528.1 | 5,744.7 |
| Petroleum Services and Supplies | 3,745 | 4,651.4 | 3,061.0 |
| Distribution Services | 1,350 | 1,771.9 | 1,423.7 |
| Other Eliminations (loss) | 476 | (520.0) | (440.4) |
| Total Revenue | 12,712 | 13,431 | 9,789 |
| NOV's Active Drilling Rigs and Energy Prices[4] | 1Q08 | 4Q08 | 1Q09 | 3Q10 |
| U.S. Drilling Rigs | 1,771 | 1,898 | 1,326 | 1,622 |
| Canada Drilling Rigs | 507 | 408 | 329 | 361 |
| International Drilling Rigs | 1,046 | 1,089 | 1,026 | 1,110 |
| Worldwide Drilling Rigs | 3,324 | 3,395 | 2,681 | 3,093 |
| Average West Texas Intermediate Crude Prices (per barrel) | $97.87 | $58.18 | $42.91 | $76.05 |
| Average Natural Gas Prices ($/mmbtu) | $8.64 | $6.40 | $4.57 | $4.28 |
Business Segments
Rig Technology (63% of total revenue[5], 84% of operating profit[5])
NOV's Rig Technology segment designs, manufactures, sells, and services systems for the drilling, completion, and servicing of oil and gas wells.[6] The segment manufactures highly-engineered equipment that automates complex well construction and management operations.[6]
Petroleum Services & Supplies (29% of total revenue[5], 23% of operating profit[5])
NOV's Petroleum Services & Supplies segment manufactures, rents, and sells products and equipment used to perform drilling operations, including drill pipe, transfer pumps, drilling motors, and drill bits.[6]
Distribution Services (12% of total revenue[5], 3% of operating profit[5])
NOV's Distribution Services segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations worldwide.[6]
Acquisitions
National Oilwell has pursued an aggressive acquisition strategy in recent years. Most recently, NOV announced in 2010 that it had agreed to pay $500 million to acquire Advanced Production and Loading (APL), a subsidiary of BW Offshore. APL designs and manufactures turret mooring systems and other products for floating production, storage and offloading vessels as well as other offshore vessels and terminals.[7]
In 2009, NOV acquired Hochang Machinery Industries, a Korea-based manufacturing and fabrication business, and South Seas Inspection, a Singapore-based inspection, repair, and maintenance provider for $160 million.[8] The Hochang acquisition is expected to strengthen NOV’s fabrication capabilities within its rig technology segment.[8]
Trends and Forces
NOV benefits from increasing onshore drilling activity
NOV expects an increase in orders for onshore drilling rigs as oil and gas companies begin to drill into dense rock formations to extract oil and natural gas. Onshore drilling rigs cost $50 million each, one-tenth the cost of offshore drilling rigs, and can be delivered within one year, while offshore rigs are usually delivered in three years. The number of onshore drilling rigs in the U.S. has increased 21% since 2010. This trend benefits NOV, which supplies many of the critical components during the construction of these drilling rigs.[9]
NOV's sales are tied to drilling activity
After the BP Deepwater Horizon oil spill, the Obama administration imposed a six month moratorium on drilling in the Gulf of Mexico. The Obama administration has rescinded its decision to expand offshore oil exploration into the eastern Gulf of Mexico and along the Atlantic coast because of weaknesses in federal regulation revealed by the BP oil spill. Drilling remains under a moratorium for certain areas for at least seven years, until stronger safety and environmental standards are instituted. Drilling will continue in the central and western Gulf of Mexico, although under a set of new safeguards put in place after the BP explosion an oil spill.
The Deepwater Horizon accident has ultimately led to slower deepwater drilling permit issuances and a decrease in drilling rig dayrates. Both of these factors have resulted in lower profit margins for National Oilwell Varco.
Despite the decline in active drilling rigs, NOV was partially shielded from the downturn in drilling activity due to its $9.6 billion backlog.[5] Overall, NOV's performance is dependent on the demand for oil and gas drilling, the amount of well remediation activity, the price of crude oil and natural gas, capital spending by drilling contractors, and the inventory levels of oil and natural gas.
Oil prices drive the demand for oil rig equipment
The key determinants of the price of oil include supply and demand considerations, generally rising equity markets, and a weakening dollar, which encourages the purchase of commodities.[10] As oil prices return to mid-2008 levels, NOV's customers will generate more revenue and pay its vendors more to supply drilling equipment and services. Meanwhile, heavy demand for oil from China and India should continue to place upward pressure on the price of oil.
Renewable Energy Could Prove Troublesome for NOV in the Long-Term
Whether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are becoming disillusioned by the world's dependence on oil and gas. Many developed, politically-progressive regions like Europe are beginning to transition away from these sources of energy, and towards renewable energy. In emerging markets like China and India, however, the drive for economic growth supersedes environmental concerns, and oil is still less expensive than most renewables. Since emerging markets are where many of the future opportunities in the global economy lie, the oil and gas industry, including oilfield services companies like National Oilwell Varco, who are intimately tied to the overall success of the oil and gas industry, could continue to grow in conjunction with a growing renewables industry.
Competition
The oilfield services sector includes such companies as Halliburton, Schlumberger, Baker Hughes, Smith International, and Transocean. Schlumberger is the industry leader by market cap, though Transocean has the largest drilling fleet in the world - 146 drilling rigs, including 48 deepwater drills[11]. Transocean, however, only drills, while the others offer more complex services like intervention and evaluation.
Baker Hughes, along with its standard services, produces drill bits and drill fluids that many oilfield services companies use in their equipment; Smith International is another company that has a strong drill bit and fluids segment. Because both companies sell hardware parts for rigs alongside their standard drilling services, they pose a greater threat to National Oilwell Varco than a company like Transocean, who only deals in drilling services. NOV also competes with subsea equipment companies like Cameron Corporation and FMC Technologies. These companies sell sub-sea products that are used, among other things, to control the flow of oil out of underwater wells.
While companies like Baker Hughes, Smith International, FMC Technologies, and Cameron Corporation may be market leaders in specific hardware areas, like drill bits or subsea "trees", none of these companies match NOV in ubiquity, as the company's prominence in the market is clearly illustrated by the fact that 90% of all offshore drilling rigs have some National Oilwell Varco hardware. Furthermore, acquisitions like the recent Grant Prideco merger only strengthen NOV's specific market positions (in this case, in the drill pipe industry).
| 2009 Revenue (millions) | % Change in Revenue, 2009/2008 | 2009 Net Income (millions) | % Change in Net Income, 2009/2008 | ||
|---|---|---|---|---|---|
| National Oilwell Varco[12] | 12,710 | -12.4% | 1,470 | -12.1% | |
| FMC Technologies[13] | 4,410 | -3.2% | 361.8 | 8.2% | |
| Cameron Corporation[14] | 5,220 | -10.7% | 475.52 | -17.02% | |
| Baker Hughes (BHI)[15] | 9,660 | -18.54% | 421 | -68.41% | |
| Smith International (SII)[16] | 8,220 | -23.7% | 148.7 | -80.43% |
References
- ↑ 1.0 1.1 Reuters: National Oilwell Varco
- ↑ 2.0 2.1 2.2 Examiner: "National Oilwell Varco positioned as value stock"
- ↑ NOV 10-k 2009 Item 7: Results of Operations
- ↑ U.S. Securities and Exchange Commission: 10-Q National Oilwell Varco Inc. for 3Q 2010, p. 21
- ↑ 5.0 5.1 5.2 5.3 5.4 5.5 5.6 National Oilwell Varco Announces First Quarter 2009 Earnings and Backlog
- ↑ 6.0 6.1 6.2 6.3 NOV 10-k 2009, Item 1: Business, p. 2
- ↑ Wall Street Journal: "National Oilwell Varco To Buy BW Offshore Subsidiary For $500M"
- ↑ 8.0 8.1 Offshore Magazine: "NOV makes double acquisition"
- ↑ Tulsa World: "National Oilwell expects rise in onshore rig orders" March 30, 2011
- ↑
- ↑ "Top Oil Drilling Companies to Merge", The New York Times, July 24th, 2007
- ↑ "National Oilwell Varco Announces Fourth Quarter and 2007 Earnings"
- ↑ "FMC Technologies Reports Fourth Quarter Diluted Earnings per Share from Continuing Operations of $0.70, up 49 Percent"
- ↑ Cameron: News Releases, "CAMERON FOURTH QUARTER EARNINGS TOTAL $0.54 PER SHARE; REVENUES UP 25 PERCENT, ORDERS AND BACKLOG REACH NEW HIGHS"
- ↑ Google Finance: BHI Income Statement
- ↑ Google Finance: Smith International Income Statement
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