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National-Oilwell (NOV)Stock (Energy Industry, Oilfield Services Industry)
 The latter purchase, of drill bit and pipe manufacturer Grant Prideco, has allowed the company to become a player in the once lucrative drill pipe market, as Grant Prideco derives over half its revenue from that key piece of hardware. The domestic land rig market has been in decline in late 2007 and early 2008, though, which could reduce demand for drill pipes and cause the merger to be worth less. NOV's product portfolio is so large that it has been called a "one stop shop" for most drilling contractors; in a market where the average rig age is 25 years and $100-per-barrel oil prices are driving a frantic, industry-wide hunt for new reserves, this broad range of services makes NOV would benefit from both the overhauling of old rigs and the production of new ones. Size is a double-edged sword, however, as the company's exposure to all parts of the drilling market means that it hurts when one particular sector falls. Over the past year, a decline in domestic land rig investment has highlighted this weakness, as there was a tangible effect on the company's fourth quarter income. But a booming demand for offshore drilling equipment helped offset this decline and pushed NOV's fourth quarter backlog to $2.2 billion, with 88% of it coming from international orders and 85% from offshore rig demand. 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. [edit] Business and FinancialsNational-Oilwell Varco is an international oilfield services company specializing in the hardware needed for oil and gas exploration and production. The company makes money by selling hardware components to drill rig manufacturers and leasing drilling rigs to oil and gas companies. From 2006 to 2007, NOV saw growth in both revenue and net income, fueled by rising oil prices pushing up demand for oilfield services and increasing rig dayrates and equipment costs. The company's operating margins increased from 15.8% in 2006 to 20.9% in 2007. Though rig technology revenues increased by 60%, operating income for the segment more than doubled because of increased demand for high-cost, complicated drilling technology.
Source: 4Q07 and FY 2007 Results[1] [edit] National-Oilwell Varco Recently Acquired Grant Prideco (GRP)NOV is known for its active acquisitions strategy; in the third quarter of 2007 alone, the company made four acquisitions totaling $50 million. Its recent acquisition of Grant Prideco has increased the company's market cap to around $34 billion.[2], creating the third-largest oilfield services company by market cap (after #1, Schlumberger and #2, Transocean). The stock-and-cash deal between NOV and GRP totaled about $7.37 billion. The combined company will operate under the Varco name and trade under the NOV ticker. The acquisition deal has been unanimously approved by both companies' boards, though it is still subject to clearance by Grant Prideco shareholders and regulators. The transaction is expected to close by the first quarter or early second quarter of 2008. The current stockholders of National-Oilwell Varco will own approximately 86% of the combined company, with Grant Prideco shareholders owning the rest. Under the terms of the agreement, Grant Prideco shareholders will receive $23.20 in cash and 0.4498 shares of NOV for each GRP share they own. This combination of cash and stock values GRP shares at $58 apiece, a 22% premium to the pre-announcement closing price. The cash component of the deal is worth about $3 billion, while equity contribution will total around $4.4 billion, which will be obtained through the issuance of approximately 57 million in NOV shares. The company plans to finance the cash portion of the transaction through a combination of cash on hand and bridge loan (approximately $2 billion), for which bank commitments has been secured. Following the deal, the company expects its debt-to-capitalization ratio to be approximately 15%. [edit] Trends and Forces[edit] Rising Oil Prices Are Driving Overhauls to the Aging Drill Rig Supply - and National-Oilwell Varco is a Key RenovatorNational-Oilwell Varco's equipment backlog increased a full $1 billion from 2006, to $9 billion in 2007, and the company received a record $2.2 billion in new orders during the fourth quarter[3] - the period where oil was hovering well over $90/barrel. These financials illustrate how oil exploration and production is a business increasingly reserved for big companies, with the capacity to raise vast amounts of capital. Many of the easy access reserves that yielded the black gold so fruitfully over the past century are maturing, especially in high-output regions like onshore North America and the shallow Gulf of Mexico. With global demand for oil rising as emerging markets like China and India enter the world economy, however, oil prices are through the roof, and oil and gas companies are scrambling to increase production and take advantage of potential windfalls. The problem? The average drilling rig found anywhere in the world is about 25 years old[4]; while this technology may have been appropriate for extracting the easy-access oil that was right below the surface, as these reserves dry up companies are looking to deeper water and more complicated technology. Rig contractors and exploration companies worldwide are beginning to invest in building new rigs or upgrading old ones, taking advantage of the huge margins caused by the current price level to spend on expensive technology. National-Oilwell Varco's 60% share of the rig equipment industry, as well as the fact that 90% of all rigs worldwide have some NOV part or another[5], makes it a huge potential benefactor of this trend. [edit] NOV is Betting on a Global Future for the Oil IndustryIn the fourth quarter of 2007, 88% of NOV's $2.2 billion backlog stemmed from international operations; 85% of it stemmed from offshore rig technology[6]. Much of this reflects growth in international deepwater projects, as the company is building "most of the world's deepwater rigs"[7]. Increasingly, drilling activity is going abroad to places like North Africa, the Middle East, South America, India, China, and Russia, where previously unreachable reserves are now within arm’s reach thanks to economic growth and new technology paid for by $100 oil. The investments that National-Oilwell Varco has made abroad, from technical schools in Norway and Singapore to manufacturing facilities in the Middle East and rigs designed especially for Latin American terrain, will only provide returns if increased drilling abroad continues to drive demand for drilling hardware. [edit] A Weakening Domestic Land Market Can Hurt NOV Despite International GrowthThe North American land drilling market has weakened over the past year, as maturing reserves and big deepwater discoveries have moved exploration offshore and/or to other countries. National-Oilwell Varco's land rig growth has been primarily international; in the fourth quarter of 2007, land rig backlog domestically had stabilized from a year-on-year fall of nearly 50% in the third quarter, but internationally had increased by 22%. Despite strong international growth, however, a weakened North American land market has affected the company's bottom line. Because the company is so large, and its product lines extend into so many markets, National-Oilwell Varco cannot avoid feeling the effects of a downturn in any market. The North American land market is a powerful example of this, as lower rig demand led to fewer expenditures from drilling contractors on upgrades and equipment, causing operating income for NOV's entire Petroleum Services and Supplies segment to decrease $4.4 million from the third to the fourth quarter[8]. On the flip side, though NOV cannot avoid the sting of any one market's fall, its diversity allows it to make up for losses in one place with gains elsewhere - in this example, the international land rig market. [edit] The Acquisition of Grant Prideco Greatly Increases NOV's Exposure to the Volatile Drill Pipe MarketWith declining capital expenditures from land drill contractors, the market for drill pipes - the part of the drill that connects the bit to the rig - is likely to fall. Grant Prideco is the leading drill pipe manufacturer in the world, and takes over half its revenue from supplying that single piece of hardware. National-Oilwell Varco's acquisition of the company greatly increases NOV's exposure to the drill pipe market; a decline in this market means fewer purchases, lower prices, smaller revenues and lower margins - all problems that seem to make a $7.37 billion acquisition much less valuable. Though land rig backlog for NOV did stabilize in the fourth quarter of 2007, a future downturn in rig demand will damage the market for drill pipes, leading to an overall devaluation of the Grant Prideco purchase. On the flip side, the drill pipe is the second most important part of a rig, after the rig itself. Because it is actively involved in the drilling process, it is also more damage-prone than many other rig parts. Both of these traits make this piece of hardware very profitable in a strong drilling market, as higher rig demand means more drill pipes will need to be installed and higher drilling activity means more drill pipes will need to be replaced. [edit] Renewable Energy Could Prove Troublesome for NOV in the Long-TermWhether it’s because of climate change fears, the rising price of oil, or the desire to separate energy needs from terrorist regimes, people are slowly 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, despite being about $100/bbl, is still less expensive than most renewables. Since emerging markets are where many of the future opportunities in the global economy lay, 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. [edit] CompetitionThe 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[9]. 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).
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