National Oilwell Varco, Inc.NOV

Morningstar Rating

Stock Research and Analysis

by Stephen Ellis

National Oilwell Varco remains at the center of several major industry trends, collecting large and growing economic rents. For offshore drillers, the firm represents the best source of rig equipment and the deep-water technology needed for new rigs Read more

Bulls Say

We expect an average of 20 deep-water rigs to be delivered annually for the next few years, versus just three or four new rigs per year historically. The firm has the opportunity to provide equipment for many of these new rigs.

NOV's distribution segment (one of the world's largest oilfield distributers) is an overlooked gem, in our view. The recent Wilson and C.E. Franklin deals increase National Oilwell Varco's purchasing power with suppliers while strengthening switching costs with customers through tighter integration.

In a clear demonstration of NOV's bargaining power, Petrobras recently awarded 100% of the drilling equipment to National Oilwell Varco for seven Brazilian-built rigs at a price ($214 million per rig) that is well within NOV's historical opportunity per rig. Read more

Bears Say

The OneSubsea joint venture combines Cameron's equipment design, manufacturing, and installation expertise with Schlumberger's reservoir knowledge and well-completion expertise and represents a threat to NOV's subsea ambitions. We think OneSubsea is a powerful statement in a market that deals with some of the most difficult-to-evaluate formations on the planet while presenting complex equipment issues requiring highly engineered products.

We estimate working capital needs have increased sharply to about 50% of annualized revenue at the end of 2012 from around 30% at the end of 2008, lowering earnings quality.

There is about $14.4 billion worth of goodwill and intangibles on the balance sheet. If management overpays for deals, the firm could take write-downs. The company took a $147 million impairment charge in mid-2009 for certain Grant Prideco-related assets.

Lower levels of onshore drilling activity in late 2012 are rolling over into 2013 as E&P firms struggle with varying levels of budget uncertainty. Demand for National Oilwell Varco's drilling consumables is driven off drilling activity levels, so we forecast a dim outlook for its onshore order book as well as PS&S revenue and its operating margin.

Cameron recently won its first complete deep-water equipment package after acquiring TTS Energy in 2012. Cameron is now a more dangerous competitor for deep-water work. Read more

Management

CEO Merrill (Pete) Miller Jr. has led National Oilwell Varco since 2001 and is Morningstar's 2012 CEO of the Year. In late 2012, Miller stepped back from the day-to-day operations of NOV in preparation for his eventual retirement. After orchestrating Read more

Profile

National Oilwell Varco is one of the largest equipment suppliers in the drilling industry. It provides a comprehensive line of equipment for rigs and consumable products Read more