National Oilwell Varco Inc. Earnings Beat the Street Despite an Awful Oil Market

By Markets Fool.com

The oil market was awful during the first quarter, but you wouldn't know that from National Oilwell Varco's first-quarter report. While the oil-field services and equipment specialist's revenue and earnings were down year over year, neither were off anywhere near as much as industry activity and earnings actually beat Wall Street expectations. Moreover, the company sees brighter days ahead, even if it's not exactly sure when the oil market will begin to recover.

Continue Reading Below

Drilling down into the numbers
Revenue for the first quarter came in at $4.8 billion, which was only 1% less than the company brought in during the first quarter of 2014. However, revenue was down 15.6% from last quarter and missed analysts' consensus estimates, but just by a mere $40 million. Here's a look at how each of the company's four segment's fared:

Revenue

Operating Profit

Operating Profit %

Segment

1Q15

1Q14

1Q15

1Q14

1Q15

1Q14

Rig Systems

$2,523

$2,256

$488

$451

19.3%

20%

Rig Aftermarket

$719

$750

$199

$191

27.7%

25.5%

Wellbore Technologies

$1,171

$1,278

$124

$224

10.6%

17.5%

Completion & Production Systems

$948

$1,002

$108

$143

11.4%

14.3%

Source: National Oilwell Varco's press release ($ in millions).

As the chart notes, rig systems' revenue increased 12% over the prior year, which helped boost operating profit. The only disappointment from this segment was that the backlog fell to $10.4 billion, down 17% from the fourth quarter and 31% from last year's first quarter. This was due to the fact that the company only added $236 million in new orders after pulling $2.25 billion in revenue from the backlog during the quarter.

Meanwhile, the company's other three segments -- rig aftermarket, wellbore technologies, and completion and production -- experienced year-over-year revenue declines of 4%, 8%, and 5%, respectively. This led to an even steeper decline in operating profit from all but the rig aftermarket division, where operating profit actually spiked on a year-over-year basis.

Continue Reading Below

Overall, National Oilwell Varco generated net income of $310 million, or $0.76 per share. That was down from the $589 million, or $1.37 per share, it earned in the first quarter of last year. However, a few special items affected net income, including a $122 million pre-tax charge for an early retirement program, a $9 million Venezuela asset writedown, and $69 million of nonrecurring foreign tax exposure. If we adjust for these one-time items net income was $466 million, or $1.14 per share. That was only down 12% from the first quarter of last year and beat analysts' consensus estimate by $0.04.

A look ahead
Like most other companies operating in the now-turbulent oil industry, National Oilwell Varco doesn't have much near-term visibility regarding when market conditions will improve. In fact, according to a statement from CEO Clay Williams in the earnings release, National Oilwell Varco expects revenue to continue to fall "at least through the next few quarters." However, the company is buoyed by a solid revenue backlog that stands at $11.9 billion. Moreover, like its industry peers, it is continuing to seek cost reductions and working to drive greater efficiency in order to better weather the rough oil market.

On a more positive note, Williams pointed out that National Oilwell Varco has "the financial resources to invest in acquisitions, as well as the transformative new technologies," and that "cyclical downturns provide extraordinary opportunities to deploy capital to better position our enterprise for a recovery." So, the CEO added, "while we don't know the duration of this downturn, we know that we will be better when the recovery comes."

Investor takeaway
National Oilwell Varco delivered a perfectly adequate quarter under the circumstances. Much of that was because the company had a strong revenue backlog heading into the downturn, which helped to mitigate some of the impact of the slowdown. Furthermore, the company's strong financial position has enabled it to invest in itself in order to be in an even stronger competitive position once conditions improve.

The article National Oilwell Varco Inc. Earnings Beat the Street Despite an Awful Oil Market originally appeared on Fool.com.

Matt DiLallo has the following options: short August 2015 $50 puts on National Oilwell Varco. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.