3 Questions for National Oilwell Varco When It Reports Earnings

By Markets Fool.com

When National Oilwell Varco reports earnings on July 28, investors will be looking for something, anything, that indicates the worst of times are coming to a close for the oil and gas equipment manufacturer. The reality is, it's probably not. Oil prices have remained weak and demand for offshore drilling rigs -- one of National Oilwell Vaarco's largest segments -- aren't expected to pick back up again until the current glut of rigs is cleared.

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Despite the current market weakness, there are some points worth paying attention to. Here are three things of importance for when National Oilwell Varco reports earnings.

How much backlog has it burned through?
Despite the large decline in U.S. drilling activity and the less-than-robust demand for new rigs out there today, National Oilwell Varco has been able to maintain relatively steady revenue numbers thanks to a very healthy backlog of orders for large price tag items such as drilling packages for offshore rigs. Last quarter's revenue was only a 1.5% decline from the same time last year -- although it was a 16% decline from the prior quarter. Having all those extra orders to fill has been valuable for the company to keep some revenue consistency.

The one thing of concern is that the company is working through this backlog as completed orders are outpacing new orders. Last quarter, the company burned through $2.42 billion of its backlog, and it represented just about half of total revenue for the quarter. At the end of last quarter, it still had $11.9 billion in unfilled orders to complete.

This may not be a major red flag today. At that rate, the company has about five quarters' worth of work before that backlog is completely dissapated. Hopefully, it can slow that burn rate with new orders, but chances of that are slim. The most important thing to watch is that backlog burn doesn't increase that much from the prior quarter. Otherwise, National Oilwell Varco could be headed for declining revenues sooner than expected.

Can it cut costs quick enough?
A little over a year ago, the company could manufacture equipment fast enough to keep up with orders and was forced at times to pay out quite a bit in extra labor costs associated with overtime and extra shifts to get everything done. Now that demand has slowed, a big component of its success will be to cut some of these excessive costs to preserve its operating margins. Last quarter, the company was able to cut its total expenses by close to 24% from the fourth quarter of 2014, allowing it to maintain an operating profit of 14.4%. It's not a great number compared to the 17.8% operation profit in the fourth quarter 2014, but it's a commendable job.

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Last quarter, CEO Clay Williams said that the company would continue to cut costs, and, hopefully, combined with that ability to tap into its backlog, it will be able to avoid any major slip in operatonal margins for at least a few more quarters.

What are you going to do with all that cash?
National Oilwell Varco is absolutely flush with cash -- there's no real other way to put it. At the end of last quarter, it had more than $3 billion in cash and short-term investments sitting on the books. That's 17% of the company's total market capitalization. The issue with much of that cash is that it is in overseas accounts from its international operations, which makes it difficult to deploy that cash in the U.S. because it would need to pay repatriation taxes, which are taxed at the corporate tax rate of 35%.

The company has stated that in the event of a repatriation tax holiday -- where the U.S. government significantly reduces the tax rate for repatriations -- it would use that cash to repurchase stock. However, considering that we are in the down part of the oil and gas cycle, it would be a very opportune time for National Oilwell Varco to use that cash to make an acquisition or two.

You shouldn't actually expect anything different this quarter in regards to its cash policy. However, there is always the chance for a surprise, so checking in with the company's conference call to see if there are any changes is probably worth your time.

What a Fool believes
National Oilwell Varco is in a rather enviable position in the oil services industry today. Shareholders may not be too thrilled with the recent stock performance, but the company still has orders to fill, strong operational margins, and plenty of cash to cover any unforeseen issues in the future. As long as it doesn't need to burn through too much of its backlog and can cut costs to maintain its margins, then investors probably don't have much to fear this upcoming quarter.

The article 3 Questions for National Oilwell Varco When It Reports Earnings originally appeared on Fool.com.

Tyler Crowe owns shares of National Oilwell Varco.You can follow him at Fool.comor on Twitter@TylerCroweFool. 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.