NOW Incs Results Bounce Off the Bottom

By Markets Fool.com

Image source: Getty Images.

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The rebound in oil prices off the bottom that occurred earlier this year is finally starting to flow through and positively impact NOW's (NYSE: DNOW) financial results. That recovery bumped up revenue from the prior quarter, which, when combined with continued cost reductions, led to a narrowing loss. That said, while the company believes the oil market hit bottom, it does see "a choppy recovery" up ahead.

NOW results: The raw numbers

Q3 2016 Actuals

Q2 2016 Actuals

Growth (QOQ)

Revenue

$520 million

$501 million

3.8%

Net Income

($36 million)

($44 million)

N/M

Adjusted EPS

($0.34)

($0.40)

N/M

Data source: NOW Inc.

What happened with NOW this quarter?

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Acquisitions and sales in the U.S. turned around the revenue decline:

  • Sales in the U.S. rose 10% over last quarter, to $372 million. Without the impact of acquisitions, revenue would have only increased by 5%. Meanwhile, revenue is still down year over year, by 25% -- 36% when excluding acquisitions -- though that has outperformed the 45% plunge in the U.S. rig count.
  • Canadian sales slumped to $67 million, which was down 22% sequentially and 29% below the year-ago quarter. Driving down sales were fluctuations in the level of operating activity, though the rig count in the country rebounded 147% over the last quarter.
  • Sales internationally dropped 26%, to $81 million, and are now half what they were a year ago. The continued deterioration of the offshore market and customers using up their inventory drove down sales.
  • Rising revenue plus continued cost-containment initiatives narrowed NOW's loss. Meanwhile, it continues to generate cash flow, delivering $31 million in operating cash flow during the quarter and $186 million so far this year.

What management had to say

CEO Robert Workman commented on the quarter by saying that:

Emerging from what we hope was the bottom of this cycle in the second quarter, North American rig count grew in the third quarter. We posted improved performance as warehousing, selling, and administrative costs, and capital expenditures, were lower than forecast while working capital efficiency gains are still proving fruitful and enabling us to produce free cash flow.

Workman noted that the uptick in drilling activity drove a slight improvement in its results during the quarter as producers started to put more rigs to work drilling shale wells. That fueled a noticeable uptick industrywide in shale-focused services and equipment sales.

For example, oil-field service giant Halliburton (NYSE: HAL) noted that sales in its shale-focused North American business gained 9% over the prior quarter. That improvement in its core market plus "relentlessly managing cost" enabled Halliburton to report a surprise profit last quarter.

That said, while the need for services spiked last quarter, equipment sales were mixed, which weighed on former NOW parent company National Oilwell Varco (NYSE: NOV) during the quarter. However, while its results still have not hit bottom yet, it did see a turn in some of its business segments. In fact, National Oilwell Varco noted that its North American revenue grew about 15% over the prior quarter.

Looking forward

While NOW believes that the market hit bottom during the second quarter, it does not expect a vast improvementin sales in the near term. Instead, Workman warned that "international offshore softness and seasonal holiday implications suggest a choppy recovery." This outlook lines up with what National Oilwell Varco and Halliburton recently said.

For example, National Oilwell Varco said that, while "international, offshore and capital equipment markets remain challenging, we believe declining global production and improving commodity prices are setting the stage for a broader recovery in 2017. Meanwhile, Halliburton said that it's cautious on the fourth quarter due to the holidays and seasonal-related downtime, but this weakness "does not change our view that things are getting better for us and our customers."

These outlooks all suggest that 2017 could be a much better year for NOW.

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Matt DiLallo owns shares of National Oilwell Varco. The Motley Fool owns shares of and recommends National Oilwell Varco and NOW. The Motley Fool owns shares of Halliburton. 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.