Image Source: National Oilwell Varco corporate website.
For some reason, Wall Street wasn't a fan of National Oilwell Varco's most recent earnings report, even though it beat earnings. Then again, understanding the logic of the market's daily movements is a futile exercise. If the earnings weren't enough to win Wall Street over, then perhaps there were some signs in the company's conference call that would give investors hope. Here are five key takeaways from management that should help you better understand what's coming for the company.
1. Signs that orders will be coming in soonNational Oilwell Varco has been at this business for a long time now, and so management has a few market indicators that most of us wouldn't really consider. One of those is called rig cannibalization, as CEO Clay Williams explains:
All of that equipment that deteriorates needs to be replaced, and today much of that equipment is coming off idled rigs. This is a great one-time way to cut costs, but it can only go on for so long until idled rigs are stripped bare and new equipment will need to be ordered. It can also lead to a major ramp-up in orders as some of those stripped rigs needs to go into service on top of the ones already out in the field.
2. There's a big technology turnover going on in drilling today ...Even though tapping shale reservoirs successfully has been going on for years now, there are still several technological changes hitting the industry today. Onshore oil and gas producers are looking for rigs that are capable of drilling longer horizontal sections at a faster pace and can move quickly from wellbore to wellbore to efficiently tap several layers of shale from the same drilling pad. While there are a decent amount of rigs that can handle these types of jobs, a majority of them can't. That means there's still plenty of work to be done in converting the existing fleet of rigs to these more capable rigs. As Williams explained:
It may not be a fast conversion cycle, since overall demand for rigs is weak today, but there is still an immense amount of opportunity for National Oilwell Varco in restocking the world's land-rig fleet with the new technology rigs.
3. ... and it really works in NOV's favorThe conversion to these AC rigs will have a double effect on the company's bottom line. Many of the companies that do have rigs out there drilling are using those advanced rigs, and many of the parts that could be used from the older fleets aren't compatible with the new rigs, which helps business, according to Williams:
As rig owners and oil-services companies can rely less and less on stripping spare parts from SCR rigs, NOV's aftermarket business segment will benefit. This is extremely promising, since rig aftermarket is the company's highest-margin business.
4. Cutting costs effectivelyJust like other oil-services companies, National Oilwell Varco is doing everything in its power to cut costs. While the company is enacting some of the things you'd expect a company to do, it's saving money in one way you might not expect: doing more of its own manufacturing. Here's how Williams puts it:
Before the recent downturn in the market, NOV had more orders it needed to fill than what it could manufacture in-house. So it contracted out lots of its manufacturing work to stay on schedule. Now that demand is on the decline, it can take a lot of that more costly outsourced work and do it at its own facilities. Not only is that keeping the company's skilled labor force employed as much as possible, 0but it's also helping to reduce costs and maintain margins.
5. Backlog is declining, but there's still a lot of work availableOne of the critical factors for National Oilwell Varco is its backlog. It's been a major source of revenue these past couple of quarters, as new orders have dried up. According to Loren Singletary, VP of investor and industry relations, there was a pretty big draw-down this past quarter.
In most cases, we would like to see a book-to-bill ratio of 100%, which means the company generates just as much new work as the amount going out the door in any given quarter. In this case, the company is burning through its backlog. This is expected, considering the conditions of the present market, but luckily for National Oilwell Varco, it had a pretty large backlog in place before the downturn to keep it afloat. It can't keep burning through its backlog as fast as it has in recent quarters, so investors should watch the company's upcoming quarters to see it it can close the gap between orders booked and orders completed.
The article 5 Key Facts National Oilwell Varco's Management Wants You to Know 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.
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