National Oilwell Varco's Management Knows How, Not When, the Oil Market Will Turn

Image Source: National Oilwell Varco corporate website.

With oil prices down, drilling activity drying up, and an excess supply of drilling equipment on the market, there wasn't much that could keep National Oilwell Varco from posting another down quarter. But when it comes to investing in NOV, cyclical downturns are part of the game. It's all about riding through the downturns until the industry inevitably turns back up again.

When that will happen is anybody's guess, but National Oilwell Varco's management spelled out what it will take for the market to turn during its most-recent conference call. Here are five quotes from management that explain what the company is seeing in the oil and gas market, and what investors in NOV should and shouldn't be concerned about.

When the market turns, this is why it will happenOil and gas producers have to spend more money constantly to keep up with declining supply and increasing demand, but as CEO Clay Williams points out, companies all around the world are not doing that right now.

Oil and gas reservoirs decline; it's simple high-school physics. When companies don't look to enact projects that manage this decline effectively to run at full speed, it makes those decline rates happen much more quickly. Without drilling activity to replace those declining production centers as Mr. Williams mentioned, then it could catch up to the industry. The path toward more oil and gas activity is known; it's all about how long it will be until we get there.

Attractive acquisitions are out there, but we're not rushing into itNational Oilwell Varco has largely built its company through a slew of mergers and acquisitions during the past couple of decades. Because of all this practice at buying companies, management has become pretty good at it. With the market where it is, there are lots of attractive acquisition options out there; but it doesn't look as though management is in any rush to make a deal.

With spending levels expected to be low in 2016, chances are the prices for some potential buy targets will come down. When that happens, NOV will likely pounce.

Companies preserving cash, but it can't last foreverMany producers out there have touted cost savings that have allowed them to lower per-barrel costs to levels that are close to current prices. While some of those cost-cutting efforts can be carried over into operations permanently, there are other methods that simply can't last. As Mr. Williams put it, some of these efforts can't continue indefinitely.

There's only a limited supply of extra parts lying around for producers and other oil services companies to pilfer from idle equipment. Once those parts are exhausted, chances are they'll be lining up to order new ones from NOV.

Still plenty of financial strength to lean onDespite the decline in business, the company is still generating cash at a decent clip to cover its capital expenditures and its dividends. However, with shares as low as they are, the company is utilizing some of its balance-sheet strength to buy back shares.

With close to $2 billion in cash and a net debt-to-EBITDA ratio of 0.69x, there's very little fear that the company is in any sort of financial distress.

The one red flag to watchIf there's one aspect of the business that should concern investors, it's National Oilwell Varco's exposure to Brazil. With Petrobras mired in a sweeping corruption scandal, and its finances getting stretched thin, there's a chance that some of the rig orders for its deepwater fields may get cancelled. For NOV, there's a decent amount of exposure in its backlog:

Chances are that National Oilwell Varco won't need to cut ties with all of these projects; but getting ahead of this, and proactively reducing its exposure to Brazil, is a good thing.

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