National Oilwell Varco has been around for more than 150 years, so it has seen its fair share of oil price spikes and plunges. This one is really no different than the ones the company has dealt with before, and according to the company's most recent earnings conference call, it already has a game plan in place to deal with it. Let's take a look at what the company is planning for in the future and how dealing with these sorts of oil price swings hasn't really put a dent in NOV's armor in years past.
Our token take on oil pricesIn reality, no one really knows where oil prices will go from here, but it doesn't seem to stop companies from making assumptions based what they are seeing the market. National Oilwell Varco CEO Clay Williams is no different. He believes that the effects of this price plunge will be relatively short-lived, like the last couple times that oil prices plunged:
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Luckily for investors, though, the company isn't making any strategic plans based on this idea. Rather, management is taking a "we're going to do what is necessary to get through this as a strong company" approach:
The industry can cut costs for only so longJust like how very few of us are driving cars with 700,000 miles on them, there aren't many companies out there that can continue to use the same drilling equipment for decades without getting a few repairs or equipment upgrades from time to time. Even if companies today are looking to cut costs by pulling pieces from idled rigs and drawing down inventory of pipes and other equipment at delayed projects, eventually, new equipment will need to be purchased. When that happens, management believes it will result in a large uptick in orders for National Oilwell Varco's equipment:
This is just something that happens in all commodity businesses. As commodity prices drop, producers get stingy to maintain certain levels of liquidity and solvency, but once things start to get better, they are forced to repair and replace the equipment they ran into the ground during the down times. NOV's management has seen it happen before, and it's almost certain it will happen again.
Eeking out some cost savings in the downturnThe past few years for National Oilwell Varco have been extremely busy. For several years, the company's equipment manufacturing arms have been working 24 hours a day, seven days a week as well as outsourcing some of its fabrication to subcontractors just to keep pace with all the orders from shipyards. This has resulted in lots of extra labor costs. So as the market starts to decline, and the company doesn't need to operate at breakneck pace, management thinks there could be some significant cost savings:
Be reducing heavy overtime costs and trimming down its subcontractor queue, it should help to increase margins and help make up for the smaller amount of revenue coming in the door. It's a great trump card management can play as new orders start to weaken.
Backlog slowly shrinking, but the orders there are definitiveA big fear for a company that generates so much revenue from a backlog of orders is that a downturn will cause some of those customers to back out of orders. Based on National Oilwell Varco's history, though, this doesn't appear likely. Yes, management thinks the backlog will shrink, but it will be a result of the company finishing more orders than new orders coming in the door and not companies canceling their contracts:
Management believes total backlog will decline by as much as $7 billion from its high late last year until new orders start to outpace production again. This would mean that the company's backlog would remain in excess of $7 billion before the upswing happens again. Leaving plenty of work on the table to keep a steady revenue stream going for several years.
Taking advantage during the downturnOne of National Oilwell Varco's calling cards is using its excess cash flow to acquire smaller manufacturers and fold their products into the NOV drilling package it sells to its customers. This is how the comapany has been able to accumulate a 60% market share in drilling equipment on offshore rigs. With the market in a downswing, and some of those smaller manufacturers struggling financially, CEO Clay Matthews expects to go shopping pretty soon:
With more than 20 prospective acquisition targets out there, rest assured that management is looking hard to maintain its market lead in drilling equipment manufacturing.
What a Fool believesNational Oilwell Varco's stock price is down, but it certainly isn't the result of anything that management has done recently. There are still plenty of levers left for management to pull to create value for shareholders, including some of the things mentioned by management on its recent conference call. For investors who may be sweating their investment in this company -- don't. Management is doing exactly what is necessary in these down times... staying the course.
The article National Oilwell Varco's Management Needs You to Know This About Falling Oil Prices originally appeared on Fool.com.
Tyler Crowe owns shares of National Oilwell Varco.You can follow him at Fool.com under the handle TMFDirtyBird, onGoogle +,or 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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