NOW Inc.'s Loss Deepens Amidst an Unrelenting Oil Market Downturn

By Matthew

Persistently weak oil prices are having a deep impact on NOW , which was quite evident in its third-quarter results. That report, which was released before the market opened on Tuesday, showed a steep loss. However, thanks to a combination of contributions from acquisitions, as well as a deceleration of the decline in oil and gas activity, the company's results showed some real positives, with revenue increasing while cash flow generation was robust. That cash flow, along with its very strong balance sheet, has it well positioned to weather the current downturn as well as to take advantage of the eventual market recovery.

Drilling down into revenueNOW reported third-quarter revenue of $753 million, which was up less than 1% sequentially. Year over year, though, the decline was substantial. Furthermore, if it weren't for $20 million in incremental revenue from acquisitions, the sequential decline would have been 2%. However, it's worth noting that these results significantly outperformed those of its former parent National Oilwell Varco , which experienced a 15% sequential decline in revenue. In addition, given the very weak operating conditions during the quarter, this is a welcome sight.

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Here's a look at revenue in each of the company's three operating regions:

Data source: NOW.

What's important to note here is the fact that NOW's revenue held up relatively well over the prior quarter despite some significant headwinds. In the U.S., for example, its revenue was flat sequentially, though it would have been down 4% if not for the benefit of acquisitions. However, that decline still outperformed the rig count, which declined 5% in the quarter.

Meanwhile, its Canadian segment delivered a 6% increase in revenue despite a weakened Canadian dollar and a very depressed energy market in Canada. Finally, its international sales were only down 2% despite the fact that the international market is starting to slow down after having held up relatively well compared to North American markets.

Drilling down into profitabilityThis context is important when drilling down into NOW's third-quarter profitability, which on the surface wasn't pretty. The company reported a loss of $224 million, or $2.09 per share, which was much steeper than last quarter's loss of $19 million, or $0.18 per share. However, there's much more to the story here.

Aside from the oil market weakness, there were three additional factors that caused that steep loss. It included an estimated $255 million non-cash goodwill impairment, $5 million in acquisition-related and severance charges, and a $16 million charge related to falling steel prices. Excluding these charges, the loss would have been $18 million, or $0.17 per share, which is a slight improvement from last quarter.

It is also worth pointing out that it isn't burning through cash. During the quarter, it generated $161 million in free cash flow, which is $70 million higher than last quarter and $215 million higher than the year-ago quarter. Driving this free cash flow was an improvement in performance thanks to cutting down its costs as well as a reduction in receivables and inventory.

This divergence between reported profit and cash flow is something that can be fairly common. Using former parent National Oilwell Varco again for context, it also reported a wide divergence with the company's $155 million net income and $410 millioncash flow. This is an important reminder because it shows that the underlying operations of a business can often be much better than the earnings number on which investors tend to focus.

Quote to noteCEO Robert Workman summed up the quarter as well as industry operating conditions in the press release by noting:

Clearly, times are tough and there is a lot of uncertainty surrounding the eventual market recovery. However, NOW operated relatively well during the quarter and, despite the loss, is still generating strong free cash flow. That has the company well positioned to take advantage of opportunities that may arise, so that it can deliver value when conditions do finally improve.

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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. 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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