Will National Oilwell Varco, Inc.'s Recovery Continue in the Third Quarter?

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After finally hitting rock bottom earlier this year, National Oilwell Varco's (NYSE: NOV) financial results continued improving during the second quarter. Revenue edged up 1% to $1.76 billion, while the company's adjusted loss of $54 million, or $0.14 per share, narrowed versus the first quarter and the year-ago period. Overall, the results lined up well with what management forecast on the first-quarter conference call.

This quarter, management anticipates that the upward momentum will continue. That's evident from the guidance provided by CFO Jose Bayardo on last quarter's conference call. Here's a look at what he anticipates the company will report across its four operating segments when it releases third-quarter results after markets close on Thursday.

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Rig systems: Almost hitting bottom

Last quarter, revenue in National Oilwell Varco's rig systems segment declined another 12% sequentially to $346 million, which was a deeper drop than the 5% to 10% the company guided for on the call. That said, this time Bayardo believes that revenue will finally bounce back, with the expectation that it will be "modestly higher" in the third quarter. Despite that anticipated rebound, Bayardo was "not calling a bottom in rig systems yet." That's because he expects margin to "tick down slightly" as a result of the lower margin mix of projects it expects to deliver in the quarter and the fact that sales out of the backlog continue to outpace new orders.

Rig aftermarket: Slow and steady wins the race

The company's rig aftermarket segment finally started bouncing back last quarter, with revenue rising 6% from the first quarter to $341 million, which was a bit ahead of guidance that sales would "increase slightly." Bayardo expects this segment to continue its "pace of slow, steady improvement" in the third quarter, with the CFO anticipating that revenue will improve by a "couple hundred basis points" and that margin will continue widening.

Wellbore technologies: Continued optimism

One of the shining stars last quarter was the wellbore technologies segment, where revenue jumped 11% to $614 million. That was well ahead of guidance for "5% to 7% top-line growth," thanks to healthy activity improvement across many U.S. shale plays. National Oilwell Varco expects sales to continue improving in the third quarter, with Bayardo estimating that they'll "increase another 8% to 10%." Furthermore, he stated, "Increasing demand across the segment allows us to reactivate idle machinery and add second and third shifts, significantly improving absorption across many of our North American manufacturing and service facilities." Because of that, he thinks that the company could start increasing prices, which should drive further margin improvement throughout the balance of the year.

Completion and production solutions: Another step forward and a smaller one back

Revenue in the company's completion and production solutions segment also came up off the bottom last quarter as expected, rising 1% to $652 million. Bayardo anticipates another "300 basis point to 500 basis point improvement in revenue" during the third quarter. That said, he predicts that margin will head in the opposite direction, falling 100 to 200 basis points because of a less favorable mix and the lack of a foreign exchange benefit during the quarter.

The guidance looks OK, but hitting the mark is another story

Overall, Bayardo's forecast suggests that revenue should have continued its low single-digit rebound in the third quarter. That said, it doesn't appear like the company will have returned to profitability, though it seems as if the loss will continue narrowing. That's assuming, of course, that the results meet expectations.

However, there appears to be some downside risk here since oil spent most of the quarter in the $40s, causing several drillers to slow down their activities and thus mute the need for more equipment. Furthermore, oil-service and equipment giant Baker Hughes, a GE Company (NYSE: BHGE) noted that it continued experiencing challenges in its oilfield equipment segment during the third quarter. Baker Hughes, which recently combined its service expertise with GE's (NYSE: GE) oil and gas equipment business, noted that sales of oilfield equipment slumped 5% last quarter. That said, Baker Hughes did point out that its equipment backlog grew for the first time in six quarters -- so it wasn't a complete downer. Still, investors do need to keep these issues in mind because it's possible that National Oilwell Varco's results might come in below its expectations, which already remain muted as a result of the continued weakness in the oil market.

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Matthew DiLallo owns shares of National Oilwell Varco and has the following options: short January 2018 $24 puts on General Electric. The Motley Fool owns shares of and recommends National Oilwell Varco. The Motley Fool has a disclosure policy.