National Oilwell (NOV): Better To Hold Given Crude Recovery

We issued an updated research report on energy equipment maker, National Oilwell Varco Inc. (NYSE:NOV) on Jun 13, 2016. Following the rebound in commodity prices, we have turned incrementally more positive on National Oilwell. However, heightened competition along with the oil driller’s falling capital spending might dent a blow to the company’s outlook.

This is reflected in the company’s current Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

National Oilwell Varco is one of the biggest manufacturers of drilling equipment in the world with an impressive business model. The company’s large installed base of rigs worldwide provides a steady recurring revenue stream through demand for maintenance, parts and other expendable products.

Most importantly, with crude advancing more than 90% from its 12-year lows in February, producers are likely to revive spending on drilling activities to spur the rig count. This, in turn, will result in improved demand for oilfield equipment, thereby driving the company’s revenues, earnings and cash flow.

Moreover, National Oilwell’s financial flexibility and strong balance sheet are real assets in this highly uncertain economy. National Oilwell Varco ended the most recent quarter with a cash balance of $2 billion and a very manageable debt-to-capitalization ratio of 19.3%.

However, with new competitors entering the market and capital expenditure by drilling contractors shrinking, National Oilwell has seen its new equipment package pricing fall around 10% below the levels achieved during the peak of 2007–2008. In particular, the company’s margins have been hit hard by the ongoing North American drilling slump. We expect the situation – characterized by tepid demand and weak pricing – to normalize only sometime in late 2016.

It is to be considered that despite oil’s massive recovery, the commodity is still under $50 and far below the breakeven price for many energy companies. Therefore, National Oilwell’s activity levels and orders – especially in the Rig Aftermarket and Wellbore Technologies segments – remain vulnerable.

Stocks to Consider

Better-ranked players in the energy sector include McDermott International Inc. (NYSE:MDR) , PetroChina Co. Ltd. (NYSE:PTR) and TC PipeLines LP (NYSE:TCP) . Each of these stocks sport a Zacks Rank #1 (Strong Buy).


NATL OILWELL VR (NOV): Free Stock Analysis Report

MCDERMOTT INTL (MDR): Free Stock Analysis Report

PETROCHINA ADR (PTR): Free Stock Analysis Report

TC PIPELINES (TCP): Free Stock Analysis Report

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