Why Hold Strategy Is Apt For National Oilwell (NOV) Stock Now

We issued an updated research report on energy equipment maker National Oilwell Varco, Inc. (NYSE:NOV) on Sep 22. The company is one of the biggest manufacturers of drilling equipment which provides for a steady recurring revenue stream. However, with a major portion of the company’s total revenue coming from international markets, National Oilwell is exposed to business risks.

National Oilwell currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.

The company’s large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts and other expendable products. Most importantly, National Oilwell does not outsource part of its work like many other energy equipment makers but rather manufactures drilling equipment internally. This significantly lowers its cost of operations.

Moreover, the company’s financial flexibility and strong balance sheet are real assets, cushioning it against periods of economic uncertainties. National Oilwell ended the most recent quarter with a cash balance of $1.5 billion and a manageable leverage of 16.2%.

However, with new competitors entering the market and lowered capital expenditure by drilling contractors, National Oilwell has seen its new equipment package pricing fall around 10% below the levels achieved during the peak of 2007-2008.

Also, National Oilwell conducts operations in many countries, with a major portion of its total revenue coming from international markets. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.

Moreover, National Oilwell – belonging to the Zacks Oil Field Equipment industry – lost 4.2% year to date.

Stocks to Consider

A few better-ranked players in the energy sector are TransCanada Corporation (TO:TRP) , Transmontaigne Partners LP (NYSE:TLP) and Lonestar Resources US Inc. (NASDAQ:LONE) . All the stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Calgary, Canada, TransCanada is a midstream energy firm in North America. The company posted an average positive earnings surprise of 4.06% over the last four quarters.

Headquartered in Denver, CO, Transmontaigne is involved in the transportation and storage of refined petroleum products. The firm recorded an average positive earnings surprise of 6.60% over the last four quarters.

Based in Fort Worth, TX, Lonestar Resources is an upstream energy player. The company’s 2017 earnings are estimated to grow 79.7%.

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