NOV – National Oilwell Varco Inc: Slurping Up Mud Pumping Profits

By CrossProfit

04/10/2007

In 2006 NOV generated $7.02B in revenue.

Half came from drilling equipment for new rigs and upgrades and half the revenue was generated from consumables and replacement parts for existing land and floatable rigs. Competitors (sometimes clients) are Schlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI).

Though we anticipate a slowdown in new land rig production, we expect the floatable segment and refurbishing division to grow considerably. There is a noticeable trend that more rigs are being used to produce the same amount or less crude (source: Baker Hughes monthly global rig count). Over the past two months, the Gulf of Mexico rig count has declined as companies moved available equipment elsewhere, including African west coast offshore sites. Rig rates have been increasing ahead of analyst expectations.

This implies two things. First, rig rates increase when demand outstrips supply. Second, though the Gulf’s proximity to refineries makes the location attractive, apparently well flow has declined to the point that it pays to dismantle, haul rigs and set up shop on the other side of the Atlantic. Taking into account the added tanker transportation expense, the Gulf’s production situation may be worse than is being reported.

NOV equipment can be found in over 70% of all rigs, primarily consumables. This bodes well for NOV as the global rig count increases. Mud pumps wear out. The deeper the bore, the more consumables are consumed. In the future, deep water wells will be coming on line increasing NOV’s sales. NOV doesn’t build [deep water] platforms yet supplies builders like Transocean (RIG) with drilling systems and parts.

We like the product and sales mix. This assures some stability in revenue in an otherwise non-predictable environment. To assist sales, NOV has some of the coolest gadgets on the market. "Cyberbase, which resembles the flight deck of an airliner, allows oil rig operators to take complete control of complex drilling machinery from a single chair. The introduction of Sniffer InfiniStream from Network General effectively creates a flight recorder which enables users to track back and quickly solve any operational anomalies quickly" (OilOnLine 10/03/2006).

Assuming that no new Saudi style vacuum pump fields are discovered over the next two years, estimated EPS for 2007 and 2008 are $5.40 and $6.50. 2008 estimations take into account inflationary pressures. The above assumption is practically a given.

ROE jumped to 14.8% (2006) from 10.5% (2005) from 9.2% (2004). We see this trend continuing in 2007. NOV’s ROE is at the low end when compared with its market cap peer group. Tenaris (TS) 46.2%, Grant Prideco (GRP) 39.3% and BJ Services (BJS) 34.7% lead the pack.

Caution: As of 04/10/2007, the information on Wikipedia for NOV http://en.wikipedia.org/wiki/Nov is outdated and inaccurate.

Disclosure: CrossProfit associates are shareholders. Analyst and family members are not shareholders. Sell-side research discontinued after Varco merger (02/2005).

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