Oilfield service company National-Oilwell Varco (NOV) reported better-than-expected second quarter results. The company’s earnings per share, excluding transaction charges, came in at 97 cents, well above the Zacks Consensus Estimate of 93 cents.
Including the after-tax charge of 1 cent, earnings per share for the quarter were 96 cents, up 81.1% from 53 cents in the second quarter 2009. The upbeat quarter results reflect management’s efficient execution skills and the company’s diversified technology portfolio.
Compared with the year-ago quarter, total revenue declined 2.3% to $2.94 billion. The reported quarter’s result was slightly below our estimate of $2.95 billion, primarily due to the lower offshore rig fabrication revenues out of backlog in the Rig Technology segment.
Rig Technology
Revenues in the Rig Technology segment plunged about 12.8% year over year to $1.67 billion. Revenues out of backlog, which comprised $1.3 billion of the total segment sales, were down 13% year over year.
The segment’s operating profit dipped 5.0% year over year to $509 million. However, operating margin at 30.4% was up from 28.0% in the year-ago period.
Petroleum Services & Supplies
The company’s Petroleum Services & Supplies segment achieved revenues of $1.03 billion, up 13.1% from the year-ago period, while operating profit leaped 43.8% from the prior-year period to $138 million. Operating margin was 13.4% versus 10.5% in the year-ago quarter. The strong U.S. sales along with the modest growth of the international markets helped the company to counterbalance the seasonal declines in Canada.
Distribution Services
Distribution Service revenues were up 19.7% year over year to $365 million. Operating profit was $13 million, compared with $10 million in the year-earlier quarter. Operating margin was 3.6%, up from 3.3% in the year-ago quarter. The segment results were pushed up by the robust expansion of U.S. operations due to higher rig counts and the strong international and industrial product sales.
Backlog
During the quarter, National-Oilwell Varco added $689 million of orders to its capital equipment backlog. The company also lost $29 million due to order cancellations, adjustments and change orders. Backlog for capital equipment orders for the company’s Rig Technology segment was $4.9 billion at June 30, 2010, compared with $5.4 billion at March 31, 2010.
Balance Sheet
As of June 30, 2010, the company had cash on hand of $2.69 billion and long-term debt (including the current portions) of $871 million. The debt-to-capitalization ratio stood at approximately 5.5%.
Our Recommendation
With a strong balance sheet, positive operating trends and a leading market position, National-Oilwell Varco remains more favorably positioned to navigate the uncertain economic environment than many of its peers. We also believe that the company is set for long-term growth prospects due to the exposure to the energy markets, making it highly levered to the recovery in global energy. However, taking into account the declining backlog orders along with the current economic downturn and commodity-price uncertainty, we retain our long-term Neutral recommendation on the stock.
This is supported by the company’s Zacks #3 Rank (‘Hold’), implying that the stock will perform in line the broader U.S. equity market over the next one to three months.
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