BrianAJackson/iStock via Getty Images
BrianAJackson/iStock via Getty Images
It's been four years since we discussed NOV Inc. (NYSE:NOV ) (formerly National Oilwell Varco). There are a couple of reasons. It's #4 on the scale meter, and we don't often get to #3, Baker Hughes (BKR), very often. We run a small shop here at the DDR and there's only time for so many articles. We have to try and make them count. We're pretty happy with the performance of two our top OSF companies, Halliburton ( HAL) and Schlumberger ( SLB), and not had a reason to go looking. Second, the drilling business toward which NOV is positioned has been challenged the last few years, giving us even less of a reason to chase up NOV.
Price chart for NOV (Seeking Alpha)
Price chart for NOV (Seeking Alpha)
As you can see, it's been a pretty lackluster performer, so we haven't missed much. Recently it made a run to the lower $20s but has pulled back with the rest of the market. Fears of "peace" breaking out in Ukraine, and a new Covid scare in Shenzhen, China, have knocked crude futures down 25% in a couple of days. We don't see this as a structural move, impairing the "we're running slap outta oil" thesis that underpins the long term investments we've made. Nope, war-time spikes usually collapse as quickly as they ascend.
The thing that brings NOV to mind now is the "pivot toward drilling" thesis I have been developing for the past couple of months. Almost every day we get some indication that this pivot is going to grow legs and walk. Yesterday it was the EIA report showing a decline in DUCs for yet another month. DUCs declined, but at a slower rate.
DUC report from EIA (Energy Information Agency)
DUC report from EIA (Energy Information Agency)
If this pivot indeed gains steam, and the rig count popped 13 rigs higher last week to 663, which suggests that it is gaining steam, NOV stands to benefit. Let's run through the Q-4 call and some other pertinent data to see if NOV makes sense near current prices.
It should be noted that the seagulls have downgraded the company based on its current run up, suggesting that new investors should wait for a better entry point. The current analyst range for the company starts at $14 on the low, and stretches to $29 on the high side. Quite a range!
NOV has lagged the three larger service companies in the recovery that began in late 2020 due to its slant toward drilling and rig building in its product and service offering. You can see about 2/3 of their revenue comes from these sources; Wellbore Technologies and Rig Technologies.
Clay Williams, CEO of NOV, comments in the call about prospects for the Wellbore Technologies segment-
Given its proximity to the E&Ps in the oilfield ecosystem and its activity-driven product portfolio, Wellbore Technologies is best positioned to benefit from pricing early in an upcycle. Notwithstanding its own supply chain challenges, it has, in fact, achieved the greatest pricing gains, mostly in quick turn, high-impact items like bits, downhole tools and rig instrumentation specified by E&Ps.
If you are making holes in the ground, completions will follow. In NOV we have a dominant company shifting to a growth mode, so we are interested... at a price. There is a high probability that the current price is too high for our liking. We will look a little deeper before making a final call.
I always try and find one or more catalysts that might move a stock on their own, or contribute to a host of beneficial factors. We think there are a couple that appear to be on the horizon for NOV.
Reactivation of stacked deepwater rigs is squarely in NOV's skillset. We learned of this shift in strategic thinking by the OSDs in our reviews of Transocean (RIG) and Valaris (VAL). Among other things that NOV manufactures are the 20K BOPs that being used by a couple of rig operators to conduct open hole completion operations in deepwater developments in the GoM. If a couple of dozen deepwater MODUs are reactivated in 2022, NOV's revenues could be considerably enhanced.
The rig building yard in Saudi is also a catalyst. As we learned in the Valaris report, there is going to be quite a bit of rig building in this region with a number of clients in a tight geographic area. It's actually a little puzzling that this hasn't developed before now. If you read any of the big service company transcripts, they all mention the NOC activity pickup in the region. If you're going to expand production, you have to drill and that means more rigs.
NOV's revenue in the fourth quarter of 2021 was $1.52 billion, a 13% sequential increase compared to the third quarter with both North American and international revenues achieving double-digit growth. Adjusted EBITDA for the fourth quarter was $69 million or 4.5% of sales. Despite Q-4 revenue increasing 14% over the prior year, working capital decreased $244 million during 2021 as it was applied to sales. In 2021, NOV generated $291 million in OCF, with capital expenditures totaling $201 million. This left in $90 million in free cash flow.
Looking ahead, in 2022, they expect capital expenditures to total $255 million with $20 million of the capital budget dedicated to the completion of their new rig manufacturing facility in Saudi Arabia. NOV also reinstated their quarterly dividend at $0.05 per share in Q-4. It beats a poke in the eye. They ended the fourth quarter with net debt of $122 million comprised of $1.71 billion in debt netted against $1.59 billion in cash.
The Wellbore Technologies segment capitalized on broad-based activity improvement and market share gains to generate $576 million in revenue during the fourth quarter, an increase of $69 million or 14% sequentially. Through share gains and the need for customers to restock depleted inventories, the segment continued to outpace the growth in global drilling activity levels. EBITDA is expected to remain flat for Q-1, but end the year in the high teens.
The Reed Hycalog drill bit business posted revenue growth in the mid-teens with strong incremental margins. The business unit realized 24% sequential revenue growth in North America, significantly outpacing drilling activity levels due to market share gains, net pricing improvements and an increasing number of projects in the Gulf of Mexico.
Revenue in international markets grew 8%, also exceeding the growth in drilling activity. Their downhole business reported double-digit revenue growth resulting from strong sales across the Western Hemisphere, Asia and the North Sea, partially offset by lower sales in the Middle East.
The Completion & Production Solutions segment generated $549 million in revenue during the fourth quarter, an increase of $71 million or 15% sequentially.
The Intervention & Stimulation Equipment business achieved sequential revenue growth in the mid-teens on higher deliveries of coiled tubing equipment and improving aftermarket revenue. As a result, over 80% of their pressure pumping revenues, which have more than tripled from Q4 of 2020 came from aftermarket sales in the fourth quarter.
Service companies are upgrading Tier 2 fleets to Tier 4 dual fuel fleets that can utilize up to 85% natural gas. This is something we have verified with the reports of fracking companies like, Liberty Oilfield Services, (LBRT). They expect the pursuit of ESG-friendly operations by clients, the need efficiency gains and the amount of industry's existing low-tiered fleet of equipment will lead to continued demand for such rebuilds. Coiled tubing continues to be the main driver for capital equipment sales.
For the first quarter of 2022, they anticipate that ongoing supply chain disruptions will limit the ability to capitalize on a rapidly improving backlog. As a result of acute raw material shortages, financial results for the Completion & Production Solutions segment in the first quarter will remain more or less flat with Q4.
Growth areas here include Wind Energy and rig equipment replacements. During 2021, NOV booked wind installation equipment orders of more than $400 million. Of equal, if not greater importance, is that they are seeing growing interest for rig equipment. Orders for rig equipment in the second half of 2021 achieved a level almost 2x the pace of what they realized in the second half of 2020.
Additionally, during the fourth quarter, offshore rig utilization exceeded 70% for the first time since 2015 due to a combination of slowly increasing activity levels and rig retirements. As a result of the improving dynamics, the opportunity set is shifting for small-scale projects associated with reactivating warm stacked rigs to large projects that will involve upgrading and reactivating cold-stacked rigs.
NOV is starting to feel the wind at its back.
We have had some setbacks in our upstream E&P positions as the week starts. The danger in conflict driven price spikes is that they are at the whim of every shift in sentiment. Companies whose revenues are a derivative of oil prices follow suit, on the upside and the downside. Nothing in my view has altered our core thesis that oil prices have passed an inflection point driven by fears of energy security. But, there will be ups and downs.
NOV is trading at an EV/EBITDA adjusted multiple of 36X. That's a sub-optimal entry point, as the dividend is window dressing. It tells us the company has come too far too fast to make a suitable risk/reward proposition. As such we must rate the company a hold at current levels. If it were to breach $14 on downward move, it might then qualify move into a safe range.
Long term the company has good prospects. If we truly begin to transition toward the exploration that will be required to replace neglected and declining field, NOV will be at the forefront of that effort.
This article was written by
I am an oilfield veteran of 38+ years. Retired from Schlumberger since 2015. My background is drilling and completion fluids. I have authored a number of technical papers on completion topics. I have worked around the world- Brazil, Russia, Scotland, and the Far East. I still maintain a training and consulting practice and am always willing to help people who want to learn.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not advice to buy or sell this stock or ETF in spite of the "BUY" rating I am forced to select in the SA template. I am not an accountant or CPA or CFA. This article is intended to provide information to interested parties and is in no way a recommendation to buy or sell the securities mentioned. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to do their own due diligence before investing their hard-earned cash.