Markman: National Oilwell Varco Is a Gusher

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Oilfield services stocks are on the move this month as the threat of a curtailed supply out of the Persian Gulf has combined with stronger readings of the economy to make investors dream a little on energy prices.

The U.S. is blessed with dozens of great companies in this industry, but one of the best for my money is National Oilwell Varco (NYSE:NOV). The company has a very unwieldy name, but it’s been one of the industry leaders for a decade, and especially in the past two years. Since their recent low in late 2008, shares are up 255%, vs 67% for all large energy stocks and 45% for the market.

NOV makes oil and gas drilling and production rigs around the world. Its main businesses are rig technology, petroleum extraction services and distribution services. The first unit provides offshore and onshore derricks and pipe systems to drillers, as well as pressure pumping units and cranes. The services unit makes, sells and rents consumables for drilling like pipe, motors, bits, mud pumps and other items that are used a few times and then tossed. The distribution unit sells and maintains supplies and spare parts for energy transportation systems. 

It has a number of joint-venture agreements with industry powerhouse Schlumberger (NYSE:SLB), but has grown to be a major player on its own after making dozens of acquisitions, and now sports a $30 billion market cap. That size makes it a little smaller than Halliburton (NYSE:HAL) and a quarter the size of Schlumberger, but a little bigger than Transocean (NYSE:RIG) and five times the size of a company like Atwood Oceanics (NYSE:ATW) or Rowan (NYSE:RDC).

In short, it’s a very large company, but still small enough to grow yet to the size of a Schlumberger.

Drilling services companies are doing well now because their customers — energy explorers — have underinvested for years. As a result, the drilling industry needs upgrading  — new rigs to dig deeper and into more complicated wells offshore in places like Brazil and Angola — as well as innovative new rigs to efficiently get at the oil and gas in the Bakken Shale of North Dakota.

NOV has successfully turned itself into one of the most trusted single sources for rigs and equipment for a lot of offshore drillers. Just to give you an idea of the opportunity, as Petrobras (NYSE:PBZ) gets ready to explore the Santos basin, it’s expected to order more than 60 deepwater drilling rigs over the next 10 years, which will be worth as much as $20 billion in orders and $20 billion in spare parts and maintenance to companies like NOV.

National Oilwell Varco also is a major supplier to British Petroleum (NYSE:BP), which will resume drilling in the deepwater Gulf of Mexico before long, as well as to many drillers in offshore Angola, Nigeria and elsewhere in Africa.

Because it’s one of the largest rig equipment makers, NOV regularly is low bidder in new contracts, and is believed to have its metal in something like 90% of all new equipment deployed. The company could face trouble from nationalist movements in countries like Brazil that wish to buy locally, but no countries have its level of expertise at manufacturing and servicing — so this is not a set of products where drillers are likely to compromise. Petrobras tried to give a lot of its new offshore drilling contracts to local firms but basically gave up after experiencing cost overruns, missed deadlines and faulty equipment.

Shares of NOV are running at a 17.5x earnings multiple, which is normal for the industry now and a bit lower than we’ve seen historically. Analysts see potential for long-term operating margins at around 20% to 23% and revenue growth around 13%, as the world’s energy companies replace their rigs. Figure earnings growth will average 15% over the next five years, which is a little higher than the industry. That puts the shares now at slightly undervalued with plenty of room to rise through the rest of the decade. 

Management reported fourth-quarter earnings in early February, and they were great, pushing optimism on 2011 higher. Merrill Miller Jr. has run the company well since 2001, as the balance sheet is in great shape with lots of cash and minimal debt for a company its size. I have recommended NOV many times in the past, and again in late January, and expect it will stay in growth-oriented investors’ portfolios for a long time.  

For more insights like this, check out Jon Markman’s daily short-term newsletter, Trader’s Advantage, and long-term investment letter, Strategic Advantage.


Article printed from InvestorPlace Media, https://investorplace.com/2011/02/markman-national-oilwell-varco-nov-gusher/.

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