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Complex Drilling Technology Revs Profits for National Oilwell Varco

National Oilwell Varco Inc. (NOV), which supplies rig technology components and supply chain systems, reported Wednesday that quarterly profits surged from a year ago as producers boosted their budgets for technology to compete in more difficult-to-extract basins.

Net income jumped 44% from a year earlier and rose 5% from 4Q2011 to $606 million ($1.42/share). Revenues were $4.3 billion, up 1% from 4Q2011 and 37% higher than in the year-ago period. Operating profits, excluding one-time charges, jumped more than 20% to $881 million. Gross margins narrowed year/year to 29.5% from 31.6%.

Rig technology, the company's largest and most profitable, accounted for about half of its revenues and nearly two-thirds of reported operating profit in 2011. Energy analysts keep an eye on the rig technology segment because in general it lags behind the commodity price cycle by a few quarters, which reflects the timing of its supply backlog.

"Our outlook for demand for our capital equipment is very strong and our expectations high for the remainder of the year," said CEO Pete Miller. "Overall, efficient execution of orders in our backlog, innovation in our leading technologies, commitment to great service, and, most importantly, the hard work of the best team in the industry, led to solid earnings again this quarter."

Capital equipment orders for rig technology in the first quarter jumped 15% from the fourth quarter to $1.91 billion, but the higher demand wasn't from North America's onshore. Instead, it reflected "higher demand for drilling equipment for new build offshore rigs."

Backlog in the business reached $10.36 billion at the end of March, slightly ahead of the $10.16 billion in orders at the end of December. New orders in the segment, NOV's largest, stood at $1.91 billion, a 15% hike from $1.67 billion recorded in 4Q2011. Sales in the rig technology segment were up 40% y/y at $2.26 billion, but down 2% from the fourth quarter. Quarterly revenue was 35% higher y/y from the petroleum services and supplies unit, and up 38% in the distribution and transmission business.

NOV's 1Q2012 book-to-bill ratio came in at 1.12, and while that is a far cry from the 2.00+ ratios turned in during the first three quarters of 2011, it does represent a slight sequential improvement from the 0.94 ratio turned in during the last quarter of 2011.

The book-to-bill ratio for NOV represents the amount of additions to the backlog divided by the amount of revenue that was booked from backlog during that same period. While the ratio itself will not explain 100% of the changes in backlog from period to period, because it does not incorporate things such as turns business (orders taken and filled in the same period), cancellations and order push-outs, book-to-bill ratios above 1.00 that generally indicate that backlog grew (fell) during its measurement period (see chart).

"Our company got off to a good start in the first quarter of 2012, with strong results in all three segments," said Miller. "Our petroleum services and supplies group performed exceptionally well, helped by high levels of oilfield activity, which is spurring demand for all our products and services."

Standard & Poor's Ratings Service (S&P) on Thursday upgraded NOV's corporate credit rating to an "A" from "A-" to reflect its "very strong financial performance" and expectation that financial measures would remain strong through "weak points in the business cycle."

S&P analysts said sustained improvements in crude oil prices since the middle of 2010 had "spurred increased construction of rigs and production facilities globally, benefiting virtually almost all of NOV's business lines. Thus, the company's capital equipment backlog was a robust $10.2 billion as of Dec. 31, 2011, double the 2010 level...Particularly beneficial for NOV, given its business mix, has been the industrywide growth in unconventional shale-based drilling and in deepwater projects."

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