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NOV Sees Continuing Downturn, But Equipment Backlog Improving

Every National Oilwell Varco Inc. (NOV) business unit was impacted adversely in the third quarter by the stunning reversal in commodity prices, and activity is expected to be no better in the final three months, the CEO said Wednesday. NOV, however, is in a position to take advantage of the "extraordinary opportunities" arising from the downturn.

The Houston-based oilfield services equipment manufacturer was able to mute some of the damage from lower oil and gas prices by managing its costs. But like many of the companies that already have reported, profits fell sequentially and year/year, which doesn't bode well for the final three months.

Net income year/year fell to $155 million (41 cents/share) from $289 million (74 cents). One-time charges included $55 million for writing down the value of its assets and $57 million in severance, facility closures and other charges. Revenue plunged 41% year/year and 15% sequentially to $3.3 billion. Operating profit was $346 million, or 10.5% of sales. Excluding the one-time charges, profits from continuing operations plunged by 56% year/year to 77 cents/share.

"The sharp decline in oil prices and activity since late last year has impacted each of our segments, and will drive activity lower in the fourth quarter," CEO Clay C. Williams said. NOV's strong financial resources should enable it "to invest in the extraordinary opportunities that will arise from this downturn, and we expect to emerge with greater capability and efficiency.

"In the meantime, with limited visibility into the timing of a recovery, we remain focused on managing costs and improving performance, while continuing to develop technologies that help our customers to improve their returns in a lower commodity price world."

Some improvement was seen in the book-to-bill ratio, the amount of new long-term orders added to backlog divided by the amount of revenue billed from the backlog. New orders in 3Q2015 actually increased for the first time since 2Q2014 -- close to the time when the energy industry began to see the beginning of the commodity price storm. The Rig Systems segment ratio improved in 3Q2015 to 0.28, while the Completion & Production Solution's ratio was 0.99.

The rebound in the overall market is nowhere near, said Williams. And the Rig Systems segment may take longer to rebound because the rig market has to work through an oversupply -- despite some pockets of growth overseas. The best rig equipment is destined to win out when the upturn begins, he said.

"We still see certain markets moving into the 21st Century to employ proven technologies," including Argentina and the Middle East, "and we are aggressively pursuing these opportunities.

"We also know many North American drillers plan to continue to high-grade their fleets to alternating current tier 1 capabilities once prosperity returns," he said. "While we expect some new specialized offshore rigs to be built by the industry over the next couple of years, and we are developing new designs and capabilities around these, we do not expect the level of building that we have seen over the past decade to resume for quite a while. Like many, we are awaiting an increase in scrapping of older units across the fleet, which seems inevitable at this point."

In the Rig Systems business, revenue in the quarter fell 44% year/year and 23% sequentially. The company pulled $1.3 billion of revenue from backlog during 3Q2015, and replaced it with $367 million on new orders, which resulted in the backlog dropping to $8.02 billion -- 11% lower than in 2Q2015 and 44% off from a year ago. Operating profit was $275 million, or 18.4% of sales. New order bookings were $313 million during 2Q2015, which was $77 million higher than in 1Q2015.

The ending backlog for the Completion & Production Solutions segment was $1.17 billion, flat from the second quarter and also down 44% from a year ago, with new orders totaling $467 million. Revenue totaled $798 million, down 9% sequentially and 33% below a year ago. Revenue out of backlog during 3Q2015 totaled $472 million.

The Rig Aftermarket business generated $570 million in revenue during the latest period, which was 13% lower sequentially and about one-third lower than a year ago. Operating profit was about 25.6% of sales. For the Wellbore Technologies business, operating profit margin fell to only 2.6% on revenues of $22 million.

NOV's overall margins, however, have held up better than forecast mostly because of the reduced costs since the downturn. Corporate expenses declined 34% year/year and were down 15% sequentially.

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