Oilfield equipment expert NOV Inc. warned Tuesday that fourth quarter earnings would be below guidance as stronger North American activity levels were not enough to overcome a softer international market.

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On a consolidated basis, NOV expects to report quarterly revenue of $1.33 billion and an operating loss of $327 million. 

“While rising North American activity levels drove higher revenues in the U.S. for our shorter-cycle businesses, international markets and demand for capital equipment remained soft through year-end, which led to fourth quarter results that were below our expectations for our three segments,” said CEO Clay Williams.

“The resurgence of Covid-19 caused customers to defer orders and resulted in a slower pace of bookings in the second half of the quarter. However, we still achieved a sequential increase in orders of 27% for our Completion & Production Solutions segment and a 105% book-to-bill for our Rig Technologies segment.”

There is an ongoing “challenging operating environment for our later-cycle business and our ongoing investments in developing new products and technologies,” but free cash flow (FCF) “remained healthy and in-line with prior guidance,” Williams said. 

“While we expect continued softness in our first quarter 2021 results, we are optimistic that improving commodity prices, rising activity and the actions we are taking to position NOV for the future will result in improved profitability over the course of 2021.”

NOV’s 3Q2020 bookings were light and market conditions remained challenging, Williams said last October during a conference call with analysts. Management at that time believed drilling activity had bottomed and was likely to rise modestly.

U.S. drilling activity in 3Q2020 “was the lowest measured since records were started in the early 1940s, making this the worst quarter in the past 300 or so,” Williams said at the time. NOV realized “only 38% book-to-bill on a consolidated basis.”

The Houston-based operator as of Jan. 1 rebranded as NOV Inc. from National Oilwell Varco Inc. 

“As the world looks to expand its energy portfolio to lower-carbon sources, we find our core engineering, manufacturing and project management expertise is providing new and exciting opportunities within this transition,” Williams said of the name change. “The corporate name change reflects the company’s broadening mission within energy to continue to drive economic efficiency and safety, as we have done for decades within traditional oil and gas.”

NOV is scheduled to issue its quarterly and full-year 2020 results on Feb. 4, followed the next day with a conference call.

Tudor, Pickering, Holt & Co. (TPH) analysts said it is “tough to be a global manufacturer with Covid-19 lockdowns kicking back in; this major bugaboo coupled with order deferrals and the associated under-absorption of costs likely coalesced” led to the big earnings miss.

“Twisting the dagger, any level of revenue miss proves quite noticeable when earnings are at such low levels,” the TPH analysts said. However, the FCF is the silver lining.

“While the commentary is qualitative in nature, NOV noted that FCF landed in line with prior expectations” of $100-200 million, “which will help bolster their already impressive balance sheet.

“We suspect the company remains focused on controlling what they can control (i.e., costs; for example: shutting down their Orange, CA, manufacturing facility), but we don’t anticipate a sharp rebound in revenue/earnings with lockdowns and Covid-19 disruptions stubbornly continuing to head the wrong direction.”

Evercore ISI analysts noted that North American (NAM) activity “accounted for only 26% of NOV’s third quarter revenue versus 39% a year ago and a peak of 47% in 1Q2018…We believe NOV’s NAM revenue likely bottomed in the third quarter, but improvements in the fourth quarter failed to offset weaker-than-expected international capital equipment sales into year-end.”

Still, Williams expects to see improving commodity prices this year.

“We agree,” the Evercore analysts said. They also acknowledged the positives in the FCF figures, “which implies full year cash of $667-767 million versus our $702 million estimate.”
In addition, the Rig Technology book-to-bill of 105% “exceeded the company’s 100% guidance and our 95% estimate for $200 million in new orders on $210 million of revenue from backlog; however, revenue from backlog likely came in much lower than expected as customers deferred shipments to preserve cash.”