national oilwell varco - research-doc.credit-suisse.com

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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10 September 2013

Americas/United States

Equity Research

Oil & Gas Equipment & Services

National Oilwell Varco (NOV) UPGRADE RATING

One Step Closer to Paradise

■ Buy It. Upgrading shares of NOV to Outperform from Neutral, owing to our increased confidence in the company's 2013 orders and Rig Technology margins. Our TP increases to $90 (from $82) and is now based on 8x our new 2014 EBITDA estimate of $5.015 billion (up from $4.9 billion).

■ Rig Tech Margins…should improve by over 100bps in 3Q13 as the $35-$40mm in unexpected costs that hit Q1 and Q2 are unlikely to develop this quarter. We believe mgmt. hedged themselves when giving Q3 guidance, increasing the likelihood of an upside surprise to Q3 earnings (we model 22% for Q3).

■ 2013 Orders > 2012. Finally. With inbound orders of $3.15 billion in Q2, and indications for a “strong” Q3 order rate, 2013 orders should exceed 2012 and alleviate concerns that the book-to-bill ratio with drop below 1:1 in 2013. Issues remain and questions about YoY order growth will start-up again sometime next year but with most of the growth, valuation, and margin metrics improving, the stock should take a step-up after underperforming the OSX by 863 bps YTD. With a buyback off the table, a swelling dividend could attractive new investors.

■ Valuation Lift. Raising our 2013/2014 EPS estimates to $5.54 and $6.50, respectively, from $5.42 and $6.33 (+4% above '14 Consensus). Our forecast of 17% EPS growth in 2014 and our expectation of a 1.34:1 book-to-bill coming out of 2013 point to implied EV/EBITDA valuations between 7.5x and 8.5x, respectively. We don't think the growth directive of NOV will change, even with our expectation of a higher dividend payout. Manufacturing will continue to drive income, with an increasingly greater proportion of that generated from aftermarket work. Thus we are using the average of the two highest correlated drivers - orders and earnings - to determine our $90 TP, which is now 8.0x our $5.015 billion EBITDA forecast.

Share price performance

64

74

84

94

Sep-12 Dec-12 Mar-13 Jun-13

Daily Sep 10, 2012 - Sep 09, 2013, 9/10/12 = US$81.02

Price Indexed S&P 500 INDEX

On 09/09/13 the S&P 500 INDEX closed at 1670.68

Quarterly EPS Q1 Q2 Q3 Q4 2011A 1.01 1.14 1.26 1.37 2012A 1.42 1.42 1.43 1.56 2013E 1.29 1.33 1.38 1.54

Financial and valuation metrics

Year 12/11A 12/12A 12/13E 12/14E EPS (CS adj.) (US$) 4.78 5.83 5.54 6.50 Prev. EPS (US$) — — 5.42 6.33 P/E (x) 16.4 13.4 14.2 12.1 P/E rel. (%) — 82.2 92.1 86.8 Revenue (US$ m) 14,658.0 20,041.0 22,712.1 25,340.8 EBITDA (US$ m) 3,515.0 4,150.0 4,176.4 5,015.4 OCFPS (US$) 5.05 1.45 3.03 4.02 P/OCF (x) 13.5 47.1 25.9 19.5 EV/EBITDA (current) 10.0 8.5 8.5 7.0 Net debt (US$ m) -3,025 -170 2,071 1,841 ROIC (%) 13.80 12.44 10.00 10.94

Number of shares (m) 427.52 IC (current, US$ m) 20,186.00 BV/share (Next Qtr., US$) 50.1 EV/IC (x) 1.5 Net debt (Next Qtr., US$ m) 1,543.1 Dividend (current, US$) — Net debt/tot cap (Next Qtr., %) 7.2 Dividend yield (%) —

Source: Company data, Credit Suisse estimates.

Rating (from Neutral) OUTPERFORM* Price (09 Sep 13, US$) 78.40 Target price (US$) (from 82.00) 90.00¹ 52-week price range 84.83 - 64.14 Market cap. (US$ m) 33,517.44 Enterprise value (US$ m) 35,588.84

*Stock ratings are relative to the coverage universe in each

analyst's or each team's respective sector.

¹Target price is for 12 months.

Research Analysts

James Wicklund

214 979 4111

[email protected]

Jonathan Sisto

212 325 1292

[email protected]

Brittany Commins

212 325 7128

[email protected]

10 September 2013

National Oilwell Varco (NOV) 2

NOV: Upgrading to Outperform We are upgrading shares of National Oilwell Varco (NOV) to Outperform from Neutral and

increasing our target price to $90 from $82, up 15% from current levels. Issues remain and

questions about year-over-year order growth will start up again sometime next year.

However, with most of the growth, valuation and margin metrics improving, the stock

should take a step-up after underperforming the Oilfield Services Index (OSX) by 863

basis points year-to-date and 2,280 basis point over the past twelve months.

■ Rig Technology (RigTech) margins should improve by over 100 bps sequentially in

3Q13 as the unexpected costs that hit the first and second quarter, and were hedged

into Q3 guidance, do not seem to be developing this quarter, increasing the likelihood

of an upside surprise to Q3 earnings.

■ The order rate for 2013 will exceed the order rate seen in 2012. This higher order rate

translates to higher and more assured earnings growth than before. For a growth and

manufacturing company, these are the most important metrics and they are both

improving.

■ Currently yielding 1.4%, we would expect to see more aggressive growth in the

dividend towards the 3.0% level over the next year or so, giving more cash back to

shareholders in a more stable, sustained and predictable manner than a stock

buyback, which management has no intention of doing anyway.

■ A large number of projects are getting to completion and will replace costs with

revenues, accelerating earnings further into 2014. The new flexible pipe facility in

Brazil is a great example of this, with the plant costing about $10 million per quarter

through 2014 but reversing from a net cost to income contribution as revenues begin

to generate in the first quarter of 2014.

■ Growth thru acquisition is still a viable strategy though increasingly difficult and with

increased competition. NOV is plagued by the law of big number, having grown its

market cap by 2x that of the second best company and almost 4x that of the large cap

and leading manufacturing companies in the sector over the past 10 years but has

dramatically broadened the scope of potential acquisitions by its expansion (See

Exhibit 1).

Not Pollyanna. We understand that the questions of an ever-expanding order rate,

accelerating earnings and accretive acquisitions will continue to be asked for some time.

The order rate issue gets resolved by time, as the last big order cycle fades out of backlog.

While NOV may build 80% of everything we build as an industry, whether or not that can

translate to long-term earnings growth is an issue. But for this year, after a full 12-months

of concern, things got better so the stock deserves a clear leg up in performance. While

questions remain, the results this year show an acceleration of activity, when it was not

expected. That tilts the bias to the positive.

There are triggers and options that can occur. Large-scale acquisitions that change the

depth, breadth and valuation of the company do exist. Leverage recapitalizations that

lower a company’s cost of capital and make them more economically competitive are not

the same as open market stock buybacks and are much more efficient. North American

equipment surpluses will eventually be worked down, boosting the performance of the

mostly US-centric acquisitions made in the past few years. Aftermarket is now about 20%

of RigTech revenues, continuing to reduce the importance and impact of orders and

backlog while fueling growth.

Momentum Shift. As a growth company, year-over-year earnings growth has a high,

~0.80 correlation with its EV/EBITDA valuation. As a manufacturing company, there is a

high correlation with the annual book-to-bill rate as well. For the past year, earnings

projections have moved down and the market has been waiting for the book-to-bill to

10 September 2013


break below 1:1, indicating even slower growth than expected. Both of these drivers are

now reversing – earnings growth is increasing and orders are stronger.

Valuation Lift. We are raising our 2013 and 2014 estimates from $5.42 and $6.33 to

$4.54 and $6.50, up 4% versus the consensus for the balance of 2013 and 2014.

NOV is both a growth company and a manufacturing company. No stock buyback,

free cash flow is for acquisitions. It is inherently a manufacturing company with even its

Petroleum Services & Supply division working exclusively with proprietary manufactured

equipment. As a result, its historical correlation to both annual earnings growth and annual

book-to-bill ratio to its EV/EBITDA valuation is very high. Arguably, the primary factors

causing the stock’s relative under-performance over the past year has been the

expectation that orders would fall short of 2012 levels, causing the book-to-bill to drop and

the realization that 2013 earnings growth would be negative for the first time in four years

with orders continuing to fade.

Momentum Shifts. Now with the reality of the 2013 order rate surpassing that of 2012

and our expectation of higher than previously and consensus expected numbers, the

valuation should also move up. Our forecast of 17% EPS growth in 2014 and our

expectation of a 1.34:1 book to bill coming out of 2013 point to implied EV/EBITDA

valuations between 7.5x and 8.5x, respectively. Since we do not think the growth directive

of the company will change much, even with our expectation of a higher dividend payout,

and manufacturing that will continue to drive income, an increasingly greater proportion of

which is generated from aftermarket, we are using the average of the two highest

correlated drivers to determine our price target which is now based 8.0x times our $5.015

billion EBITDA forecast to generate our $90 target price.

RigTech margins should improve over 100 bps sequentially in Q3 as the unexpected

costs that hit Q1 & Q2 (that were hedged into Q3 guidance) do not seem to be

developing this quarter.

Over the past few years, shipyards have improved efficiency and staffing and have been

able to complete rigs in shorter periods of time which meant that the delivery schedule for

rig equipment got compressed. What used to take 36 months is now being targeted at 26-

30. This causes significant disruption across a number of supply chains, component

manufacturing, assembly – disruptions that usually has a significant impact on costs. It can

easily take a year or longer to re-streamline your entire system onto this shorter schedule.

The company referred to them as “congestion issues” as a result of accelerated delivery

schedules on their projects.

Over 160 offshore projects had to be re-baselined in terms of cost/margin projections. We

estimate that costs were $35-$40 million higher than what would have been the run rate in

1Q13. Installation and commissioning is the last step in the rig building process. You put

everything in and then go test it. You fix anything that does not work right until everything

is working right and you hand it over to your customer. It is generally your cost to fix

everything. The original plan had been that commissioning would take 6-7 months per rig

but construction delays at the beginning of many projects put pressure on the shipyards

for timely final delivery, compression the time for commissioning to four months or less. As

many of these projects begin to mature, NOV has seen the number of job double in the

last three months. As a result, in 2Q13, people and freight costs were higher than

expected, driving projects costs higher. We estimate that the unexpected and higher costs

from installation and commissioning in the second quarter were also between $35-$40

million, or approximately $0.06 per share.

Since management had not expected the cost overruns in the first two quarters, they very

prudently decided they should have some contingency for the unexpected happening

again. In our conversations with people, we have not heard of any issues that would cause

a recurrence meaning that RigTech margins could see a 100-130 basis point sequential

improvement in 3Q13. While the market expects RigTech margins to continue to move up

from ~21%, the main issue now is that they quit going down. And as a higher priced

Increasing our target to

$90 from $82

Unexpected and higher

costs from installation

and commissioning in 1Q

and 2Q were between $35-

$40mm

10 September 2013


backlog, with improving supply chain, manufacturing and delivery, flow through the system,

margins should move up from here. The higher than expected backlog should drive

revenues and margins higher as well.

Mix still matters and demand for land rigs, pressure pumping equipment and coil tubing

equipment and other intervention related equipment is still weak. Some plants are seeing

very weak throughput, negatively impacting absorption and some plants are operating so

full out that efficiencies begin to fade. These issues should normalize over time as excess

industry capacity in these product lines are worked off.

Aftermarket continues to improve with $611 million of aftermarket revenues generated in

RigTech in Q2, up 16% sequentially. There has been a big push, in the company to grow

aftermarket and by industry regulation, that forces its growth. For example, blowout

preventer (BOP) repair by a non-OEM is rapidly becoming a thing of the past.

The order rate for 2013 will exceed the order rate seen in 2012. This higher order

rate translates to higher and more assured earnings growth than before. For a

growth and manufacturing company, these are the most important metrics and they

are both improving.

Six months ago, virtually no one believed that orders this year would exceed those of last

year. Deepwater rig equipment is one of the largest order items for NOV, with full rig

packages totaling more than $250 million each. Last year, the industry saw a record

number of offshore rigs ordered with 44 floaters (41 of which were ultra-deepwater) and 26

jackup rigs put into the order book. So far this year, 18 floaters have been ordered, 15 of

which are ultra-deepwater rigs), and 53 jackups have been ordered. But the diversification

of NOV’s product offering over the past two years has allowed overall orders through Q2

to hit $6.19 billion, with $3.15 billion in new capital equipment orders in the quarter alone.

The Q2 book-to-bill was 1.5:1, higher than expected due to higher than expected orders.

Q3 orders are looking very similar to Q2 – NOV sold eight floaters in the first two quarters

of 2013 and "another eight" could be sold in the third quarter, along with a "double-digit

number of jackups" and potentially in $1.0 billion in FPSO orders for the whole year.

The concern had been that while NOV may very well manufacture 80%+ of everything the

industry builds over the next 10-15 years, without some momentum to the order rate or

growth in other businesses, there is no assurance that it would result in actual earnings

growth. With the upside surprise in Q2 orders which will likely be followed by another

surprise in Q3, earnings growth over the next two years should accelerate faster than

previously expected. Next year, the same worries are likely to surface but NOV just

“bought” one additional year of growth for now and as a result, we expect another leg up

on the stock price.

FPSO orders surged in Q2 with the order of the largest turret mooring system ever for APL,

which we estimate to be about $100-$150 million. The FPSO business is still suffering

from under-absorption and orders are still being pushed to the right. Over time, we expect

orders to continue to improve as global FPSO use will increase. The third quarter should

see another strong FPSO order , intake, implied from the large number of FEED studies

underway. Overall, backlog is seeing more assertive financial terms for delivery and

backlog is now building with higher margin work.

A large number of projects are getting to completion and will replace costs with

revenues, accelerating earnings further into 2014.

The flexible pipe facility in Brazil is a great example of this, with the plant costing about

$10 million per quarter through 2014 but that reversing from a net cost to income

contribution as revenues begin to generate. The President and COO went through an

exhaustive list of expansion projects undertaken over the past year or two to consolidate,

expand and generally optimize operations across the entire company. Going from

construction to implementation should improve efficiencies and margins both immediately

and longer term.

RigTech margins could

see a 100-130bps

improvement in 3Q13

Aftermarket revenues

grew +16% QoQ in 2Q13

"We think Q3 will be

strong"

"We expect roughly $4.0

billion to flow out of

backlog for the second

half of the year".

10 September 2013


The projects include both integration and consolidation of acquisitions, which total about

$6 billion over the last eighteen months, and a large number of organic expansions. The

list includes:

■ Robbins & Meyers being integrated into six different product lines,

■ Consolidation of Fiberspar, and the Wilson and CE Franklin distribution acquisitions,

■ A Houston facility to consolidate distribution locations with more than 80 out of 267 in

the system slated for consolidation,

■ A new tubular inspection and coating (Tuboscope) facility for the GOM,

■ Blowout Preventer (BOP) manufacturing plant expansion 2x,

■ Brazilian facilities including the flexible pipe facility that will mark a significant reversal

of cost vs. income beginning next year,

■ Coiled tubing manufacturing expansion,

■ Aftermarket support facility expansion for RigTech,

■ Rig manufacturing in Russia,

■ Mission Products capacity expansion in the Middle East,

■ XL Systems conductor facility expansion in Nigeria,

■ New drill pipe line in Navasota (GrantPrideco),

■ A new tube plant in Tulsa, and

■ Composite pipe, used for FPSO and offshore construction, facility expansion in

Malaysia.

Capital expenditures in the second quarter totaled $152 million versus $168 million in the

first, putting NOV on pace to outspend last year’s $583 million in capex by about 5%.

There is also capital going into new technologies and products. NOV did not get its

dominant market share by not leading the development of technology and well

understands the requirements maintain that position. With BOP manufacturing capacity

being doubled and the trend toward two BOPs on today's deepwater rigs, it follows that

developments and products that improve the efficiency of testing, manipulating and

servicing them using ROVs instead of retrieving the units are being developed. The same

can be said of NOV product lines across the board. Technology leadership reduces

commoditization, increases sales and generally generates higher margins. NOV has a

dedication to this.

Growth thru acquisition is still a viable strategy though increasingly difficult and

with increased competition.

NOV is plagued by the law of big number, having grown its market cap by 2x that of the

second best company and almost 4x that of the large cap and leading manufacturing

companies in the sector over the past 10 years. The ability to make acquisitions that would

move the growth needle has been suspect with good reason, with the $2.5 billion accretive

Robbins & Meyers acquisition early this year not moving the needle on stock price

performance. But with the recent IPO of a casing and tubular running company with a

current $6 billion market cap that most investors and even many analysts had ever heard

of before, there are more acquisition opportunities than many might expect. Further, many

are seeing the growth in US oil & gas activity providing segments of the OFS sector with

faster growth than many industrial sectors, resulting in a number of acquisitions by

companies outside the sector, from aerospace to waste management to industrial and

accelerating interest by private equity. With that interest and growth potential, NOV is right

10 September 2013


to pursue growth through acquisitions though it is increasingly difficult to make material

acquisitions to fuel growth. We could publish a list of potential targets but there are too

many that could fit in different ways and no reasonable way for us to handicap the event or

timing. With 90% of its cash currently stranded overseas, that market looks most

interesting but that has been the case for some time without any significant events.

Exhibit 1: Market Growth Comparison, Indexed

0

500

1,000

1,500

2,000

2,500

NOV

SLB

HAL

BHI

WFT

SPN

CAM

FTI

Source: Bloomberg

NOV has made $5.3 billion in acquisitions in the past six quarters, a total of 20 different

ones. Fourteen were smaller companies and 60% of the total was for the three big ones –

Robbins & Meyers, Fiberspar, and Enerflow. The further consolidation of the distribution

business was augmented with ~$1 billion spent on the Wilson and CE Franklin

acquisitions, making NOV the undisputed 900 pound gorilla in that business. That is a

great deal of complex integration to accomplish and we think NOV is doing a good job but

it is not an easy, simple or quick task and we don’t see that near-term earnings reflect the

true and final streamlining of that process.

Our earnings estimates are pushed higher by the order rate surprise, the

completion of several projects and the likelihood of a 3Q13 earnings beat. Those

factors drive our valuation and stock price higher as well.

Earnings growth is obviously highly correlated to the stock’s valuation since NOV has

been an unabashed growth stock for the past decade. Earnings growth stalled this year

with the consensus expecting a 9% decline in earnings versus 2012 and a ten-year

average of 29%. With the higher than expected order rate fueling faster than expected

earnings growth, the valuation should increase. Our $6.50 EPS estimate for 2014

represents 22% growth versus the 2013 consensus, marking 2013 as the near-term

bottom in earnings growth. Correlating the annual earnings growth with the historical

EV/EBITDA multiple, the highest correlated of the three most common valuation

parameters yields a valuation of 9.8x, significantly higher than our $90 target price. NOV is

also a manufacturing company which means it is driven by its order rate, backlog and

timed delivery of equipment or its book-to-bill ratio. In Q1, the CEO guided to an

expectation of an annual book-to-bill of 1.1:1 for 2013. The higher than expected order

rate is pushing that to 1.35:1 and having an upward driving effect on the resulting valuation

as well. With a 0.78 r-square and the order rate we expect for this year, the valuation

multiple moves to 8.7x. So on a blended basis, our price target for NOV is $90, a blending

of the two highest correlated historical valuation parameters and our upwardly revised

forecast for 2013 and 2014.

The company’s cost of capital, as calculated by Bloomberg Financial, is 12.2%, down

considerably from the 16% seen in 3Q11 and down from the 14% level at year-end 2012,

10 September 2013


due primarily to the debt taken on associated with the Robbins & Meyers acquisition and

the market shifts in the cost of equity and debt. NOV currently has 12.3% of its capital in

debt and 87.7% of its capital in equity, according to Bloomberg. When we initiated

coverage on the company at the beginning of the year, the cost of equity was above 15%

and the cost of debt was only 1.6%. Since then, the capital markets have moved in NOV’s

favor, with the cost of capital declining by over 250 basis points and the cost of debt rising

by almost 100 basis points. The current return on invested capital is currently around 9.5%,

keeping EVA negative but we expect that to improve. Returns on tangible assets are close

to 13% but the $9 billion in goodwill and $5.3 billion in intangible assets reduces that net

return. Components of GrantPrideco and other US-centric acquisitions, bought closer to

the tops of their respective markets, appear to be the primary culprits.

Current and long-term debt total $4.12 billion with $2.3 billion in cash, with $2 billion of that

stranded overseas, giving the company a net debt to capital ratio of 6%.

PSS is not the same as everyone else’s “services” business.

Virtually everything dollar of revenue in PS&S is dealing with a proprietary piece of NOV’s

manufacturing. Mission Products, GrantPrideco, drilling motors, fishing tools, handling

systems, inspection and coating of pipe – the list of “products” that are manufacturing and

sold or rented as a “service” confuses many investors and some argue that a services

business should have a lower valuation than a manufacturing business. The demand

profile is a bit different than rig or FPSO equipment in terms of average “ticket” size or

revenue generation per item but all revolve around some manufacturing capability of the

company and right now in the market, manufacturing, and especially manufacturing of

consumables, is the best sector out there from an expected valuation perspective. The

company’s prime customers is this segment are drilling contractors, pressure pumpers,

directional drillers and others that are currently depleting inventory rather than re-stocking

but that is a process that can only go on for so long before underlying demand starts

driving growth again. Strong international was positive in the quarter, contrasting with a

relatively weaker US. Like most other companies, the Gulf of Mexico continues as a

source of strength.

There are four big macro trends in the industry as seen by NOV.

Deepwater rigs, FPSOs, jackup rig re-tooling and shale developments onshore. There is

no question that this list captures most everything going on in the industry today. There

are two issues: 1) the pace of growth in these trends, and 2) the margins generated.

Pricing in deepwater rig equipment has been improving, not deteriorating, in spite of recent

discounts by shipyards on rig costs. FPSOs will probably not grow as quickly early as

many had hoped but NOV has a significant market share for the equipment required, so

any increase in unit bids and placements will help. Current manufacturing is seeing under-

absorption but that should reverse next year. The strength in the jackup market has not

been a surprise. We have argued all year for a better jackup market than deepwater.

There are too many places reachable with jackups that can benefit from the emerging

technologies. And, optimizing recoveries of hydrocarbons in place in shales is paramount

since the “discovery” is a sunk cost.

Recent results imply improvement.

Second quarter earnings results were generally positive, with operating profit up 1%

sequentially but down 9% from the same time last year. Operating margins were of 14.7%

were down 400 basis points from the same quarter last year. Total RigTech revenues

were up 8% sequentially and up 18% compared to 2Q 2012 but operating margins

disappointed, down 50 bps sequentially and down 18% compared to a year ago. Pressure

pumping equipment is a good proxy, and was down 10% sequentially and down 46% from

the end of last year and should be down again this quarter. It is viewed that these

businesses will have a difficult period.

10 September 2013


NOV booked 7 drillships, 1 semi and 12 jackups in the quarter, winning all the deepwater

BOPs and 9 of the jackup BOP orders. Ocean Rig (ORIG) ordered another UDW drillship

from Samsung this week, implying another set of equipment sold by NOV. FPSO orders

are starting to see traction as well. Management expects the order intake for Q3 to be very

similar to Q2, which is clearly and upside surprise. RigTech revenues will decrease slightly

in Q3 from continued decline in intervention and stimulation equipment sales and

somewhat lower project revenues but be more than offset by higher aftermarket. We

believe though that the guidance of 20%-21% margins for Q3 for RigTech will be closer to

22%. (See Exhibit 2)

Operating margins in PS&S declined 2% sequentially on a 3% increase in revenues, down

a whopping 470 basis points from 2Q 2012. Margins ticked down in Q2 due to continued

integration of acquisitions, right-sizing several businesses and pricing pressure in others.

In Q3, we expect revenues to recover aided by continued strength in Canada ex-breakup,

stronger activity in the GoM and broad international strength. Margins should stay close to

current levels, basically flat, while now “excess” inventories are reduced. Once equilibrium

is reached and activity continues up, we would expect to see some of those 470 basis

points recovered.

Third Quarter 2013 Outlook

Broadly speaking, NOV expects orders for new drilling equipment packages and floating

production equipment to remain strong in the third quarter. Pent-up demand for new land

rigs in Latin America and the Middle East should finally materialize into new orders.

Exhibit 2: 3Q12 Segment Guidance

Revenues Margins Other

Rig Technology Down low-to-mid single digit % range 20% - 21% for balance of '13 $4.0 billion out of backlog in 2H

PS&S Up low-to-mid single digit % range Flat w/ Q2; 17.4% Margins may progress modestly in 2H

Distribution Services Up in mid-single digit % range Flat w/ Q2; 5.5% Source: NOV Third Quarter 2013 Conference Call

Rig Tech revenues should decrease in the low-single-digit percentage range, as continued

declines in the sale of intervention and stimulation equipment and somewhat lower project

revenues will more than offset continued growth in aftermarket work. And because of

continued supply chain congestion, Rig Tech EBIT margins should range between 20% to

21% for the balance of 2013. Roughly $4.0 billion of revenue will flow out of backlog in the

second half of the year.

Petroleum Services & Supplies sales should improve in the low-to-mid-single digit

percentage range, as Canada comes out of breakup, activity in the Gulf of Mexico creates

more demand for a number of NOV's products and services, and international businesses

continue to gain momentum. However, customers are still working through existing

inventories. PS&S margins should remain fairly consistent in Q3 v. Q2 with the possibility

of modest improvements as the year progresses.

10 September 2013


Exhibit 3: Historical EBIT Breakdown

$2,380, 57%$1,519, 37%

$253, 6%

2012 EBIT

$2,070, 63%

$1,095, 33%

$136, 4%

2011 EBIT

Rig Technology Petroleum Services & Supply Distribution Services

$2,071, 76%

$585, 21%

$78, 3%

2010 EBIT

Source: Company data, Credit Suisse estimates

We do not expect a buyback. Those are easy words to write considering historical

comments by management but management has also stated that it believes in giving back

to shareholders. As a result, we would expect NOV to increase its dividend to a more

meaningful yield over the next year or so. Capital expenditures will be down next year and

the company does generate significant cash with a free cash flow yield of 3.3% forecasted

for next year. The company will continue to look at and make acquisitions but the law of

large numbers makes it more difficult over time to make impactful acquisitions and there

are not many of the size of the recent Robbins & Myers acquisition at $2.5 billion. The

stock currently has a yield of 1.5%, among the highest in our group excluding the offshore

drillers. It is a sign of corporate maturity - when growth slows, dividends increase - and

NOV is in that point in its cycle. And, it is a positive sign by management on the

sustainability of cash flow available for dividends. We consider a "meaningful" yield to be

in the 3.0% range for an OFS company considering where we are in the cycle. While we

have no implicit guidance from the company on the issue, we would expect the dividend to

continue to increase, increasing the valuation of the stock.

Orders

During the second quarter of 2013, NOV received new capital equipment orders of $3.15

billion (the company's second largest quarterly inbound total ever), reflecting continued

strong demand for oilfield equipment, and representing a book-to-bill ratio of 1.5x. Year-to-

date, NOV's inbound order total is in excess of $6.19 billion (See Exhibit 4).

NOV "sold another eight floating rig packages in the second quarter", after selling eight in

Q1, and believes it can sell a comparable number again in Q3. We expect recent

successes of deepwater drilling programs, increased permitting, and the need to offset

yearly production decline rates will drive demand for more rig equipment and FPSO

systems. In Q2, "the largest turret mooring system order ever for APL" contributed to the

NOV's second quarter inbound order total and the company expects "similarly strong

FPSO order levels in the third quarter, following numerous FEED studies". In fact, NOV

has hinted at the fact that FPSO orders alone could total approximately $1.0 billion in 2013.

Overall, NOV expects orders for FPSOs and rigs to be very strong in the third quarter".

This is the first time NOV has had the confidence to say this and we think this gives

greater confidence to higher earnings growth in 2014, which has been one of the linchpins

of the valuation.

10 September 2013


Exhibit 4: NOV Historic Orders

-100%

-50%

0%

50%

100%

150%

200%

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

2005 2006 2007 2008 2009 2010 2011 2012 2013YTD

$ m

illio

ns

Y-o

-Y %

Chan

ge


Exhibit 5: Book-to-Bill Ratio

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13

NOV Avg. Quarterly Share Price Book-to-Bill


Backlog

Backlog for capital equipment orders for the Company's Rig Technology segment hit a

historic record level of $13.95 billion as of June 30, 2013, up 8% from the end of the first

quarter and up 24% from the end of the second quarter 2012.

10 September 2013


Exhibit 6: NOV Backlog

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

Backlog Orders


Robbins & Meyers (RBN) Integration

RBN "is a great fit," according to NOV. The RBN deal expanded NOV's offering of land

BOPs within Rig Tech and provide the company with additional service infrastructure to

further enhance service and repair capabilities in the field. RBN also improved NOV's

already marketing leading position in downhole motors and downhole progressive cavity

pumps. And added to NOV's broad suite to flow control products.

NOV is rationalizing product lines across businesses to improve supply chain efficiencies,

better manage inventories and mitigate any potential for customer confusion.

In addition to these cost saving opportunities, NOV is also identifying opportunities to grow

revenue. For example, NOV discovered that matching RBN's stator tube and bonding

agent with its legacy elastomer is delivering far better power section performance than

either product previously delivered.

Other

Despite global decline rates in the high single digits, NOCs and IOCs, as well as, large

independents are being more prudent with their capital allocation/drilling programs. The

offshore drilling industry, according to Credit Suisse's Gregory Lewis, is seeing the

beginning of a soft patch right now with 56 newbuilds (ultra-deepwater rigs and jackups)

primed to be delivered in 2013 alone (excluding those destine for Brazil). Leading edge

dayrates are starting to bifurcate – newer rigs are commanding higher dayrates, while

older rig rates are waning.

If demand remains firm and supply slows, then the market could tighten in late 2014 again.

NOV firmly believes the demand landscape is improving. The company is "expanding

operations in places like Abu Dhabi, Oman, Dubai, South Africa, Russia, Angola, Brazil,

and Mexico". Continued deepwater development, application of horizontal drilling and

hydraulic fracture stimulation to conventional prospects and unconventional shale

technologies will provide the basis for future growth overseas and we believe NOV is

exceptionally well positioned to capitalize on these opportunities.

Looking further out, to 2017, and the supply/demand scenario depends on Brazil

newbuilds. Of course, the overarching point behind all this is what will the global economy

be doing? Will China GDP be growing 5% per annum or 10%? Where will oil prices be?

With $100 a barrel and decline rates in excess of 5% globally more and more drilling has

to be focused on more remote regions of the globe. A scenario where more advanced rigs

and equipment will be demanded from the industry’s leading manufacturer, National

Oilwell Varco.

10 September 2013


Exhibit 7: Global Offshore Rig Supply / Demand (2004-2015E)

88%

90%

92%

94%

96%

98%

100%

-5%

0%

5%

10%

15%

20%

25%

2004 2006 2008 2010 2012 2014

Utilization Supply Growth Demand Growth

Source: IHS-Petrodata and Credit Suisse estimates.

Exhibit 8: Geographic Demand Growth

0

50

100

150

200

250

2003 2005 2007 2009 2011 2013 2015

Other WAFA US GOM Indian Ocean

NW Europe Brazil Australia Asia/Pac

Source: IHS-Petrodata, Credit Suisse estimates

10 September 2013


Exhibit 9: And Drilling Costs Are Still Rising

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2002 2004 2006 2008 2010 2012 2014

BG BP Chevron Conoco ENI

Exxon Shell Statoil Total


10 September 2013


Exhibit 10: NOV Income Statement

($ In Millions) 2009 2010 2011 2012 1Q13 2Q13 3Q13E 4Q13E 2013E 1Q14E 2Q14E 3Q14E 4Q14E 2014E

Revenues:

Rig Technology 8,093 6,965 7,788 10,107 2,628 2,833 2,814 3,129 11,404 2,957 3,150 3,320 3,692 13,119

Petroleum Services & Supply 3,745 4,182 5,654 6,967 1,701 1,749 1,761 1,867 7,077 1,758 1,863 1,937 2,053 7,611

Distribution Services 1,350 1,546 1,873 3,927 1,227 1,295 1,340 1,417 5,280 1,275 1,395 1,497 1,583 5,750

Eliminations (476) (537) (657) (960) (249) (276) (251) (273) (1,049) (258) (275) (290) (315) (1,139)

Total Company Revenues 12,712 12,156 14,658 20,041 5,307 5,601 5,664 6,140 22,712 5,732 6,131 6,464 7,013 25,341

% of revenues

Rig Technology 64% 57% 53% 50% 50% 51% 50% 51% 50% 52% 51% 51% 53% 52%

Petroleum Services & Supply 29% 34% 39% 35% 32% 31% 31% 30% 31% 31% 30% 30% 29% 30%

Distribution Services 11% 13% 13% 20% 23% 23% 24% 23% 23% 22% 23% 23% 23% 23%

EBIT:

Rig Technology 2,287 2,071 2,070 2,380 557 587 619 688 2,451 585 693 764 886 2,928

Petroleum Services & Supply 453 585 1,095 1,519 311 304 308 330 1,253 320 343 360 390 1,413

Distribution Services 50 78 136 253 65 71 74 78 288 70 77 82 87 316

Segment EBIT 2,790 2,734 3,301 4,152 933 962 1,001 1,096 3,992 976 1,112 1,206 1,363 4,657

Corporate Expenses & Other (241) (268) (323) (607) (117) (136) (135) (135) (523) (135) (135) (135) (135) (540)

Total Company EBIT 2,549 2,466 2,978 3,545 816 826 866 961 3,469 841 977 1,071 1,228 4,117

EBIT Margins (%)

Rig Technology 28% 29.7% 26.6% 23.5% 21.2% 20.7% 22.0% 22.0% 21.5% 19.8% 22.0% 23.0% 24.0% 22.3%

Petroleum Services & Supply 12% 14.0% 19.4% 21.8% 18.3% 17.4% 17.5% 17.7% 17.7% 18.2% 18.4% 18.6% 19.0% 18.6%

Distribution Services 4% 5.0% 7.3% 6.4% 5.3% 5.5% 5.5% 5.5% 5.4% 5.5% 5.5% 5.5% 5.5% 5.5%

Segment EBIT Margin 21.9% 22.5% 22.5% 20.7% 17.6% 17.2% 17.7% 17.9% 17.6% 17.0% 18.1% 18.7% 19.4% 18.4%

Expenses:

Cost of Sales & Services $8,429 $7,846 $9,565 $14,143 $3,846 $4,091 $4,102 $4,481 $16,520 $4,189 $4,448 $4,684 $5,073 18,394

% Sales 66.3% 64.5% 65.3% 70.6% 72.5% 73.0% 72.4% 73.0% 72.7% 73.1% 72.5% 72.5% 72.3% 72.6%

Depreciation & Amortization 490 499 555 628 174 190 192 194 750 199 202 205 208 760

SG&A 1244 1345 1560 1725 471 494 504 504 1973 504 504 504 504 2,016

% Sales 9.8% 11.1% 10.6% 8.6% 8.9% 8.8% 8.9% 8.2% 8.7% 8.8% 8.2% 7.8% 7.2% 8.0%

Research & Development 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0

Total $10,163 $9,690 $11,680 $16,496 $4,491 $4,775 $4,798 $5,179 $19,243 $4,892 $5,154 $5,393 $5,785 $21,223

Operating Income $2,549 $2,466 $2,978 $3,545 $816 $826 $866 $961 $3,469 $841 $977 $1,071 $1,228 4,117

% Margin 20.1% 20.3% 20.3% 17.7% 15.4% 14.7% 15.3% 15.7% 15.3% 14.7% 15.9% 16.6% 17.5% 16.2%

% Incremental Margin 67% 15% 20% 11% (6%) (6%) (7%) 13% (3%) 6% 29% 26% 31% 25%

Interest Expense (44) (37) (22) (38) (28) (30) (30) (30) (118) (28) (28) (28) (28) (112)

Interest Income 3 3 3 3 12 3 3 3 3 12

Equity Income in unconsolidated aff iliates 47 36 46 58 19 15 10 10 53 13 13 13 13 52

Other income (expense), net (110) (22) (39) (60) (13) 13 10 10 20 5 5 5 5 20

Other costs (73) (57) 0 0 (130) 0 0 0 0 0

Total (107) (23) (15) (40) (93) (56) (7) (7) (163) (7) (7) (7) (7) (28)

Income Before Taxes 2,442 2,443 2,963 3,505 724 770 859 954 3,306 834 970 1,064 1,221 4,089

Income Before Taxes less VAT 2,395 2,407 2,917 3,447 705 755 849 944 3,253 821 957 1,051 1,208 4,037

Income Taxes (794) (739) (944) (1,022) (224) (239) (266) (296) (1,025) (267) (311) (341) (391) (1,309)

Minority Interest (4) 8 9 8 0 0 0 0 0 0 0 0 0 0

Net Income 1,644 1,712 2,028 2,491 500 531 592 658 2,281 567 660 724 830 2,781

Non Recurring Items After Tax (175) (40) (34) (29) (50) (37) 0 0 (87) 0 0 0 0 0

Discontinued Operations 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Minority Interests 2 0 0 0 2 0 0 0 0 0

Reported Net Income 1,469 1,672 1,994 2,462 502 531 592 658.4 2,283 567 660 724 830 2,781

Ave. Diluted Shares Outstanding (000) 418.3 419.5 424.5 427 428 428 428 428 428 428 428 428 428 428

Reported Net Income Per Share $3.51 $3.99 $4.70 $5.77 $1.17 $1.24 $1.38 $1.54 $5.34 $1.32 $1.54 $1.69 $1.94 $6.50

Non Recurring/ Disc. Items Per Share $0.42 $0.10 $0.08 $0.07 $0.12 $0.09 $0.00 $0.00 $0.20 $0.00 $0.00 $0.00 $0.00 $0.00

Recurring Net Income Per Share $3.93 $4.08 $4.78 $5.83 $1.29 $1.33 $1.38 $1.54 $5.54 $1.32 $1.54 $1.69 $1.94 $6.50

EBITDA $2,797.4 $2,947.1 $3,515.0 $4,150.0 $928 $990 $1,081 $1,178 $4,176 $1,061 $1,200 $1,297 $1,457 $5,015

Tax Rate 32.5% 30.2% 31.9% 29.2% 31.0% 31.0% 31.0% 31.0% 31.0% 32.0% 32.0% 32.0% 32.0% 32.0% Source: Company data, Credit Suisse estimates

10 September 2013


Companies Mentioned (Price as of 09-Sep-2013)

Baker Hughes Inc. (BHI.N, $50.25) Cameron International Corp. (CAM.N, $59.7) FMC Technologies, Inc. (FTI.N, $55.34) Forum Energy Technologies, Inc. (FET.N, $26.79) Halliburton (HAL.N, $50.24) National Oilwell Varco (NOV.N, $78.4, OUTPERFORM, TP $90.0) Ocean Rig UDW Inc (ORIG.OQ, $18.49) Schlumberger (SLB.N, $86.62)

Disclosure Appendix

Important Global Disclosures

James Wicklund and Jonathan Sisto, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for National Oilwell Varco (NOV.N)

NOV.N Closing Price Target Price

Date (US$) (US$) Rating

17-Sep-10 41.28 54.00 O

26-Oct-10 52.03 60.00

08-Dec-10 61.67 69.00

04-Feb-11 76.45 81.00

28-Apr-11 76.98 90.00

27-Jul-11 80.00 93.00

18-Aug-11 63.25 95.00

25-Oct-11 67.99 87.00

03-Feb-12 82.14 86.00

30-May-12 67.19 NR

31-Jan-13 74.14 72.00 N *

04-Feb-13 70.17 74.00

30-Jul-13 69.40 82.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N O T RA T ED

N EU T RA L

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s tot al return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings w ere based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

10 September 2013


Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 42% (55% banking clients)

Neutral/Hold* 40% (49% banking clients)

Underperform/Sell* 15% (39% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factor s.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for National Oilwell Varco (NOV.N)

Method: Our 12-month target price of NOV is $90 per share. Our target price is based on 8.0x our 2014 EBITDA estimate. Since the end of 2008, NOV's average EV/EBITDA multiple is 12.4x, while its average P/E multiple is 6.5x.

Risk: Risks to our $90 target price include a slowdown in deepwater rig construction and deliveries and thus weaker demand for OII’s remotely operating vehicles (ROVs). Weaker than expected oil and natural gas prices could reduce customer spending on Subsea Products and Projects. More general risks include (1) gas and oil prices, (2) non accretive or ill-timed acquisitions, (3) loss of customers, (4) environmental and governmental regulations, (5) geopolitical risks.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (NOV.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (NOV.N) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (NOV.N).

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (NOV.N) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

10 September 2013


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Principal is not guaranteed in the case of equities because equity prices are variable.

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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

10 September 2013


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Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required when investing in such instruments.

When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.

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