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  • 8/11/2019 Zacks National Oilwell Varco

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    2014Zacks Investment Research, All Rights reserved. www.Zacks.com 10 S. Riverside Plaza, Chicago IL 60606

    NationalOilwell Varco, Inc. (NOV-NYSE)

    SUMMARY

    SUMMARY DATA

    Risk Level * Average

    Type of Stock Large-Valu

    Industry Oil Fld Mch& Eq

    Zacks Industry Rank * 215out of 26

    Current Recommendation NEUTRAL

    Prior Recommendation Underperform

    Date of Last Change 07/11/2013

    Current Price (07/15/14) $83.88

    Target Price $88.00

    We are maintaining our Neutral recommendationNational Oilwell Varco. We like its healthy backlog, sobalance sheet and strength in international operatioparticularly in the Middle East and Brazil. The RobbinsMyers acquisition has further boosted NOV s earninvisibility by expanding its blowout preventer product linecritical safety machine for a well. NOV s proposal to sinto two separate entities has added to the positsentiment. However, we think the current valuation is and adequately reflects the company s future growprospects. Moreover, with markets remaining competitand pricing likely to be weak, we see no obvious catalin NOV s business to significantly push the stock pr

    higher.

    52-Week High $84.50

    52-Week Low $69.40

    One-YearReturn (%) 17.67

    Beta 1.90

    Average Daily Volume (sh) 2,869,766

    Shares Outstanding (mil) 429

    Market Capitalization ($mil) $35,989

    Short Interest Ratio (days) 3.37

    Institutional Ownership (%) 86Insider Ownership (%) 1

    Annual Cash Dividend $1.84

    Dividend Yield (%) 2.19

    5-Yr. Historical Growth Rates

    Sales (%) 16.4

    Earnings Per Share (%) 9.0

    Dividend (%) 44.0

    P/E using TTM EPS 14.9

    P/E using 2014Estimate 13.9

    P/E using 2015 Estimate 12.5

    Zacks Rank *: Short Term1 3 months outlook 4 Sell

    * Definition / Disclosure on last page

    ZACKS CONSENSUS ESTIMATES

    Revenue Estimates(In millions of $)

    Q1 Q2 Q3 Q4 Year(Mar) (Jun) (Sep) (Dec) (Dec)

    2012 4,303 A 4,734 A 5,319 A 5,685 A 20,041 A

    2013 5,307 A 5,601 A 5,687 A 6,172 A 22,767 A

    2014 5,777 A 5,682 E 5,808 E 5,508 E 22,775 E

    2015 5,852 E 5,798 E 23,497 E

    Earnings Per Share Estimates(EPS is operating earnings before non-recurring items, but including employee

    stock options expenses)

    Q1 Q2 Q3 Q4 Year

    (Mar) (Jun) (Sep) (Dec) (Dec)

    2012 $1.44 A $1.46 A $1.52 A $1.49 A $5.91 A2013 $1.29 A $1.33 A $1.34 A $1.56A $5.52 A2014 $1.40A $1.46 E $1.53E $1.65 E $6.04E2015 $1.57E $1.60 E $6.69 E

    Projected EPS Growth -Next 5 Years % 12

    July16, 2014

    http://www.zacks.com/
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    Equity Research NOV| Page 2

    OVERVIEW

    Houston, Texas based National Oilwell Varco, Inc. (NOV), formerly National Oilwell, is a world leader ithe design, manufacture, and sale of comprehensive systems, components, products, and equipmenused in oil and gas drilling and production worldwide. The company reached its current form following thMarch 2005 merger between National Oilwell and Varco International.

    In April 2008, National Oilwell Varco acquired drilling-products maker Grant Prideco in a stock and cas

    deal totaling about $7.37 billion. Grant Prideco s operations have been included in the companyPetroleum Services and Supply segment. This segment now includes drilling product and servicesReedHycalog, XL systems, and IntelliServ products of Grant Prideco. Given the lack of product overlabetween the two companies (Grant Prideco was primarily a drill-pipe and bits manufacturer with growing international footprint), the transaction significantly increased the size and scope of NationOilwellVarco s product portfolio.

    In May 2014, National Oilwell Varco separated its distribution business from its remaining operationsthereby creating two independent companies.

    Till recently, National Oilwell Varco divided its operations into three major segments: Rig TechnologyPetroleum Services & Supplies, and Distribution & Transmission. But effective April 1, 2014, and i

    conjunction with the spin-off, the company has reorganized its operations in fourbusiness segments: RSystems, Rig Aftermarket, Completion & Production Solutions, and Wellbore Technologies.

    Rig Systems: The Rig Systemsunitworks on the lines of the Rig Technology segment and will baccountable for the design and manufacturing of integrated drilling systems and components for lanand offshore drilling rigs.

    Rig Aftermarket:The Rig Aftermarketsegment is engaged in the delivery of consumables, spareand other necessary services to maintain the usefulness of the assets.

    Completion & Production Solutions: The Completion & Production Solutions segment primarifocuses on developing wellbore completions and achieving higher production though technologica

    advancements. This segment mainly offers services to well intervention service providers anproducers of oil and gas.

    Wellbore Technologies: The Wellbore Technologies segment focuses on improving drillinperformance at both land and offshore rigs through a vast array of tools and services.

    REASONS TO BUY

    National Oilwell Varco is one of the biggest manufacturers of drilling equipment in the world with aimpressive business model. The company s large installed base of rigs worldwide provides for steady recurring revenue stream through demand for maintenance, parts and other expendablproducts.

    National Oilwell Varco s recently completed acquisition of smaller rival Robbins & Myers will allothe energy equipment contractor to broaden scale and scope of the solutions that it offers to oil angas customers worldwide. In particular, the move will help National Oilwell Varco to strengthen itposition as a supplier of blowout preventer (a critical safety machine that can shut a well off in casof an emergency), as Robbins & Myers is the fourth-largest maker of such devices.

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    Equity Research NOV| Page 3

    The growing search for oil into new deepwater frontiers has significantly increased the demand forigs capable of tackling the immense challenges of drilling in a mile or more of water. National OilweVarco is well positioned to supply such technologically-advanced production equipment.

    We remain positive on the outlook for the new National Oilwell Varco post-split, as it holds thpromise of unlocking significant value. Creation of two separate companies will allow both of them tpursue great opportunities in their respective market segments and better serve the needs of botinvestor groups without the constraints of the parent company.

    National Oilwell Varco has a strong balance sheet with a debt to capitalization ratio of 12.1%Moreover, since it commenced paying dividends in 2009, management has increased the payouevery year. This indicates National Oilwell Varco's healthy financial position.

    REASONS TO SELL

    With new competitors entering the market and shrinkage of capital expenditure spending by thdrilling contractors, National Oilwell Varco has seen its new equipment package pricing fall aroun10% below the levels achieved during the peak of 2007 2008. In particular, the company s marginhave been hit hard by the ongoing North American drilling slump. We expect the situation

    characterized by tepid demand and weak pricing to normalize only sometime in mid-2014.

    Oilfield service stocks are extremely volatile and the correlation of their movement with underlyinbusiness fundamentals is sometimes difficult to establish. As such, shares of National Oilwell Varcmay not be suitable for investors who are not comfortable with often substantial day -to-day volatility

    National Oilwell Varco conducts operations in many countries, with a major portion of its totarevenue coming from international markets. As such, the company is exposed to risks associatewith doing business abroad. Such risks include embargoes and/or expropriation of assets, exchangrate risks, terrorism and political/civil sentiment, etc.

    Grant Prideco has historically been a major supplier to the domestic onshore drilling market; th

    outlook for which has softened due to natural gas weak fundamentals. National Oilwell Varcoacquisition of Grant Prideco has, therefore, increased its exposure to this potentially weak market.

    National Oilwell Varco relies on its ability to develop and acquire essential products and technologiethat drive its operational performance and growth. If their technologies and/or products becomobsolete, or they cannot bring them to market in a timely and competitive manner, they may facsevere operational and financial dilemmas.

    RECENT NEWS

    SecondQuarter 2014 Results Announcement

    National Oilwell Varco plans to release its second quarter 2014 results on Jul 29, 2014 before thopening bell.

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    Equity Research NOV| Page 4

    National Oilwell Completes NOW Spin-Off

    On May30, 2014, National Oilwell Varco announced that the spin-off of its distribution business, NOWInc., has finally reached completion.

    The new entity will debut in the NYSE today under the symbol DNOW. National Oilwell also stated thaMerrill A. Miller, Jr. will act as the new executive chairman of NOW.

    As previously mentioned, for every four shares of NOV, one share of the new entity was issued tNational Oilwell stockholders as of May 22. Also, for any fractional share issue, the stockholder iexpected to receive a cash payment after the issue is sold in the open market.

    National Oilwell s management stated that the spin-off was in accordance with its strategy to enhanclong-term value for shareholders. The separation of its distribution business should unlock value for thcompany.

    National Oilwell Ups Dividend by 77%

    On May15, 2014, National Oilwell Varco announced an increase in its quarterly cash dividend to $0.4per share ($1.84 annualized), up almost 77% from $0.26.

    National Oilwell s management stated that this increase reflects the company s confidence in its financicondition and future cash flow growth. As of Mar 31, 2014, the company had $3.7 billion in cashManagement believes that this strong cash flow position enabled it to declare the latest increase payout.

    Notably, this is the second major dividend hike by the company. Last year, National Oilwell had doubleits payout to $0.26. Such increases, if continued, would make National Oilwell a lucrative choice for valuinvestors.

    VALUATION

    National Oilwell Varco remains better positioned to navigate the uncertain environment than many of itpeers, given its strong balance sheet, backlog of over$16 billion, leading market position and technologinnovation. Furthermore, we believe that the company s competitive position has received a boosfollowingthe Robbins & Myers acquisition, which hasexpandedthe scale and scope of National OilweVarco s solutions to oil and gas customers worldwide.

    However, shares of the company are fairly valued at current levels, considering the sensitivity of NationaOilwell Varco s business to gas/oil price volatility, as well as exploration and production (E&P) spendin

    patterns, costs, geo-political risks, competition and the advent of new technologies.

    These factors are reflected in our continued Neutral recommendation on National Oilwell Varco shares.

    National Oilwell Varco s current trailing 12-month earnings multiple is 14.9X, compared with the 28.0industry average and 18.1X for the S&P 500. Over the last five years, National Oilwell Varco s sharehave traded in a range of 7.5X to 19.9X trailing 12-month earnings. As of now, the stock is trading at discount to its peer group, based on forward earnings estimates.

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    Equity Research NOV| Page 5

    Our $88price objective reflects a 2014P/E multiple of 14.6x, which is within historical trading ranges.

    Key Indicators

    P/EF1

    P/EF2

    Est. 5-YrEPS Gr%

    P/CF(TTM)

    P/E(TTM)

    P/E5-Yr

    High(TTM)

    P/E5-YrLow

    (TTM)

    National Oilwell Varco, Inc. (NOV) 13.9 12.5 12.0 11.5 14.9 19.9 7.5

    Industry Average 21.5 20.4 16.3 13.4 28.0 78.4 14.6S&P 500 16.9 15.8 10.7 14.8 18.1 27.7 12.0

    EnerNorth Industries Inc.(ENYNF)PEDEVCO Corp. (PED) 26.3Weatherford International Ltd. (WFT) 20.2 12.8 18.0 9.2 38.2 210.5 12.9Technip ADS(TKPPY) 17.0 12.0 14.7 10.8 18.0 51.5 13.7

    TTM is trailing 12 months; F1 is 2014and F2 is 2015, CF is operating cash flow

    P/BLastQtr.

    P/B5-Yr High

    P/B5-Yr Low

    RO E(TT M)

    D/ELast Qtr.

    Div YieldLast Qtr.

    EV/EBITDA (TTM)

    National OilwellVarco,Inc. (NOV) 1.6 2.1 0.9 11.0 0.1 2.2 8.4

    Industry Average 2.1 2.1 2.1 8.0 0.3 0.6 10.1S&P 500 4.7 9.8 3.2 23.1 0.0

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    Equity Research NOV| Page 6

    Earnings Surprise and Estimate Revision History

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    DISCLOSURES & DEFINITIONS

    The analysts contributing to this report do not hold any shares of NOV. The EPS and revenue forecasts are the Zacks Consensuestimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personviews as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectrelated to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in threport is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to methe particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as aoffer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for thsecurities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six ttwelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelvmonths. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. Thcurrent distribution of Zacks Ratings is as follows on the 1103 companies covered: Outperform - 15.7%, Neutral - 78.8%, Underperform 4.8%Data is as of midnight on the business day immediately prior to this publication.

    Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trendsearnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The modassigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. ZackRank 5 = Strong Sell. We also provide a Zacks Industry Rankfor each company which provides an idea of the near-term attractiveness ofcompany s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on eacstock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5

    thgroup has the highe

    values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to thsecond, third, and fourth groups of stocks, respectively.