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National Oilwell: Going Gangbusters
06/09/2014 7:00 am EST
Our newest offshore drilling idea doesn't build or operate offshore rigs; but it does manufacture the advanced technical equipment installed on land- and sea-based platforms that control the drilling, explains Robert Rapier in The Energy Strategist.
National Oilwell Varco (NOV) also supplies a wide range of equipment, parts, and services routinely used in land-based drilling operations.
This is a highly lucrative business rich in free cash flow; National Oilwell Varco produced $2.7 billion of operating cash flow in excess of capital spending last year.
This year is likely to see an even larger surplus, only some of which will go to pay a dividend increased by 77% earlier this month, for a prospective yield of 2.2% at the current share price.
Offshore rig equipment sales are still going gangbusters for NOV, powering the 9% revenue growth it reported in the first quarter and accounting for the bulk of the 27% increase in an order backlog that now exceeds $16 billion.
This business is expected to cool off in the second half of the year in response to the ongoing offshore market correction. But the recovering sales to North American shale drillers should pick up the slack.
Meanwhile, NOV is about to spin off its low-margin procurement logistics business to shareholders, a transaction that should focus investors on the stronger margins and dominant market share NOV commands in rig equipment.
Starting with the current quarter, National Oil Well Varco will set up new reporting segments highlighting its reliable aftermarket revenue for rig equipment and growing strength in well completions and related services.
In addition, medium-term catalysts include the global spread of shale exploration, growing demand for floating production platforms, and the coming wave of five-year retrofits for offshore rigs launched in 2011-12.
For an industry-leading franchise growing nearly 10% annually, National Oilwell Varco sports a modest valuation of eight times trailing EBITDA based on its enterprise value. The balance sheet is clean, featuring more cash than debt.
This is a top-notch, well-diversified franchise with significant upside potential and shareholder-friendly management, worthy of a spot in our Conservative Portfolio.
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