National Oilwell Varco (NOV)

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

National-Oilwell Varco organizes its operations in three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services. The Rig Technology segment (accounted for 56% of the company's first half of 2008 revenue) designs and manufactures integrated drilling systems and components for land and offshore drilling rigs. The Petroleum Services & Supplies segment (31%) consists of a number of the company's services and consumables, including inspection and quality assurance services for tubular goods, solids controls and rig instrumentation. The Drilling Services segment (13%) sells and rents technical equipment used in the drilling process.

In December last year, National-Oilwell Varco announced the acquisition of drilling-products maker Grant Prideco (Ticker: GRP, Not Covered) in a stock and cash deal totaling about $7.37 billion. The transaction closed in April this year. Grant Prideco's operations have been included in the company's Petroleum Services and Supply segment. This segment now includes drilling product and services, ReedHycalog, XL systems, and IntelliServ products of Grant Prideco. Given the lack of product overlap between the two companies (Grant Prideco is primarily a drill-pipe and bits manufacturer with a growing international footprint), the transaction significantly increases the size and scope of National-Oilwell Varco's product portfolio.

With oil and gas producers' cash flows buoyed by high commodity prices, capital outlays for exploration and production activities should continue trending up over the next few years. This is showing up in increased demand for drilling equipment, which, despite some recent weakness, has helped increase the North American rig count to prior cyclical highs. The rise in demand has enabled drilling contractors not only to put back older equipment into service, but also order new drilling rigs. With limited excess drilling capacity and dayrates growing towards replacement-cost levels, demand for constructing new rigs (newbuilds) and refurbishing existing ones is steadily increasing.

National-Oilwell Varco remains well positioned to capitalize on these positive trends, being a major capital equipment supplier to the drilling industry. It is the largest manufacturer of land rigs in the world and is also a major manufacturer of critical drilling equipment for offshore rigs. Additionally, the company's large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts, and other expendable products. The company s Petroleum Services & Supplies group is the leading provider of mud pump liners, valves, pushrods, fluid modules and other parts. The company is also the leading provider worldwide of drilling motors, the predominant technology used to drill horizontally. Horizontal drilling is the high-growth end of the U.S. land drilling, where National-Oilwell Varco remains well positioned. The recent Grant Prideco (GRP) acquisition further strengthens the company's cyclical leverage through an expanded and much-diversified product portfolio.

National-Oilwell Varco continues to invest in technology to improve the quality of its product portfolio. It is expected to invest more than $400 million on capital projects this year, up from last year's total of around $250 million. Notable among its new products are the TDX1250 top drive, the CRT350 casing running tool, and the Drake rig. The TDX1250 top-drive technology delivers industry-leading 105,000-foot pounds of continuous torque in a very compact and easily maintained package. The CRT350 casing running tool is designed to deliver its customers safer and faster casing operation. The Drake rig (a 1,000-horsepower rig with a three-piece telescoping mast and a rugged design that can accommodate some of the harsh terrains) is designed specifically to accommodate the tight road restrictions and small location that its land contractors have been demanding.

The company's capital equipment order backlog at the end of the second quarter of 2008 was $10.8 billion (traditional backlog that does not include any contribution from the Grant Prideco acquisition), up from $9.9 billion at the end of the first quarter of 2008 and $9 billion at the end of 2007. During the second quarter, the company took in $2.2 billion of new orders. Only about 13% of the current backlog is land-drilling related and 87% is offshore and 91% of the backlog is destined for international markets. Out of the total backlog of $10.8 billion, a little over $3 billion is scheduled to flow through to revenue in remaining part of 2008, about $5 billion in 2009, with a balance of nearly $3 billion thereafter. This provides good visibility to the company's earnings and cash flows potential over the coming quarters.

Another important feature of the company's business is its growing international presence as evident from the large international component of its record backlog (approximately 91% of its current backlog is international). There has also been strong interest in building offshore rigs for promising new deepwater basins like Brazil's Santos basin where Petrobras has announced two major discoveries recently. For 2008, National-Oilwell Varco expects continued broad international growth from its strong presence in China, the Middle East, North Africa, and Russia. Management is particularly bullish on Russia, as there is a tremendous demand for its higher technology drilling equipment that has a proven track record in drilling and safety performance. Management expects a potential of between 200 and 250 land rigs for this market over the next five years. In China, the company has completed a few offshore derricks, executed a very large sale order of high-tech equipment. All these initiatives will assist the company to have great market share in China. Apart from this, the company continues to get increased land rig business from the Middle East and North Africa. The company is in the process of expanding its current capabilities in the Middle East to extend to a four-rig pad facility. This expansion will be fully operational in the second quarter of 2009. Another area of interest for NOV is South America, where it has been successful in getting new land rigs in Mexico, in Argentina and in other areas in South America, and offshore rigs in Brazil's Santos basin.

National-Oilwell Varco has established quite a track record of making and executing acquisitions. Since 1997, National-Oilwell has completed more than 40 acquisitions. Since its merger with Varco International, the company has emerged as a major one-stop-shop for the drilling industry, providing both capital equipment as well as support and supply services. The Varco transaction has not only increased the combined company's footprint in the global oil patch, but also brought in new product and service offerings, such as pressure control equipment, tubular inspection and coating services, waste management and disposal services and pipeline inspection services. Additionally, integration of the two companies' selling, general, and administrative structures resulted in cost savings and improved prospects for cross over sales. Given this track record of smooth integration of acquired businesses/companies, we are very confident in management's ability to integrate the newly-announced Grant Prideco acquisition. We estimate that the management-projected synergy estimate of $40 million is on the conservative side. On the whole, this transaction makes National-Oilwell Varco shares a compelling investment given the company's increased leverage to the very lucrative oilfield machinery cycle.

Read full report on National-Oilwell Varco, Inc.

Company overview provided by

Company Products/Services/Markets:

Enter Company Products/Services Here

Strategy:

Describe Key Aspects of Company's Strategy Here

Competitors:

Enter Competitors Here

Industry Trends and News:

Enter Industry Trends and News Here

Acquisitions, Divestitures, Major Transactions, Spin-offs :

Enter Acquisitions, Divestiures, Major Transactions, Spin-offs Here

Management – Pros & Cons, Changes:

Enter Management - Pros & Cons, Changes Here

Buy Rationale:

Enter Buy Rationale Here

Sell Rationale:

Enter Sell Rationale Here