We issued an updated research report on energy equipment maker National Oilwell Varco Inc. NOV on Aug 28, 2015.
National Oilwell Varco reported better-than-expected second-quarter 2015 results. The company’s healthy backlog and solid balance sheet are other positives. However, the ongoing oil price slump has affected the drilling equipment supplier’s activity levels through receding orders, which makes us cautious. This is reflected in National Oilwell’s current Zacks Rank #3 (Hold), which implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.
On Jul 28, 2015, National Oilwell reported impressive second-quarter results that beat the Zacks Consensus Estimate on cost-cutting measures. In order to survive in the unfavorable business environment, the company reduced operating cost considerably, primarily by reducing headcounts.
The company’s financial flexibility and strong balance sheet are real assets in this highly unstable economy. National Oilwell Varco ended the last quarter with a cash balance in excess of $2.5 billion and a very manageable debt-to-capitalization ratio of 18.5%.
However, we remain concerned about the company’s exposure to crude prices. The ongoing slump in commodity prices has curtailed energy drilling and equipment demand. The decline in demand has, in turn, affected the company’s revenues, earnings and cash flow.
The next few quarters are also expected to be challenging for National Oilwell in the floating production, storage and offloading (FPSO) space. This is because low commodity prices have prompted clients to reassess the scope of such projects and look for ways to reduce costs.
Stocks to Consider
Some better-ranked stocks from the broader energy sector are Warren Resources Inc. WRES, Alon USA Energy, Inc. ALJ and Alon USA Partners, LP ALDW. All theses stocks sport a Zacks Rank #1 (Strong Buy).
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