Will National Oilwell Varco Underperform the Industry ETFs?
What Challenges Does National Oilwell Varco Face before Recovery?
National Oilwell Varco’s returns and key drivers
Oilfield equipment and services (or OFS) companies such as National Oilwell Varco (NOV) are affected by rig counts and energy prices. In the past year, West Texas Intermediate (or WTI) crude oil has fallen ~27%.
National Oilwell Varco’s one-year returns, -37% net of dividends, are worse than the industry ETF Market Vectors Oil Services ETF’s (or OIH) -24%. NOV makes up 5.1% of OIH. The Energy Select Sector SPDR ETF (XLE), the broader energy industry ETF, has produced a -17.6% return.
NOV significantly outperformed the US rig count, which fell 57% in one year. NOV has underperformed the SPDR S&P 500 ETF (SPY), which has returned 2.7% during the same period. NOV’s peer Forum Energy Technologies (FET) has also outperformed NOV, producing a -27% one-year return net of dividends.
CARBO Ceramics (CRR), however, underperformed NOV, producing a -52% return in the past year. For a look at the companies with the best growth expected in 1Q16, read Market Realist’s article The Top Growth Oilfield Services Stocks for 1Q16.
How related are NOV and crude oil prices?
The correlation coefficient between National Oilwell Varco’s stock price and crude oil prices from March 2015 to the present is 0.71. This indicates a relatively strong degree of correlation between crude oil prices and National Oilwell Varco’s stock price.
Analyzing NOV’s performance and its strategies
Uncontracted newbuild rigs, falling offshore activities, significant order cancellations in Brazil, and ongoing energy market uncertainty in North America remain National Oilwell Varco’s concerns. National Oilwell Varco’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) has risen significantly in the past year. In the short- to medium-term, analysts expect National Oilwell Varco’s earnings to fall.
On the other hand, a better mix of spares to service and repair work can partially mitigate NOV’s revenue and margin falls in 1Q16. NOV’s free cash flow has been strong in the past three years, and its steady dividend has shown its management’s confidence in its balance sheet strength. NOV’s outlook remains challenging prior to crude oil’s price recovery.
Browse this series on Market Realist: