Last quarter, we saw
National Oilwell Varco (NYSE: NOV)
taken down a notchfollowing a 9% sequential contraction
in its backlog. With not a single order coming in for a
"floater" (i.e. deepwater rig) this time around, the company
had a similar tale to tell in its third-quarter conference
call yesterday.
Revenue for the period came in at $3.1 billion,
representing a small sequential uptick. The big-ticket rig
technology segment racked up $2 billion in sales, with $1.6
billion coming out of backlog. NOV delivered seven offshore
rigs in the quarter, taking this cycle's total to 66. The
firm is busily rigging up another 33, so this rig-building
game is hardly played out. A glance at the fleet status
reports of deepwater drillers like
Transocean (NYSE: RIG) or
Ensco (NYSE: ESV) will confirm that.
There were 12 new rigs awarded term contracts in Brazil in
2008 that NOV is still holding out for. Financing is just
tough right now. Banks are now requiring 25% to 30% equity in
these projects. If you're trying to build a rig without a
contract in hand, you can forget about a loan guarantee from
your local government or trade finance institution. No
wonder, then, that NOV's factories are running at 50% to 70%
of 2008 levels.
Long-term deepwater demand is clear enough. Just look at
the likes of
CNOOC (NYSE: CEO),
ExxonMobil (NYSE: XOM), and
BP (NYSE: BP) jostling for a
place at the tablein Ghana. As frontiers open up, the
world will need a lot more deepwater rigs. What we have on
our hands is a lull within a long-term fleet overhaul.
In the meantime, NOV has more breathing room to perform at
a very high level on its current orders. The rig technology
group posted record margins in the quarter, and the firm
overall is generating copious free cash flow. As for taking
names, the
oil services spongeis looking at $600 million in
acquisitions this year, barring a breakthrough with one of
the $1 billion-range offers that have so far been
rebuffed.
NOV will come out of this downturn in very fine shape. I
have to reiterate my call that there's no reason to
cry for this rig builder.
This article was originally published as
Stacking Cash and Taking Names in the Oil Patchon
Fool.com
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