National Oilwell Varco (NOV, Financial), the massive multinational oil company based out of Houston, Texas, has been a solid long-term stock. However, it now appears that that run is at an end.
The maker, producer and facilitator of all things oil has continued to struggle in recent years due to the sharp drop in oil prices. Revenue and earnings both dropped significantly, and are just now starting to recover, tepidly. The most recent quarter saw yet another loss. This hole may be one that National Oilwell cannot climb out from; investors might be best served leaving the oil giant in its hole.
Recent struggles are just the beginning
During the first quarter of 2018, the general American economy continued to hum along, and the stock market even saw modest gains despite choppy political headwinds. Meanwhile, National Oilwell continued its struggle, posting lower than expected first quarter revenues, as well as an overall loss for the quarter. National Oilwell announced revenues of $1.8 billion, fully 8% below industry expectations of $1.95 billion.
The company cited several specific reasons for why earnings were in the red, particularly highlighting the lower-than-expected progress on getting new offshore rigs constructed, as well as delays in oil production equipment. Additional reasons for coming in below expectations were deferred orders and a lack of customers re-upping their orders, largely due to weakened oil production and low oil prices.
If this weak revenue trend continues, National Oilwell will start to face significant trouble. Investors will quickly become weary of the stock if performance is middling at best. Hence, it might be time to steer clear.
With low oil prices, performance has stumbled
National Oilwell’s financial performance over the last three years has been a mixed bag. Massive losses occurred from 2015 to 2016 when oil prices cratered, and those numbers have seen no significant recovery. Total revenue dropped by 50% from $14.8 billion in 2015 to $7.3 billion in 2016. For a historically high-performing giant of the oil business, this was a very significant, almost debilitating blow.
In 2017, revenue increased, eking up to $7.3 billion, less than a 1% increase over the previous year. And now, in 2018, with a weak first quarter already on the books despite comparative recovery in the industry more broadly, National Oilwell looks poised to continue its recent history of tepid growth.
While gross profit increased significantly from 2016 to 2017, from a loss of $101 million to a gain of $892 million, it was still significantly below the more than $3 billion posted in the halcyon days of 2015. And, despite strong revenue in 2015, the last three years have seen three straight overall losses for the company. Net losses for the past three years were $769 million, $2.4 billion and $237 million, respectively.
Further, there appears to be no coherent strategy for righting the stalling ship. Management has argued that more time is needed for such a large undertaking, but more than two years into the new normal and there has been no visible plan for a turnaround in action.
Is there any silver lining?
National Oilwell is still one of the nation’s critical oil industry companies despite its contraction and significant losses. It continues to provide important products and services to oil producers throughout Texas and the South.
Optimism might be garnered for National Oilwell if management can clearly articulate a strong strategy for returning the company to growth moving forward. If new, innovative product approaches are adopted, the company has a shot at success even if it cannot return to its once very dominant position.
However, the deck is stacked against the company. Oil prices are still low and the investment wave of the future is focused on renewable sources of energy as the next great, "sexy" thing. We cannot say for sure where National Oilwell will be in three or four years, but the current trajectory is not a rosy one. It is poised to do more of the same, and the same simply is not good enough.
Despite a great deal of uncertainty, one thing is clear: National Oilwell will not succeed (at least in the short term) unless oil prices hike again.
Verdict
All in all, we believe National Oilwell Varco is a stock to avoid. The company has not shown a robust ability to create consistent revenue in the face of dropping oil prices. We do not see a general market trend increasing oil prices sufficiently in the near-term horizon and, therefore, do not see a strong comeback in the offing. Even if National Oilwell is able to produce middling growth soon, it will likely not be enough to make it particularly attractive. This is one is worth leaving on the shelf.
Disclosure: I/We own none of the stocks discussed in this article.
