National Oilwell Varco NOV is known as one of the best-managed oilfield services companies in the business. Management’s cost containment efforts and pristine balance sheet have buoyed the company amid the rout in oil prices. I have been an NOV bear for over year now, claiming the stock was overvalued given its earnings prospects. However, bulls have ignored me given [i] the company’s consistent dividends and [ii] an eventual rebound in oil prices.
A commenter on my previous article had this to say:
It’s a great company over the long haul. I’m just concerned that it will get spanked so badly that they will have to cut the dividend … At some point, drilling will start to increase (no clue when) and NOV will be there to reap the rewards. Until then, I’m trying to be cautious.
In my opinion bulls’ worst fears — a dividend cut — could be confirmed this year. Management practically has to cut the dividend in order to keep liquidity from falling further.
Diminution In Rig Systems Has Caught Up With NOV
Rig Systems sells land rigs, offshore drilling equipment and components. At 37% of revenue it is the company’s largest operating segment. It is also its worst performer. With oil prices sub-$50 drilling projects have not been economical for certain clients. The company has delayed delivery of rigs in order to help clients stem cash burn. Rig Systems’ revenue has free fallen in the process.
Rig Systems revenue was down 32% sequentially in Q4, versus an 18% decline for total revenue. Y/Y Rig Systems is off an eye-popping 60%, versus a 52% decline in total revenue.
Cash Flow From Operations Is Down 60% Since 2013
In turn, that has hurt National Oilwell’s earnings and cash flow.
