NOV: Energy Supplier Sees Some Energy Itself (NYSE:NOV)

NOV Inc. (NYSE:NOV), or perhaps still better known as National Oilwell Varco to many investors, has failed to provide a compelling long-term investment opportunity to many investors. After a period of nearly 10 years since the (shale) peak in 2014, the company is seeing signs of life again with growing sales and margins, which combined with a stagnant share price, might open the door for long-term opportunities here.

Serving The Energy Industry

NOV provides technology-driven solutions for the energy sector with its workforce of some 32,000 workers who are active in more than 500 locations across more than 60 countries. Some 85% of its revenues are generated from providing services to the traditional oil and gas sector, complemented by renewables and industrial customers.

The company’s solutions generally focus on efficiency, automation, decarbonization, treatment of drilling waste, and providing attractive unit economics in what generally are tougher places to work.

Despite these upbeat words, it is the long-term track record of NOV, which is uneven, to say the least. Revenues were reported at $21 billion in 2014, at a time when U.S. shale oil peaked, at least in enthusiasm. Revenues subsequently plunged to $7 billion in 2016, and ever since have largely come in between $5.5 and $8.5 billion.

The company was very profitable in 2014, posting operating profits of $3.7 billion at the time, on various occasions was posting losses in the years which followed, but just as revenues have recovered in 2023, the same applies to profitability as well. This has been well reflected in the underlying share price developments, as an $80 stock in 2008 and 2014 has largely traded in a $15-$25 trading range lately, reflective of the worsening fundamental performance.

Establishing A Base

In February, NOV reported its 2023 results, a year in which revenues rose by 18% to nearly $8.6 billion. Growth slowed down during the year, as fourth quarter sales were up 13% to nearly $2.4 billion. In terms of activities, revenues are split pretty evenly between the three segments under which NOV reports its results: a $3.2 billion wellbore technologies business, a $3.0 billion completion & production solutions business, and a $2.6 billion rig technologies. While the revenue contribution of each of these segments is quite similar, the margin profile and capital intensity of these businesses varies a great deal more.

Operating profits for the year rose from $264 million in 2022 to $651 million. This number comes ahead of interest expenses, taxes and equity income in affiliates. The company posted GAAP earnings of $993 million, equal to $2.50 per share, but this was only the result of the release of valuation allowances on deferred tax assets. If I apply a 25% tax rate to the applicable earnings numbers, I peg net earnings around $450 million, equal to $1.15 per share.

Despite the huge improvement in operating profits for the year, fourth quarter profits were actually dead flat at $161 million. Nonetheless, there have been structural improvements, with absolute EBITDA and EBITDA margins being the highest since 2015, nearly a decade ago.

The company ended the year with a net debt load of $1.18 billion, resulting in a relatively modest 1.2 times EBITDA multiple as the company posted adjusted EBITDA equal to a billion in 2023.

Despite an anticipated decline in demand in North America in 2024, NOV expects growing adoption of its advanced technologies and continued growth in international and offshore markets, more than offsetting weaker demand in North America. Moreover, working capital efficiencies, alongside the anticipated growth, should drive robust cash flow generation.

With 397 million shares trading at $20, the company commands a near $8.0 billion equity valuation, and a $9.2 billion enterprise valuation, with the business being valued at just over 1 times sales and about 9 times EBITDA.

A Small Sale

While NOV did not report the transaction, NOV reached a deal in March with Arcosa (ACA) to sell its Ameron Pole Products business, in a deal which closed in April already.

NOV will sell the manufacturer of engineered, premium concrete and steel poles in a deal valued at $180 million, equal to about 2% of its own enterprise valuation. With the business generating $94 million in sales, the company fetched a premium sales multiple of near 2 times sales and about a 9 times EBITDA multiple, with this metric coming in at $20 million.

All in all, about a percent in sales and two percent in EBITDA will leave the door for what seem to be reasonable valuation multiples, as leverage will come down from 1.2 times to about 1.0 times EBITDA. Given the modest size of the transaction, this bolt-on transaction will not alter the investment case in any meaningful way.

And Now?

The reality is that NOV has been hoping and touting for a rebound for a while, as revenue growth in 2023 has been solid, as the same applies to operating margin improvements, although these are still stuck in the mid- to higher single digits.

While the fourth quarter growth was a bit less convincing, growth is still reported as the company guided for 2024 sales to grow by another 4-8%. This suggests that sales are seen between $8.9 billion and $9.3 billion (largely) which undoubtedly should result in earnings improvements. This comes as the company sees continued margin improvements, although it is difficult to read what exactly this means in terms of the numbers.

If EBITDA might improve some 10-20%, that could boost pre-tax profits by $100-$200 million (working on assumptions) here, which works down to $0.25-$0.50 per share on a pre-tax basis. This would lay down a roadmap for earnings to improve to roughly $1.25-$1.50 per share this year.

Moreover, there might be upside as geopolitical turmoil and uncertainty has recently manifested itself into higher oil prices, as this could spur more capital expenditures of producers (over time). Furthermore, the company is not alone in this situation, as undisputed industry leader Schlumberger (SLB) has seen tough times as well. It recently opened its checkbook to engage in consolidation, as it announced a big $7.8 billion deal to acquire ChampionX (CHX).

Hence, it really feels as if operating momentum and interest for the sector might be returning as quite frankly shares have been lagging while some operating green shoots have been seen. The stagnant share price might have to do with continued focus on ESG by the investment community, something, which might depress long-term valuation multiples. At the same time, it can provide an opportunity as well as NOV grows the industrial, renewables and alternative businesses as well.

Amidst all this, now might be a better entry point for NOV Inc. shares (with a longer-term view) than we have seen in many years. Amidst all this, I am taking a very close eye on NOV Inc. shares here, awaiting the first quarter results (expected post-market on April 25th) before reconsidering this neutral but constructive stance.