National Oilwell Varco Cements Solid Oil-Field Services

As last week neared its end, a pair of Houston-based rig equipment manufacturers, National Oilwell Varco (NYS: NOV) and Cameron International (NYS: CAM) , reported higher-than-expected earnings, effectively drawing a solid week for the major oil-field-service companies' to a close.

A cap on oil-field services' stellar quarter
The sector's biggest member, Schlumberger (NYS: SLB) , had joined the group's third-largest company, Baker Hughes (NYS: BHI) , a week earlier by leading off in reporting and handily outdistancing analysts' expectations. And while BP (NYS: BP) will wrap up reporting for big oil on Tuesday -- and despite the presence of a number of independent producers still waiting in the wings -- Varco and Cameron left little doubt that the services group is generally weathering current geological, regulatory, geopolitical, and economic conditions for energy more effectively than are its exploration and production partners.

In the interest of telling a complete story, let's concentrate on the results turned in by National Oilwell Varco here. For the quarter, the company earned $605 million, or $1.42 per share, compared with $481 million, or $1.13 a share for the comparable quarter in 2011. But if you back out charges, the company earned $1.46 per share for the quarter, clearly beating the analysts' $1.40 expectation. Its revenues rose 35% year-on-year to $4.7 billion.

All three of Varco's units contributed to the solid quarter. Rig technologies checked in with a more than 10% year-on-year hike in its operating profits, while petroleum services and supplies bested the second quarter of 2011 by an impressive 57.8%. Distribution and transmission more than doubled its operating results from a year ago.

A bulging backlog
At quarter's end, National Oilwell Varco's order backlog was 46% above the level at which it completed the first half of the 2011. Of the latest figure -- $11.3 billion, 14% was headed for land, and 86% was intended for offshore. Geographically, 92% was scheduled for international markets, while 8% will be used domestically.

Commenting on the all-important backlog and the likelihood that it'll continue its impressive growth, the company's CFO Clay C. Williams noted that "there are a number of drilling equipment packages for Brazil that have not yet been awarded. Additionally, there is interest in construction of floaters in Asia to fill the gap between now and the delivery of the rigs out of new shipyards in Brazil." Further, he observed the existence of "growing interest in new deepwater frontiers in West Africa, East Africa, a recovering Gulf of Mexico, the North Sea, and Southeast Asia."

At the same time, Williams also said, "We have been investing heavily in our businesses, both organically and through M&A (mergers and acquisitions)." Indeed, in just the most recent quarter, the company doled out about $2 billion for six purchases. Specifically, it acquired:

  • Wilson Distribution & Transmission, a Canadian electrical wire and cable distributor

  • CE Franklin, another distributor located north of the border

  • NKT Flexibles, a maker of subsea production equipment

  • Rig Technology, yet another Canadian company that provides well-servicing equipment

  • Zap-Lok Pipeline Systems, a manufacturer of low-cost mechanical pipe connection technology

  • Well Sites Services, a small company that holds patents for employing Varco's water-based drilling fluids

Included in the NKT acquisition was a new flexible pipe manufacturing unit in Brazil.

Still on the prowl
The active shopping spree is likely to continue. As Williams also said during the company's call:

We expect to continue to find and close attractive acquisitions and believe we find ourselves in a sweet spot in M&A. Sellers have the right mix of prosperity and fear, and we have a high level of conviction in our outlook for oil-field markets. We also have a strong balance sheet and a proven record of solid cash flow. As a group, (the) acquisitions closed in the second quarter illustrate well our expected returns and our strategies around capital deployment.

According to Williams, the company is also continuing "to invest in organic opportunities around the world, expanding manufacturing facilities for blowout preventers, top drives, drill pipe tubular coating, coil tubing units, pumps, power, sections, downhole tools, composite pipe, marine connectors and aftermarket services." And beyond that, the company is progressing with a new test well research facility "to ensure (its) continued technical leadership on a variety of products."

There are indications that the third quarter could represent yet another high water mark for National Oilwell Varco. With demand for subsea equipment expanding from the soft levels of 2011, the company has received awards for about $200 million in turret mooring systems following the close of the June quarter. Those contracts will be reflected in the third quarter.

The Foolish bottom line
For my money, National Oilwell Varco's results simply illustrate that, because of their geographic diversity and relative immunity to short-term changes in commodities prices, oil-field services stocks should be prominent in Foolish energy portfolios. With few members of the group expanding more rapidly or entering more new offshore venues than this solid company, I'd urge Fools to monitor its expansion and progress closely by adding it to My Watchlist.

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Fool contributor David Lee Smith doesn't have financial interests in any of the companies named in this article. The Motley Fool owns shares of National-Oilwell Varco. Motley Fool newsletter services have recommended buying shares of National-Oilwell Varco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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