On Feb 11, 2013, we downgraded oilfield services behemoth
National Oilwell Varco Inc.
(
NOV
) to Underperform from Neutral, based upon a number of near-term
challenges. Our bearish investment thesis is supported by a Zacks
Rank #4 (Sell).
Why the Downgrade?
With markets remaining competitive and pricing likely to be soft,
the company's margins are expected to suffer in the next few
quarters. The recent weakness in the North American onshore
drilling environment has also been a negative. Furthermore, we
expect shares of National Oilwell Varco to remain depressed until
it fully works its way through the acquisition of
Robbins & Myers Inc.
(
RBN
).
Causes for Concern
With new competitors entering the market and shrinkage of capital
expenditure spending by the drilling contractors, National
Oilwell Varco has seen its new equipment package pricing fall
around 10% below the levels achieved during the peak of
2007-2008.
In particular, the company's margins have been hit hard by the
ongoing North American drilling slump. We expect the situation -
characterized by tepid demand and weak pricing - to normalize
only sometime in late 2013.
National Oilwell Varco's proposed $2.5 billion acquisition of
smaller rival Robbins & Myers has been delayed due to the
extension of antitrust reviews by the U.S. and Canadian
officials. This has been a drag on the energy equipment
contractor's share price.
The company's widespread international operations expose National
Oilwell Varco to certain risks that include embargoes and/or
expropriation of assets, exchange rate risks, terrorism and
political/civil sentiment, etc.
Stocks that Warrant a Look
While we expect National Oilwell Varco to perform below its peers
and industry levels in the coming months and see little reason
for investors to own the stock, one can look at
McDermott International Inc.
(
MDR
) and
Patterson-UTI Energy Inc.
(
PTEN
) as good buying opportunities. These energy equipment suppliers
- sporting a Zacks Rank #2 (Buy) - have solid secular growth
stories with potential to rise from current levels.
MCDERMOTT INTL (MDR): Free Stock Analysis
Report
NATL OILWELL VR (NOV): Free Stock Analysis
Report
PATTERSON-UTI (PTEN): Free Stock Analysis
Report
ROBBINS & MYERS (RBN): Free Stock Analysis
Report
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