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National Oilwell Reports Earnings

Below is an analyst report on National Oilwell's most recent quarter. The stock price is down from a high of $92 to $25, but its business is as strong as ever.

The current selloff is so far overdone that companies with strong earnings are trading well below fundamentals. NOV is trading at a forward P/E below 5.

This is another instance of a great company that was owned extensively by the hedge fund community because of its strong balance sheet and growing earnings, but that was sold off because so many hedge funds have been liquidating their holdings.


NOV's Backlog Is at an All-Time High
By Tim Melvin

10/23/2008 12:35 PM EDT

National Oilwell Varco (NOV) once again exceeded analyst expectations. For the third quarter, the company reported earnings of $547.7 million, or $1.31 per share, compared to earnings in the same quarter of 2007 of $366 million, or $1.02 per share. Analysts had expected EPS of $1.30.

The results included charges of 4 cents a share for the Grant Prideco acquisition and 9 cents for losses from Hurricane Ike. Revenue for the quarter was $3.61 billion, an 18% increase over last year. Continued strong demand for drilling equipment raised the backlog to $11.8 billion compared to $10.8 billion at the end of the second quarter. Total new orders were $2.4 billion.

CEO Pete Miller said that he was very pleased with the results and that the company's strong balance sheet and exceptional products would allow it to continue to thrive even in the current weak oil and gas markets. Backlog levels were at an all-time high for the company.

In the third quarter, $1.4 billion of the backlog was recognized as revenue; an additional $1.5 billion is expected to be recognized in the fourth quarter and $5.7 billion in 2009. The backlog is a critical function of the rig services division. Only orders under contract are counted in the backlog.

Letters of intent and booked orders are not included. All contracts include a substantial down payment and a system of regular payments to National Oilwell Varco. If payments are missed, the company stops work. As of the end of the third quarter, the total cash received from the order backlog exceeded the company's project cost by 30%.

The backlog represents a diversified portfolio of projects, with 90% of the projects outside the United States. Also, 66% of the backlog is new build offshore rigs, 19% is offshore components, and 15% is for land-based drilling rigs. Although the company expects orders from Petroleum Services and Distribution divisions for the next several quarters as a result of the financial and oil market pressures faced by the industry, cash flow from the backlog and the strong balance sheet will allow the company to weather the storm. National Oilwell Varco has used its strong cash to strengthen its position.

The company has $1.7 billion of cash flow from operations and $1.5 billion of free cash flow so far in 2008. Management has used the cash to pay down debt, including repaying the entire $2 billion of debt resulting form the Grant Prideco acquisition so far in 2008. At the close of the quarter, the company had $1.8 billion of cash, with just $41.5 billion of debt. In addition, the company has $2.5 billion available under revolving credit agreements to take advantage of opportunities created by the difficult environment.

CFO Clay Williams noted on the call that capital-starved environments, which is what many envision for the oil services industry next year, can create spectacular acquisition opportunities. The strong quarter leaves the company well positioned going forward. Currently analysts expect National Oilwell Varco to earn $5.71 per share in 2009.