NOV Downgraded to Strong Sell

On Mar 12, Zacks Investment Research downgraded oilfield services behemoth National Oilwell Varco Inc. ( NOV - Analyst Report ) to a Zacks Rank #5 (Strong Sell).

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.

Why the Downgrade?

With new competitors entering the market and shrinkage of capital expenditure spending by the drilling contractors, NOV – which ranks ahead of Cameron International Corp. ( CAM - Analyst Report ) as the biggest U.S. maker of oilfield equipment – has seen its new equipment package pricing fall around 10% below the levels achieved during the peak of 2007–2008.

In particular, NOV’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.

Additionally, the company’s widespread international operations expose NOV to certain risks that include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc.

As a result of these bearish factors, the tendency for a downward estimate revision has been more obvious in recent times. In fact, the Zacks Consensus Estimate for the first quarter has moved down by 14 cents (or 9%) to $1.39 per share over the last 60 days. The Zacks Consensus Estimate for the full year is $6.13, down 39 cents (or 6%) in the same timeframe

Stocks that Warrant a Look

While we expect NOV 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 Range Resources Corp. ( RRC - Analyst Report ) and EPL Oil & Gas Inc. ( EPL - Snapshot Report ) as good buying opportunities. These domestic energy explorers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.