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Bear of the Day: National Oilwell Varco (NOV)

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Prices for US crude oil have recently declined more than 20% from their 4-year highs reached last month, officially entering bear market territory. A combination of increasing US domestic production, rising stockpiles and a lower-than-expected impact from sanctions on Iran have all contributed to a sharp drop in prices over the last five weeks.

Lower oil prices are often positive for the economy as a whole and for the pocketbooks of consumers who can expect to pay less for gasoline at the pump, but they tend to be bad for the companies who supply oil producers.

Shares in National Oilwell Varco (NOV - Free Report) have also been punished over the same period, also shedding 20% of their value since the beginning of October. Though the company does not drill for oil or market petroleum products itself, it supplies a wide range of technology, equipment and services to the oil industry for exploration, extraction and production.

The US is now producing more than 11.5 million barrels/day and is forecast to top 12M/day by early in 2019. Saudi Arabia and Russia have also stepped up production lately in anticipation of a sanction related falloff in output from Iran. The US granted eight major exceptions allowing other countries – most notably India – to continue purchasing from Iran and the result is a global supply glut.

During periods of depressed prices, oil producers are less likely to make the investments in capital that will allow them to increase volumes in the future. A major component of models for the expected return on future projects is a forecast for the price of oil - and lower sales prices make initiating those projects look less advantageous.

The most recent quarterly report at NOV was a significant disappointment with the company turning in a breakeven net profit, missing the Zacks Consensus Estimate of $0.12/share.

NOV noted that they saw lower-than expected performance in several units because of higher steel and labor costs – a trend that looks likely to continue.

Thanks to subsequent negative earnings revisions, NOV is a Zacks Rank #5 (Strong Sell).

NOV is also currently in the Zacks Short List Portfolio, an algorithmic trading service intended to spot companies that are expected to underperform based on deterioration in a pre-determined set of financial metrics.

Though the outlook for the entire drilling equipment industry looks somewhat bleak right now, small-cap specialty manufacturer Superior Drilling Products Inc (SDPI - Free Report) , currently a Zacks Rank #2 (BUY), looks to be in a better position to weather the storm.

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