National Oilwell Varco, Inc. (NOV - Free Report) recently inked a deal to form a joint venture (JV) with Saudi Aramco for manufacturing onshore rigs and equipment in Saudi Arabia. The latest development will brighten prospects of the energy services sector in Saudi Arabia and boost future growth potential of National Oilwell.
The Rig-Building JV Deal
The JV, which will serve as a major hub for high-specification rigs with breakthrough technologies, aims to construct up to 10 onshore drilling rigs annually. It will also supply advanced drilling equipment, spare parts and packages for jack-up rigs, along with providing repair and maintenance services for the sophisticated drilling technologies.
Located at Ras Al Khair on the kingdom’s east coast, the facility will lead to the creation of around 1,000 jobs. While the project is likely to be completed in 2020, the first rig is expected to be delivered in 2021.
Houston-based National Oilwell will own 70% stake in the JV and Saudi Arabia’s state-owned oil/gas entity will hold the remaining 30%. The tie-up is also supported by Saudi Aramco’s partnership with Nabors Industries Limited (NBR - Free Report) , which has already agreed to purchase 50 onshore rigs over a period of 10 years.
Deal Motive for Saudi Aramco
With the deal leading to the creation of high-specification land rigs along with providing after-market services in Saudi Arabia, it will advance the kingdom’s oil services industry. It will help in encouraging trade with locally produced goods and services. Of late, Saudi Aramco has entered into strategic alliances with various U.S. oil companies including Schlumberger Limited (SLB - Free Report) , Halliburton Company (HAL - Free Report) , Weatherford International PLC, among others, to promote bilateral business between the two countries.
The deal is in sync with Saudi Arabia’s reform program “Vision 3030,” as the JV will bolster the kingdom’s manufacturing capabilities, and spur economic diversification along with the creation of jobs. Under the reform plan, the country aims to fuel economic modernization and foreign investment. Saudi Aramco’s plans for IPO are also part of Vision 3030, as the company intends to diversify globally.
While the IPO-offering plans have made a slow progress, the company is gearing up for downstream efforts, and aiming to maximize value by making investments in refineries and chemical plants. Saudi Arabia is taking a keen interest in investing in Texas petrochemical plants, and the refineries in Corpus Christi and Port Arthur. In fact, it is planning to invest $18 billion in its U.S. subsidiary, Motiva Enterprises LLC's Port Arthur refinery that has a processing capacity of 603,000 barrels of crude per day.
Just a week ago, Saudi Aramco announced its collaboration with Abu Dhabi National Oil Company (ADNOC) to foray into the retail petroleum business in India. Both the company signed a memorandum of understanding (MoU) with a consortium of three Indian national oil companies for investing in the development of $44-billion mega refinery in Ratnagiri.
Encouraging Prospects of National Oilwell
National Oilwell Varco is one of the biggest manufacturers of drilling equipment in the world, boasting an impressive business model. Strong demand for the firm’s onshore-focused Wellbore unit offers strong upside potential. The latest JV with Saudi Aramco is expected to boost the prospects of National Oilwell going forward, thereby driving revenues and earnings.
While offshore-levered Rig Technologies is still bearing the brunt of reduced activities and declining backlog, the gradual uptick in the oil prices is likely to spur a recovery in the offshore segment in the coming period. In fact, last month, National Oilwell inked a deal to acquire a Dutch offshore rig design and engineering company, GustoMSC, boosting the former’s supply chain. The deal is considered as a vertical integration. The acquisition strengthens National Oilwell’s hold in the offshore industry, expanding equipment-providing business to the upstream companies.
National Oilwell currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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