On Feb 11, 2013, we downgraded oilfield services behemoth National Oilwell Varco Inc. (NOV - Free Report) 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. .
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 - Free Report) and Patterson-UTI Energy Inc. (PTEN - Free Report) 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.