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NOV Upgraded to Hold

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On Mar 16, Zacks Investment Research upgraded oilfield services behemoth National Oilwell Varco Inc. (NOV - Free Report) to a Zacks Rank #3 (Hold).

Why the Upgrade?

Houston, Texas based NOV boasts of a healthy backlog, solid balance sheet and strength in international operations, particularly in the Middle East and Brazil. The just-completed Robbins & Myers acquisition will further boost NOV’s earnings visibility by expanding its blowout preventer product line; a critical safety machine for a well. The recent influx of offshore rig awards adds to the positive sentiment.

Detailed Analysis

NOV is one of the biggest manufacturers of drilling equipment in the world with an impressive business model. The company’s large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts and other expendable products.

NOV’s recent $2.5 billion acquisition of smaller rival Robbins & Myers will allow the energy equipment contractor to broaden scale and scope of the solutions that it offers to oil and gas customers worldwide. In particular, the move will help NOV to strengthen its position as a supplier of blowout preventer (a critical safety machine that can shut a well off in case of an emergency), as Robbins & Myers is the fourth-largest maker of such devices.

The growing search for oil into new deepwater frontiers has significantly increased the demand for rigs capable of tackling the immense challenges of drilling in a mile or more of water. NOV is well positioned to supply such technologically-advanced production equipment.

However, with new competitors entering the market and shrinkage of capital expenditure spending by the drilling contractors, NOV – which ranks ahead of Cameron International Corp. 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.

Stocks That Warrant a Look

While we expect NOV to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Calumet Specialty Products Partners L.P. (CLMT - Free Report) and Marathon Petroleum Corp. (MPC - Free Report) as good buying opportunities. These oil refiners and marketers – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with potential to rise significantly from current levels.

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