National Oilwell Varco -Stock Analysis Qualitative

1. Business Description (from google finance):

National Oilwell Varco, Inc. is a provider of equipment and components used in oil and gas drilling and production operations, oilfield services, and supply chain integration services to the upstream oil and gas industry. The Company operates through three segments. Its Rig Technology segment designs, manufactures, sells and services complete systems for the drilling, completion, and servicing of oil and gas wells. Its Petroleum Services & Supplies segment provides a variety of consumable goods and services used to drill, complete, remediate and workover oil and gas wells and service drill pipe, tubing, casing, flowlines and other oilfield tubular goods. Its Distribution & Transmission segment provides maintenance, repair and operating supplies and spare parts to drill site and production locations worldwide. 

2. How Does NOV Make Money? 

Revenues:

Rig Technology Segment: This segment designs, manufactures, sells and services complete system for the drilling, completion, and servicing of oil and gas wells. This segment offers a comprehensive line of highly-engineered equipment that automates complex well construction and management operations. Products include  topdrive, mud pump, pressure pumping equipment, drilling rig monitor, drawworks, pipe histering systems, workover rigs, land rig packages, blowout preventers, cranes, coiled tubing, wireline tubing. etc. 

Petroleum Services and Supplies: This segment provides a range of support equipment, spare parts, consumables and services. It sells and provides a variety of tubular services, composite tubing, and coiled tubing, inspection and reclamation services for drill pipe, casing, production tubing, suck rods and line pipe at drilling and workover rig locations. This segment also provides product and services that are used in the course of drilling oil and gas wells. The NOV Downhole business sells and rents bits, drilling motors and specialized downhole tools that are incorporated into the drill stem during drilling corporations. Furthermore, this segment offers solids control and waste management, and Coring Solutions (which enables the extraction of actual rock samples from a drilled well bore and allow geologists to examine the formations at the surface. 

Distribution and Transmission: The Distribution Services business unit provides supply chain management services to drilling contractors and exploration and production companies. It also stocks and sells a large line of oilfield products including consumable maintenance, repair and operating supplies, valves, fittings and other parts that are needed throughout the drilling, completion and production process.  NOV RigStore provides the installation, staffing and management of supply stores on offshore drilling rigs. 
The Transmission business unit supplies products and services used in the construction of water pipelines, lining and wind towers, progressing cavity pumps, grinders, filters, screens and a variety of artificial lift equipment. 

 Costs:

Raw Materials:Steel, other commodities and energy costs. 

Marketing costs.

Research and Development costs.

Engineering and Manufacturing costs. 

SG&A costs. 

3. How does the Company grow?

NOV grows both by organic growth and acquisition. Capital expenditure has been between 1.9% to 3.5% of revenues. Acquisition costs of $1 billion, 556 million and 573 million during 2011, 2010 and 2009. 

4. Moat: 

i. One-stop-shop. The firm supplies nearly all of the equipment needed for a land rig and much of the downhole equipment and consumables (which are being consumed at a greater rate than in the past) as well. 

ii. Scale and rig equipment dominance, particularly in deep-water rigs. NOV's equipment is on 90% of the world's rigs. 

iii. Premium products. 

Offshore drillers, it has the best and only source of rig equipment and the deep-water technology needed for new rigs to economically drill far more complex and deeper wells. 

iv.Diversified revenue stream

5.  3Cs:

(i) Customers: 

• Rig Technology: Drilling contractors, who provide the equipment, people and expertise to drill the wells, which can be either offshore or onshore. Such as Transocean and Diamond Offshore. Other customers include rig fabricators, well servicing companies, pressure pumping companies, national oil companies, major and independent oil and gas companies, supply stores, and pipe-running service providers. 

• Petroleum Services: Major and independent oil and gas companies, national oil companies, drilling and workover contractors, oilfield equipment and product distributors and manufacturers, oilfield service companies, steel mills, and other industrial companies. 

• Distribution Services: Major and independent oil and gas companies, national oil companies, drilling contractors, well services companies. 

• Transmission Services: Local, state and federal agencies, developers and general contractors. 
• Samsung Heavy Industries account for 12% of NOV's revenue. 

(ii) Cost structure: Fixed costs vs varying costs: Low operating leverage implies low fixed costs compared to various costs. (iii) Competitors: 

• Rig Technologies: Access Oil Tools;Aker Solutions AS; American Block; Cavins Oil Tools; Tesco Corporation; Vanoil; Huntings Ltd;

• Petroleum Services :Schlumberger; Baker Hughes; Halliburton; Weatherfold International; Shaw Cor Ltd; EDO Corporation; Patterson Tubular Services; Vallourec & Mannesmann; and Precision Tube (a division of Tenaris). 

• Distribution: WESCO International Inc;KS Energy Limited; Apex Distributions; CE Franklin; Wilson Supply ( a division of Schlumberger). 

• Transmission: Northwestern Pipe Company and a number of regional competitors. 

6. The selling process: 

• Rig Technology: Direct sales force and distribution service centers. 

• Petroleum Services: Direct sales force and through commissioned representatives. 

• Transmission and Distribution: NOV's own network of distribution service centers. 

7. Pricing Power:

Strong pricing power as disclosed by the Company: The Company has generally been successful in its effort to mitigate the financial impact of higher raw materials costs on its operations by applying surcharges to and adjusting prices on the products it sells. 

8. What’s the impact of govt regulations in the business and what’s the risk involved here?

The Business is subject to numerous federal, state and local laws, regulations and policies governing environmental protection, zoning and other mattes. The adoption of climate change legislation or regulations restricting emissions of greenhouse gases could increase its operating costs or reduce demands for NOV's products. 

9.What’s the spread of business between international and USA operations and the impact of foreign currency on earnings?

For 2011, 56% of the revenue NOV generated are international. NOV's foreign operations include Canada, Europe, Middle East, Africa, and Southeast Asia, Latin America. 

10. Important data to watch:

• West Texas Intermediate Crude
• Natural Gas Price
• Rig Counts. 

11. Does the balance sheet have a large amount of goodwill and intangibles?

As of 12/31/2011, goodwill totals $6.151 billion and intangibles totals $4.073 billion and total asset is $25.515 billion. Goodwill and intangibles represent 40% of total assets, which is not a small number. NOV is subject to future goodwill and intangibles impairment. 

12. Are there any quality issues with its products?

2010 Warranty Accrual: $52 million. Actual warranty amounts: $45 million

2011 Warranty Accrual: $40 million. Actual warranty amounts: $47 million

Warranty expense is very minor compared to sales (less than 1%).