Can This Company Help Investors Strike Black Gold?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As the new year begins, I would like to pinpoint a leading provider of equipment and components utilized in oil and gas drilling and production operations: National-Oilwell Varco (NYSE: NOV).

Strengths:

  • Stable Revenue Growth: In 2006, National-Oilwell reported revenue of $7.03 billion; in 2011, the company announced revenue of $14.66 billion, representing year over year annual growth of 15.83%, a trend that is anticipated to continue into the future, with projections placing 2014 revenue at $24.82 billion, due mostly to an increase in global energy demand and the introduction of new technologies
  • Institutional Vote of Confidence: 90% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future
  • Dividend: Currently, National-Oilwell pays out quarterly dividends of $0.13, which puts the dividend as yielding 0.78% annually
  • Reasonable Valuation: At the moment the company carries a price to earnings ratio of 11.91, a price to book ratio of 1.59, and a price to sales ratio of 1.92, all of which point to a company trading with a fairly reasonable valuation
  • Double Digit Margins: National Oilwell holds a net profit margin of 13.61%, representing a strong and profitable company, this strong signal is due to National Oilwell’s pricing power
  • Cash & Equivalents: Oilwell currently holds about $1.70 billion of cash and cash equivalents on their balance sheets, a major upside to the business  

Weaknesses:

  • Debt: At the moment, Oilwell carries about $1.18 billion of debt on their balance sheets, a minor disadvantage to the company; however this debt is outweighed by the cash and cash equivalents on their balance sheets
  • Margin Compression: Over the past five years, Oilwell’s revenue has outgrown its gross profit, representing margin compression, a major weakness in the company
  • Operating Expenses: When a business expands such as Oilwell’s has, the costs related to operating that business will expand, however over the past five years operating expenses have outgrown revenues, a troubling sign

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 2009, Oilwell has consistently raised its payouts, a trend which is highly expected to sustain into the future
  • Acquisitions: In July 2012, Oilwell acquired CE Franklin Limited, and further acquisitions in the future could introduce new technologies into the company and fuel growth
  • Innovations in Technology: Oilwell is highly invested in producing innovative and new technologies to its customers, and further innovations could spark growth
  • Growth in American Energy Market: A recent international energy agency report predicts that the United States will pass Saudi Arabia as the world’s largest oil producer by 2017, and with growth in the US energy industry will come increased opportunities for Oilwell to expand and meet rising demand
  • Increase in Global Energy Demand: The global demand for energy is rising, and is only set to continue to rise into the future, offering significant opportunities for Oilwell to meet the rising demand, additionally, this rise in demand should help support energy prices, both of which benefit Oilwell’s business

Threats:

  • Competition: The industry Oilwell operates in is extremely competitive, and the battle to offer the best product for the least amount of money can lead to margin compression
  • Stagnant Global Economy: In a stagnant economic landscape, energy demand dwindles, and energy prices fall, and in turn Oilwell’s business suffers
  • Government Regulation: Any government regulation which restricts energy companies from expanding could hurt Oilwell’s business, this restricting pattern of regulation has been shown when the Obama administration turned down the Keystone pipeline proposal

Competitors:

Major publicly traded competitors of Oilwell include Cameron International (NYSE: CAM), Baker Hughes (NYSE: BHI), Schlumberger (NYSE: SLB), and Tesco (NASDAQ: TESO). All of these companies operate in the energy service industry. Cameron is valued at $13.68 billion, pays out no dividend, and carries a price to earnings ratio of 21.74. Baker Hughes is valued at $17.80 billion, pays out a dividend yielding 1.48%, and carries a price to earnings ratio of 12.88. Schlumberger is valued at $90.71 billion, pays out a dividend yielding 1.61%, and carries a price to earnings ratio of 16.71. Finally, Tesco is valued at $436.27 million, pays out no dividend, and carries a price to earnings ratio of 9.17.

The Foolish Bottom Line:

Financially, Oilwell is extremely solid. The company possesses solid revenue growth, a growing dividend, and a pile of cash that outweighs its debt load. The company’s future is packed to the brim with opportunities that could lead to growth, mostly fueled by growth in global energy demand. All in all, National Oilwell Varco is a tremendous growth play on the energy industry, and should prosper for years to come.


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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