Finding Value in Oil Service Stocks

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

I'm in this business to make money, I am also a disciple of Benjamin Graham, so naturally I am always on the lookout for stocks that offer deep value, and right now, some of the best value I can find is in oil services stocks, which have been sold off recently due to the falling price of oil.

In practice, the panic selling that has been spurred by the recent slump in commodities will have almost no material effect on oil service companies. The demand for their products and services will continue to remain high, no matter what the price of oil. The planet will always need oil and the price will never be compressed enough for companies to stop searching for the black gold.

So where is the value?

There are four companies that offer potential for value investing right now. Drilling companies -- Rowan Companies (NYSE: RDC) and Nabors Industries (NYSE: NBR) and equipment companies, National Oilwell Varco (NYSE: NOV) and Baker Hughes (NYSE: BHI).

These four are all currently trading below, or around book value:

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>P/B</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Rowan</p> </td> <td> <p>0.8</p> </td> </tr> <tr> <td> <p>Nabors</p> </td> <td> <p>0.7</p> </td> </tr> <tr> <td> <p>National Oilwell</p> </td> <td> <p>1.3</p> </td> </tr> <tr> <td> <p>Baker Hughes</p> </td> <td> <p>1.4</p> </td> </tr> </tbody> </table>

Indeed, both Rowan and Nabors are currently trading for less than the cost of their drilling fleets.

But do these numbers stack up; how secure are the balance sheets of these companies, and what is the true tangible asset value per share?

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Current Assets </strong></p> </th><th> <p><strong>Current Liabilities</strong></p> </th><th> <p><strong>Tangible Assets</strong></p> </th><th> <p><strong>Total Liabilities</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Rowan</p> </td> <td> <p>$1,550</p> </td> <td> <p>$294</p> </td> <td> <p>$7,860</p> </td> <td> <p>$3,330</p> </td> </tr> </tbody> </table>

Figures in $US millions

Rowan has a solid balance sheet with a current ratio of 5. The company has plenty of short term liquidity. Indeed, even over the longer-term, the company appears financially strong as total assets cover total liabilities twice. Additionally, $1 billion of the company's current assets is actually cash.

These figures give the company a book value of $36.4 per share and a cash value per share of $8.2.

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Current Assets</strong></p> </th><th> <p><strong>Current Liabilities</strong></p> </th><th> <p><strong>Tangible Assets</strong></p> </th><th> <p><strong>Total Liabilities</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Nabors</p> </td> <td> <p>$3,130</p> </td> <td> <p>$1,130</p> </td> <td> <p>$12,200</p> </td> <td> <p>$6,630</p> </td> </tr> </tbody> </table>

Figures in $US millions

Nabors has a strong current ratio of 2.7, total assets cover total liabilities slightly less than twice, indicating a book value per share of $20.7 and a cash value per share of $2.7 - currently not offering as much value as Rowan.

Furthermore, unlike Rowan, which has net debt of around $1 billion (1.9x EBITDA), Nabors has a net debt pile of $4 billion (2.2 x EBITDA).

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Current Assets</strong></p> </th><th> <p><strong>Current Liabilities</strong></p> </th><th> <p><strong>Tangible Assets</strong></p> </th><th> <p><strong>Total Liabilities</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>National Oilwell</p> </td> <td> <p>15,680</p> </td> <td> <p>5,650</p> </td> <td> <p>19,560</p> </td> <td> <p>11,130</p> </td> </tr> </tbody> </table>

Figures in $US millions

So far, as value goes, National Oilwell has the best balance sheet. With a current ratio of 2.8, National Oilwell is almost able to cover all of its liabilities, both current and long-term, with its current assets. With a current ratio of nearly 3 and almost no debt, the company has the strongest balance sheet in the group. 

Unfortunately, as of yet, the share price has not dropped enough to allow the company to trade below it book value of $47.4 per share.

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Current Assets</strong></p> </th><th> <p><strong>Current Liabilities</strong></p> </th><th> <p><strong>Tangible Assets</strong></p> </th><th> <p><strong>Total Liabilities</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Baker Hughes</p> </td> <td> <p>10,420</p> </td> <td> <p>4,120</p> </td> <td> <p>19,740</p> </td> <td> <p>9,420</p> </td> </tr> </tbody> </table>

Figures in $US millions

Baker Hughes has a current ratio of 2.5, the lowest in the group. The company has a book value per share of $38.7 and cash value per share of $2.3. Baker has a small amount of debt amounting to around 1x EBITDA.

Based on the balance sheets of these four companies, I believe that Rowan, with its cash balance and discount to book, and National Oilwell, with the group's strongest balance sheet, could both offer potential for value investing.

Further study

It would be silly to say that National Oilwell and Rowan operate in the same sector. While National Oilwell makes the parts for oil rigs and related equipment, Rowan actually operates the rigs -- a completely different job.

<table> <thead></thead> <thead> <tr><th> <p><strong>Company</strong></p> </th><th> <p><strong>Net Margin</strong></p> </th><th> <p><strong>5-yr Revenue growth</strong></p> </th><th> <p><strong>5-yr EPS growth</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Rowan</p> </td> <td> <p>14.7%</p> </td> <td> <p>-36%</p> </td> <td> <p>-60%</p> </td> </tr> <tr> <td> <p>National</p> </td> <td> <p>12.5%</p> </td> <td> <p>49%</p> </td> <td> <p>19%</p> </td> </tr> </tbody> </table>

Rowan has been struggling over the past five years. The company's revenue and EPS have fallen, while its net margin has fallen from 19.4% in 2008 to 14.7% during 2012.

On the other hand, National Oilwell has grown its revenue and EPS significantly over the period, although its net margin, like that of Rowan, has fallen from 14.5% to 12.5%.

Rowan has been the victim of falling revenue and rising costs. Indeed, during 2008, the company's gross profit margin was 37%, unfortunately this margin now stands at 28%. 

So, overall, as value investing goes, Rowan offers a good prospect. However, the company's revenue and earnings have been on a decline over the past five years. That said, the company will start to take delivery of four new ultra-deep water high spec drilling rigs over the next few years, which should brighten the company's dimming prospects. 

Then again, if you are looking for growth without the risk that Rowan carries, National Oilwell could be your best bet.


Rupert Hargreaves owns shares of National Oilwell Varco. The Motley Fool recommends National Oilwell Varco. The Motley Fool owns shares of 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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