NOV's Selloff On Last Week's Events Is Likely Overdone, But Wait For The Dust To Settle

seekingalpha02-05

NOV saw a double sell-off last week.The market got scared by Saudi dropping its capacity expansion plans and didn't appreciate NOV's North America revenue guidance either.Both concerns are overdone as...

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Brett_Hondow/iStock Editorial via Getty ImagesInvestment thesis NOV Inc.'s (NYSE:NOV) stock sold off twice last week, once on the news that Aramco is scrapping plans to expand capacity to 13 million barrels per day and the second time when the market reacted negatively to the company's muted North America guidance despite NOV actually beating earnings.   TradingView via Seeking Alpha I think the selloff is overdone, as the Aramco announcement will have little tangible impact, while the guidance wasn't really negative. However, if the energy (XLE) sentiment remains poor over the next weeks, I wouldn't be surprised to see NOV to retest the May 2023 lows of $14. I am watching the stock closely but remain on the sidelines for now. What does NOV do? NOV is a diversified oilfield equipment manufacturer that operates a number of fairly autonomous businesses from drilling pipe (Grant Prideco) to drill bits (ReedHycalog) and drilling rig equipment among countless others. The company is really more of a conglomerate similar to a Honeywell (HON) or General Electric (GE) but with a focus on the oilfield and has in more recent times expanded to renewables and geothermal applications. As an equipment supplier, NOV doesn't just sell to oil and gas companies (XOP) but also to services companies (OIH), so to some extent it stands a bit further back in the supply chain. For example, NOV provides various equipment for offshore drilling rigs, which drilling contractors like Valaris (VAL) use, to serve the ultimate customers. I have been generally bullish on energy services stocks and NOV is a reasonable idea in this space, especially with 60% of its revenue derived from the more promising international and offshore markets:   NOV PresentationRunning a diversified product portfolio isn't a bad thing, but in NOV's case, I don't think it ever properly integrated the multiple businesses it acquired over the years. SLB (SLB) has also done a myriad of acquisitions, but overtime these get subsumed into the same platform. NOV, in contrast, seems to prefer things to run in a decentralized way, but that tends to add costs. Should NOV investors worry about the Saudi news? Judging from the market reaction when Saudi Aramco announced that, at the request of the Saudi government, it would no longer pursue expanding its \"maximum sustained capacity\" from 12 to 13 million barrels per day of oil production, NOV investors should indeed be concerned. However, NOV's management painted a different picture on the Friday earnings call:  While 2022 was characterized by the recovery of activity in North America, 2023 saw continuing momentum in offshore and international markets that is underpinning the steady up cycle, we believe, will continue to unfold over the next several years, Aramco's Safaniya plans notwithstanding. Despite postponement of plans to grow production capacity to 13 million barrels per day, we still expect the Kingdom to remain quite busy as it drills to stem declines in conventional oil wells and it drills to develop unconventional gas. We expect our revenues in 2024 there to continue to grow.  While more details will undoubtedly emerge, it looks like the curtailed Saudi plans will mostly affect aspirational projects that have not yet reached FID (final investment decision). SLB actually made a public statement shortly after the Saudi news came out:  We acknowledge the decision by Saudi Aramco to maintain its Maximum Sustainable Capacity at 12 million barrels per day (MMBD), and not to continue increasing MSC to 13 MMBD,” said SLB Chief Executive Officer Olivier Le Peuch. “We continue to work very closely with Saudi Aramco, and our understanding is that all ongoing oil and gas projects remain intact and that only two offshore oil increment projects not yet started will be suspended.” “Our forecast for significant growth for 2024 in the Kingdom remains intact. Looking ahead, the combination of our revenue mix in the Kingdom, which is weighted toward onshore and the expanding gas market, and our unique market position in other countries in the Middle East will continue to support the multi-year growth cycle in the region.”  At the end of the day, if Aramco doesn't add this one million of extra capacity, someone else will and the services companies can divert their resources to where the customer demand is. By most signs, this will probably end up being a nothing burger, but it may take 1-2 quarters for the market to see the revenue uptrend remains intact. Why did NOV slide despite the earnings beat? To be fair, the earnings beat was largely due to the release of tax valuation allowances:   NOV Press Release In layman's terms, the company had amassed tax losses that were unlikely to be ever used, given how bad the business was doing during the pandemic. You can only use your losses if you generate income to offset against. As the business projections have improved, the company could bring back these tax losses on its balance sheet, which shows as income. However, it is clear that this \"income\" is basically a revision of accounting estimates. It has nothing to do with NOV having generated more revenue or EBITDA in the last quarter. Nonetheless, revenue and EBITDA looked better sequentially and year-on-year so perhaps the Friday selloff had more to do with the North America guidance from management during the call:  We are more subdued in our 2024 outlook for North America. The euphoria of 2022 has matured into a phase of consolidation and strict capital discipline in 2023, exacerbated by continued volatility in oil prices and depressed domestic natural gas prices. I believe E&P CapEx will likely decline slightly year-over-year. Nevertheless, North America production will remain vital to the global supply and energy security. The expected commissioning of incremental US LNG export capacity in 2025 could spark additional North American gas drilling activity later in the year to prove me wrong.  It is not what everybody wanted to hear, but after SLB, Halliburton (HAL) and Baker (BKR) essentially said the same about their North American businesses, I don't know why NOV's stance would be a surprise. NOV's management is still bullish on the international and offshore markets, which as noted bring in more of the company's revenues: Exceptionally strong year-end shipments of drill pipe and managed pressure drilling equipment, along with healthy drilling activity levels in international and offshore markets more than offset a softening North American market. Perhaps there was also some dissatisfaction with NOV's EBITDA margins not catching up with the Big 3; in fact, even Weatherford (WFRD) that emerged from bankruptcy has posted better margins: Data by YChartsHowever, again, this is not a new issue. Some of it goes back to my comment about the decentralized operations, but also as primarily a manufacturer that stands further back in the supply chain, NOV is probably not going to be as profitable as its services focused peers no matter what. Valuation and risks At 11x forward earnings, NOV isn't particularly cheap, although it isn't a bad multiple for a manufacturing business and is consistent with the big oilfield services providers: Data by YChartsWall Street analysts see considerable upside, but I expect the targets will get revised down after the 11% slide on Friday, unless the stock makes up the lost ground quickly:   Seeking AlphaI personally think NOV will return to the $20s fairly soon, but I don't know if we won't see even lower levels before: Data by YChartsA retest of the May 2023 lows of $14 wouldn't surprise me, especially if the currently poor energy sentiment doesn't improve fast. Given NOV just reported, the risks over the next months are likely also going to be on the macro side too; it's unlikely we'll get more company specific events, at least until the next earnings call. Is NOV a buy, hold or sell? I think the Wall Street average target of $25 is reasonable in the medium term, e.g., next 6-12 months, but shorter term I would rate NOV a \"hold\". I just feel there is too much risk trying to gauge where exactly the correction will flatten out.  If we get close to the $14s from last spring, that would make NOV a fairly strong buy for me, but for now I remain neutral and am keeping it on my watchlist.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2409434464"}