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NOV Reports Solid Earnings

The company's strong execution, especially in the rig technology segment, was impressive.
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National Oilwell Varco (NOV) reported earnings that, on an operating basis, beat the consensus by 2 cents at $1.40 a share.

The upside was driven by higher rig technology results, which is key and what the stock trades on. The headline-reported $1.37 a shares included $19 million of pre-tax transaction costs tied to the distribution spin. Revenues were $5.8 billion and total margins were 15.2% and in line with consensus. Net-net, better rig technology revenues and margins and record backlog were the positives offset by weather-impacted petroleum services and supplies (PS&S) and in-line capital equipment orders.

The stock has climbed back from the low $70s and hit new highs last week. It's up 13.4% from the March 20 lows, so expectations were elevated into the quarter. We've trimmed this position back and locked in hard-fought gains into the release. But generally speaking, the quarter was solid and the company's strong execution, especially in the rig technology segment, was impressive, especially considering the aggressive supply additions in the deep-water market.

Rig technology revenues and margins were ahead of Street expectations, with sales of $5.8 billion, up 8.8% y/y and down 6.7% q/q. The sequential decline was expected on seasonality, but fell less than expected (we had an 11% drop). Core rig technology revenue was $3 billion, which rose 14.5% y/y and fell 9.1% q/q. Operating margins of 21.1% were ahead of the "near 21%" guidance from management and was ahead of consensus by 40 bps. Productivity measures and technology investments are beginning to help the margin story and this is something we are happy to see. Plus land rig and stimulation equipment orders continue to rise, which is favorable for the mix.

PS&S operating income was $326 million, which rose 4.8% y/y and fell 10.9% q/q and was below the consensus estimate and likely because of weather disruptions in North America land, which we thought would be the case. The distribution spin (6.6% of operating income) reported solid results to $68.8 million up 4.6% y/y and 13.1% q/q and the spin still expected to occur in the second quarter. Capital equipment orders were $2.3 billion vs. the $2.35 billion consensus.

Backlog was up 1% sequentially to a record of $16.4 billion. The company delivered $2.2 billion out of backlog vs. the $2 billion expectation.

The call is later this morning and we'll be listening for guidance, particularly the second half of 2014, where visibility is worse given the deep-water supply issues. But in the press release it appears the management is more bullish about the North America land activity.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long NOV.