Do Fundamentals Favor National Oilwell Varco Stock?

SLB: Schlumberger logo

The shares of National Oilwell Varco (NYSE: NOV) currently trade at 50% below pre-Covid levels observed in January 2020 while the shares of its competitor Schlumberger (NYSE: SLB) remain 30% lower. Does that make NOV stock a better pick over SLB? Both companies provide oil field services including drilling & completion and production solutions to upstream oil & gas companies in the U.S. and abroad. Due to lower benchmark price expectations in the coming years, NOV and SLB incurred sizable impairment charges in 2020 – leading to a 25% contraction in the asset base. While SLB stock is a riskier pick due to higher financial leverage, the consistent historical difference in revenue growth and operating cash margin is responsible for SLB’s higher valuation multiple (P/S). Considering NOV’s lower valuation multiple (P/S) compared to prior years, the company’s H1 2021 performance, and a wider difference in current P/S multiple of SLB and NOV than observed in the past,  Trefis believes that National Oilwell Varco has more room for growth. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, National Oilwell Varco vs. Schlumberger: Industry Peers; Which Stock Is A Better Bet?

1. Revenue Growth

Schlumberger’s growth has been a little higher than National Oilwell Varco in recent years, with Schlumberger’s revenues expanding at an average rate of 6% from $27.8 billion in 2016 to $32.9 billion in 2019. National Oilwell Varco’s revenues observed a 5% average growth rate from $7.3 billion in 2016 to $8.5 billion in 2019. However, both companies reported a 28% top-line contraction in 2020.

  • Schlumberger’s four operating segments, Digital & Integration, Reservoir Performance, Well Construction, and Production Systems contribute 12%, 28%, 36%, and 24% of total revenues, respectively. An uncertain demand environment has prompted upstream companies to limit capital expenses and enhance asset productivity. Thus, the company’s digital solutions business is observing a strong demand during the pandemic.
  • National Oilwell Varco’s three operating segments, Wellbore Technologies, Completion & Production Solutions, and Rig Technologies contribute 37%, 32%, and 31% of total revenues, respectively. The company observed broad-based growth across segments due to rising drilling & completion services in the U.S. and other nations prior to the pandemic. Per recent filings, the Rig Technologies segment observed strong growth in the second quarter assisted by demand for renewables.
  • Due to lower rig count figures in the U.S. and other nations, Schlumberger and National Oilwell Varco observed a 15% (y-o-y) and 21% (y-o-y) top-line contraction in H1 2021, respectively.
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2. Returns (Profits)

As both companies incurred sizable impairment charges in the past two years, we compare their cash generation capabilities. In 2019, Schlumberger generated $5.4 billion of operating cash with $33 billion in total revenues – implying an operating cash flow margin of 16%. Whereas National Oilwell Varco reported $8.5 billion of total revenues and $0.7 billion of operating cash flow resulting in a margin of 8%.

  • Interestingly, Schlumberger’s cash generation capabilities are nearly twice that of National Oil Varco which has resulted in a sizable difference in the P/S ratio. In 2020, Schlumberger and National Oilwell Varco’s P/S multiple was 1.4 and 0.9, respectively. Moreover, the difference of 0.5 in P/S multiple has been observed even in 2019 and 2018.
  • Prior to the pandemic, Schlumberger returned 50% of operating cash to shareholders as dividends and invested 30% in property, plant & equipment as capital expenses. Whereas, National Oilwell Varco had been utilizing its operating cash as a part of its growth strategy.
  • Both companies have implemented cash control measures and limited capital expenses as well as shareholder returns due to the pandemic. Given Schlumberger’s higher cash generation capabilities and historical dividend trends, it is a good pick to earn consistent dividend income. (related: Speculating On Tech Stocks? Why Not Consider Schlumberger Stock Instead)

3. Risk

Per annual filings, Schlumberger and National Oilwell Varco reported $16 billion and $1.8 billion of long-term debt, respectively. Both company’s shrinking asset base due to impairment charges and high long-term debt obligations is a drag on long-term shareholder returns.

  • Higher financial leverage coupled with continued revenue growth is a boon for generating surplus equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
  • Schlumberger’s higher financial leverage compared to National Oilwell Varco and similar revenue contraction in 2020 makes SLB stock a riskier bet.
  • Notably, both companies reported a 25% (y-o-y) contraction of the asset base in 2020. (related: Halliburton Stock Looks Overvalued)
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