Cratering oil prices have taken a significant toll on investor’s sentiments in the oil industry. A number of oil stocks have taken a significant beating amid as investors continue to question the sector's long term prospects. While National-Oilwell Varco, Inc. (NYSE: NOV) has also taken a significant hit, the stock appears to be trading at a great discount after a recent correction lower.
National-Oilwell Price Analysis
The stock is currently trading at a critical support level above which remains well supported for a potential rally. Above the $8 a share level, National Oilwell looks set to bounce back, as was the case at the oil slump peak in March.
However, a close below the $8 a share level could leave the stock susceptible to further drops on bears using the opportunity to push the stock lower. A rally from current lows is also highly dependent on oil prices rallying and finding support above the $40 a barrel level.
What Does National Oilwell Do?
National Oilwell is engaged in the designing, manufacturing, and distributing components and products used in oil and gas drilling activities worldwide. The company operates through three segments of Wellbore Technologies, Completion & Production Solutions, and Rig Technologies. The company is also engaged in the distribution of solid control and waste management equipment.
Why is National Oilwell a Potential Bounce Back Play?
Stabilizing Oil Prices
National Oilwell is a potential bounce-back play, after the recent slide to a key support level, as fundamentals in the oil industry show signs of improvements. The opening of the global economy in the aftermath of the COVID-19 pandemic has resulted in a significant uptick in demand for oil, likely to support higher oil prices.
Oil prices finding support above the $37 a barrel raises prospects for a rally past the $40 a barrel level. A rally from current lows looks likely. Unlike in the first quarter of the year, countries have refrained from imposing full lockdowns to curb the deadly virus's spread. Lockdowns resulted in demand tanking to record, leading to oil prices plunging to the negative territory.
With countries open, amid a second wave of coronavirus infection, oil prices remain well supported for further rallies as demand continues to edge higher. Higher oil prices are highly needed for oil companies to accelerate oil and gas drilling activities. National Oilwell generates a good chunk of its revenues from selling oil drilling equipment to such companies.
Narrower Than Expected Q2 Net Loss
Narrower than expected net loss in the recent quarter is another development that affirms National Oilwell Varco improving underlying fundamentals. The company reported an adjusted net loss of 7 cents a share narrower than a net loss of 11 cents expected by investors. The narrower net loss could be attributed to, among other things, better than expected revenues owing to the Completion & Production Solutions segment.
Revenues in the second-quarter came in at $1.5 billion, an outperformance considering the overall energy industry's turmoil. Revenues in the Rig Technologies segment came in at $476 million, slightly below consensus estimates of $498 million and $671 million reported a year ago. The drop could be attributed to a drop in global rig activity and a decline in aftermarket revenues.
The Completion & Production segment topped estimates reporting revenues of $611 million compared to $600 million expected. The outperformance was due to the strong execution of the existing backlog.
A number of companies have gone under, and a good chunk is struggling to stay afloat. Similarly, companies have significantly cut their budgets on the purchase of oil and drilling equipment on refraining from pursuing new projects.
As the oil and gas industry faces its biggest contraction in recent years owing to the COVID-19 pandemic, National Oilwell has resorted to curbing its expenses in a bid to drive the bottom line higher. The company has resorted to prudent strategies and disciplined working capital employment to stay afloat amid the tumultuous period.
National Oilwell exited the quarter $1.45 billion in cash and cash equivalent, highly sufficient to finance its activities over the next year.