Deepwater Production Equipment Demand Will Open Future Markets

Key Takeaways

• Strong backlog and higher margins in Energy Equipment, driven by deepwater demand and cost cuts, enhance revenue and EBITDA margins.
  
• High-margin technologies, efficiency improvements, and tariff mitigation efforts support earnings growth and profitability.
  
• Macroeconomic headwinds and increased oil supply risk lower revenue and margins due to reduced E&P activities and potential tariff impacts.

Catalysts

Designs, constructs, manufactures, and sells systems, components, and products for oil and gas drilling and production, and industrial and renewable energy sectors in the United States and internationally.

• NOV's strong backlog and increasing margins in the Energy Equipment segment, driven by demand for deepwater production equipment and cost reductions, are expected to improve revenue and EBITDA margins.
  
• The resilient international and offshore market activity, particularly in the Arabian Gulf and Brazil, along with unconventional plays like the Jafurah gas field and Vaca Muerta region, are expected to boost revenues as these projects move forward.
  
• The introduction of new high-margin technologies and improvements in operational efficiencies are likely to contribute to increased net margins and earnings growth.
  
• Continued share repurchases and dividend payments, including a supplemental dividend to true up returns, suggest a strong free cash flow generation, enhancing earnings per share.
  
• Mitigation strategies for tariffs, including leveraging supply chain flexibility and reshoring efforts, aim to reduce costs and maintain EBITDA margins, supporting overall profitability.

NOV Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOV's revenue will decrease by 0.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.7% today to 6.4% in 3 years time.
• Analysts expect earnings to reach $574.9 million (and earnings per share of $1.54) by about July 2028, down from $589.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $640.8 million in earnings, and the most bearish expecting $435 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.5x on those 2028 earnings, up from 8.3x today. This future PE is greater than the current PE for the US Energy Services industry at 11.3x.
• Analysts expect the number of shares outstanding to decline by 4.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

NOV Future Earnings Per Share Growth

Risks

• Emerging trade war and macroeconomic headwinds could lead to lower oilfield activity, potentially impacting NOV's revenue and earnings negatively.
  
• The decision by OPEC to add more oil to the market creates the risk of lower commodity prices, which could reduce North American E&P activities and consequently affect NOV's revenue and net margins.
  
• Potential tariff expenses, despite mitigation efforts, could create additional costs for NOV. This could lead to an $8 million to $15 million hit per quarter, impacting net margins and earnings.
  
• The international versus North American activity mix indicates potential for reduced revenues from declining North American shale activities, impacting overall revenue and net income.
  
• Macroeconomic uncertainty and deteriorating market conditions could result in the delay or reduction of capital equipment orders, affecting NOV's future revenue and backlog strength.

Valuation

• The analysts have a consensus price target of $16.182 for NOV based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $22.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.9 billion, earnings will come to $574.9 million, and it would be trading on a PE ratio of 11.5x, assuming you use a discount rate of 7.9%.
• Given the current share price of $13.02, the analyst price target of $16.18 is 19.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.