Advanced Equipment Spurs Revenue Potential But Margin Pressure Looms Amid Industry Uncertainty

Key Takeaways

• Growth in deepwater projects and unconventional techniques in international markets could drive future revenue increases and improve NOV's margins.
  
• Innovation in digital technologies and new market share gains position NOV for operational efficiency and potential long-term margin improvements.
  
• Uncertain global and North American markets, alongside declining product demand, could pressure NOV's revenue and profit margins across various segments.

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.

• The resumption of final investment decisions (FIDs) in deepwater projects, including the Gulf of Mexico and offshore Suriname, driven by NOV's advanced equipment, suggests potential for increased future revenues from long-cycle capital equipment.
  
• As offshore production equipment demand, such as turret mooring systems and flexible pipe, grows due to deepwater developments, this could offset declining rig equipment sales, potentially leading to improved overall margins for NOV.
  
• The international adoption of unconventional development techniques, particularly in markets like Argentina and the Middle East, provides NOV opportunities to sell more drilling and completion technologies, supporting future revenue growth.
  
• Despite the current subdued activity in North America, NOV’s new technology offerings have enabled market share gains which could translate into increased revenue and possibly better margins if activity improves.
  
• NOV's focus on innovation and digital technologies, such as edge computing and drilling automation, can provide operational efficiencies and new revenue streams, positively impacting margins and earnings over the long term.

NOV Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOV's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.0% today to 7.9% in 3 years time.
• Analysts expect earnings to reach $769.5 million (and earnings per share of $1.96) by about November 2027, down from $1.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.4x on those 2027 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Energy Services industry at 16.6x.
• Analysts expect the number of shares outstanding to grow by 0.26% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

NOV Future Earnings Per Share Growth

Risks

• The global macro environment is uncertain, with concerns over sliding Chinese oil demand, excess OPEC capacity, and potential non-OPEC oversupply, putting pressure on commodity prices and leading to cautious spending by oil and gas operators, which could impact revenue.
  
• Declining demand for shorter-cycle products and services, such as drill pipe, could affect NOV's consolidated revenue and profit margins if the trends continue into the future.
  
• The offshore drilling sector is facing white space or uncontracted time, leading to delayed spending by drilling contractors on equipment upgrades, which can affect demand for NOV’s drilling equipment and associated revenues.
  
• A slowdown in U.S. shale production growth due to maturing unconventional basins and increased capital discipline could reduce market demand for NOV's North American drilling and completion products, impacting revenue from this region.
  
• Economic uncertainties, particularly in North America land markets, could maintain subdued activity levels, impacting NOV’s sales of drilling and well construction equipment in this major market and affecting earnings if the activity does not pick up.

Valuation

• The analysts have a consensus price target of $20.39 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 $25.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $9.8 billion, earnings will come to $769.5 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 8.8%.
• Given the current share price of $15.99, the analyst's price target of $20.39 is 21.6% 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.