Rising Offshore Innovations Drive Growth But Sluggish Sector Dynamics May Hamper Long-Term Gains

Key Takeaways

• Growth in demand for production equipment from deepwater and unconventional shale projects is likely to enhance NOV’s revenue.
  
• Cost savings and improved backlog projects are expected to boost margins and operational efficiency.
  
• Market challenges in oil, shale, and offshore sectors, alongside supply chain constraints, could challenge NOV's revenue stability in the near future.

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 anticipates substantial growth in demand for production equipment, driven by increased investments in deepwater projects and unconventional shale development internationally. This is likely to positively impact revenue.
  
• The company is seeing rising orders for offshore production systems, including flexible pipe and other production-related technologies, which are expected to offset declines in offshore drilling equipment demand and bolster margins.
  
• Improved quality of backlog projects and better contractual terms are expected to support higher future earnings and margins, as NOV continues to high-grade its order book with more profitable projects.
  
• NOV's growth in international unconventional markets and technology advancements in energy equipment, particularly with new digital products, are expected to capture market share and drive revenue growth internationally.
  
• Ongoing cost savings initiatives, targeted at specific business units and underperforming product lines, are aimed at enhancing operational efficiency and improving net margins over the next several years.

NOV Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NOV's revenue will grow by 3.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.0% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $792.0 million (and earnings per share of $2.01) by about October 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 5.6x today. This future PE is lower than the current PE for the US Energy Services industry at 17.4x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.67%, as per the Simply Wall St company report.

NOV Future Earnings Per Share Growth

Risks

• Sliding Chinese oil demand, excess OPEC capacity, and potential non-OPEC oversupply could pressure commodity prices and make oil and gas operators cautious about their spending, which may negatively impact NOV's future revenues.
  
• North American shale basins are maturing with pressures declining basin-wide, leading to more capital discipline among shale producers and a potential plateau in U.S. production growth, potentially affecting NOV’s revenues from this market.
  
• Emerging supply chain constraints, particularly with FPSOs and related equipment for deepwater developments, may delay project timelines and first oil, affecting NOV’s order and revenue forecasts into 2025.
  
• The potential modest decline in demand for offshore drilling equipment, as some drilling contractors delay upgrades and investments, suggests a possible decrease in NOV’s short-term revenues from these products.
  
• Despite strong orders in some segments, overall consolidated revenues for NOV's offshore activities declined due to volatile demand for drill pipe and conductor pipe connections, which could indicate future revenue volatility.

Valuation

• The analysts have a consensus price target of $21.0 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 $16.0.
  
• 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 $792.0 million, and it would be trading on a PE ratio of 13.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $15.35, the analyst's price target of $21.0 is 26.9% 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.