Decarbonization Will Crush Oilfield Order Volumes

Key Takeaways

• Heavy reliance on traditional oil and gas exposes NOV to declining demand, revenue instability, and intensified competition amid industry transition and consolidation.
  
• Failure to diversify leaves NOV vulnerable to technological disruption, increasing ESG pressures, and rising capital costs, threatening profitability and long-term viability.
  
• Expanding global energy demand and technology adoption, combined with diversification and cost reductions, are setting the stage for sustained profitability and stable long-term revenue growth.

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 accelerating global shift toward energy transition and decarbonization, including rapid adoption of electric vehicles and renewables, threatens to structurally reduce oil demand over the coming decade, risking a persistent decline in NOV's order volumes and revenue from traditional oilfield equipment and services.
  
• NOV's lack of meaningful diversification into new energy markets or adjacent industries could leave it heavily exposed to a cyclical and potentially shrinking upstream oil and gas sector, leading to greater revenue volatility and structurally lower long-term earnings.
  
• Technological advances in drilling efficiency and automation are enabling operators to extract more with fewer rigs and reduced support needs, which diminishes the per-well demand for NOV's equipment and services and compresses potential future revenues and margins.
  
• Increasing ESG mandates and institutional divestment from fossil fuel-linked sectors are expected to raise NOV's cost of capital, limit access to funding, and exert long-term downward pressure on share price and profitability, regardless of near-term operational performance.
  
• The rise of international and regional competitors, coupled with ongoing industry consolidation among exploration and production customers, is intensifying pricing pressure, accelerating margin compression, and could erode NOV's profitability over the long run if the company cannot outpace cost and innovation trends.

NOV Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NOV compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NOV's revenue will decrease by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 5.4% today to 4.6% in 3 years time.
• The bearish analysts expect earnings to reach $371.6 million (and earnings per share of $1.07) by about August 2028, down from $471.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 12.3x on those 2028 earnings, up from 9.4x today. This future PE is greater than the current PE for the US Energy Services industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 5.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.49%, as per the Simply Wall St company report.

NOV Future Earnings Per Share Growth

Risks

• The company is seeing strong long-term demand drivers in offshore energy production and deepwater oil and gas development, which require NOV's specialized tools and infrastructure solutions, positioning future revenues and margins for growth as these markets expand.
  
• Increased global investment in natural gas infrastructure, LNG, and unconventional gas projects is creating robust sales for NOV's composite pipe and process systems, indicating an expanding market opportunity that could drive higher revenue and order backlog.
  
• NOV is actively growing its automation and digital technology offerings, with rapid adoption of platforms like NOVOS and robotics systems, setting the stage for margin expansion and recurring service revenues as customers prioritize operational efficiency.
  
• Diversification outside the North American market, including greater exposure to international unconventionals and renewables infrastructure such as offshore wind, is offsetting regional downturns and supporting more stable, growing global revenues.
  
• Structural cost reduction initiatives and facility consolidation, combined with a resilient balance sheet and strong free cash flow generation, are positioning NOV for improved profitability and enhanced earnings power as cost savings outpace near-term inflation and tariff headwinds.

Valuation

• The assumed bearish price target for NOV is $11.55, which represents two standard deviations below the consensus price target of $15.62. This valuation is based on what can be assumed as the expectations of NOV's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $8.0 billion, earnings will come to $371.6 million, and it would be trading on a PE ratio of 12.3x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $11.9, the bearish analyst price target of $11.55 is 3.0% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• 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.