In the latest Barron's 500 National Oilwell Varco (#3, NOV) ranks only behind Blackrock (#1, BLK) and Research In Motion (#2, RIMM).
In the California gold rush, suppliers of picks and shovels fared far better than prospectors. The same might be said of the oil patch; just ask National Oilwell Varco, a supplier of oil and gas drilling-rig equipment, whose revenue more than tripled in the past four years, to $9.8 billion. The Houston company's earnings rose more than 500%, to $3.76 a share, and its backlog of business grew to $9.9 billion in the first quarter, up from $2.3 billion in 2005.
Some of that growth was due to acquisitions. In March 2005 National Oilwell purchased Varco for $2.59 billion in stock. The combined company bulked up even more this past April, when it completed the $7 billion takeover of Grant Prideco, adding drill bits and drill pipe to its product line-up.
National Oilwell's growth stems in part from improved manufacturing efficiencies. A factory that turned out 95 to 100 top drives (the part that turns the drilling pipe) three years ago now manufactures 365, with only a modest capital investment of $1 million to $1.5 million, says Merrill (Pete) Miller, chairman and CEO. The company espouses "quick response manufacturing," an approach to enhancing efficiency developed at the University of Wisconsin.
National Oilwell's stock has climbed 67% in the past 12 months, as oil has breached new highs above $120 a barrel. Yet the shares trade at only 13.5 times Wall Street's 2009 earning estimates. The concern, apparent in most oil-industry multiples, is that crude prices will peak, in which case the total number of industry drilling-rig orders -- which stood at 158 in January, up from 29 in April '05 -- will fall.
Oil's seemingly inexorable rise has sparked fierce debate, however. "Hundred-dollar-plus oil is a clear indication that worldwide demand for oil is continuing unabated," says Gary Russell, a senior equity analyst for the AIM Energy fund. "The industry is going to need many, many, many more rigs to find oil supply, to keep up with demand."
One sign of the company's confidence: National Oilwell has ignored pressure to buy back shares and instead has used its cash to expand its business. "The world needs more oil and gas," says Miller. "The worldwide rig count will climb in the next 10 years."
And this blurb from Schlumberger's (#4, SLB) Andrew Gould:
An increase in exploration, spurred by the need to find new sources of oil and gas in the next three to five years, will benefit the company. "The market is going to be surprised by the extent to which drilling is going to have to increase," Gould predicts.