NOV’s Perspective in Q4: KEY Takeaways

This article on NOV will discuss the offshore challenges, whether a recovery awaits in the international market, its outlook in the US market, the company’s Q4 segment performance, and how its cash flows grew in 2024.

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Outlook: US vis-à-vis International

We discussed our initial thoughts about NOV's (NOV) Q4 2024 performance in our short article a few days ago. This article will dive deeper into its current outlook and the industry. In the near term, NOV's management does not expect North America's short-cycle drilling and completion activity to grow due to energy operators’ capex constraints and efficiency gains. However, the company can outperform the market due to its strategic positioning and technology offerings. It expects the market for drill bits and downhole tools to grow and its gains from the growth to offset the market declines. However, demand for pressure pumping and stimulation equipment will likely remain soft in 2025.

In international markets, NOV expects activity to be “flattish year-over-year” in Q1 2025. While activities in Kuwait, UAE, and Oman can increase in the Middle East, Saudi Arabia can falter. Brazil and unconventional development in the Vaca Muerta in Argentina can lead the charge in Latin America. Investors may note that unconventional shale plays typically require high-spec land rigs, coiled tubing and completions kits, chokes, separators, and corrosion-resistant flow lines. Because NOV offers many of these product lines, its market share in emerging unconventional basins should grow.

Backlog And Key Projects

NOV's book-to-bill ratio increased to 1.21x in Q4 compared to 1.1x in Q3. Its backlog has increased by 22% over the past four years. However, quarterly shipments out of backlog have risen by 60% during this period. Its FY2024 capital equipment orders totaled $2.75 billion.

During Q4, NOV’s Max Completions (digital solutions) monitoring solution supporting frac operations for major operators in the Williston, Eagle Ford, and Haynesville Basins, utilizing Remote Frac Monitoring (RFM) and frac valve positioning sensors. During the quarter, it deployed a new Max Production optimization platform.

NOV received multiple orders for advanced gas processing and water treatment equipment packages for FPSOs in Brazil and East Africa. In Saudi Arabia, it secured a contract to supply a drilling equipment package for a new jack-up rig. In CCUS (carbon capture and storage), it received a contract to supply an offshore mooring and injection system in Denmark. It also bagged orders to supply recovery and solids separation systems in the Middle East and to supply glass-reinforced epoxy piping in an LNG fleet expansion program.

Offshore challenges

NOV’s management is concerned about lower utilization or white space in offshore drilling in 2025. Offshore FIDs increased by 50% in 2024 compared to a year ago following the filling of Asian shipyards. This led to elongated delivery dates and slowed down deepwater E&P operators’ drilling schedules. Also, many conversion or construction projects for floating production, storage, liquefaction, and regasification vessels have resulted in higher congestion and costs.

Although delayed production plans caused temporary gaps in utilization, NOV expects contracting activities to pick up in Q2 2025 in anticipation of higher deepwater activities in 2026. NOV’s growing backlog within Energy Equipment signals the high demand for its production equipment, particularly offshore production processing and subsea flexible pipe.

Q4 Financial Results

In Q4 2024, both the Energy Equipment and Energy Products & Services segments witnessed a 1% year-over-year revenue fall. The Energy Equipment segment saw operating income rise (19% up) from Q4 2023 to Q4 2024. On the other hand, operating profit in the Energy Products and Services segment increased by 26%.

NOV's cash flow from operations increased significantly in FY2024 (by 8x) compared to a year earlier. FCF turned significantly positive in FY2024. It expects FY2025 capex to be in line with FY2024. It also expects an EBITDA-to-FCF conversion rate of more than 50% in 2025. During Q4, the company returned $141 million to its shareholders through dividends and share repurchases.

Relative Valuation

NOV is currently trading at an EV/EBITDA multiple of 6x. Based on sell-side analysts' EBITDA estimates, the forward EV/EBITDA multiple is 6.5x. The current multiple is lower than its five-year average EV/EBITDA multiple of 20.3x.

NOV's forward EV/EBITDA multiple contraction versus the current EV/EBITDA is less steep than its peers because its EBITDA is expected to increase less sharply than its peers in the next year. This typically results in a lower EV/EBITDA multiple than its peers. The stock's EV/EBITDA multiple is lower than its peers' (CHX, FTI, and WHD) average. So, the stock is reasonably valued compared to its peers.

Final Commentary

NOV's management has a relatively bearish outlook on the short-term energy market environment. Demand for its drilling and completion tools and services can remain subdued due to operators’ capex constraints and efficiency gains in the US. This can hurt pressure pumping and stimulation equipment sales. However, the market for drill bits and downhole tools can grow.

Internationally, the market will remain steady with divergent growth tracks in various geographies. It can see increased demand for its completion products in Brazil and Argentina's Vaca Muerta shale basin. NOV's book-to-bill ratio also increased in Q4, indicating a recovery in the latter part of 2025. Its free cash flow turned positive in FY 2024, allowing it to continue to repurchase shares to increase shareholder returns. The stock is reasonably valued versus its peers.

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