National Oilwell Varco Morning Star Analysis

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National Oilwell Varco, Inc. NOV

Last Price 84.55 USD Fair Value 97.00 USD Consider Buy 67.90 USD Consider Sell 131.00 USD Uncertainty Medium
[NYSE]
TM
QQQQ
Morningstar Credit Rating Industry A+ Oil & Gas Equipment & Services
Economic Moat Wide
Stewardship C
Petrobras Recent Rig Orders Are Good News for Equipment Firms and Offshore Drillers
by Stephen Ellis Senior Stock Analyst Analysts covering this company do not own its stock. Pricing data through February 16, 2012. Rating updated as of February 16, 2012. Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Analyst Note Feb. 14, 2012
Stock Price
74.0 64.0 54.0 44.0 34.0
24.0 08 09 10 11 12
Petrobras recent commitments to 28 offshore rigs should benefit both equipment firms and offshore drillers. Petrobras has placed orders for 21 offshore rigs with Sete Brasil and another five rigs with Ocean Rig. Sete Brasil, which is Petrobras rig management company and owned by pension funds, banks, and Petrobras itself, added two more rig orders within days of Petrobras original order, and plans to contract them on the spot market. The 15-year contracts range from $530,000 to $548,000 a day with provisions for lowering the rates subject to additional financing, tax, and operational cost savings. We note that the orders do not resolve our long-standing concerns over both schedule and construction price risk (recent rig construction prices in Brazil are about $800 million versus $625 million elsewhere), particularly with the nascent Brazilian shipyard industry, but ordering the rigs is certainly a good first step. The rig orders present a large opportunity for the equipment firms. Given National Oilwell Varcos prior win of 100% of the rig equipment on Sete Brasils earlier order of seven rigs, we believe it will again be the preferred partner for the latest order of 23 rigs. Based on the earlier price of $214 million per rig, the equipment order could be around $4.9 billion. Wed expect to see the equipment ordered within six to nine months. For Ocean Rig, we believe Cameron likely will supply the blowout preventers as it has done with the other rigs in Ocean Rigs fleet, which represents a $150 million to $200 million opportunity in 2012. For the offshore drillers, the Sete Brasil order is also good news. The upsizing of Petrobras rig order beyond the original 28-rig tender to 35 rigs indicates Petrobras rig needs are likely well beyond what it has publicly indicated. This dynamic suggests that offshore drillers such as Ensco, Noble, Seadrill, and Transocean are well-positioned to meet Petrobras short-term rig gap, as
the first rig, if it meets its schedule, wont be delivered until mid-2015. Diamond Offshore recently placed an order to upgrade a midwater rig as it sees healthy demand in Brazil for exactly this reason. Alternatively, the offshore drillers could take rig management contracts with Sete Brasil to operate the under-construction rigs. We believe that taking the original rig contracts, as laid out by Sete Brasil, would be a value-destroying measure, as a $500,000 to $550,000 day rate does not create economic value for an $800 million rig. In order for the contracts to be attractive to the major offshore drillers, the day rates need to be around $650,000 a day with provisions that allow the drillers to recover labor and other materials cost increases over time. Finally, while the rigs do represent additional rig supply to the market, we believe the 15-year nature of the contracts limits the ability for the rigs to compete for contracts on the global rig markets, protecting the industrys overall returns.
Thesis Feb. 07, 2012
As the dominant rig equipment supplier, National Oilwell Varco remains at the center of the rush by oil and gas companies to develop large offshore discoveries. After years of underinvestment by drillers, the drilling industry badly needs retooled and upgraded rigs to economically drill far more complex and deeper wells. As National Oilwell Varco has spent decades consolidating the rig equipment industry, it is the best and only source of rig equipment for many of the largest offshore drillers. The company provides rig equipment, consumable goods for drilling such as tubulars, and rig maintenance and spare part distribution. The rig equipment segment is the largest (53% of 2011 revenue), and we believe some of its biggest opportunities lie in Brazil and the Gulf of Mexico. Petrobras has found billions of barrels of oil in the Santos basin and intends to order more than 60 deep-water rigs during the next decade to help develop the area, which means there is $12 billion-$18 billion in new rig equipment orders potentially available. We estimate a further $10 billion-$12 billion in orders for rig upgrades and spare parts, maintenance (13% of 2011 revenue), and drilling

[NYSE]
TM
QQQQ
Economic Moat Wide
Stewardship C
Close Competitors National Oilwell Varco, Inc. Schlumberger NV
Currency(Mil) USD USD USD USD
Market Cap 35,836 104,115 13,768 12,236
TTM Sales 13,571 39,669 6,737 4,701
Oper Income 2,713 6,338 741 556
Net Income 1,860 4,997 587 400
Cameron International Corporation FMC Technologies, Inc.

Morningstar data as of February 16, 2012.
consumables (about a third of 2011 revenue). In the Gulf of Mexicos deep water, BPs large discoveries such as Tibor and Kaskida could mean several billion dollars more in potential new equipment orders and associated services. As hundreds of offshore rigs are being delivered during the next few years to drill new wells, we expect more large offshore discoveries to be announced and National Oilwell Varcos opportunities to multiply. National Oilwell Varco can take advantage of the large potential opportunities because of its low-cost position derived from being the worlds largest rig equipment company. Its equipment is on 90% of the worlds rigs, which ensures a steady income stream of repair and maintenance requests and repeat business from customers. We believe this large equipment base provides plenty of opportunities to deploy capital profitably, from adding manufacturing capacity to adding new product lines via acquisitions to raise customer switching costs. National Oilwell Varcos powerful position means that most traditional rivals compete by targeting products to small market niches. However, one of the biggest long-term competitive challenges for the company is the pressure on national oil companies, such as Petrobras, to purchase rig equipment and other supplies from local firms. This means National Oilwell Varco may be locked out of numerous large markets in the future, or face customers with substantially greater bargaining power than in the recent past. We may be seeing such a situation develop in the politically charged Brazilian market. Petrobras initial
tender for 12 offshore rigs in 2008 all went to Brazilian drilling contractors, and the company intends to do the same with its upcoming tenders. However, political pressures could force Petrobras equipment orders to be awarded to less experienced Brazilian suppliers. In our opinion, the outsourcing to local contractors means cost overruns, missed production deadlines, and potentially plugging formerly lucrative opportunities because of drilling inexperience. Petrobras seems to recognize that this scenario is likely, and in a clear demonstration of National Oilwell Varcos bargaining power, it recently awarded drilling packages to National Oilwell Varco for seven Brazilian-built rigs. The award reflected all of the rigs that Petrobras has obtained from its recent tender, at a price ($214 million per rig) that is well within National Oilwell Varcos historical opportunity per rig. However, if Brazils experiment is successful, it may embolden other national oil companies around the world to follow a similar path and exclude National Oilwell Varco from some large potential markets.
Valuation, Growth and Profitability
Were keeping our fair value estimate at $97 per share after incorporating the NKT deal. Our fair value estimate implies a forward 2012 EV/EBITDA multiple of 9 times and a forward 2012 P/E multiple of 17. The firms outlook is bright in an improving deep-water environment where drillers are eagerly ordering new rigs. All of the new rigs represent potential new wins for National Oilwell Varco. In addition, Petrobras appears close to awarding rig equipment orders for as many as 21 deep-water rigs across the next 18 months, and National Oilwell Varco is extremely well positioned to secure a large portion of the awards. Petrobras needs are likely to come on top of the already existing boom in new-build announcements since late 2010. We think both trends will lead to rapid growth in quarterly ordering trends through 2012. Overall, we assume a firmwide operating margin of 21% in 2012.
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[NYSE]
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Economic Moat Wide
Stewardship C
Longer term, we think National Oilwell Varcos revenue growth will be 10% annually, as the global rig fleets gradually upgrade and replace rigs after two decades of underinvestment. We project stable long-term rig equipment operating margins at 25%-27% and overall company operating margins at 20%-21% through 2015. We expect National Oilwell Varcos capital and deal-related expenditures in 2012 and 2013 to be $1.6 billion (which includes the $670 million outlay for NKT) and $1.1 billion, respectively.
Bears Say
Risk
The company is exposed to cost inflation on its raw-material and labor costs. It also has to meet tough delivery deadlines on certain fixed-price contracts. Many rigs in the 1980s missed their original delivery dates and were delivered significantly over budget. A repeat scenario could hurt the companys profitability and further damage its already-weak reputation for customer satisfaction.
Many drillers believe upgrades on offshore rigs can add as many as 20 years of useful life. This would extend the life span of a rig to 45 years from 25. If this is the case, new rig orders and National Oilwell Varcos results will suffer. U.S. drilling activity is extremely volatile, which could make customers reluctant to spend heavily on new land rigs. Any sustained decline in drilling activity could mean a sharp drop-off in new land rig orders and order cancellations for the firm. There is about $6.2 billion worth of goodwill on the balance sheet. If management overpays for deals, the firm could take write-downs. The company took a $147 million impairment charge in mid-2009 to certain Grant Prideco-related assets.
Financial Overview
Bulls Say
Financial Health: The balance sheet looks rock-solid, as the firm ended 2011 with $3.5 billion in cash versus just $510 million in debt. We expect the firms cash-generation abilities in the near future to provide ample cash for its needs.
We expect an average of 20 deep-water rigs to be delivered annually for the next few years, versus just 3-4 new rigs a year historically. The firm has the opportunity to provide equipment for many of these new rigs. The vast majority of the global jackup fleet is well over 20 years old. Both deep-water and land rigs have similar age profiles. These ancient rigs present lucrative upgrading opportunities for the company. The NKT, Ameron, and APL deals indicate the deal-making skills of the NOVs management team. All three deals expand NOVs product portfolio in key growth areas as well as niches with highly attractive competitive dynamics.
Company Overview
Profile: National Oilwell Varco is one of the largest equipment suppliers in the drilling industry. It provides a comprehensive line of equipment for rigs and consumable products used in oil and gas production. The company also provides distribution services, which include maintenance, spare parts, and repair services for its equipment. Management: CEO Merrill Miller Jr. has led National Oilwell Varco since 2001. After orchestrating numerous acquisitions that have largely consolidated the equipment market to the firms benefit, Miller has earned his paycheck, in our opinion. The company also consistently

[NYSE]
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QQQQ
Economic Moat Wide
Stewardship C
offers some of the best industry commentary on its quarterly calls. We believe Miller and CFO Clay Williams are shrewd judges of value and very good capital allocators. We think the recent deals for Ameron, APL, and NKT expand NOVs footprint in key growth areas and will create shareholder value over the long run. That said, the firm could be far more open about how it determines compensation. Wed like to see details about specific hurdle targets and the use of shareholder-friendly measures such as several years of return on invested capital or return on equity to judge management performance. Wed also like to see separation of the chairman and CEO roles, which would improve board independence. Overall, we view National Oilwell Varco as a very well-run company with a thoughtful management team that is focused on creating shareholder value.

[NYSE]
TM
QQQQ
Economic Moat Wide
Stewardship C
Analyst Notes
Feb. 14, 2012 Petrobras Recent Rig Orders Are Good News for Equipment Firms and Offshore Drillers
Petrobras recent commitments to 28 offshore rigs should benefit both equipment firms and offshore drillers. Petrobras has placed orders for 21 offshore rigs with Sete Brasil and another five rigs with Ocean Rig. Sete Brasil, which is Petrobras rig management company and owned by pension funds, banks, and Petrobras itself, added two more rig orders within days of Petrobras original order, and plans to contract them on the spot market. The 15-year contracts range from $530,000 to $548,000 a day with provisions for lowering the rates subject to additional financing, tax, and operational cost savings. We note that the orders do not resolve our long-standing concerns over both schedule and construction price risk (recent rig construction prices in Brazil are about $800 million versus $625 million elsewhere), particularly with the nascent Brazilian shipyard industry, but ordering the rigs is certainly a good first step. The rig orders present a large opportunity for the equipment firms. Given National Oilwell Varcos prior win of 100% of the rig equipment on Sete Brasils earlier order of seven rigs, we believe it will again be the preferred partner for the latest order of 23 rigs. Based on the earlier price of $214 million per rig, the equipment order could be around $4.9 billion. Wed expect to see the equipment ordered within six to nine months. For Ocean Rig, we believe Cameron likely will supply the blowout preventers as it has done with the other rigs in Ocean Rigs fleet, which represents a $150 million to $200 million opportunity in 2012. For the offshore drillers, the Sete Brasil order is also good
Feb. 03, 2012
news. The upsizing of Petrobras rig order beyond the original 28-rig tender to 35 rigs indicates Petrobras rig needs are likely well beyond what it has publicly indicated. This dynamic suggests that offshore drillers such as Ensco, Noble, Seadrill, and Transocean are well-positioned to meet Petrobras short-term rig gap, as the first rig, if it meets its schedule, wont be delivered until mid-2015. Diamond Offshore recently placed an order to upgrade a midwater rig as it sees healthy demand in Brazil for exactly this reason. Alternatively, the offshore drillers could take rig management contracts with Sete Brasil to operate the under-construction rigs. We believe that taking the original rig contracts, as laid out by Sete Brasil, would be a value-destroying measure, as a $500,000 to $550,000 day rate does not create economic value for an $800 million rig. In order for the contracts to be attractive to the major offshore drillers, the day rates need to be around $650,000 a day with provisions that allow the drillers to recover labor and other materials cost increases over time. Finally, while the rigs do represent additional rig supply to the market, we believe the 15-year nature of the contracts limits the ability for the rigs to compete for contracts on the global rig markets, protecting the industrys overall returns.
National Oilwell Varco Acquires NKT Flexibles; Buys Into Structurally Attractive Flexible Pipe Niche
National Oilwell Varco has agreed to acquire NKT Flexibles for about $670 million. NKT, a joint venture between NKT Holdings and Subsea 7, designs and manufactures flexible pipe for floating, production, storage, and offloading
vessels, as well as subsea applications including production, gas lift, gas injection, water injection and other products. We have long thought National Oilwell Varco would expand to the subsea space, perhaps through an

[NYSE]
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QQQQ
Economic Moat Wide
Stewardship C
Analyst Notes (continued) acquisition of FMC Technologies, but this deal addresses the issue nicely, too. NKT generated about $264 million in 2011 revenue and about $53 million in EBITDA (or a 20% margin), which means National Oilwell Varco paid about 12.6 times 2011 EBITDA for the asset. The price appears rich, but the flexibles business is a very attractive one, and NKT is well positioned for the future. We like the flexibles space and we believe it has attractive structural elements that do create competitive advantages. The industry is consolidated to the extent that there are only four major players globally, and the use of long-term frame agreements with customers creates high switching costs by locking in a customer to a given manufacturer. It also requires substantial technical expertise to develop pipe that can be qualified for installation in 10,000 feet of water. The four main suppliers, which in order of size, are Technip, GE (through
Feb. 02, 2012
Wellstream), NKT, and Prysmian. Technips share of the market is roughly twice that of GEs and NKTs combined. Technip is the only player that is vertically integrated in the industry, as it not only manufactures the pipe around the world, but also installs it. That said, NKT recently won a four-year frame agreement with Petrobras, which is the worlds largest consumer of flexible pipe for $1.7 billion. As part of the agreement, NKT (and now National Oilwell Varco) will build a flexible pipe plant in Brazil at a cost of around $175 million, which will open in 2013. Thus, this deal allows National Oilwell Varco to expand its relationship with one of its most important customers, acquire assets with attractive competitive dynamics, and expand its footprint in the FPSO as well as the subsea space. Overall, we view the NKT acquisition favorably, and think it will generate a respectable return for National Oilwell Varco.
National Oilwell Varco Continues to Roll Amid an Improving Deep-Water Outlook
National Oilwell Varco delivered a respectable fourth quarter. Revenue increased 14% sequentially to $4.26 billion, aided by $71 million in revenue contributed by the Ameron acquisition. Operating profit, excluding charges, was up 11% to $860 million over the same time frame. New rig equipment orders during the quarter were $1.67 billion, a decline from the last two quarterly results of $3.9 billion (which included a record-breaking $1.5 billion Petrobras order) and $3 billion. The firms orders tend to be lumpy on a quarterly basis, and we note it received a record $10.8 billion in rig equipment orders in 2011, easily beating its prior high of $7.3 billion. National Oilwell Varco remains well positioned in an improving deep-water environment. We believe the deep-water outlook continues to strengthen, as evidenced by a recent two-and-a-half-year, $530,000 a day contract
for Enscos 8506 and a three-year contract for Nobles Jim Day at an adjusted $580,000 a day. Both day rates are well above recent lows of $450,000 and indicate a tightening deep-water market for the drillers. Furthermore, Gulf of Mexico deep-water rig activity is back to around two thirds of pre-Macondo levels, and we expect to reach and exceed pre-Macondo levels by the beginning of 2013. In fact, the Bureau of Ocean Energy Management recently announced that an oil and gas lease sale in the central Gulf of Mexico, where the spill occurred, will take place in June 2012. This new lease sale is the first for the central Gulf of Mexico since the Macondo spill and includes leases that were originally postponed because of the disaster. New lease sales will continue to promote healthy levels of drilling activity and demand for rig equipment in the region, and we believe the oil and gas industry

[NYSE]
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Economic Moat Wide
Stewardship C
Analyst Notes (continued)

Oct. 25, 2011 National Oilwell Varco Turns In Another Record-Breaking Quarter; Thesis Intact
National Oilwell Varco delivered a very good third-quarter report. Revenue was $3.74 billion, up 6% sequentially, and operating profit increased 9% over the same time frame to $778 million. Rig technology order intake was a record $3.94 billion, including a $1.5 billion order from Estaleiro Atlantico Sul. National Oilwell Varcos backlog now stands at $10.27 billion, up more than 100% year over year. During the last rig ordering cycle, it took National Oilwell Varco nearly two years to add similar levels of backlog. We expect the firms backlog to top or be very close to breaking 2008s high of $11.8 billion next quarter. We estimate there are about 45 or so mostly deep-water rig options that have yet to be exercised, and with rig construction prices increasing, we believe these options are becoming more valuable to drillers. Thus, National Oilwell Varco has a healthy tailwind as these drillers are motivated to order
Sept. 01, 2011 National Oilwell Varcos Economic Moat Is Now Wide
more rigs. Nonbacklog revenue in the rig technology segment improved 12% sequentially and 14% year over year, as the firm continues to benefit from strong demand for its aftermarket spare parts and services. We estimate National Oilwell Varcos aftermarket business is around $1.5 billion a year and growing. After Macondo, the offshore drillers have relied more heavily on original equipment manufacturers to certify and service their equipment, and demand is so high that it is causing significant downtime issues for the drillers because the equipment cannot be serviced quick enough. National Oilwell Varco has equipment on 90% of the worlds rig fleet, so it should continue to be a prime beneficiary of this trend. All of these trends confirm our thesis for this wide-moat firm.
Weve increased our economic moat rating for National Oilwell Varco to wide from narrow. We upgraded National Oilwell Varco to a narrow moat in early 2008, as we recognized the value of its low-cost position in rig equipment. The companys equipment is on more than 90% of the worlds rigs, and we estimate it has about 60% market share in rig equipment. National Oilwell Varcos competitive position has been built piece by piece through decades of acquisitions after the 1980s bust. The opportunity to acquire many of its competitors and rationalize the industry during a multidecade bust was unique, and existing and new entrants will find it impossible to duplicate the firms size and reach. As a result, many offshore and onshore drillers have standardized on National Oilwell Varcos equipment, including Ensco and Transocean, and large chunks of Pattersons and Nabors onshore fleets have come from NOV as well. The company is so dominant in the industry that its nickname is No Other Vender.
We believe National Oilwell Varco has a wide economic moat because of its low-cost and comprehensive position in rig equipment, which was acquired through decades of acquisitions. We believe this position cannot be duplicated by peers because NOV already owns brands with reputations and market positions that stretch back decades. The dominance of a low-cost position can be weakened by competitors that focus on extracting premium prices for niche product lines. However, we believe National Oilwell Varco has effectively marginalized competitors by raising switching costs for its customers that already largely standardize on its equipment. A few examples of these higher switching costs are rig stores on rigs, consistent acquisition activity that extends the firms product line into new niches (APL, Grant Prideco), and the complete integration of all its rig equipment into a single operating system, which should boost rig performance over time while lowering costs and levels of rig downtime for the

[NYSE]
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Economic Moat Wide
Stewardship C
Analyst Notes (continued) drillers.

Aug. 31, 2011 Cameron to Buy LeTourneaus Drilling Operations; Faces Uphill Battle Against National Oilwell Varco
Cameron has agreed to purchase LeTourneaus drilling systems and offshore equipment operations from Joy Global for $375 million in cash. Joy Global completed its purchase of LeTourneau from Rowan for $1.1 billion in cash in June and retains the mining equipment portion of the business. We think this division of assets makes much more sense than the original deal, as both companies now own the pieces of LeTourneau that are closest to their core competencies. For Cameron, acquiring the drilling equipment side of LeTourneau represents a rare opportunity to purchase a decent-size player in a market that has been controlled by National Oilwell Varco. In 2010, LeTourneau generated roughly $515 million in drilling equipment revenue and reported an operating loss of $18 million after $42 million in inventory write-downs. Therefore, National Oilwell Varco will still remain dominant in the rig equipment business with $7 billion in 2010 equipment revenue versus our estimate of $1.3 billion in 2010 revenue for Camerons newly enlarged drilling equipment operations.
Aug. 15, 2011
The dominance of National Oilwell Varco is partly why we view the deal as value-neutral at best for Cameron. Cameron should be able to derive significant benefits from pushing LeTourneaus equipment through its global distribution network, which is far larger than what Rowan could offer. However, virtually all of the operating income that LeTourneau generated in 2008-10 came from providing premium jackup rig equipment to Rowan. Rowan has now shifted its attention toward adding deep-water rigs, and its two new deep-water rig orders primarily contain equipment from National Oilwell Varco. Rowans lucrative under-construction jackup program wraps up at the end of 2011. The loss of this tailwind exposes the shortcomings in LeTourneaus product lines, as National Oilwell Varco retains well over 80% of the mud pump market, and LeTourneau does not have significant share in the top drive, rotary table, draw works, and land rig markets. We believe Cameron will face an uphill battle to extract significant value from its acquisition of LeTourneaus drilling systems.
National Oilwell Varco Wins 100% Share of First Seven Petrobras Rigs
National Oilwell Varco announced that it has signed $1.5 billion in contracts to provide seven drilling equipment packages to Estaleiro Atlantico Sul. This is the largest single order in the companys history and represents 100% share of Petrobras first seven rig commitments from earlier this year. The order is significant because of its sole-source nature, as National Oilwell Varcos global market share for rig equipment is around 60% by our estimates. In addition, at $214 million per rig, the order size is well within National Oilwell Varcos opportunity set of $200 million-$300 million per deep-water rig, which implies that the company didnt bend on price. We view the lack of
obvious price discounts as further indication of the strength of National Oilwell Varcos moat, especially when facing off against a powerful national oil company like Petrobras. The seven-rig order was part of Petrobras plan to obtain 28 rigs, and it has retendered for the remaining 21 rigs, which also represent potential wins for National Oilwell Varco. If National Oilwell Varco can claim the remaining 21 rig equipment orders, they would represent about $4.5 billion in orders. We do not think National Oilwell Varco can continue to monopolize the rig equipment market for Petrobras future orders, but we acknowledge it now has a

[NYSE]
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Stewardship C
Analyst Notes (continued) significant edge over its peers.
Disclaimers & Disclosures No Morningstar employees are officers or directors of this company. Morningstar Inc. does not own more than 1% of the shares of this company. Analysts covering this company do not own its stock. The information contained herein is not represented or warranted to be accurate, correct, complete, or timely. This report is for information purposes only, and should not be considered a solicitation to buy or sell any security.
Morningstar Stock Data Sheet
Pricing data thru Feb. 16, 2012
Rating updated as of Feb. 16, 2012
Fiscal year-end: December

National Oilwell Varco is one of the largest equipment suppliers in the drilling industry. It provides a comprehensive line of equipment for rigs and consumable products used in oil and gas production. The company also provides distribution services, which include maintenance, spare parts, and repair services for its equipment.
Morningstar Rating
Sales USD Mil Mkt Cap USD Mil Industry
Sector
13,571
Last Price Fair Value
35,836
Uncertainty
Oil Energy & Gas Equipment & Services

Economic Moat
TM
QQQQ
14.40 7.59
84.55
97.00 38.80 25.81
Medium 92.70 17.60
Wide 67.72 32.18
Stewardship Grade
C per share prices in USD

Annual Price High Low Recent Splits
12.43 8.75
18.69 10.83
34.16 16.54
82.00 26.88
2:1
50.17 22.19
86.71 47.97
84.64 67.99
Price Volatility
79.0 39.0 19.0
Monthly High/Low Rel Strength to S&P 500 52 week High/Low 86.71 - 47.97 10 Year High/Low 92.70 - 7.59
7909 Parkwood Circle Drive Houston, TX 77036-6565 Phone: 1 713 346-7500Website: http://www.natoil.com
4.0 1.0 6.0 2.0
Bear-Market Rank 1 (10=worst) Trading Volume Million
Growth Rates Compound Annual

Grade: C 1 Yr 3 Yr 5 Yr 10 Yr
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
YTD
Stock Performance Total Return % +/- Market +/- Industry Dividend Yield % Market Cap USD Mil
Financials
Revenue % Operating Income % Earnings/Share % Dividends % Book Value/Share % Stock Total Return % +/- Industry +/- Market Profitability Analysis
Grade: C
-4.4 5.7 13.1 310.0 10.9 5.3 16.9 3.7

Current
7.5 6.2 1.9 . 26.0 44.9 14.9 26.9

5 Yr Avg
21.2 38.7 34.5 . 25.5 20.6 14.6 22.0

Ind
26.6 41.1 47.8 . 22.8 23.1 9.9 21.6

Mkt
6.0 29.4 14.3 . 1769

2001
2.4 -24.0 -17.4 . 1902

2002
57.8 48.8 22.9 . 3033

2003
77.7 74.7 28.8 . 10929

2004
-2.4 -16.0 -26.4 . 10737

2005
140.1 136.6 95.5 . 26200

2006
-66.7 -28.2 -7.6 . 10199

2007
84.9 61.5 22.0 0.2 18450

2008
53.5 40.7 17.6 0.6 28322

2009
1.8 1.8 11.3 0.7 28817

2010
24.4 16.4 13.1 0.5 35836

TTM
1747 24.5 189 10.8 104 . . . 5.76 -35 -27 -63

2001
1522 23.8 134 8.8 73 0.45 . 163 6.41 104 -25 79

2002
2005 23.2 159 7.9 77 0.45 . 170 7.54 31 -32 -1

2003
2318 21.4 169 7.3 110 0.64 . 173 12.03 166 -39 127
2004
4645 21.3 477 10.3 287 0.91 . 317 14.31 78 -105 -28
2005
7026 25.1 1111 15.8 684 1.94 . 354 18.68 1217 -200 1016
2006
9789 28.9 2044 20.9 1337 3.76 . 355 30.26 1188 -252 936
2007
13431 30.3 2918 21.7 1952 4.90 . 399 33.73 2294 -379 1916
2008
12712 29.8 2315 18.2 1469 3.52 0.10 417 37.39 2095 -250 1845
2009
12156 31.5 2447 20.1 1667 3.98 0.41 419 40.43 1542 -232 1310
2010
13571 31.1 2713 20.0 1860 4.40 0.44 423 40.43 2328 -409 1919
TTM
Revenue USD Mil Gross Margin % Oper Income USD Mil Operating Margin % Net Income USD Mil Earnings Per Share USD Dividends USD Shares Mil Book Value Per Share USD Oper Cash Flow USD Mil Cap Spending USD Mil Free Cash Flow USD Mil
Profitability
Return on Equity % 11.5 Return on Assets % 8.0 Fixed Asset Turns 7.2 Inventory Turns 2.5 Revenue/Employee USD K 330.8 Gross Margin % Operating Margin % Net Margin % Free Cash Flow/Rev % R&D/Rev % Financial Position
Grade: B
16.0 9.5 7.9 2.9 325.3 * 29.1 19.4 12.6 12.7 .
11.2 22.6 6.2 9.5 2.3 7.5 5.3 16.0 . 1049.5 24.4 13.6 8.4 2.2 . 38.3 16.7 11.2 0.1 9.7
31.1 20.0 13.7 14.1 .
12-10 USD Mil
09-11 USD Mil
Cash Inventories Receivables Current Assets Fixed Assets Intangibles Total Assets Payables Short-Term Debt Current Liabilities Long-Term Debt Total Liabilities Total Equity Valuation Analysis
Current
3333 3388 3240 10535 1840 9893 23050 1607 373 4536 514 7302 15748
5 Yr Avg Ind
3870 3907 3109 12038 1967 9937 24544 2407 2 4744 510 7410 17134
Mkt
. . 6.0 . .
2001
4.3 8.1 4.8 0.88 2.1

2002
3.6 7.6 3.8 0.95 2.1

2003
4.5 9.2 4.8 0.96 2.0

2004
6.2 10.4 6.2 1.00 1.6

2005
8.7 14.8 9.7 0.90 1.8

2006
12.7 22.9 13.7 0.93 1.8

2007
11.6 20.2 14.5 0.80 1.7

2008
6.8 11.0 11.6 0.59 1.5

2009
7.5 11.2 13.7 0.55 1.5

2010
8.0 11.5 13.7 0.58 1.4

09-11
Return on Assets % Return on Equity % Net Margin % Asset Turnover Financial Leverage
Financial Health
631 300 868 .

2002
769 595 933 0.64

2003
794 594 1090 0.54

2004
737 350 1296 0.27

2005
1811 836 4194 0.20

2006
2300 835 5024 0.17

2007
3567 738 6661 0.11

2008
4034 870 12628 0.07

2009
5424 876 14113 0.06

2010
5999 514 15748 0.03

2011
7294 510 17134 0.03

TTM
Working Capital USD Mil Long-Term Debt USD Mil Total Equity USD Mil Debt/Equity
Valuation
24.5 . 1.2 1.9 17.1
24.8 . 0.9 1.7 61.4
27.8 . 1.3 2.3 18.4
34.6 . 1.8 2.6 109.9
15.8 . 1.5 2.1 8.9
19.5 . 2.7 3.9 22.0
5.0 . 0.7 0.8 4.3
12.5 . 1.5 1.3 8.8
16.9 . 2.3 1.8 18.3
15.5 0.9 2.1 1.7 12.4
19.2 1.3 2.6 2.1 15.4
Price/Earnings P/E vs. Market Price/Sales Price/Book Price/Cash Flow
Quarterly Results
Revenue USD Mil Dec 10 Mar 11 Jun 11 Sep 11
Industry Peers by Market Cap

Mkt Cap USD Mil Rev USD Mil P/E ROE%
Price/Earnings Forward P/E Price/Cash Flow Price/Free Cash Flow Dividend Yield % Price/Book Price/Sales PEG Ratio
19.2 12.2 15.4 18.6 0.5 2.1 2.6 0.7
13.9 . 13.1 15.9 . 1.9 1.9 .
21.6 . 14.8 86.2 0.7 2.4 1.9 .
14.7 13.4 7.5 17.1 2.0 2.0 1.2 1.5
Most Recent Period Prior Year Period

Rev Growth %
3172.0 3146.0 3513.0 3740.0 3134.0 3032.0 2941.0 3011.0

Dec 10 Mar 11 Jun 11 Sep 11
National Oilwell Var Schlumberger NV Cameron Internationa Major Fund Holders
35836 104115 13768
13571 19.2 39669 22.2 6737 23.9
11.5 16.0 13.3

Earnings Per Share USD
1.2 -17.8
Dec 10
3.8 -12.9
Mar 11
19.4 -2.3
Jun 11
24.2 -2.5
Sep 11
% of shares
1.05 0.94
0.96 1.01
1.13 0.96
1.25 0.96
. . .
TTM data based on rolling quarterly data if available; otherwise most recent annual data shown.
*3Yr Avg data is displayed in place of 5Yr Avg
Morningstars Approach to Rating Stocks
Our Key Investing Concepts Economic Moat Rating Discounted Cash Flow Discount Rate Fair Value Uncertainty Margin of Safety Consider Buying/Consider Selling Stewardship Grades
TM
At Morningstar, we evaluate stocks as pieces of a business, not as pieces of paper. We think that purchasing shares of superior businesses at discounts to their intrinsic value and allowing them to compound their value over long periods of time is the surest way to create wealth in the stock market. We rate stocks 1 through 5 stars, with 5 the best and 1 the worst. Our star rating is based on our analysts estimate of how much a companys business is worth per share. Our analysts arrive at this "fair value estimate" by forecasting how much excess cash--or "free cash flow"--the firm will generate in the future, and then adjusting the total for timing and risk. Cash generated next year is worth more than cash generated several years down the road, and cash from a stable and consistently profitable business is worth more than cash from a cyclical or unsteady business. Stocks trading at meaningful discounts to our fair value estimates will receive high star ratings. For high-quality businesses, we require a smaller discount than for mediocre ones, for a simple reason: We have more confidence in our cash-flow forecasts for strong companies, and thus in our value estimates. If a stocks market price is significantly above our fair value estimate, it will receive a low star rating, no matter how wonderful we think the business is. Even the best company is a bad deal if an investor overpays for its shares. Our fair value estimates dont change very often, but market prices do. So, a stock may gain or lose stars based
just on movement in the share price. If we think a stocks fair value is $50, and the shares decline to $40 without much change in the value of the business, the star rating will go up. Our estimate of what the business is worth hasnt changed, but the shares are more attractive as an investment at $40 than they were at $50. Because we focus on the long-term value of businesses, rather than short-term movements in stock prices, at times we may appear out of step with the overall stock market. When stocks are high, relatively few will receive our highest rating of 5 stars. But when the market tumbles, many more will likely garner 5 stars. Although you might expect to see more 5-star stocks as the market rises, we find assets more attractive when theyre cheap. We calculate our star ratings nightly after the markets close, and issue them the following business day, which is why the rating date on our reports will always be the previous business day. We update the text of our reports as new information becomes available, usually about once or twice per quarter. That is why youll see two dates on every Morningstar stock report. Of course, we monitor market events and all of our stocks every business day, so our ratings always reflect our analysts current opinion.
Economic Moat Rating
TM
The Economic Moat Rating is our assessment of a firms ability to earn returns consistently above its cost of capital in the future, usually by virtue of some competitive advantage. Competition tends to drive down such
TM
Morningstar Research Methodology for Valuing Companies
Competitive Analysis
Economic TM Moat Rating
Company Valuation
Fair Value Estimate
Uncertainty Assessment
QQQQQ
Q QQ QQQ QQQQ QQQQQ
The current stock price relative to fair value, adjusted for uncertainty, determines the rating.
Analyst conducts company and industry research: Management interviews Conference calls Trade-show visits Competitor, supplier, distributor, and customer interviews
The depth of the firms competitive advantage is rated: None Narrow Wide
Analyst considers company financial statements and competitive position to forecast future cash flows. Assumptions are input into a discounted cash-flow model.
DCF model leads to the firms Fair Value Estimate, which anchors the rating framework.
An uncertainty assessment establishes the margin of safety required for the stock rating.
Morningstars Approach to Rating Stocks (continued)
economic profits, but companies that can earn them for an extended time by creating a competitive advantage possess an Economic Moat. We see these companies as superior investments.
Very High, or Extreme. The greater the level of uncertainty, the greater the discount to fair value required before a stock can earn 5 stars, and the greater the premium to fair value before a stock earns a 1-star rating.
Discounted Cash Flow
Margin of Safety
This is a method for valuing companies that involves projecting the amount of cash a business will generate in the future, subtracting the amount of cash that the company will need to reinvest in its business, and using the result to calculate the worth of the firm. We use this technique to value nearly all of the companies we cover.
This is the discount to fair value we would require before recommending a stock. We think its always prudent to buy stocks for less than theyre worth.The margin of safety is like an insurance policy that protects investors from bad news or overly optimistic fair value estimates. We require larger margins of safety for less predictable stocks, and smaller margins of safety for more predictable stocks.
Discount Rate
We use this number to adjust the value of our forecasted cash flows for the risk that they may not materialize. For a profitable company in a steady line of business, well use a lower discount rate, also known as "cost of capital," than for a firm in a cyclical business with fierce competition, since theres less risk clouding the firms future.
Consider Buying/Consider Selling
The consider buying price is the price at which a stock would be rated 5 stars, and thus the point at which we would consider the stock an extremely attractive purchase. Conversely, consider selling is the price at which a stock would have a 1 star rating, at which point wed consider the stock overvalued, with low expected returns relative to its risk.
Fair Value
This is the output of our discounted cash-flow valuation models, and is our per-share estimate of a companys intrinsic worth. We adjust our fair values for off-balance sheet liabilities or assets that a firm might have--for example, we deduct from a companys fair value if it has issued a lot of stock options or has an under-funded pension plan. Our fair value estimate differs from a "target price" in two ways. First, its an estimate of what the business is worth, whereas a price target typically reflects what other investors may pay for the stock. Second, its a long-term estimate, whereas price targets generally focus on the next two to 12 months.
Stewardship Grades
We evaluate the commitment to shareholders demonstrated by each firms board and management team by assessing transparency, shareholder friendliness, incentives, and ownership. We aim to identify firms that provide investors with insufficient or potentially misleading financial information, seek to limit the power of minority shareholders, allow management to abuse its position, or which have management incentives that are not aligned with the interests of long-term shareholders. The grades are assigned on an absolute scale--not relative to peers--and can be interpreted as follows: A means "Excellent," B means "Good," C means "Fair," D means "Poor," and F means "Very Poor."
Uncertainty
To generate the Morningstar Uncertainty Rating, analysts consider factors such as sales predictability, operating leverage, and financial leverage. Analysts then classify their ability to bound the fair value estimate for the stock into one of several uncertainty levels: Low, Medium, High,

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National Oilwell Varco, Inc. NOV

Economic Moat Wide

Analyst Note Feb. 14, 2012

Thesis Feb. 07, 2012

National Oilwell Varco, Inc. NOV

Economic Moat Wide

Close Competitors National Oilwell Varco, Inc. Schlumberger NV

Currency(Mil) USD USD USD USD

Market Cap 35,836 104,115 13,768 12,236

TTM Sales 13,571 39,669 6,737 4,701

Oper Income 2,713 6,338 741 556

Net Income 1,860 4,997 587 400

Cameron International Corporation FMC Technologies, Inc.

Valuation, Growth and Profitability

National Oilwell Varco, Inc. NOV

Economic Moat Wide

National Oilwell Varco, Inc. NOV

Economic Moat Wide

National Oilwell Varco, Inc. NOV

Economic Moat Wide

National Oilwell Varco, Inc. NOV

Economic Moat Wide

National Oilwell Varco Continues to Roll Amid an Improving Deep-Water Outlook

National Oilwell Varco, Inc. NOV

Economic Moat Wide

Analyst Notes (continued)

National Oilwell Varco, Inc. NOV

Economic Moat Wide

Analyst Notes (continued) drillers.

National Oilwell Varco, Inc. NOV

Economic Moat Wide

Analyst Notes (continued) significant edge over its peers.

Morningstar Stock Data Sheet

Pricing data thru Feb. 16, 2012

Rating updated as of Feb. 16, 2012

Fiscal year-end: December

National Oilwell Varco, Inc. NOV

Sales USD Mil Mkt Cap USD Mil Industry

Oil Energy & Gas Equipment & Services

97.00 38.80 25.81

Medium 92.70 17.60

Wide 67.72 32.18

C per share prices in USD

4.0 1.0 6.0 2.0

Bear-Market Rank 1 (10=worst) Trading Volume Million

Growth Rates Compound Annual

-4.4 5.7 13.1 310.0 10.9 5.3 16.9 3.7

7.5 6.2 1.9 . 26.0 44.9 14.9 26.9

21.2 38.7 34.5 . 25.5 20.6 14.6 22.0

26.6 41.1 47.8 . 22.8 23.1 9.9 21.6

6.0 29.4 14.3 . 1769

2.4 -24.0 -17.4 . 1902

57.8 48.8 22.9 . 3033

77.7 74.7 28.8 . 10929

-2.4 -16.0 -26.4 . 10737

140.1 136.6 95.5 . 26200

-66.7 -28.2 -7.6 . 10199

84.9 61.5 22.0 0.2 18450

53.5 40.7 17.6 0.6 28322

1.8 1.8 11.3 0.7 28817

24.4 16.4 13.1 0.5 35836

1747 24.5 189 10.8 104 . . . 5.76 -35 -27 -63