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hollandmarigoldOil and Offshore

Nov 8, 2013 (3 years and 9 months ago)

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Investment Proposal and Recommendation


Energy Industry

National Oilwell Varco

Hon
i
g, Hall Investments LLC

3/29/2010






Table of Contents

1.

The Company

i.

Business Description

ii.

Summary

of Revenue Contribution

iii.

Business Lines


1.


Specific Competitors

2.

Products

3.

Contracts

iv.

Risk Factors (Oil and Gas)

2.

Distribution to shareholders

3.

Financial Statement Forecasts

i.

Sales Growth History and Forecast

ii.

Discussion of Financials

1.

Scenario Analysis with risks

4.

Relative Valuation

i.

Multiples against industry

5.

Recommendation

6.

Appendix








Brief
Business Description

National Oilwell Vacro, Inc. (NOV or the
Company
), a Delaware corporation incorporated in 1995,
is a leading worldwide provider of equipment and components used in oil and gas drilling and
production operations, oilfield services, and supply chain integration services to the
upstream

oil and
gas industr
y. The company conducts operations in over 825 locations across six continents.

The Company has a long tradition of pioneering innovations which improve the cost
-
effectiveness,
efficiency, safety and environmental impact of oil and gas operations. The Comp
any’s common
stock is traded on the Ney York Stock Exchange under the symbol “NOV”. The Company operates
through three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution
Services.

Summary of Revenue Contribution


Growth in
Revenue

Over the last three years NOV has experienced some volatility in revenue contribution when
breaking down revenue by business segment. While the Rig Technology segment steadily grew from
$3,585 in 2006 to 8,093 in 2009; the other two segments were b
oth up and down during the time
period.

Rig Technology grew by 60% in 2007 from the previous year, 31% in 2008 from the previous year,
and grew 8% in 2009 from the previous year. The large growth from 2006 to 2008 was due in part
to high Oil prices which
reached $147 a barrel in July 2008. Other growth in this segment came
from strategic acquisitions in order to expand the product offering throughout the globe. A huge
player in the performance of the Rig Technology segment is the ability of NOV’s clients t
o spend
money on capital expenditures. This willingness by the clients is mostly driven by the rig activity
during the given period of time. A Key indicator of rig activity is the worldwide rig count published
by Baker Hughes. The rig count increased 11% i
n 2006 2 % in 2007, 7 % in 2008 which in turn
resulted in higher backlogs for the Rig Technology segment as conditions for capital equipment
purchases greatly improved. However, as a result of the financial crisis and significant lower
commodity process th
e rig count declined 31% in 2009. As a result NOV customers were far less
willing to commit cash for capital expenditures which halted the growth and thus resulted in a lower
growth rate in 2009.

Petroleum Services and Supplies segment grew by 26% in 2007
from the previous year, 52% in 2008
from the previous year, and declined by 19% in 2009 from the previous year. The positive
Revenue (in $ millions):
2009
2009%
2008
2008%
2007
2007%
2006
2006%
Rig Technology
8,093
64%
7,528
56%
5,745
59%
3,585
51%
Petroleum Services & Supplies
3,745
29%
4,651
35%
3,061
31%
2,425
35%
Distribution Services
1,350
11%
1,772
13%
1,424
15%
1,370
19%
Eliminations
-476
-4%
-520
-4%
-441
-5%
-354
-5%
Total Revenue
12,712
$

100%
13,431
$

100%
9,789
$

100%
7,026
$

100%
momentum seen in the growth in
the segment from 2006 to 2008 ca
n mostly be attributed to the
growing level of oilfield drilling and

work

over activity. This segment is highly dependent on the
amount of drilling activity as most of the services performed come from the use of NOV’s
equipment. Again, looking at the rig count the number of rigs in operations grew year by year from
2006 t
o 2008. The sharp decline in this segment in 2009 can also be explained through the steep
drop in the rig count during that same year.

Distribution Services segment by 4% in 2007 from the previous year, 24% in 2008 from the
previous year, and declined by
19% in 2009 from the previous year. The demand for this segment is
highly dependent on the level of drilling, servicing, and oil and gas production activities. This
segment is highly correlated to the performance of the Petroleum Services and Supplies segm
ent as
they both rely heavily of drill activity. As the rig count grows as seen from 2006 to 2008 the
Distribution Services revenues climb as more services are needed to keep up with the level of
activity. Consequently, as the rig counts drops so does the
revenue streams in this segment which is
apparent in 2009.

Reoccurring Revenue verse Capital Expenditures

NOV segments receive revenues from both capital expenditures as well as reoccurring revenues.
Most of the Rig Technology segment manufactures products that are high costs and higher life
expectancy. Most of these purchases are one time purchases that only
need to reoccur years after the
initial purchase. The Petroleum Services and Supplies and the Distribution Services segments are
mostly made up of reoccurring revenue streams. Most of the services and products in these
segments are continuously executed an
d purchased. Example of these reoccurring revenues may be
inspections of the rig, drill bits, and electronic analysis of drilling.

Domestic vs. International


NOV receives revenues from all over the globe. The United States has been the largest single
co
ntributor of revenues over the life of the firm. Over the last three years the amount of revenue
NOV received from the United States has dropped from 41% of the total revenues to 27%. This
can be explained by NOV aggressive strategy to gain exposure to int
ernational markets in order to
leverage growth. South Korea is an area where NOV has seen tremendous growth, mostly through
Geographic Revenue Breakdown
2009
2009%
2008
2008%
2007
2007%
United States
3,444


27%
4,369


33%
3,983


41%
South Korea
2,830


22%
291


2%
-


0%
Singapore
801


6%
856


6%
562


6%
Norway
629


5%
603


4%
677


7%
United Kingdom
578


5%
497


4%
348


4%
Canada
550


4%
751


6%
619


6%
Other Countries
3,880


31%
6,064


45%
3,600


37%
Total
12,712
$

100%
13,431
$

100%
9,789
$

100%
NOV’s aggressive acquisitions. In 2007 South Korea accounted for zero revenue and in 2009 it
accounted for 22%, making it the second

largest contributor of revenues. Overall NOV receives
roughly one third of its revenues from the United States and two
-
thirds from international markets.

Product Margins

The Rig Technology segment generated a record $8.1 billi
on in revenue and $2.3 billion
in operating
profit in 2009, producing

an operating margin
for the segment of 28.2 percent
. This is up slightly
from the operating margin from the previous year that was 26.2%.
The Petroleum Services and
Supplies
segment gene
rated $3.7 billion in revenue and $301 million in operating profit in 2009,
producing

an operating margin

for the segment of 8.0%. Operating margin was 22.4%

in 2008 and
dropped sharply in 2009 primarily due to reduced rig count activity combined with stro
ng price
competition. The Distribution Services segment generated $1.35 billion in revenue and $50 million
in operating profit in 2009, producing an operating margin of 3.7%. Operating margin decreased in
2009 from 7.3% in 2008 as a result of strong price
competition and rig activity decline.

Business Lines

Rig Technology

The Rig Technology segment designs, manufactures, sells and services complete systems for the
drilling, completion, and servicing of oil and gas wells. The segment offers a comprehensive
line of
highly
-
engineered equipment that automates complex well construction and management
operations, such as offshore and onshore drilling rigs; derricks; pipe lifting, racking, rotating and
assembly systems; rig instrumentation systems; coiled tubing e
quipment and pressure pumping units;
well working rigs;
wire line

winches;
wire line

trucks; and cranes. Demand for Rig Technology
products is primarily dependent on capital spending plans by
drilling

contractors, oilfield service
companies, and oil and ga
s companies; and secondarily on the overall level of oilfield drilling activity,
which drives demand for spare parts for the segment’s large installed base of equipment. NOV has
made strategic

acquisitions and other investments during the past several year
s in an effort to
expand their product offering and their global manufacturing capabilities, including adding
additional operations in the United States, Canada, Norway, the United Kingdom, China, Belarus,
India, Turkey, the Netherlands, Singapore, Brazil,

and South Korea.

Products

within Rig Technology


Mud Pumps


Mud pumps are high pressure pumps located on the rig that
force

drilling mud
down the drill pipe,
through

the drill bit and up the space between the drill pipe and the drilled
formation (the “annulus”) back to the surface. These pumps, which generate pressures of up to 7500
psi, must therefore be capable of displacing drilling fluids several thousand feet dow
n and back up
the well bore. The conventional mud pump design, known as the
triplex

pump, uses three
reciprocating pistons oriented horizontally. Recently, NOV has introduced the HEX Pump, which
uses six pumping cylinders, versus the three used in the trip
lex pump. Along with other footprint.
Reduced pulsation is desirable where
down hole

measurement equipment is being used during the
drilling process, as is often the case in directional drilling

Drilling Motors



NOV has helped lead the application of AC m
otor technology in the oilfield
industry. They are now transitioning from buying
motors

from third
parties

to building them their
own facilities and further developing motor technology, including the introduction of permanent
magnet motor technology to the

industry. These permanent magnet motors are being used in top
drives, cranes, mud pumps, winches, and
draw works
.


Hoisting Systems


Hoist
ing systems are used to raise or

lower the drill stem while drilling or
tripping, and to lower casing into the wellb
ore. The
draw works

is the heart of the hoisting system.
It is a large winch that spools off or takes in the drilling line, which is in turn connected to the drill
stem at the top of the derrick. The
draw works

also plays an important role in keeping the weight on
the drill bit at a desired level. This task is particularly challenging on offshore drilling rigs, which are
subject to wave motion. To address this, NOV has introduced the Active Heave Drilling “AHD”
Draw works
. The AHD
Draw works

uses computer
-
controlled motors

to compensate for the
motion experienced in offshore drilling operations.

Instrumentation


The Company’s Instrumentation business provides drilling rig operators real
time measurement and moni
toring of critical parameters required to improve rig safety and
efficiency. Systems are both sold and rented, and are comprised of hazardous area sensors placed
throughout the rig to measure critical drilling parameters; all networked back to a central co
mmand
station for review, recording and interpretation.


Comp
etitive

Advantage/Growth Opp
ortunities

The Rig Technology segment offers areas of growth for the Company as well as strong competitive
advantages over the rest of NOV’s competitors. An area of g
rowth comes in the Drilling Motors
line of products. In the past Nov has supplied its customers with drilling motors from a third party.
NOV has begun to manufacture their own motors, thus taking out the third party. Along with
manufacturing the motors, NO
V is developing advance motor technology and techniques that gives
their motors an edge over the competitors.


NOV holds a competitive advantage in the Mud Pumps product line with their HEX pump. This
pump uses six pumping cylinders and has other proprieta
ry features that make it the premium pump
in the industry when comparing it to others who only have three cylinder pumps.
Hoisting Systems

is another area where NOV holds a competitive advantage over their competitors. Hoisting Systems
have always struggl
ed on offshore drilling because of

the wave motion. NOV introduced

the Active
Heave Drilling
Draw works

to compensate for wave motions.

Another area in which NOV has a
competitive advantage is in Instrumentation. The company offers unique business integrat
ion
services to directly integrate information into business applications. DrillSuite is a business solution
introduced by NOV that allows contractors to streamline administration by eliminating manual entry
of data, promotes accurate payroll processing an
d invoicing, and includes asset tracking and
preventive maintenance management.


Competitors/ Market

The products of the Rig Technology group are sold in highly competitive markets and its sales and
earnings can be affected by competitive actions such as price changes, new product development, or
improved availability and delivery. The group’s primary
com
petitors

are Access Oil Tools; Aker
Solutions; American Block; Bromco’ Canrig: Cavins Oil and more. Management believes that the
principal competitive factors affecting its Rig Technology business are performance, quality,
reputation, customer service, ava
ilability of products, spare parts, and consumables,
breadth

of
product line and price.

Petroleum Services & Supplies

NOV’s Petroleum Services & Supplies segment provides a variety of consumable goods and services
used to drill, complete, remediate and
wor
k over

oil and gas wells and service pipelines,
flow lines

and other oilfield tubular goods. The segment manufactures, rents and sells a variety of products and
equipment used to perform drilling operations, including drill pip, wired drill pipe, transfer
pumps,
solids control system, drilling motors, drilling fluids, drill bits, reamers and other
down hole

tools,
and mud pump consumables. Demand for these services and supplies is determined principally by
the level of oilfield drilling and
work over

activi
ty by drilling contractors, major and independent oil
and gas companies
, and national oil companies. Oilfield tubular services include the provision of
inspection and internal coating
services

and equipment for drill pipe for application in highly
corrosiv
e environments. The segment sells its tubular goods and services to oil and gas companies;
drilling contractors; pipe distributors, processors and manufacturers; and pipeline operators. This
segment has benefited from several strategic acquisitions and oth
er investments completed during
the past few years, including additional operations in the United States, Canada, the United
Kingdom, China, Kazakhstan, Mexico, Russia, Argentina, India, Bolivia, the Netherlands, Singapore,
Malaysia, Vietnam, Brazil, and t
he United Arab Emirates.

Products within Petroleum Services & Supplies

Tubular Coating
/Inspection



The
Company

develops
,

manufactures
,

and applies its proprietary
tubular coatings, known as the Tube
-
Kote ®coatings, to new and used tubular. Tubular coatins help
prevent corrosion of tubular by providing a tough plastic shield to isolate steel from corrosive
oilfield fluids such as CO 2, H
2 S and brine. Delaying or preventing corrosion exten
d
s the

life of
existing tubular, reduces fluid flow rate through tubular by decrea
sing or eliminating paraffin and

scale build
-
up, which can reduce or block oil flow in producing wells.


Newly manufactured pipe sometimes contains serious defects that are not detected at the mill. In
addition, pipe can be damaged in transit and during handling prior to use at the well site. As a result,
exploration and production companies
often

have new tu
bular inspected before they are placed in
service to reduce the risk of tubular failures during drilling, completion, or production of oil and gas
wells.

Drill Pipe Products


The Company manufactures and sells a variety of drill stem products used
for the

drilling of oil and gas wells. The principal products sold by this segment are: (i) drill pipe, (ii)
drill collars and heavyweight drill pipe and (iii) drill stem accessories including tool joints. Drill pipe
is the principal tool, other than the rig, req
uired for the
drilling

of an oil or gas well.

Its primary
purpose is to connect the above
-
surface drilling rig to the drill bit.

IntelliServ


NOV IntelliServ is a joint venture between the Company and Schlumberger, Ltd. In
which NOV holds a 55% interest a
nd maintains
operational

control. This IntelliServ provides
wellbore data transmission services that enable high
-
speed communication up and down the drill
string throughout drilling and completion operations that are undertaken during the construction of
o
il and gas wells.

Bit Products


NOW
Down hole

( the business unit that combines a wide array of drilling and
intervention tool product lines)
manufactures

fixed cutter and roller cone drill bits and services its
customer

base through a technical sales and marketing network in virtually every significant oil and
gas producing region of the world. It provides fixed
-
cutter bit technology under various brand
names includin
g TReX ®, Raptor, and Duraforce.

Comp
etitive

Advantage
/Growth Opp
ortunities

The Petroleum Services and Supplies segment offers both areas of growth as well as competitive
advantages to NOV.
An area of potential growth comes from the Tubular Coating
and Inspection
service line. The Company produces Tube
-
Kote®
coatings, which is a proprietary coating that
prevents corrosion. In 2005, NOV entered into a joint venture with the Chinese that will allow
NOV to coat Chinese produced drill pipes. This business has been growing rapidly and in 2007
NOV opened second coat
ing plant in China. As China continues to consume large amounts of oil
the coating business will continue to grow for NOV.
Another area of potential growth for NOV is
in their IntelliServe product. NOV IntelliServ’s core product was commercialized in Febr
uary 2006
and incorporates various proprietary mechanical and electrical components into the premium
drilling tubular to enable data transmission rates that are currently up to 20,000 times faster than
mud pulse, the current industry standard. The demand f
or this service is growing considering the
added benefits Oil and Gas contractors receive.

The Company has a competitive advantage within the Tubular Coating and Inspection service line.
Along with the proprietary Tube
-
Kote® used to coat the drill pipes th
e Company introduced a
hard
banding

material called TCS
-
8000. This product enhances the wear characteristics and reduces
down
hole

casing wear on drilling pipes.
NOV also has a competitive advantage in the Drill Pipe Products
line. NOV offers premium drill
ing products that include proprietary lines of XT® and
TurboTorqueTM connections and 5 7/8
-
inch drill pipe that delivers superior performance to the
industry standard of 5 ½ inch drills.

Another area of competitive advantage that NOV has is in their
Bit Pr
oducts line. One of NOV most significant drill bit innovations is the TReX and Raptor cutter
technology, which significantly increase abrasion resistance (wear life) without sacrificing impact
resistance. The performance of these bits exceeds conventional
standards for bit performance.

Competitors/Market

Customers for the Petroleum Services & Supplies’ tubular services include major and independent
oil and gas companies, national oil companies, drilling and
work over

contractors, oilfield equipment
and product distributors and manufacturers, oilfield service companies, steel mills, and other
industrial companies. The Company’s
competitors

include Ameron
International

Corp; Smith
International, Inc; Baker Hughes Incorp
orated; and
Halliburton

Company.

Distribution Services

NOV’s Distribution Services segment provides maintenance, repair and operating supplies and spare
parts to drill site and production locations worldwide. In addition to NOV’s comprehensive network
of f
ield locations supporting land drilling operations throughout North America, the segment
supports major offshore drilling contractors through locations in Mexico, the Middle East, Europe,
Southeast Asia and South America. Distribution Services employs adva
nce information technologies
to provide complete procurement, inventory management and logistics services to its customers
around the globe. Demand for the segment’s services is determined primarily by the level of drilling,
servicing, and oil and gas prod
uction activities.

Services within Distribution Services

NOV Rig Store


NOV RigStore™ is a cutting
-
edge industry value offering by the Distribution
Services group whereby they provide the installation staffing and managemen
t of supply stores on
offshore
drilling rigs.

Domestic & International Services


Approximately

70% of the Distribution Services group’s
sales in 2009 were in the United States and Canada. The remainder comes from key international
markets in Latin America, the North Sea, Middle East,
Africa and the Far East. The Distribution
Services group has now expanded into oilfields in over 20 countries. Approximately 23% of
Distribution Services revenues are from the resale of goods manufactured by other segments within
the Company and the balanc
e are
sales

of goods manufactured by third parties.

Comp
etitive

Advantage/Growth Opp
ortunities

The Distribution Services segment offers both an opportunity for potential growth as well as areas
of competitive advantage.

The potential opportunity for growth

in this segment can be seen through
NOV’s future strategy.

The group works to strategically increase its revenue and enhance its
alliances with customers by continuous expansion of product and service solutions and creation of
differentiating value propo
sitions. Additionally the group leverages its extensive purchasing power to
reduce the costs of goods. The group is strategically expanding its sourcing network into low cost
countries globally.

A huge competitive advantage that NOV has in the Distribution

Services comes from their NOV
RigStore. With the NOV RigStore ™ business model, Distribution Services installs its own ERP
system onboard in order to access and leverage Distribution’s global inventory, hundreds of support
locations, and thousands of vend
ors across multiple product lines. This business model relieves the
average offshore drilling
rigs

balance sheet by providing improved accounting of these
expense

items, lower capital costs, extended payment on

p
art of the driller until the item is actuall
y issued
from the onboard supply store, and removed risk of ownership from the customer. Whether it is a
smaller, new drilling contractor or larger, established drilling company the benefits of effective
supply chain management and reduced total cost of ow
nership are substantial.

An
other

area of
competitive advantage is the unique one
-
stop
-
shop NOV provides in the Exploration and
Production market. NOV’s expertise in Exploration and Production products makes it the biggest
global provider of equipment and s
ervices to this space.

Competitors/Markets

The primary customers for Distribution Services include drilling contractors, well servicing
companies, major and independent oil and gas companies, and national oil companies. Competitors
in Distribution
Services include Wilson Supply, CE Franklin, MCJunkin Red Man, and a number of
regional competitors.

Contracts

Backlogs

The Company grew its backlog of capital equipment orders from $0.9 billion in 2005 to $11.8 billion
in 2008. However, as a result of the

credit crisis and slowing drilling activity, orders have declined
below amounts flowing out of backlog as revenue, causing backlog to decline to 6.4 billion in 2009.
The land rig backlog compromised 11 percent, and offshore compromised of 89 percent of th
e total
backlog in 2009. Equipment destined for international markets to
taled 92 percent of the backlog in
2009.


We believe that existing contracts for rig equipment are strong. The current trend of growing the
backlog will continue as the credit markets loosen up. The Company carries large down payments
and progress billing terms that are favorable to the completion

of the sale. The Company also has a
solid history of correctly estimating the cost of backlog orders up front so not mark down profits at
time of delivery.

Risk Factors

Influence of Oil and Gas Activity Levels on NOV’s Business

The oil and gas industry i
n which NOV participa
tes has historically experienced
significant volatility.
Demand for NOV’s services and products depends primarily upon the general level of activity in the
oil and gas industry worldwide, including the number of drilling rigs in operations, the number of oil
and
fast

wells being drilled,
the depth and drilling conditions of these wells, the volume of
production, the number of well completions and the level of well remediation activity. Oil and gas
activity is in turn heavily influenced by, among other factors, oil and gas prices worldwide.

High
levels of drilling
and

well
-
remediation activity generally spurs demand for the Company’s products
and services used to drill and remediate oil and gas wells. Additionally, high levels of oil and gas
activity increase cash flows available for drillin
g
contracts
, oilfield service companies, and
manufacturers of oil country tubular goods to invest in capital equipment that the Company sells.

The willingness of NOV’s clients to make capital expenditures and continue drilling activity is
influenced by man
y factors in which NOV has no control. These include the ability of OPEC to
maintain stable prices, level of production by non
-
OPEC countries, worldwide demand for oil and
gas, costs of exploring and producing oil, and development of alternative energy sou
rces.

In 2008 and 2009, most of the Company’s Rig Technology revenue resulted from major capital
expenditures of drilling contractors, well servicing companies, and oil companies on rig construction
and refurbishment, and well servicing equipment. These c
apital expenditures are influenced by the
amount of cash flow that
contractors

and service companies generate from drilling, completion, and
remediation activity; as well as by the availability of financing, the outlook for future drilling and well
servici
ng activity, and other factors. Most of the remainder of the Rig Technology segment’s revenue
is

related to the sale of spare parts and consumables, the provision of equipment
-
repair
services
, and
the rental of equipment, which the Company believes are gen
erally determined directly by the level
of drilling and well servicing activity.

The one key factor to all of the oil and gas activity is the price of oil. The price in oil has been
volatile since 1972 and has seen extra volatility in the recent years with

prices in the mid $100’s
down to $35. Expectations for future oil and gas prices cause many shifts in the strategies and
expenditure level of oil and gas companies and drilling contractors, particularly with respect to
decisions to purchase major capital
equipment of the type NOV manufactures.

Distribution to Shareholders

NOV announced that its Board of Directors declared the regular quarterly cash dividend of $0.10
per share of common stock. This is the first time NOV will have a regular paying dividend.

At a
stock price of roughly $44.00, this $0.10 dividend yields a 0.91% yield. This is an insignificant return
but possibly shows that there is too much cash in management’s hands coupled with a potential lack
of value producing projects. The Board has dec
ided that it would be in the best interest of the
shareholder’s interests to return them cash in this manner, rather than destroying value by taking on
negative NPV projects.

This is consistent with our analysis of NOV’s necessity for growth through acquis
itions. With a lack
of value producing projects, management has turned to growth opportunities presented by acquiring
smaller firms in the industry.




Financial Statements Forecasts

NOV’s intrinsic value is influenced by two dominating factors. The first
factor is growth by
acquisition verses organic growth and the sustainability of each; and the second factor is the
Company’s revenues dependency on oil rig activity.

NOV recently instilled an aggressive strategy to start acquiring firms in the industry. T
he following
show
s the firms acquired during 2007, 2008,

and 2009.
NOV spent an average of $600m a year
purchasing these firms

net of cash
, with a notable $7.2bn purchase of Grant Prideco in 2008.



Valuation Scenarios

Given Management’s plan for
aggressive growth through acquisitions going into th
e future, we
developed ten

scenarios for our discounted cash flow analysis.

First, we

had to get a base scenario

finding

NOV’s organic value, by taking away, our best estimate of, the contributions to rev
enues and
costs of the firms NOV has acquired.
From here, we ran nine different scenarios based on different
Acqusition
Form
Operating Segment
Date of Transation
Gammaloy Holdings, L.P
Asset
Petroleum Services & Supplies
2007
Molde Produksjonssenter AS
Stock
Rig Technology
2007
Moineaus S.A.I.C.
Stock
Petroleum Services & Supplies
2007
Hiram Industries, Inc.
Asset
Petroleum Services & Supplies
2007
Sampwell Testing Services
Stock/Asset
Petroleum Services & Supplies
2007
CTES, LP
Asset
Rig Technology
2007
Sara Services Pvt. Ltd.
Stock
Rig Technology
2007
Kreiter Geartech
Asset
Rig Technology
2007
Die Company, Inc.
Asset
Petroleum Services & Supplies
2008
Welch Power Source, L.L.C.
Stock
Petroleum Services & Supplies
2008
Hendershot Tool Company
Stock
Petroleum Services & Supplies
2008
Grant Prideco, Inc.
Stock
Petroleum Services & Supplies
2008
NOV Fabtech
Joint Venture
Rig Technology
2008
CKS
Asset
Petroleum Services & Supplies
2008
Bear Pump & Equipment, Ltd.
Asset
Petroleum Services & Supplies
2008
Kem-Trom Technologies, Inc.
Asset
Petroleum Services & Supplies
2008
Sakhalin Outfiiters LLC
Stock
Distribution Services
2008
Mid-South Machine, Inc.
Stock
Petroleum Services & Supplies
2008
ASEP Group Holding B.V.
Stock
Rig Technology
2009
ANS (1001) Ltd.
Stock
Petroleum Services & Supplies
2009
Spirit Drilling Fluids Ltd.
Asset
Petroleum Services & Supplies
2009
Spirit Minerals LP
Asset
Petroleum Services & Supplies
2009
Rincon de los Sauces Inspection Operation
Asset
Petroleum Services & Supplies
2009
Western Thunderhorse
Asset
Petroleum Services & Supplies
2009
South Seas Inspection
Stock
Petroleum Services & Supplies
2009
Hochang Machinery Industries Co. Ltd
Stock
Rig Technology
2009
Stork MSW
Stock
Petroleum Services & Supplies
2009
levels of acquisition spending into the future.
Ultimately
we ran these scenarios
to figure out how
growth by acquisitions affects share price.

Whe
n attempting to create
the base scenario
, our valuation came across many problems. First off,
out of 27 acquisitions over the past three years, there is only public information related to one of
these, Grant Prideco. This purchase did end up being very sig
nificant, as it represented a $7.2bn
outflow. Further investigation showed that NOV’s annual report does not provide the financial
effect related to pre and post mergers. This hindered our ability to indentify actual value added from
each merger. Furthermo
re, the 10k attempted to explain the effect on how different segments
changed from certain mergers, but this did not provide any help as there are no financials broken
down to allow us to make further insight about added value. This lack of detail within t
he 10k
presented a red flag within our analysis. This may show that management may be trying to hide the
real value gain/loss from these acquisitions.

In any event, we developed this
base

case model with the most realistic assumptions g
iven the
information

provided by

our analysis.

Grant Predico was purchased for a total of $7.2 billion
meaning that NOV purchased it at

a

14 PE which added growth/value to NOV’s earnings, as
NOV’s PE at the time was 20. Although they initially received earnings at a c
heaper price than their
own it is
only a one time transaction and will not represent further earnings growth.

Below is a
detailed list of the accounts affected by the acquisition of Grant Prideco:


Using the given
information, we

backed out the financial
of Grant Prideco from NOV’s statements,
giving us a better perception of NOV’s organic value, untainted by this large acquisition.

Proceeding,
we used our same approach with certain accounts being a percent of sales and others being a percent
of what they
represent. Yet, we had to make further assumptions regarding CapEx and top line
revenue growth. This

base

model presents a world in which NOV grows internally without outside
purchases.

In order to account for the different levels of acquisition spending i
n our scenarios we
Cash
171
$

Receivables
420
$

Assets held for sale, net
784
$

Invesntories
611
$

Prepaid and other current assets
210
$

PPE
392
$

Goodwill
2,775
$

Intangibles
3,696
$

Investment in unconsolidated affiliate
512
$

Other assets
98
$

Accounts payable and accrued liabilities
(316)
$

Accrued income taxes
(627)
$

LTD
(176)
$

Deferred income taxes
(1,305)
$

Minority interest
(25)
$

Other liabilities
(21)
$

Total purchase price
7,199
$

created a “
B
usiness
A
cquisitions” line item

that directly affects CapEx
. Since the base model
presents only internal growth the value in this new lin
e item is held constant at zero, seen as follows:


Because of this, NOV’s top line gro
wth will be affected. The new revenue growth was calculated
using historical organic growth rates and our

future economic outlook concerning worldwide rig
activity. Given this, our top line growth
is as follows:


The graph below represents the change in t
he income statement after our backing out of Grant
Prideco’s financials, seen in dark blue.


With these new calculations, this model derives a share price for NOV with organic growth of
$3
8
.
25
. This value
represents what NOV should be worth on a per share

basis if it were to continue
to grow internally, with no outside acquisitions.

##
2008
2009
2010
2011
CapEx
-218,636,396
946,576,396
279,664,000
Business Acquisitions
0
0
0
PPE
2,068,700,000
1,850,063,604
2,796,640,000
3,076,304,000
Depreciation
401,600,000
359,155,771
517,378,400
569,116,240
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
10%
10%
9%
9%
8%
8%
7%
6%
6%
6%
5%
Income Statement
Growth
10%
10%
2007
2008
2009
2010
2011
Revenue
Sales
$7,873,300,000
$11,162,500,000
$10,812,000,000
11,893,200,000
13,082,520,000
Services
$1,915,700,000
$2,268,900,000
$1,900,000,000
2,090,000,000
2,299,000,000
Total
$9,789,000,000
$13,431,400,000
$12,712,000,000
13,983,200,000
15,381,520,000
Minus Acquisitions Revenue
$1,908,634,000
$2,290,360,800
$2,748,432,960
3,023,276,256
3,325,603,882
New Total Revenue
$7,880,366,000
$11,141,039,200
$9,963,567,040
$10,959,923,744
$12,055,916,118
Cost of Revenue
Cost of Sales
$5,675,300,000
$7,783,900,000
$7,297,000,000
8,325,240,000
9,157,764,000
Cost of Services
$1,283,500,000
$1,576,000,000
$1,631,000,000
1,463,000,000
1,609,300,000
Total
$6,958,800,000
$9,359,900,000
$8,928,000,000
9,788,240,000
10,767,064,000
Minus Acquisitions Costs
$1,327,905,000
$1,520,451,225
$1,740,916,653
1,915,008,318
2,106,509,150
New Total Costs
$5,630,895,000
$7,839,448,775
$7,187,083,347
$7,873,231,682
$8,660,554,850
Gross Profit
$2,249,471,000
$3,301,590,425
$2,776,483,693
$3,086,692,062
$3,395,361,268
SGA
$785,800,000
$1,154,000,000
$1,322,000,000
1,289,860,619
1,418,846,681
Intangible Asset Impairment
$147,000,000
Operating Profit
$1,463,671,000
$2,147,590,425
$1,307,483,693
1,796,831,443
1,976,514,587
New Operating Profit
$1,463,671,000
$2,147,590,425
$1,454,483,693
$1,796,831,443
$1,976,514,587
Interest and Financial costs
$50,300,000
$67,300,000
$53,000,000
41,441,904
42,270,742
Interest Income
$52,600,000
$44,600,000
$9,000,000
31,879,582
33,154,765
Other Income (Expense), net
($17,800,000)
$66,500,000
($63,000,000)
0
0
Income before Income Taxes
$1,448,171,000
$2,191,390,425
$1,347,483,693
$1,787,269,121
$1,967,398,610
Provision for income taxes
$675,800,000
$992,800,000
$735,000,000
584,107,531
642,976,668
Net Income
$772,371,000
$1,198,590,425
$612,483,693
1,203,161,590
1,324,421,942
Net Income Attributable to non controlling interests
$16,000,000
$16,500,000
$4,000,000
11,186,560
12,305,216
Net Income Attriutable to Company
$756,371,000
$1,182,090,425
$608,483,693
1,191,975,030
1,312,116,726

In developing this DCF model, we followed a simple percent of sales method for the accounts
directly impacted by top line sales. We also took special account for certain acco
unts that deal
straight with taxes, long term debt, etc.

Adding Back Acquisition Growth

From here, we developed nine different scenarios accounting for varying levels of acquisition
spending, back up to NOV’s current level of acquisition spending. We did
this in order to find how
much growth is being realized through acquisitions. In order to do this, we developed a very in
-
depth formula which takes into account the following: the different amount of revenue seen by total
acquisitions, the equal amount of
costs, how each account was affected by total acquisitions, and
how each of these ultimately affects top line growth. We were able to do this by simply using a range
from 0 to 1, 0 being NOV with
full
acquisition growth and 1 being organic growth.

Using in
tervals
of .1, we developed 9 cases that reflected a different amount of acquisition spending, thus different
top line growths. The following graph depicts the level of acquisition spending and its correlated top
line growth rate:


As seen above, the
level of top line growth decreases the more NOV relies on simply organic
growth into the future. NOV organic financials (those with acquisitions taken out) show revenue
growth well below that of growth with spending on acquisitions. To exemplify our strate
gy, the
following is an excerpt from our financial statements with a “.2”, meaning that NOV is spending
only 80% of its usual expenditures on acquisitions:

PV of Operations
16,625,534,948.42
$

Plus: Surplus Cash
-
$

Market Value of Firm
16,625,534,948.42
$

Less: Long Term Debt
620,294,927.15
$

Market Value of Equity
16,005,240,021.27
$

Shares Outstanding
418,451,731.00
$

Per Share Value
38.25
$

2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
25%
23%
21%
19%
17%
15%
14%
11%
10%
7%
5%
0.1
23%
21%
19%
18%
16%
14%
12%
10%
9%
7%
5%
0.2
21%
19%
18%
16%
15%
13%
11%
10%
8%
7%
5%
0.3
20%
19%
17%
16%
14%
13%
11%
10%
8%
7%
5%
0.4
18%
17%
15%
14%
13%
12%
10%
9%
8%
6%
5%
0.5
16%
15%
14%
13%
12%
11%
9%
8%
7%
6%
5%
0.6
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
0.7
14%
13%
12%
11%
10%
10%
9%
8%
7%
6%
5%
0.8
12%
11%
11%
10%
9%
9%
8%
7%
6%
6%
5%
0.9
11%
10%
10%
9%
9%
8%
7%
7%
6%
6%
5%
1
10%
10%
9%
9%
8%
8%
7%
6%
6%
6%
5%

What you should notice here is the $480,000 additional

amount in the “Business Acquisitions” line
item, which ultimately affects CapEx etc.

The following is a summary of the prices derived with each spending scenario:


After careful analysis, this summary concludes that spending on acquisitions dramatically increases
firm value. The main question we have is whether or not NOV’s level of spending on acquisitions is
sustainable in the long run. We believe that there is onl
y so much opportunity to grow through
acquisition, which is limited by the size of the industry and by the price at which you have to buy.
Because of this, we feel that NOV may be able to sustain levels between 40% and 60%, as far as
acquisition spending,
of what they are spending now. Seen above, this shows a share price value
between $46.03 and $52.68.

Sensitivity

We decided to conduct a
n additional

sensitivi
ty analysis on our model
. This was determined because
we believe that this
model’
s growth rates
a
re very much

correlated to worldwide rig activity, directly
affecting NOV’s growth. Looking at historical revenue growth and historical rig count growth, we
calculated a correlation of .77. With this information we derived the following scenario analysis o
f
rig activity

revenue growth

price per share.

Balance Sheet
2008
2009
2010
2011
CapEx
370,281,704
1,910,922,296
1,100,802,976
Business Acquisitions
480,000,000
480,000,000
504,000,000
PPE
1,755,100,000
1,645,381,704
3,076,304,000
3,673,106,976
Depreciation
401,600,000
376,494,383
569,116,240
679,524,791
Deferred Income Taxes
126,000,000
118,123,238
125,684,317
155,863,142
Goodwill
5,780,000,000
5,418,669,162
5,691,162,400
6,795,247,906
Intangibles, net
5,039,500,000
4,724,460,769
3,845,380,000
4,591,383,720
0
Other Assets
615,500,000
577,022,642
531,038,200
627,183,511
Total Assets
23,412,500,000
21,948,891,308
24,272,358,461
28,191,562,154
Level
Price
1
$38.25
0.9
$39.06
0.8
$40.29
0.7
$44.50
0.6
$46.03
0.5
$47.66
0.4
$52.68
0.3
$58.14
0.2
$60.30
0.1
$66.46
0
$74.58
The graph seen below is a summary of our findings. We decided to use two cases, one with a 10%
growth in the worldwide oil rig count and one with a
-
10% growth. Using the .77 correlation we
derived from befo
re, we assumed that a 10% increase/decrease would represent a 7.7%
increase/decrease in NOV’s top line revenue growths. Applying this to our model, the prices seen
below were derived.


Forecasting worldwide rig activity proves to be very difficult because

of the volatility the count sees
on an annual basis. From our analysis and research we believe that rig count will remain at or close
to current day levels, as they represent a normalized historical rig count.


Relative Valuation


Current Market Price roughly
$40
.00

From a relative valuation view, NOV is undervalued in most aspects of a multiples analysis. As seen above,
the given multiples all derive a price well above NOV’s current market price of roughly $44.00. It is useful to
a
dd a multiples analysis when looking at any company, as it gives a base to the valuation.

When valuing NOV as a business, as opposed to just the equity in its business, we used a P/E Ratio to value
NOV as a multiple of its operating income. Given the indu
stry and Company’s ratios, we derive NOV’s price
to be
undervalued
and should be hovering around $82.00.

Price
Price
Price
1
$38.67
1
$38.25
1
$37.83
0.9
$41.33
0.9
$39.06
0.9
$36.87
0.8
$42.85
0.8
$40.29
0.8
$37.83
0.7
$47.72
0.7
$44.50
0.7
$41.41
0.6
$49.60
0.6
$46.03
0.6
$42.62
0.5
$51.60
0.5
$47.66
0.5
$43.91
0.4
$57.44
0.4
$52.68
0.4
$48.17
0.3
$63.82
0.3
$58.14
0.3
$52.78
0.2
$66.46
0.2
$60.30
0.2
$54.51
0.1
$73.69
0.1
$66.46
0.1
$59.68
0
$76.21
0
$74.58
0
$72.96
Stagnant
10% Growth Oil Rig
Neg 10% Growth Oil Rig
TTM
NOV
HAL
SLB
Industry
Derived NOV Price
P/E
11.07
27.49
18.49
21.08
$82.13
P/Sales
1.37
1.54
3.98
2.03
$64.01
P/Book
1.26
2.85
3.68
2.51
$85.68
EV/EBITDA
4.62
8.88
15.72
10.31
$96.25
Focusing on the Price to Sales ratio, we conclude that NOV’s stock price is again,
undervalued
. An
advantage of using a sales multiple is that it is e
asier to compare firms engaged in different markets. Many of
the firms within NOV’s industry focus on sp
ecific regions of the world or
simply equipment over services
etc. This analysis gives us a broader valuation of NOV vs. its industry.

Market values pro
vide one reasonable estimate of the value of a business; accountants often shed light to a
varied estimate of the same business. An accounting estimate of book value is derived by accounting rules
and is directly related to the original price pair for an a
sset and any accounting adjustments (depreciation).
Given our calculations and the industry ratio, we conclude that on a Price
-
Book analysis, NOV’s stock price
is
undervalued.

Finally, looking at ratio that is unaffected by NOV’s capital structure is the E
V/EBITDA multiple. This
compares the value of a business, free of debt, to its earnings before interest. Again, looking at this ratio, we
derive a price for NOV per share that is well above its current trading price, meaning that it is
undervalued.

Summary
/Investment Recommendation

Developing
our

different valuation
scenarios

given our assumptions, detective work, and lack of
public information has led us to different conclusions.
The scenarios have produced different values,
each depending on what manageme
nt plans to do with future spending on acquisitions. Our belief is
that NOV’s intrinsic value falls in the ranges of$46.03
-
$52.68.

Finally, our relative valuation gave us
a share price ranging from $64
-
$92, emphasizing
mixed valuations given certain assump
tions,
comp
ared to its trading price of roughly $40
.00.


Companies that have seen many acquisitions in its recent history are incredibly hard to value given
the lack of information provided and the massive amount of assumptions needed in order to
perform a

DCF analysis.

From our analysis, we have seen a consistency with our determination that
NOV’s
recent
historic growth has been attributable by acquisitions more than organic growth.


In the case of NOV
,

we have come to a mixed conclusion given our valuati
on.

We feel that the
Company and its management are in line with cre
ating value for the firm, but are

failing to see that
growth of this nature cannot hold in the long run. This does not necessarily mean that NOV is
doomed and

will become a bad company. T
he Company has

competitive advantages, organic
growth opportunities, and the
stagnant to slightly positive
forecasted worldwide rig activity is
favorable for the firm. Thus our investment recommendation concerning NOV is neutral. If
management is in line w
ith our analysis and will focus on mor
e internal growth opportunities and
dialing down to a 40%
-
60% spending level when looking at acquisitions,

we believe NOV will have
a very positive outlook in the long run. On the other hand, if management continues on

this track of
only growing through
high levels of
acquisitions, we believe NOV will ultimately lose value for its
shareholders.