NOV Inc. (National Oilwell Varco) — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. NOV supplies equipment, technology and services to the upstream oil and gas industry. Results were sharply affected by the COVID-19 pandemic, lower oil demand and prices, and reduced customer spending.
Financial performance and position
- Q2 revenue: $1.496 billion, down 30% from $2.132 billion a year earlier and down from $1.88 billion in Q1 2020.
- Q2 profitability: Gross profit was $137 million (9.2% gross margin), versus $62 million (2.9%) in Q2 2019. Operating loss was $100 million; net loss attributable to NOV was $93 million, or $0.24 per share. Q2 included $102 million of specified charges. Adjusted EBITDA, a non-GAAP measure, was $84 million, or 5.6% of revenue, down from $178 million in Q1 and $195 million in Q2 2019.
- Six-month results: Revenue was $3.379 billion, down 17% from $4.072 billion. Operating loss was $2.050 billion and net loss attributable to NOV was $2.140 billion, or $5.57 per share. Adjusted EBITDA was $262 million, versus $335 million in the first half of 2019.
- Cash flow: First-half operating cash flow was $417 million, compared with cash use of $111 million in 2019; management cited strong receivable collections and working-capital movements. Investing cash use was $111 million, including $124 million of capital expenditures. Financing cash use was $27 million. Cash increased by $276 million to $1.447 billion. Operating cash flow less capital expenditures was approximately $293 million.
- Liquidity and debt at June 30: Cash was $1.447 billion and total debt was $2.029 billion, implying net debt of approximately $582 million. NOV reported $2.0 billion available under its revolving facility, compliance with its debt covenant (29.4% debt-to-capitalization against a 60% maximum), and $524 million of letters of credit under separate bilateral facilities. Current assets were $5.590 billion and current liabilities $1.954 billion. Lease liabilities totaled $752 million.
- Other balance-sheet changes: Total assets declined to $10.447 billion from $13.149 billion at year-end 2019, primarily reflecting impairments. Goodwill fell to $1.493 billion from $2.807 billion. Company stockholders’ equity declined to $5.460 billion from $7.778 billion; retained earnings became a $1.474 billion deficit.
Segments and material changes
- Wellbore Technologies: Q2 revenue of $442 million, down 48% year over year; operating loss was $67 million, including $62 million of other items. NOV attributed the revenue decline principally to falling drilling activity.
- Completion & Production Solutions: Q2 revenue of $611 million, down 8%; operating profit was $42 million, including $12 million of other items. Existing backlog execution partly offset weaker completions activity and COVID-related logistical disruption.
- Rig Technologies: Q2 revenue of $476 million, down 29%; operating loss was $25 million, including $20 million of other items. Lower rig activity and logistics issues, especially in aftermarket operations, weighed on results.
- Year-over-year operating comparisons are distorted by major Q2 2019 impairment charges. In Q1 2020, NOV recorded $1.891 billion of goodwill, intangible and other long-lived asset impairments, plus a $224 million impairment of an equity investment. First-half cash-flow adjustments also included $1.378 billion of goodwill and indefinite-lived intangible impairments and $513 million of long-lived asset impairments.
- Q2 capital-equipment orders were weak: Completion & Production Solutions booked $196 million (51% book-to-bill) and had $1.0 billion of backlog; Rig Technologies booked $74 million (34% book-to-bill) and had $2.79 billion of backlog. NOV expected approximately 67% of the former backlog and 12% of the latter to convert to revenue during the remainder of 2020.
Outlook, risks and unusual items
- Management expected customer activity and spending to remain depressed through the rest of 2020. It described continued cost and organizational streamlining while maintaining investment in products and technologies, including environmentally oriented offerings. No specific consolidated revenue or earnings guidance was provided.
- Management cited the pandemic’s effects on energy demand, oil prices, drilling activity and customer capital budgets. Customers could delay or cancel projects, invoke force majeure, defer payments or enter bankruptcy; supply-chain, workforce, travel and facility disruptions could also affect performance and collections. NOV warned that these conditions could materially affect results, liquidity and financial condition.
- Q2 average WTI was $27.81 per barrel, down 40% from Q1; worldwide average rig count fell 39% sequentially to 1,255. At July 17, WTI was $40.59, while North American active rigs were 285, 32% below the Q2 average.
- Tax benefits included a revised CARES Act net operating loss carryback estimate: the anticipated benefit was reduced from $123 million to $100 million, and NOV received a $94 million cash refund in June. A separate $90 million refund was expected from amending its 2016 return; the receivable was classified in other assets. Management planned to complete the carryback computations in Q3.
- The Q2 dividend was suspended: no dividend was paid in the quarter, versus $0.05 per share in Q2 2019. First-half 2020 dividends were $0.05 per share, versus $0.10 a year earlier. Future dividends are at the board’s discretion.
- NOV reported various litigation, regulatory and other contingencies and stated its recorded reserves covered matters considered probable. It said the total potential loss could not be determined; outcomes could exceed estimates, and some claims may not be covered by insurance.
Important facts for investors to verify
- Whether the expected second-half 2020 industry recovery and backlog conversion assumptions were realized, particularly for Rig Technologies.
- Whether customer cancellations, payment delays, defaults or bankruptcies increased and affected receivables, contract assets or cash generation.
- Whether further goodwill or long-lived asset impairments were required as market forecasts and discount-rate assumptions changed.
- Final amounts and timing of the tax refunds and carryback benefits, including the additional CARES Act-related claim.
- Liquidity, covenant compliance, and the effect of the suspended dividend and any subsequent capital-allocation decisions.
- Potential exposure from litigation, regulatory matters, supply-chain disruption and other pandemic-related contingencies.