NOV Inc

NOV produced second-quarter revenue of $2.13 billion, down 2% year on year from disruptions in the Middle East but up 4% sequentially. And despite the year-on-year sales decline, EBITDA margin improved roughly 180 basis points year on year, mostly on higher energy equipment sales.

Why it matters: Multiple factors helped energy equipment results, including execution on offshore production projects nearing completion, favorable sales mix, and a benefit of roughly $14 million related to tariff refunds. Still, even without the tariff refunds, total EBITDA margins still improved. Despite the market selloff, we were pleased with results in the quarter and attributed the stock's declines to valuation that was assuming too much upside in the broader oilfield services industry from increased activity. Both results and guidance mildly exceeded our expectations. NOV faces a continued weak order book in the energy equipment segment as book-to-bill ratios remain at 0.8 times; customers remain cautious due to geopolitical uncertainty. Still, we agree with NOV that the long-term environment for offshore investment looks increasingly constructive.

The bottom line: After reassessing our long-term view, particularly as offshore investments benefit NOV's top line and its better-than-expected performance and guidance, we lift our fair value estimate to $18.50 from $17 for the no-moat-rated firm. We don't think significant upside exists at current prices as the stock is in 3-star territory. NOV argues that there is a significant upcycle brewing in the offshore market and that it has right-sized its business. We agree, but too much has to go right to get the rerating it's seeking. We model peak revenue of $9.5 billion and peak adjusted EBITDA of $1.25 billion by the end of the decade. NOV argues that it can maintain 20% higher EBITDA in a synchronized global recovery. But that's a bit of a contingency, as markets rarely operate with an ideal backdrop, as history shows.

After reassessing our long-term view, particularly as offshore investments benefit NOV's top line and its better-than-expected performance and guidance, we lift our fair value estimate to $18.50 from $17 following second-quarter earnings. However, we still value the stock at roughly 7 times EV/EBITDA.

We expect the Iran war to disrupt upstream capital spending in 2026 from shut-in production. But longer term, we mostly agree that offshore activity is necessary to supplant the waning supply growth from US shale, especially as operational breakevens sit roughly $20 cheaper than onshore. So, we model a decent cyclical inflection in 2027, driven mostly by a mid-single-digit rise in offshore-related sales that year. But while we forecast offshore activity supporting additional revenue growth, NOV’s high onshore mix will dampen its long-term sales outlook as producers become more capital-efficient.

Overall, we expect rig count to rise at 3% compounded annual growth rate over the next five years, and model some benefits stemming from unconventional gas system requirements in the Middle East. Still, offsetting factors lead in onshore land investments lead us to model a roughly 1.5% CAGR over the next five years. Midcycle operating margins should exceed 7% as the company executes additional personnel adjustment initiatives as well as some volume leverage. Although we like that NOV has relatively low leverage and solid cash flows, we think the firm is unlikely to repeat its success during the shale boom, even under a new CEO.

We assign NOV a no-moat rating. Oilfield service companies typically earn moats through intangible assets from customer relationships, a track record of success in solving complex projects cost-efficiently, and intellectual property.

In NOV’s case, however, switching costs would be the most relevant moat source. NOV holds leading share in rig equipment at over 20% of the global market. NOV’s installed base means its rig technologies offering is a much stronger business relative to its other offerings. The equipment is unique because of the high level of engineering expertise required to replicate such a sophisticated technology package, where mechanical, electrical, controls, and software must work together across other advanced equipment. This segment offers rig aftermarket services that provide original equipment parts for legacy NOV equipment. NOV’s equipment stacks require decades of maintenance, repair, and overhaul, or MRO, and rig crews are trained on NOV equipment.

This segment also includes the repair of major nonmodular rig subsystems. Operators can’t afford downtime on such integral pieces of equipment. NOV’s familiarity and know-how (many parts are built to specification) of caring for these products, along with its warranty offering, creates a stream of recurring revenue (especially on filters, seals, bearings, safety system upgrades, and electronics). We see evidence of switching costs here since other mechanics would need to reengineer the entire control stack, wiring, and hydraulic lines, and certification documentation if they replace it with a non-NOV piece of equipment. Using a non-NOV component risks control system incompatibility, failure of safety interlock features, certification violations, and warranty loss. If customers choose to swap OEM equipment, regulators often require recertification and engineering documentation from the design-authority holder in NOV. NOV controls the documentation required to certify the rig. Despite these moatworthy dynamics, these offerings are too small a portion of the business to consistently maintain excess returns.

Industry trends further challenge NOV’s ability to carve a moat. Cyclical headwinds such as rampant inventory cannibalization and overall reduced demand for new builds are factors in the energy equipment business. Overexuberant investment in rig equipment leaves oilfield service firms with excess capacity. To reduce costs, customers strip parts from idle fleets to maintain their active fleets. Competing service firms can sometimes effectively remove some of NOV’s aftermarket services as they work through excess capacity. Since aftermarket services is a major profit pool for NOV, inventory cannibalization is particularly damaging to a potential moat.

Many of NOV’s products and service offerings outside of rig technologies—such as drill bits, pipes, and most downhole tools—lack intangible assets. Peers have readily available substitutes that produce almost indistinguishable customer outcomes. So, price is the chief consideration for customers. Also, most oilfield service contracts that aren’t part of maintenance, repair, or overhaul can last as short as a few weeks, with few lasting longer than five years. Short engagements also give producers plenty of opportunities to switch providers, making it difficult for NOV to establish entrenched customer relationships. Drill pipe and bits are also dual-sourced, and their production is a highly standardized process (low differentiation, product, or service complexity). They’re also often bundled. But we suspect NOV has fewer differentiated bundled offerings than larger competitors, which is why we suspect it commands a smaller share of the drill bit market.

We also posit that large, integrated peers have superior technical know-how and intellectual property relative to other oilfield services firms like NOV. We suspect scale has helped these competitors accumulate more extensive and varied field experience, which has increased their know-how as they learn to serve operators in varied drilling regions and conditions. We surmise this has enabled them to accumulate greater domain expertise to apply to customers' future needs. Finally, larger, integrated peers also have wider product and service breadth. Producers appreciate product and service bundling as it usually leads to fewer points of contact during their operations, which reduces operational complexity.

A renaissance in offshore activity can fully offset any headwinds for NOV and lead to meaningfully higher revenue.

NOV’s capabilities in unconventional gas in the Middle East offer it an asymmetric business opportunity.

NOV’s presence in subsea will support results in the event of an oil price drop as some offshore projects have a lower breakeven than onshore economics.

Rig equipment demand won’t ever return to prior US shale revolution levels, permanently reducing customers’ need for NOV’s core offerings.

North American rig efficiency gains will lead to insurmountable and continued headwinds for NOV’s rig equipment sales.

The entire oilfield services industry faces fallout from a meaningful increase in oil supply from OPEC+. If oil prices remain depressed, demand for NOV’s high-margin aftermarket business will remain low, as rigs remain increasingly idle.