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Will NOV's Debt Get Downgraded To Junk?


NOV bulls point to its prodigious backlog and pristine balance sheet as positives.

NOV's revenue and EBITDA have been punished by the downturn in the oil patch.

Debt/EBITDA at Q2 was 3.3x. It could exceed 5x at Q3 -- junk levels.

Moody's downgraded WFT to junk after debt/EBITDA reached 5.4x. NOV could be next.

The rout in oil prices has taken a toll on National Oilwell's (NYSE:NOV) revenue, earnings and share price. Bulls are quick to point to the company's prodigious backlog and pristine balance sheet as reasons it will survive any downturn in the oil patch. The backlog was $7 billion at year-end 2015. It was down over 40% to $3.9 billion at Q2; the company had to remove $2.1 billion from its backlog (related to Brazilian floaters) after Sete Brazil filed for bankruptcy in the first half of the year. Now the company's pristine balance sheet is beginning to show cracks.

Debt/EBITDA Approaching Junk Status

National Oilwell's Q2 revenue and EBITDA fell Q/Q by 21% and 80%, respectively. Its EBITDA margin declined to 1% from 6% in the previous quarter due to declining economies of scale. After squandering $3 billion on share repurchases the company cut its dividend in April in order to preserve capital. The move came just...