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NOW Inc's Results Continue Heading in the Right Direction

While some turbulence returned to the oil market in the second quarter, industry conditions were still much better than they were last year. That's evident in NOW Inc's (NYSE: DNOW) financial results where revenue spiked and its net loss narrowed versus last year and sequentially. Further, given the direction its results are heading, the company believes that it could return to profitability in the second half of 2017 if current conditions hold up.

NOW results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$651 million

$501 million

29.9%

Adjusted net Income

($11 million)

($44 million)

N/A

Adjusted EPS

($0.10)

($0.40)

N/A

Data source: NOW Inc.

What happened with NOW this quarter?

The drilling rebound in the U.S. is driving up sales:

  • Revenue shot up thanks to stronger sales in the U.S. where the company generated $481 million in revenue. That's up 42.7% versus last year and is 9.6% higher than last quarter. Further, it was ahead of the company's expectations, despite some challenges in the sector as service providers struggled to refurbish and staff well completion fleets.
  • Sales in Canada were also up sharply versus last year, rising 43.6% to $79 million. That was also ahead of expectations, despite a seasonal pullback in the country that knocked sales down 17.7% sequentially.
  • International sales were the lone laggard, falling 16.5% versus last year to $91 million, which was also down 5.2% from the first quarter.

Image source: Getty Images.

What management had to say

CEO Robert Workman commented on what drove results in the second quarter, pointing out that:

Solid gross margin gains and tightly managed expenses produced exceptionally strong incrementals of 35% in the quarter. Our ability to capitalize in a recovering market, with a focus on more lucrative transactions, while right-sizing our business, drove meaningful impacts to profitability. Moreover, even though DUCs continued to climb, as service providers worked to refurbish and staff frac fleets, our upstream operations in the U.S. performed better than expected, as did our Canadian business despite a seasonal pull-back.

One of the things Workman said was that the company's sales in the U.S. surged despite the headwind of a rising inventory of drilled uncompleted wells (DUCs) due to equipment and staffing shortages. That issue adversely impacted other service companies in the sector. For example, Core Labs (NYSE: CLB) noted that "revenue in the second quarter was slightly lower compared to previous quarterly guidance as a result of industry shortages of completion crews and equipment, which caused fewer than expected completions." Because of those tight market conditions, Core Labs anticipates that its revenue growth will moderate in the coming quarters.

Looking forward

Despite those headwinds, Workman is optimistic that NOW's financial results will continue recovering. In fact, the CEO stated that "in the second half of 2017, we expect to reach positive EBITDA, and possibly EPS, excluding other costs, if market conditions and product margins hold." That said, those market conditions appear to be topping out given that so many shale drillers have announced spending cuts and activity reductions for the second half due to weaker oil prices. If that trend continues, it will make it tougher for the company to get back in the black.

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Matt DiLallo owns shares of Core Laboratories. The Motley Fool owns shares of and recommends Core Laboratories and NOW. The Motley Fool has a disclosure policy.