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What's in Store for National Oilwell (NOV) in Q2 Earnings?

Energy equipment supplier National Oilwell Varco, Inc. NOV is set to release second-quarter 2017 results after the closing bell on Jul 27.

In the preceding three-month period, the company delivered a positive earnings surprise of 15% on the back of rising momentum in the North American land market along with aggressive cost reduction and improved efficiencies. Further, the company had reported average positive surprise of 12.74% in the trailing four quarters.

Let’s see how things are shaping up for this announcement.

National Oilwell Varco, Inc. Price and EPS Surprise


Factors to Consider This Quarter

Houston, TX-based National Oilwell is a world leader in the designing, manufacturing and selling of comprehensive systems, components, products, and equipment used in oil and gas drilling and production worldwide.

Drilling activities have increased of late due to an improvement in North American land market. This is likely to help National Oilwell witness higher revenues in domestic markets. During the second quarter, the count of U.S. rigs have increased around 15% to 940. Over the last one year the U.S. rig count has increased around 116%. This increased rig count bodes well for the energy equipment suppliers like National Oilwell. During the quarter, the international rig counts also rose by about 2%. National Oilwell Varco which conducts operations in many countries, with a major portion of its total revenue coming from international markets, is likely to benefit from the higher international rig count.  President Trump’s exit from Paris Climate accord also provided an impetus to drilling activities.

During the quarter, the company inked an agreement with Saudi Aramco to form a joint venture in Saudi Arabia. This is likely to strengthen National Oilwell‘s drilling technology franchise and its financials. The company has a clean balance sheet with impressive liquidity and coverage ratios when compared to most of its peers including McDermott International, Inc. MDR and Exterran Corporation EXTN among few others. We also appreciate National Oilwell’s successful cost-management initiatives amid weak oil prices.

However, weak oil and gas prices might mar demand for energy equipment suppliers. During the second quarter, oil and natural gas prices declined 8.4% and 5%, respectively. Lower commodity prices might lead to reduced exploration and production activities. This could call for lower investments by oil majors which will impact revenues of equipment supplier companies. This is also reflected in the share price of National Oilwell which witnessed a decline of around 18% in the second quarter.

Earnings Whispers

Our proven model does not conclusively show that National Oilwell is likely to beat earnings estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -6.67%. This is because the Most Accurate estimate is at a loss of 16 cents, while the Zacks Consensus Estimate is pegged at a loss of 15 cents.

Zacks Rank: National Oilwell currently carries a Zacks Rank #3. Though a Zacks Rank #3 increases the predictive power of ESP, a negative ESP makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Ranks #4 and 5) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stock Poised to Beat Earnings

While earnings beat looks uncertain for National Oilwell, another firm within the Oil and Gas Mechanical & Equipment industry Dril-Quip, Inc. DRQ, can be considered on the basis of our model, which shows that it has the right combination of elements to beat estimates this quarter:

Dril-Quip has an Earnings ESP of +100% and a Zacks Rank #3. The company is anticipated to report earnings on Aug 4. You can see the complete list of today’s Zacks #1 Rank stocks here.

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