National Oilwell Varco 1Q14 Earnings Call Notes

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Most of the easy oil has already been discovered

“with most of the easy oil already discovered, future conventional sources will continue to become increasingly challenging to find. As economic growth steadily drives oil demand, we believe that growing production from; one, deepwater technology, which opened up vast horizontal expanses of the planet to production, and two, shale technology, which opened up vast vertical sections of the stratigraphic column to production will supply this demand, both oil and NGLs in greater and greater proportion through the 21st century’

Highest marginal cost barrel is the worst positioned

“Since the earliest days of the oil industry, companies have battled ferociously to emerge as the lowest marginal cost source, or at least not be the highest marginal cost source of the last incremental barrel. The high-cost barrel is the most disadvantage position on this battlefield. When economic cycles diminish demand, as they do from time to time, oil prices drop and the highest marginal cost position suffers the most.”

The battle lines of the oil industry constantly ebb and flow

“market forces continually test to resolve high marginal cost producers. The battle lines constantly ebb and flow as various combinations of innovation and geology lead winners to relative advantage and sometimes brief periods of respite from harsh market forces, at least until their fields decline or some other competitor finds better rocks and technology.”

The success of an oil service provider is based on demonstrated ability to lower cost of production

“NOV is a unique supplier of critical components to the combatants on this battlefield. We understand that our success rests on the success of our customers, meaning lowering their marginal cost per barrel”

“Our products win demand in the marketplace by conferring lower cost and higher value to their users. That’s why we must continue to invest in promising technologies and ideas.”

The cost of producing deepwater will come down over time with innovation

“while deepwater producers have struggled lately with project execution challenges and rising costs, these are certain to be remedied by time and innovation.”

Deepwater is facing transient challenges

“The deepwater drilling space faces startup challenges, which we believe are transient. A lot of new deepwater rigs have been launched recently with new crews, and these are operating under tighter operational requirements post Macondo.”

Continuing to do business in Russia, old rigs create opportunity

“With regards to Russia as I just mentioned, we are investing in another facility there. We have manufacturing operations for many years in Belarus, which primarily supplies for Russian market. A couple of years ago, we opened another facility in Nizhnevartovsk. And so it’s a market that has a lot of potential. There are something on the order of 800 rigs operating in Russia and most of those are older technology and there is a growing recognition, I think most Russian oil companies for the need for new technology, much like their counterparts in North America and elsewhere around the globe.”

A lot of supply chain issues that they’ve had to work through

“If you look, back, Brad, over the last couple of years, orders began flowing in, in earnest late 2011, 2012, we rebuilt our backlog up to new record levels here more recently. We began to experience supply chain challenges in the first components that go into rigs, which are typically mud pumps. And the as we can’t work through those again those we get better of that, the next kind of way that we saw was rig floor equipments, derricks, finally BOPs last year with the source of some challenges. And then more lately it’s been IMC.”