National Oilwell Varco 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Domestic E&Ps are putting money back into more drilling

“we are seeing the major North American shale plays growing, domestic E&P wellhead cash flows are rising with increasing production and strong commodity prices, and producers are choosing to plow back more their cash into new shale drilling.”

Offshore rig demand softening into the second half of the year

“Offshore demand held up well for the second quarter, but as we discussed last quarter, we expect the second half of 2014 to be more challenging. We see the market for new floating rig softening for at least the next few quarters due to lower dayrates pressured by new and contracted capacity coming into the market.”

Deals are expensive even for strategic buyers

“Even though we’re almost are strategic buyer, meaning that we have access to efficiencies and cost savings that financial buyers usually don’t. We are nevertheless frequently outbid. Rather than chase expensive deals ever higher, we will sought through many potential targets to focus on rifle shot singles, doubles with disciplined returns demanded of the acquisitions we execute.”

Acquisitions focused on continuing to build aftermarket service capabilities

“I would say the flavor of this is continued investment in our aftermarket support of the growing installed base of rig equipment.”

Focused on smaller transactions

“the overarching theme here is generally I think we’re seeing smaller transactions and believe that those offer a better purchase economics. The bigger these deals become the more attention they attract. And when that happens, generally the price goes up, the multiples go up and our returns go down.”

Low 20s normalized margin

“I think low 20s normalized margins is probably appropriate.”

Could be a soft few quarters ahead

“with regards to the duration of this downturn. We’re not sure, we believe, it’s not a one quarter dip. We get at least a few quarters and it could extend beyond that overall.

Long-term our outlook is still very, very bright. There’s an awful lot of development drilling and expiration drilling that still needs to go on in deepwater basins require floating rigs. So we think the fundamental demand is there. But a lot of capacity flowing into the market last year, this year, next year is giving rise to this.”