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A Great Opportunity in the Oil Services Sector

I've recently found very little to like in the oil services sector, but a move this week has me looking very seriously at starting a position in National Oilwell Varco (NOV), an admitted underperformer for the past two years.  Let's take a look at what happened and why I'm warming up to this gargantuan services name.  

First, let me clear up why I've avoided the oil services sector -- there are just too many variables to assess in finding a strong candidate for investment.  The sector companies that are most well known, like Halliburton (HAL), Schlumberger (SLB), Baker-Hughes (BHI) and Weatherford (WFT) will encompass the gamut of services, from consulting to maintenance, from rig engineering to transport logistics and will do it in almost any environment; onshore and off shore, traditional and pressure pumping.  Finally, they are expanding services in all corners of the globe, where margins can be radically different in Iraq compared to the Gulf of Mexico.  Unless you have insight into the global trajectory of drilling in multiple venues, you're less apt to trade the big services companies well.  

Which brings us to National Oilwell Varco, a company much more focused into offshore drilling than other venues and one that has underperformed for most of the last two years.  To me, this underperformance has been as much a function of price as of the nature of the business -- there was hardly a catalyst to drive the share price higher.  But there is a reason that the oil services industry refers to NOV with the mnemonic "No Other Vendor" -- when it comes to certain offshore operations and mechanical procedures, Oilwell Varco provides where no one else can.

And this week's announcement that NOV will be spinning off its distribution assets might be just the catalyst that the shares need to finally get out of their own way.  My thesis is that oil services will see by far their greatest growth and margins coming from the deepwater drilling sector and we know that NOV has some monopoly services that they can provide there.  Further, the company is spinning off the lower margin businesses that have certainly generated terrific cash flow, but haven't excited investors into buying and owning shares.  

The 2012 $4.5B profit booked by the distribution division of NOV that comprise maintenance and repair services are nothing to sneeze at, and will provide a terrific base for a new, if fairly boring subsidiary.  But the move to consolidate and focus onto deepwater services in the new and slimmer organization is something that has me excited, particularly because the shares have been mostly dead money for the past two years, virtually at the same price since the start of 2011.

Yes, there is value here.

And with deepwater drilling heating up and ready to demand much higher margins going into the 2nd half of 2014, now's the time to start building a position in 'No Other Vendor' -- National Oilwell Varco.

Recommended at $79.

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