Time to Consider National Oilwell Varco

 | Sep 26, 2013 | 4:00 PM EDT
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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 look at what happened and why I'm warming up to this gargantuan services name.

First, let me explain why I've avoided the oil services sector: There are too many variables to assess a strong candidate for investment. The sector companies that are best known -- Halliburton (HAL), Schlumberger (SLB), Baker-Hughes (BHI) and Weatherford (WFT) -- encompass the gamut of services, from consulting to maintenance, 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.

This brings me back to National Oilwell Varco -- a company more focused on 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 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 when no one else can.

This week's announcement that NOV will be spinning off its distribution assets might be the catalyst 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 monopoly services that it can provide there. Furthermore, the company is spinning off the lower-margin businesses that have generated terrific cash flow but haven't excited investors enough to buy shares.

The $4.5 billion profit booked in 2012 by NOV's distribution division, which comprises 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 on 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.

Yes, there is value here. And with deepwater drilling heating up and ready to demand much higher margins going into the second 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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