The stocks of companies like Houston-based National Oilwell Varco, Inc. (NYSE:NOV) can be counterintuitive at times. It will often appear as though Wall Street obsesses over whatever a company doesn't have at the moment – if orders are good, the complaints are about margins; if margins are recovering, there are worries about orders tailing off.

In the case of National Oilwell Varco, the company seems to be on top of the production and margin challenges in its offshore business that are still troubling Cameron International Corp. (NYSE:CAM), but now investors worry about the health of the offshore rig order cycle. Land rig orders are looking better, though, and a greater than two-turn discount to Houston-based peers/competitors like Cameron, FMC Technologies, Inc. (NYSE:FTI), and Dril-Quip, Inc. (NYSE:DRQ) seems a little overdone.

No Other Vendor

Not many companies have the influence within their industries that National Oilwell Varco enjoys. About 90% of the world's drilling rigs have some NOV equipment on them and the company has 60-80% share in topside (machinery above ground or water level) packages for land and offshore rigs. From top drives and rotary equipment, to mud pumps, wireline equipment and downhole tools, National Oilwell Varco is a dominant force in the industry. Even companies like Helmerich & Payne, Inc. (NYSE:HP) that build their own rigs typically order substantial amounts of equipment from NOV. In only a few niches, like surface trees (an above-ground assembly of valves, spools and fittings) where Cameron is a share leader, does NOV not have a leadership position.

National Oilwell Varco isn't as dominant below the waterline, though it's still a significant business. NOV has around a 30-40% share in subsea equipment for floaters and jackups (types of oil rigs), trailing Cameron in both cases and competing with emerging rival General Electric Co. (NYSE:GE). NOV has been gaining share in the blowout preventer business, pulling ahead of companies like Cameron and GE in new orders.

Land Recovery and Growth in FPSOs

Investors definitely didn't like NOV's guidance on orders following first quarter earnings, with the implication of possibly no new-build floater orders in the second half of the year. NOV's facilities have been running all-out to keep up with orders, but now the fear is that weakness in dayrates (the rate a contractor is paid by an oil company or operator for running a rig) and delayed offshore projects are going to cut into rig orders.

That doesn't necessarily mean that NOV is going to run out of orders. While new orders did decline 23% year over year in the first quarter, orders for the North American land market saw an upturn. A large piece of the U.S. land rig fleet is 20 years old (or older) and not up to the task of efficiently drilling modern wells in unconventional shales. That ought to feed to a replacement/upgrade cycle that keeps orders coming in.

At the same time, while jackup and floater rig orders may be at or close to the peak for this cycle, there is still growth in floating production, storage and offloading (FPSO) units. Through its acquisition of NKT Flexibles in 2012, NOV has increased its potential content per FPSO and now seriously rivals France's Technip S.A. in the market.

Can Management Rally the Troops?

In three months National Oilwell Varco has seen its coverage breakdown go from 24 buys, eight holds, and one sell to 19 buys, 11 holds, and one sell/reduce. Investors have also seen the company's multiple to forward EBITDA shrink into the high single-digits while Cameron, FMC Technologies, and Dril-Quip all enjoy double-digit multiples. Some of this can certainly be tied to different end-market exposures and different places in the cycle, but it's still an unusually large spread.

The Bottom Line

Even if National Oilwell Varco can't close the gap, an 8x multiple to 2014 EBITDA still suggests a fair value of nearly $89. That makes it an interesting relative value next to Cameron and FMC, though the former has a stronger self-improvement story right now and FMC is stronger in terms of near-term performance and orders. While this cycle is showing some gray hairs, NOV may yet have enough value to be worth a look in 2014 as the U.S. land market improves.

Disclosure: As of this writing, the author was long Cameron.

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