With multiple reports in hand, it looks like a few themes have emerged in the energy equipment space. Order growth is fine, but margins have become more problematic. Given that orders tend to drive these stocks, that works out well for investors today. Still, investors considering National Oilwell Varco (NYSE:NOV) need to consider the opportunities in offshore in the context of challenging conditions in the onshore industry.

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Fourth Quarter - Some Good, Some Bad, but It's the Good That Will Matter
For better or worse, investors in energy equipment stocks typically care about financials in the following order - orders, revenue and margins. Consequently, while NOV didn't have a perfect quarter, it did all right on the numbers that matter most for short-term stock performance.

Revenue rose 33.5% as reported for the fourth quarter and was up 7% over the third quarter. Rig Tech sales were up about 25% (and 14% sequentially), doing well relative to Street estimates. Petroleum Services and Distribution and Transmission were less impressive on the sequential comparisons, but both showed great year-on-year growth and performed better than expected.

Not unlike Cameron's (NYSE:CAM) report the prior day and General Electric's (NYSE:GE) earlier report, NOV's margins were not so impressive. Gross margin fell more than 5.4 points from the year-ago level and missed most analyst targets by about a point. That, in turn, fueled disappointing operating performance. Operating income rose about 11% on an adjusted basis, but the margin missed by about a point. As was also the case with Cameron, most of the disappointment here was concentrated in one segment - NOV's Rig Tec operations saw a greater-than-three-point drop in adjusted margins.

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Orders Picking up Across the Board
Like Cameron and General Electric, National Oilwell Varco is seeing ongoing order growth. While the growth here wasn't quite as strong as at CAM, NOV saw orders increase 45% from the year-ago level and 6% from the prior quarter - basically in line with expectation and good for a 1.1 times book-to-bill ratio.

It's worth remembering that the companies serve different markets with different fundamental trends. Cameron and General Electric have been seeing strong growth in subsea and surface equipment - equipment like blowout preventers and trees. To that end, Cameron's booking of blowout preventers for new rigs at Transocean (NYSE:RIG) is likely a sign that NOV picked up drilling equipment orders here as well.

Even still, NOV is built around rig equipment, where it has a dominating presence (Cameron, GE and Aker Solutions only small competitors here), and not around subsea or surface equipment. NOV's equipment may be on almost every rig built outside of China and Russia (NOV is said to stand for "No Other Vendor"), but declining rig counts in North America are not especially conducive to good performance from rig technology, nor the petroleum services segment.

Said differently, it is likely that onshore rig demand will pick up eventually (and drillers/producers will increasingly demand more sophisticated rigs with newer, better equipment), but lower rig counts could make revenue and margin numbers a little tricky for the first half of 2013.

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The Bottom Line
NOV has built itself into the 900-pound gorilla of the rig equipment space, but the company's growth is still largely beholden to the energy cycle. As a result, this is a volatile stock with sharp peaks and deep troughs. On a more positive note, the company looks to be still relatively early into a new upward cycle, so order and revenue growth could have room to run from here.

Valuation in this sector is no easy task, as investors tend to fixate on order growth and EBITDA multiples, and both numbers can change quickly and by large degrees. Even so, the shares look undervalued today and could test $90 if this equipment cycle proves to have legs. This is a very hard stock to hold for the long term, however, so any investor considering a buy should do so with some idea of the exit strategy as well.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.