National Oilwell Varco's Dividend Cut: Why Now?

TL;DR

National Oilwell Varco cut its dividend because its offshore-rig-heavy business remained far from recovery despite oil rising above $40 and production beginning to decline. The 89% reduction brought the payout to $0.05 per quarter, preserving cash while rigs were being cold stacked, docked, auctioned, or stripped for parts. Read on to understand why the speakers considered the cut prudent and how offshore activity shapes the company’s recovery.

Transcript

Tyler Crowe: Moving on, we talked a lot about bankruptcy, and sticking with the bad news theme, let's talk about some dividend cuts. Taylor Muckerman: Yeah, people are probably scratching their heads, "Oil prices are up, why such dour news about the energy space today?" Crowe: Yeah. So, earlier this week, National Oilwell Varco, a company both Tayl... Read More

Key Insights

• 💇 National Oilwell Varco, a highly regarded company in the energy sector, has cut its dividend by 89%.
• 🧑‍⚕️ The company's decision to reduce the dividend is a strategic move to safeguard its financial health and be prepared for the eventual recovery in the oil industry.
• 🪘 The recovery timeline for National Oilwell Varco is heavily dependent on the revival of offshore activity, which is expected to take longer than onshore activity.
• 🥶 The market conditions have led to rigs being cold stacked, put back at docks, and sold in auctions, indicating the challenges faced by the company.
• 💪 Despite the dividend cut, National Oilwell Varco maintains a strong balance sheet with a positive net cash position.
• 🛄 The company has a history of successful acquisitions and aims to be well-financed for future opportunities.
• 🙂 Analysts admire National Oilwell Varco's prudent decision-making and financial preparedness in light of current market conditions.

Questions & Answers

Q: Why did National Oilwell Varco cut its dividend despite rising oil prices?

National Oilwell Varco remained heavily tied to offshore rigs, whose recovery was expected to lag behind the return of land activity. CEO Clay Williams said the company wanted to treat shareholders right but had to cut the dividend because of how the market was acting.

Q: How large was National Oilwell Varco’s dividend cut?

The company cut its dividend by 89%. That reduced the payout to $0.05 per quarter.

Q: Why was the dividend cut made at this point in the market cycle?

Oil had risen above $40 and production was starting to slide, but land rig activity was still declining and offshore recovery remained further away. The speakers viewed an early cut as a prudent way to preserve capital while the company’s finances still looked good.

Q: Why is offshore activity important to National Oilwell Varco’s recovery?

Offshore operations represented a large portion of National Oilwell Varco’s business. Taylor Muckerman said meaningful offshore activity would be needed to return the company close to where it had been a couple of years earlier.

Q: What was happening to inactive oil rigs during the downturn?

Rigs were being cold stacked, returned to docks, or offered at auctions. Some companies were also breaking down land or offshore rigs and using their components as parts.

Q: Could improving onshore activity help National Oilwell Varco?

Yes. Although offshore rigs were a major part of the business, National Oilwell Varco also had onshore exposure, and its revenue would likely improve when land activity picked up.

Q: Why did the speakers consider the dividend cut prudent?

They said the company still had substantial cash and appeared to be net cash positive relative to its debt, although Tyler Crowe noted that he did not have the figures available. Cutting the dividend could leave National Oilwell Varco well financed and ready when the market recovered.

Q: How could National Oilwell Varco use the cash it preserves?

The company could keep capital available for an acquisition or another opportunity when the market turned. The speakers said National Oilwell Varco made acquisitions routinely and had developed a detailed record of practices that had worked or failed over time.

Summary & Key Takeaways

• National Oilwell Varco, a company that both Tyler and Taylor are invested in, has reduced its dividend by 89%.

• The CEO, Clay Williams, explained that the cut was necessary due to the market conditions.

• While oil prices have been increasing and production is starting to decline, the recovery for offshore rigs is still uncertain.