11% of the S&P 500’s value is derived from energy stocks. I have the same amount of my retirement portfolio allocated toward the energy sector as well. But unlike the S&P 500, my energy portfolio consists of just one company – National-Oilwell Varco, Inc. (NYSE:NOV).
Since buying the company, and making a CAPS pick, last fall, the stock has underperformed the market by about 20%. Meanwhile, plenty of names in the energy sector have handily outperformed the market. But I’m not jumping ship (or rig, as the case may be). There are five main reasons I’m holding onto National-Oilwell Varco, Inc. (NYSE:NOV).
Growing demand for oil
Even as Americans are trying to shrug off their oil dependence with Teslas and Prii, the demand for oil continues to grow. China has become a big oil consumer, and will continue to grow as its economy develops further. The recovering U.S. economy is also a big contributor, as oil is still one of the most efficient forms of energy.
As demand increases, the finite supply of oil means the price of a barrel will likely increase in time. While this doesn’t directly affect National Oilwell Varco, it provides incentive to the companies National-Oilwell Varco, Inc. (NYSE:NOV) supplies to continue drilling. In that way, the company’s revenue is still influenced by the price of oil.
Natural gas – not a problem
Some investors may be worried that alternative energy sources such as natural gas may keep oil prices low. But if they’re investors in National-Oilwell Varco, Inc. (NYSE:NOV), they shouldn’t be. Its rigs are equally capable of extracting natural gas as they are oil.
While natural gas prices in America have been low, that could change if the energy source rises in popularity. That would actually benefit National-Oilwell Varco, Inc. (NYSE:NOV) in the same way rising oil prices do.
Meanwhile, natural gas prices remain high internationally, where the company has done very well recently. Those energy high prices have allowed the company to expand in Russia, Brazil, and Angola.
Big backlog
National-Oilwell Varco, Inc. (NYSE:NOV) added more than $1 billion sequentially to its order backlog in the first quarter. The backlog now stands at a record $12.9 billion. To put that in perspective, that’s more than half of analysts’ average revenue estimate for 2014. A backlog that continues to grow is a good sign of good things ahead for the company.
For the first quarter, National Oilwell booked $3 billion new orders, and delivered about $2 billion out of the backlog. There is a limit to how large the company will allow the backlog to grow, but CEO Pete Miller said he expects the book-to-bill ratio to exceed 1-to-1 for 2013. As demand grows, the company will have to increase production capacity to prevent the backlog from getting out of hand. A company could have worse problems.
