Balance sheet and cash flow
National Oilwell’s debt levels have increased over the last six months from $1.5 billion to $4.35 billion. Most of that debt was added to finance the company’s $2.5 billion acquisition of Robbins & Myer’s, its largest acquisition in four years. But considering the company’s cash position of $2.45 billion and its excellent cash flows, this debt level is very attractive.
The company has averaged $1.35 billion in free cash flow over the last five years. That includes a 2012 restructuring of working capital that caused the number to skew negative for a couple quarters. With a net debt position of about $1.5 billion – after including $400,000 in investments on the balance sheet – the company should be able to pay down its debt very quickly.
Dividend growth
But management won’t use all of its free cash to pay down debt. It also returns some of that cash to shareholders through its dividend. Since it started paying a dividend in 2009, management has raised the dividend every year. Most recently it doubled the quarterly dividend to a 1.5% yield.
The companies payout ratio is a miniscule 9%, meaning there’s plenty of room for the company to grow its dividend in the future. It also means management believes there are opportunities for it to invest in during the meantime – perhaps increased production capacity. Investors should feel secure with the dividend yield, and know it will likely continue to grow.
Energy in the sector
During the latest earnings call, Pete Miller indicated National Oilwell Varco typically typically lags behind service providers and drilling contractors. Looking at the rest of the sector gives us a rosy picture for National Oilwell’s future.
Haliburton continues the pattern of growing international operations, and saw a record first-quarter revenue of $7 billion this year. Despite relative weakness in North America, the company intends to increase its rig count in the region by 100 to 150 by the end of 2013. Halibruton’s expansion plan indicates continued growth for National Oilwell Varco abroad as well as domestically.
Similar stories can be seen across the industry. These companies are spending money to grow. Specifically, they’re spending money at National Oilwell Varco, which supplies the majority of oil rig equipment in the world. That’s why the company will remain in my portfolio for the foreseeable future.
Adam Levy owns shares of National Oilwell Varco. The Motley Fool recommends Halliburton (NYSE:HAL) and National Oilwell Varco. The Motley Fool owns shares of National Oilwell Varco. Adam is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 5 Reasons to Hold On to This Energy Company originally appeared on Fool.com is written by Adam Levy.
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