Commodities & Metals

Two Oil and Gas Breakups Too Large to Ignore

Offshore drill rig
Source: Thinkstock
Two oil field services companies announced on Tuesday that they plan to spin off parts of their businesses into separately traded companies. National Oilwell Varco Inc. (NYSE: NOV) will hive off its distribution business, and Noble Corp. (NYSE: NE) plans to spin off its standard specification (shallow-water) drilling units.

Both companies are trying to boost their share prices by unlocking value for shareholders. National Oilwell Varco’s distribution and transmission business accounts for about 20% of the company’s total revenues, but operating margins are in the 6% range.

In similar fashion, Noble is going to concentrate its efforts on the high-margin deepwater drilling business and leave the shallow-water business. Last May, Noble won a contract with Statoil ASA (NYSE: STO) for a North Sea project in deep water and a harsh environment that Noble hopes will lead to strategic relationship with Statoil in the coming developments in the Arctic.

National Oilwell Varco’s distribution business has pulled in $2.52 billion in the first half of 2013, nearly double its revenues in 2012. The increase is due to two acquisitions the company made last year. The company said that assets at 415 locations and operations in 26 countries that now contribute about 85% of the segment’s revenues ($2.14 billion) would be spun off. The company expects the spin-off to be completed in the first half of next year, subject to the usual regulatory and board approval. Shareholder approval is not required.

In a note to clients, a Sterne Agee analyst noted:

As two separate companies, the remainder of [National Oilwell Varco] and the distribution business is expected to have better operational flexibility to focus on their specific products, services and customers.

Sterne Agee currently has a Buy rating on National Oilwell Varco with a price target of $80. The firm believes that the spin-off could add $7 to $9 to its price target. Shares closed at $79.10 on Wednesday night, in a 52-week range of $63.08 to $82.47.

Noble plans to split itself into a company that provides rigs for high specification drilling in deepwater, ultra-deepwater and harsh environments and a second company for what is known as standard specification drilling. The shallow-water part of the spin-off will own five drillships, three semisubmersibles, 34 jackup rigs, two submersibles and one floating production storage and offloading (FPSO) unit and will manage the operations of one platform.

Noble stock closed at $38.60 on Wednesday, in a 52-week range of $33.02 to $42.34. Noble’s forward P/E is just 8.3 and National Oilwell Varco’s is 12.62. Both companies think they are better than that. Thomson/First Call’s consensus price target for Noble is about $47.20 and nearly $85 for National Oilwell Varco.

Both these deals look like wins for investors, and the spin-off companies look to be solid performers. Whether either company gets the expected boost in share price remains to be seen, but both are doing what they can to give themselves a chance.

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