CAM Cameron International Corp.

We have downgraded oilfield services firm National Oilwell Varco Inc. (NOV) to Neutral from Outperform ahead of its third-quarter results.

National Oilwell Varco is one of the biggest manufacturers of drilling equipment in the world with an impressive business model. The company’s large installed base of rigs worldwide provides for a steady recurring revenue stream through demand for maintenance, parts and other expendable products.

Given its strong balance sheet, backlog of over $7.7 billion, leading market position and technology innovation, National Oilwell Varco remains better positioned to navigate the uncertain environment than many of its peers. Furthermore, we believe that the company’s competitive position has received a boost from last year’s APL acquisition, which will expand National Oilwell Varco’s floating production storage and offloading vessel (“FPSO”) product line and raise its earnings visibility.

However, we think the current valuation is fair and adequately reflects the company’s future growth prospects. Moreover, with markets remaining competitive and pricing likely to be weak, we do not see any obvious catalyst in National Oilwell’s business to significantly push the stock price higher.

Therefore, despite the company’s leading position in the global oilfield services market, positive fundamentals and attractive valuation, we prefer to remain on the sidelines at this point. Our new long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).

Houston, Texas-based National Oilwell Varco, formerly National Oilwell, is a world leader in the design, manufacture and sale of comprehensive systems, components, products and equipment used in oil and gas drilling and production worldwide.

The company, which ranks ahead of Cameron International Corp. (CAM) as the biggest U.S. maker of oilfield equipment, reached its current form following the March 2005 merger between National Oilwell and Varco International. National Oilwell Varco organizes its operations in three business segments: Rig Technology, Petroleum Services & Supplies, and Distribution Services.

 
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