Zacks.com: Analyst Blog

National-Oilwell Varco, Inc. (NOV) reported strong first-quarter 2008 results, driven by continued strong demand from the deepwater offshore and international land markets. Revenue for the quarter was up 1% sequentially and 24% year-over-year to $2.68 billion.

New orders of $2 billion during the quarter brought the total backlog to a record $9.9 billion, highlighting the high level of earnings visibility going forward. Approximately 90% of the total backlog pertains to international markets, while about 88% of the total relates to offshore equipment.

On April 21, National-Oilwell Varco closed on the Grant Prideco (GRP) acquisition. Earlier, on December 17, 2007, NOV announced the acquisition of drilling-products maker GRP in a stock and cash deal totaling about $7.37 billion. The combined company will operate under the Varco name and trade under the NOV ticker. With the completion of the acquisition, the company has emerged as an oilfield machinery powerhouse enjoying a very strong cyclical leverage.

We view the transaction as a win-win for the shareholders of both companies, as it provides them a more diversified oil and gas drilling exposure. Apart from getting the 22% premium on their stock holdings, Grant Prideco holders get continued cyclical exposure by owning shares of National Oilwell Varco.

In addition, they will get the stock portion of the consideration as tax-free. On the other hand, for NOV shareholders, Grant Prideco is the technological leader in drill pipe and bits and its business nicely fits into National-Oilwell's portfolio of assets.

Given the strong cash flow visibility (NOV had a backlog of approximately $9 billion at the end of last year), we are confident of the company's ability to payoff the transaction-related debt of approximately $2 billion. Our recommendation for the shares is Buy with a target price of $85.

Read the analyst note on NOV.