NOV Inc.: Navigating Near-Term Headwinds with an Eye on Energy's Future

As the energy sector grapples with fluctuating commodity prices and geopolitical tensions, NOV Inc. (NOV) has emerged as a paradox: a company thriving in key strategic areas while contending with immediate operational headwinds. The question for investors is whether the firm's long-term advantages in renewables and technology can outweigh near-term challenges in North America. For now, the answer leans toward a hold-and-wait strategy, as NOV's resilience in execution and innovation positions it to outlast the current slump—and capitalize on energy's evolving landscape.

The Backlog Story: Sustained Demand Amid Volatility

NOV's $4.41 billion backlog in energy equipment as of Q1 2025 marks a 12% year-over-year increase, reflecting robust demand for its advanced drilling and infrastructure solutions. This growth is particularly notable given the challenging macroeconomic backdrop. New orders rose to $437 million, with a book-to-bill ratio of 80%—up from 77% in 2024—indicating strong order flow despite industry caution.

This backlog provides a critical buffer against short-term revenue declines. For instance, while North American revenue dipped 3% year-over-year, the backlog's execution helped stabilize profitability. The Energy Equipment segment's operating profit surged to $134 million (11.7% of sales), driven by pricing power and efficient backlog management.

Free Cash Flow: A Turnaround Story

NOV's free cash flow flipped from negative $147 million in Q1 2024 to a positive $51 million this year, thanks to improved working capital management and disciplined capex. The company's Excess Free Cash Flow (after investments) hit $51 million, enabling it to return $109 million to shareholders via buybacks and dividends in Q1 alone.

This turnaround is crucial. Management has vowed to return at least 50% of Excess FCF to shareholders, a commitment that bolsters credibility. However, investors should note that FCF remains volatile—Q2 tariffs could add $15 million in quarterly costs, complicating margins.

Offshore Renewables: The Long Game

While NOV's core business faces North American headwinds, its pivot to renewables and subsea infrastructure is paying off. Key wins include:
- A Japanese vessel's integrated cable-lay system for offshore wind projects.
- XLW-S connectors for Suriname's deepwater GranMorgu project, supporting 30+ wells.
- Geothermal drilling solutions in Iceland and Europe, leveraging its AI-driven Drilling Beliefs & Analytics (DBA) platform.

These contracts highlight NOV's ability to adapt to energy transitions. The STAR™ composite pipeline—chosen for a West Texas produced-water project—and ERT™ power sections, which set drilling records in the Utica shale, further underscore its tech-driven edge.

Near-Term Challenges: North America's Slump and Tariffs

The elephant in the room is North American demand. Lower commodity prices have forced E&P firms to cut activity, with NOV's Energy Products and Services revenue dropping 2% year-over-year. Margins in this segment contracted to 8.4% of sales, as lower volumes and unfavorable mix pressures offset efficiency gains.

Meanwhile, tariffs are escalating. NOV now expects $15 million per quarter in tariff costs starting Q2, up from $8–10 million in Q1. These costs could delay cost recovery and complicate global supply chains—a risk not yet fully priced into the stock.

Investment Thesis: Hold and Wait for a Pullback

NOV's stock has been volatile, trading between $20 and $28 over the past year, reflecting market skepticism about its near-term prospects. However, its $51M in Excess FCF and expanding backlog suggest it can weather the current storm.

Why wait?
- Near-term risks include Q2 guidance for 1–4% revenue declines and potential further OPEC+ cuts.
- The stock's current valuation—12x forward EBITDA—is reasonable but leaves little room for error until profitability stabilizes.

When to buy?
Look for a dip below $20, where the stock's 52-week lows offer a better risk-reward. A pullback could create an entry point to benefit from NOV's long-term tailwinds:
- Offshore renewables and geothermal projects, which have multi-year contracts.
- Differentiated technologies (e.g., DBA, ERT) that reduce drilling costs and boost safety.

Conclusion: A Hold with Long-Term Conviction

NOV is not a high-flying growth story today. It's a company navigating a tough present to secure a stronger future. Investors should acknowledge its execution in backlog management and renewables while waiting for the market to reassess its value amid lower near-term risks. Hold for now, but keep an eye on a potential correction—then consider a strategic entry. NOV's resilience and strategic bets on energy's evolution make it a hold-and-wait story worth monitoring.

Disclosure: This analysis is for informational purposes only and not personalized financial advice.