National Oilwell Varco Terminates Contract With EAS In Brazil: Should Investors React?

JPMorgan on Wednesday issued a company note on National-Oilwell Varco, Inc. (NYSE: NOV) after the company agreed to terminate its contract with Estaleiro Atlantico Sul in Brazil to deliver seven deepwater drilling equipment packages. The firm rates National Oilwell Varco as Neutral, while a price target is unavailable.

Analyst Sean Meakim wrote, "As the company remains cash ahead on its contracts, it won't take a charge in 4Q, though its Rig Systems backlog will be reduced by $1.1 billion (14 percent). The challenges in Brazil (particularly with respect to the EAS rigs) have been a focus for several quarters, and we think if anything the event could provide some near-term relief for the shares."

JPMorgan believes that the decline in the price of oil has put significant pressure on offshore Exploration and Production companies' capital expenditure budgets. This price pressure could cause further customer restructurings of contacts and more cancellations.

With regards to investor sentiment, Meakim wrote that due to a solid backlog of orders, strong balance sheet, and a 5.4 percent dividend yield, National Oilwell Varco's stock does look like a relatively safe investment in the near term.