DNOW - DistributionNow

[rishig]

Apparently Fairholme want(ed) to merge DNOW & MRC..

 

http://www.businesswire.com/news/home/20160223005481/en/Announces-Fourth-Quarter-Full-Year-2015-Results

 

HOUSTON--(BUSINESS WIRE)--NOW Inc. (NYSE: DNOW) reported for its fourth quarter ended December 31, 2015 a net loss of $249 million, or $2.33 per fully diluted share, compared to net income of $16 million, or $0.14 per fully diluted share in the same period of 2014. Excluding other costs, net loss was $27 million or $0.25 per fully diluted share. Other costs in the fourth quarter of 2015 included a pre-tax non-cash impairment charge of $138 million associated with the fair value of goodwill, $3 million in acquisition-related and severance charges and an after-tax charge of $129 million related to a deferred tax asset valuation allowance.

 

Phaceliacapital,

 

Where did you find the information about Fairholme?

 

It's from the latest letter:

http://www.fairholmefundsinc.com/Letters/FAIRX2015AnnualLetter.pdf

[Phaceliacapital]

Bloomberg Terminal:

 

Fairholme’s Berkowitz Says MRC, DNOW Should Consider Merger

2016-02-23 15:45:56.241 GMT

 

 

By Joshua Fineman

    (Bloomberg) -- MRC Global, NOW Inc. should be among first to experience rebound with higher oil, gas prices, Fairholme Capital Management CIO Bruce Berkowitz writes in 2015 annual letter.

 

  * Shrs of MRC, DNOW comprise 4.8% of Fund assets

  * Merger would create “huge” efficiencies, maximize

    shareholder value

  * MRC rose as much as 26% intraday, most ever; DNOW shrs pare

    gain to 5.2% from 12%

  * NOTE: Earlier, DNOW holder Fairholme reports 6.7% stake; MRC

    holder Fairholme reports stake 5.6% vs 5.51% as of Dec. 13F

    * MRC Holder Fairholme Contacted Issuer About Possible

      Merger

 

 

[KCLarkin]

Bloomberg Terminal:

 

Fairholme’s Berkowitz Says MRC, DNOW Should Consider Merger

2016-02-23 15:45:56.241 GMT

 

 

By Joshua Fineman

    (Bloomberg) -- MRC Global, NOW Inc. should be among first to experience rebound with higher oil, gas prices, Fairholme Capital Management CIO Bruce Berkowitz writes in 2015 annual letter.

 

  * Shrs of MRC, DNOW comprise 4.8% of Fund assets

  * Merger would create “huge” efficiencies, maximize

    shareholder value

  * MRC rose as much as 26% intraday, most ever; DNOW shrs pare

    gain to 5.2% from 12%

  * NOTE: Earlier, DNOW holder Fairholme reports 6.7% stake; MRC

    holder Fairholme reports stake 5.6% vs 5.51% as of Dec. 13F

    * MRC Holder Fairholme Contacted Issuer About Possible

      Merger

 

Is Fairholme the reason for the jump today? Or the horrible earnings? The Fairholme news is several weeks old.

[Phaceliacapital]

Think it's earnings, it opened at +8% or something.

[skanjete]

thank you for the reply.

Interesting news...

[undervalued]

why is it keep going up when earnings is so bad? short covering?

[Jurgis]

why is it keep going up when earnings is so bad? short covering?

 

"Why" questions about short term price movements are rather meaningless, but if I had to guess, it would be oil price rebound. Also market rebound.

[AzCactus]

why is it keep going up when earnings is so bad? short covering?

 

"Why" questions about short term price movements are rather meaningless, but if I had to guess, it would be oil price rebound. Also market rebound.

 

Lol.  I think Benjamin Graham has a really good quote that answers your question. 

[flesh]

Massive fcf/currently trading at cheap fcf multiple, huge inventory to convert to cash, making acquisitions at somewhat depressed multiples with fcf. Amazing balance sheet. High likelihood of future acquistions at great multiples. First too benefit from oil rebound, great mgmt. Some of the cost cuts will remain with rebound as inevitably happens when a business get's clear on what it really needs=larger profit margin.

 

What's not to like?

[kab60]

Continued losses, writedown of inventory, low historic ROE? :) FCF yield is pretty meaningless since it's countercyclical. They have to replenish their inventory. I like the story, but if historic ROE is around 10 pct and you buy at book is that good enough? A big merger sounds interesting and might improve margins, so that might change the story.

[littlemiami]

Pricing

why is it keep going up when earnings is so bad? short covering?

 

People placing some probability on a possible DNOW/MRC deal?

 

Berkowitz's not so subtle 13D - 

"In addition, the Reporting Persons will be in contact with members of the Issuer's management, the members of the Issuer's Board of Directors, other significant shareholders and others regarding the Reporting Persons' views on the long-term prospects of the Issuer.  The contact may include proposing or considering any of the actions enumerated in Item 4 of the instructions to Schedule 13D.  In connection with the foregoing, the Reporting Persons have contacted members of the Issuer's management about a possible merger with another issuer." 

[flesh]

Continued losses, writedown of inventory, low historic ROE? :) FCF yield is pretty meaningless since it's countercyclical. They have to replenish their inventory. I like the story, but if historic ROE is around 10 pct and you buy at book is that good enough? A big merger sounds interesting and might improve margins, so that might change the story.

 

Ya, I hear ya, good points. Fcf is nice for acquisitions at lower multiples and I suppose should increase ROE and I also assume some margin expansion will come of it and scale as well. In the last ec you could tell mgmt was being squirrely about potential large acquistions so could be something there.

 

They'll have to replenish their inventory but at that point I'd be surprised if a recovery doesn't manage to stay priced in. On the other hand we could have a seesaw of oil prices for awhile trending upwards over years.

 

 

[undervalued]

WTH.. For some reason I kept selling at the worst time for tax purposes (end of Jan). Thankfully I still hold half in IRA. Anyone else manage to do this every time? Any idea on how to avoid this in the future? When I double down, it kept going down, when I sell it doubled. I think I should do Indexing. I have the worst luck possible.

[jay21]

WTH.. For some reason I kept selling at the worst time for tax purposes (end of Jan). Thankfully I still hold half in IRA. Anyone else manage to do this every time? Any idea on how to avoid this in the future? When I double down, it kept going down, when I sell it doubled. I think I should do Indexing. I have the worst luck possible.

 

Buy into a closest comp, another undervalued security, or dont tax loss harvest.

[flesh]

WTH.. For some reason I kept selling at the worst time for tax purposes (end of Jan). Thankfully I still hold half in IRA. Anyone else manage to do this every time? Any idea on how to avoid this in the future? When I double down, it kept going down, when I sell it doubled. I think I should do Indexing. I have the worst luck possible.

 

I would say simply to know what the value is. If you decide the value is much greater than it's selling for, don't sell. If it's getting close enough to your updated valuation, sell, or sell half, or whatever.

 

If you don't know what it's worth, mr. market's constant price changes will give you misinformation.

 

There's probably other ways and I know this is an obvious answer, but this is the primary mistake I see most people making.

[RadMan24]

What? What would you expect a distributor to do differently in this environment? They generated a significant amount of cash, and any reason to build inventory is good news.

[kab60]

What? What would you expect a distributor to do differently in this environment? They generated a significant amount of cash, and any reason to build inventory is good news.

Was that directed at me? If so, I think they're doing what they have to do and seem to execute well in a difficult environment. I'm just asking if it should trade a meningsful amount above book.

[Guest notorious546]

Deteriorating Q1 market continues topline contraction, but market position strengthened

Net loss for Q1 2016 of $63M

Diluted loss per share, excluding other costs, for Q1 2016 was $0.35

Excluding steel price related line pipe write downs of approximately -$0.02, EPS would be a loss of $0.33

Revenue per global operating rig was $1.3 million; $1.1 million excluding 2015 acquisitions

Year over year Q1 revenues were negatively impacted by approximately $19 million due to strengthening US dollar

•Lower cost structure, continued balance sheet discipline, generating cash

Reduced headcount by 425 since Q4 2015; closed or consolidated four additional branches

Reduced AR by $72 million in Q1 2016

Reduced inventory by $60 million in Q1 2016

$89 million cash flow from operating activities

Reduced long term debt by $53 million (to $55 million) in Q1 2016

Net cash position of $76 million at March 31, 2016

Filed for HSR approval for acquisition of Power Service, Inc. on April 29, 2016

 

The company remains unprofitable but has managed to generate free cash flow. Earnings and EBITDA are both notable losses. The company's international segment performed the best with only a 3% decrease relative to last quarter, followed by United states down 18% then canada at 20%. Working capital as a % of sales is at 35% and management thinks 25% is achievable. On a whole, industry statistics and indicators are anticipating a weak market for the balance of the year. The balance sheet still looks like its a good shape and ~$50 million in debt was paid down during the quarter. Free cash flow for the quarter was about 86 million and full year expectations are about 150 to 200 million, which represents an fcf yield to equity of ~8% to 11%. Pricing pressure on some of their steel products could come off as tarriffs in Canada and import restrictions in the united states protect margins from Chinese dumping.

 

Overall, i still like the stock. high free cash flow yield, good balance sheet and great torque to an recovery in commodity prices.

[Homestead31]

Will be interesting to see what they paid for the Power Service Acquisition.  In my mind, this story is still about 3 things: a strong balance sheet, an eventual recovery in drilling, and taking market share / buying weak competitors during the down turn.

 

Power Services did $270 in revenue in 2014, not huge, but not tiny either.  the price paid will be illustrative toward what is going on out there - management has indicated extreme patience / preference to just take share rather than buy share, but nichey plays like Power Service will add real value and revenue when the market turns

[MrB]

Can someone help me out here, please? On the conference call they said the following about Power Services, Inc.

 

"We continue to build out higher-value-added product lines and services. You saw this with the deal we announced last Friday. We signed and filed for HSR approval for Power Service, out of Wyoming. Power Service provides rotating and process equipment, engineering, design, installation, fabrication, and service solutions. They distribute OEM parts, including pumps, generator sets, air compressors, and blowers, and fabricate custom lease automatic transfer custody units, or LACT units, vapor recovery units, ASME code vessels, and water production skids serving the upstream, midstream, and downstream oil and gas markets, as well as the mining, Power Generation, and general industrial industries.

Their turnkey tank battery solutions would provide a number of synergies for DNOW. There are few businesses in the US who offer their solutions, but not at the same level of quality. This would solve one of our supply chain customer's requests that we've had for years. This business would benefit greatly when customers start completing the DUCs, as they are able to deliver a complete tank battery solution immediately after the completion company finishes fracking the well, and will accelerate the time it takes for our customer to get oil and gas to market.

Power Service also consumes high volumes of pipes, valves, and fittings and other core DNOW products during the process of fabricating these modularized solutions. And they would benefit from our supplier relationships, scale, and access to inventories in our network.

Integrating with them would also raise DNOW's valve actuation business services to a Tier 1 level by applying Power Services' core competencies around spooling and valve modification. It would also give us the opportunity to leverage our Odessa Pumps infrastructure in the Permian and Eagle Ford, and DNOW's pumping solutions businesses in the US, Canada, and abroad, with product lines for which Power Service has distributorships to continue to grow customer participation organically."

 

Is DNOW now a distribution/supply chain management company that's buying manufacturers or am I looking at this the wrong way??

[Guest notorious546]

Power Service provides rotating and process equipment, engineering, design, installation, fabrication, and service solutions. They distribute OEM parts, including pumps, generator sets, air compressors, and blowers, and fabricate custom lease automatic transfer custody units, or LACT units, vapor recovery units, ASME code vessels, and water production skids serving the upstream, midstream, and downstream oil and gas markets, as well as the mining, Power Generation, and general industrial industries.

 

yeah i think you are right, it's an manufacturer/designer for a number of products. I'm guessing the idea is that DNOW can utilize it's branches to sell these pre-made units/components that can meet customers needs in a more timely fashion. As for the higher value comments, not sure if we have anything to suggest their are good margins or high returns on capital for this business. I'm all ears though, good chance i've misinterpreted something.

 

http://www.powerserviceinc.com/about-us/

 

 

[MrB]

Power Service provides rotating and process equipment, engineering, design, installation, fabrication, and service solutions. They distribute OEM parts, including pumps, generator sets, air compressors, and blowers, and fabricate custom lease automatic transfer custody units, or LACT units, vapor recovery units, ASME code vessels, and water production skids serving the upstream, midstream, and downstream oil and gas markets, as well as the mining, Power Generation, and general industrial industries.

 

yeah i think you are right, it's an manufacturer/designer for a number of products. I'm guessing the idea is that DNOW can utilize it's branches to sell these pre-made units/components that can meet customers needs in a more timely fashion. As for the higher value comments, not sure if we have anything to suggest their are good margins or high returns on capital for this business. I'm all ears though, good chance i've misinterpreted something.

 

http://www.powerserviceinc.com/about-us/

 

At this point, not material, but if they keep it up then it would mean a shift from their distribution/balance sheet light model.

[MrB]

Management meet

Welcome to post questions that we can put to management in a few weeks.

[Broeb22]

I would encourage you to look at the IPS segment of DXP Enterprises. From what you've described, they have a pretty similar business to this PowerService. I can tell you that IPS earned high returns on capital (based on segment earnings in the 10-k) when things were good, and it has been absolutely crushed during this downturn. I don't know the purchase price DNOW is paying, but if they are paying a reasonable price based on 2015 results, then they are likely getting a good deal.

 

This business is attractive to end users because IPS does the work of fabricating a completed system the end user can plug in, in a turnkey manner, as opposed to integrating and fabricating the product themselves.

 

That's my take at least.

[MrB]

I would encourage you to look at the IPS segment of DXP Enterprises. From what you've described, they have a pretty similar business to this PowerService. I can tell you that IPS earned high returns on capital (based on segment earnings in the 10-k) when things were good, and it has been absolutely crushed during this downturn. I don't know the purchase price DNOW is paying, but if they are paying a reasonable price based on 2015 results, then they are likely getting a good deal.

 

This business is attractive to end users because IPS does the work of fabricating a completed system the end user can plug in, in a turnkey manner, as opposed to integrating and fabricating the product themselves.

 

That's my take at least.

 

Yes that lines up with management speak too. Thanks.