NOV - National-Oilwell Varco

[HWWProject]

In the last decade, NOV has grown revenues more than 10-fold .  Meanwhile profit margins have nearly doubled, leading to a veritable oil gusher of earnings and free cash flow.  NOV has almost no debt and easily supports its current 2.9% dividend yield.  By all accounts it is a well managed company and has caught the attention of Warren Buffet, who's Berkshire Hathaway currently owns about 1.5% of shares.

 

Some industry analysts have discussed NOV as a potential takeover target (for GE which seems odd to me).

 

My dcf valuation for NOV puts an intrinsic value at $92 per share.  At today's price of $61.50, NOV is offering a 33% discount to Intrinsic Value. The dramatic fall in oil prices seems to be offering a great opportunity to long-term investors.

 

 

 

 

 

[Phaceliacapital]

I think it's a great opportunity, you can buy an excellent franchise business that has #1 or #2 positions in every product line it has. It has the track record, the reputation and the quality of the products that is needed to sell in the O&G industry (most products being mission critical).

 

In some segments it has over 90% market shares and the company was one of the main drivers for standardization in the industry. A new rig practically always uses products from NOV. While the outlook for unconventional drilling is currently negative, in the long term this will happen and this should benefit NOV. If you look 10 years out this company will still exist (apart from being taken out).

 

It's net cash and revenues + earnings should be supported by backlog in 2015, 2016 might be a bit wobbly. They can also easily cut some of their production as this is outsourced:

 

"I've given this presentation through practices six times and every time I forget something.

And one of the things I was going to talk about had to do with the amount of machining hours that we actually execute within our own facilities and in general. We have 800 machine tools across our manufacturing platform. They're executing at about 2.5 million machine hours a year.

We outsource, even though we've invested over $900 million into that, we outsourced $2.7 million. We have a lot of room to flex our organization and that was part of the plan. We never want to build the facility for maximum output because you'll never be right or you won't be right for one day. So, we have built our organization to be able to flex.

Now, manufacturing is a core competency. We have lots of machine tools, but we also leverage the industry. And we will flex that when the orders are not as great."

 

I advise you to read the transcripts from their capital markets day, one excerpt:

 

"We didn't just build this business for growth. We talked about the sustainable competitive advantage. If you're thinking about the word sustainable, you got to recognize that we're in a highly cyclical industry. And so you need to make sure that you're building the business to weather those storms and to continue to flourish even in the downturn. So what you see here in blue in the background is rig count. And the green bars are net income. Anybody in the room remember kind of the credit crisis right away, vaguely, maybe. So oil price has dropped 75%, rig count falls 44%. It impacted us, of course, it did. Rig count fell 44%. Because of the strength of our backlog, you look at our net income, it only

dropped 23% by comparison. And if you really dig into the numbers and I didn't do it here for you because I didn't want you to think I was playing some kind of shale game, changing up my metrics. EBITDA over that time period for us only dropped 10%, pretty strong. You look at our peer group from the previous slide, they fell 50% on average.

Here's what so great about that. If you think back to 2009, I was running a portion of our [ph] PSNS (02:55:19) segment at the time. Activity drops like that, it hurts my business, right? We're a day-to-day transactional business. Rigs need to be turn into the right. So I'd go from all my facilities running full out, three shifts, outsourcing to what in the heck just happened. Luckily, in our rig systems business back then, we had $11 billion backlog. Just like Joe has now, we're running three shifts, we're outsourcing way too much."

 

The ST ride might be less entertaining though :)

[rpadebet]

Yes great business. Good capital allocators.

 

Good time to get in, but be prepared for a "not so fun" ride in the near term. they had a huge pipeline at end of last quarter, so most likely there is some buffer this year, but if oil stays low for longer, even they could be impacted.

[KCLarkin]

In the last decade, NOV has grown revenues more than 10-fold .

 

Any secular trends that might have contributed to that growth?

[frommi]

I wrote something negative in the DNOW thread, but given the marketcap and potential of DNOW and that the management team from NOV is now active there, isn`t it the more logical pick?

[muscleman]

What's the downside if oil stays low?

[HWWProject]

What's the downside if oil stays low?

 

In the 2008 credit crisis NOV crashed below 1 x Book Value - then about $30 per share and about 2.5 x Tangible BV - then $8 per share.    Book Value is currently $51 per share, Tangible BV is $19 per share.  This would seem to put a floor around $45 - 50 per share.  Hopeful I'd be brave enough to add to the position at those levels.

 

My full DCF results and a few more thoughts are at:  http://www.healthywealthywiseproject.com/wealthy-blog/thesecurityilikebestnov-national-oilwellvarco

 

[Picasso]

Is book value really a good measure of downside on the stock?  These stocks tend to trade on discounted cash flows not some liquidation value of the company. 

 

Also this is not a Buffett pick but one of the T's.

 

I noticed when they announced their new share repurchase program the stock actually dropped significantly that day.  I remember looking at that and thinking if a large buyback wasn't going to at least keep the shares up on the day you are really fighting against a bigger trend.  I only mention this because it will affect how long it will take to see returns on this investment.  Like IBM you might be sitting in this for a while.  To some that might not matter.

 

I remember looking into the company in 2010 and couldn't get comfortable with their massive growth in earnings.  2004 net income was around $100 million versus today at $2.5 billion.  With these kinds of companies you go through long periods of multiple compression (QCOM or DE anyone?) and growth estimates have to slow and then you start dealing with the sustainability of current figures, especially given their near monopoly on the rig market.  This is a personal preference of mine, but I don't like paying a fair multiple on what could be cyclically high earnings without some kind of inside scoop on the quality of the business.

[handycap5]

good posting and discussion. when i looked at this, i pulled together the capex spending for RIG and 4-5 other competitors over the last decade. They all buy stuff from NOV. Obviously it had boomed, I mean BOOMED! NOV's primary business is the manufacturing of long-lived assets. It is hard for me to understand after the cycle over the last decade how one can get comfortable with any sense of the "normal" earnings power of this business. would love other's comments on this subject...

[bizaro86]

With existing rigs being very underutilized, and likely to get worse, I don't think new rig orders are very likely. They might have a bit of protection from backlog, but after that it could be ugly.

[HWWProject]

Is book value really a good measure of downside on the stock?  These stocks tend to trade on discounted cash flows not some liquidation value of the company. 

 

 

 

I used a dcf model for my Intrinsic Value calculation.  But if there were ever no earnings on the Income statement (or market feared such) we are left with what's on the Balance sheet.  So then I'd think multiples of book value / tangible bv apply.

 

[thefatbaboon]

Anyone aware of any oil services companies that are mainly aftermarket/consumables? 

 

 

[rpadebet]

Anyone aware of any oil services companies that are mainly aftermarket/consumables?

 

I am assuming you are looking for a pure play, because NOV has a decent aftermarket/consumables business which is part of their RIG technologies segment if I am not wrong.

[thefatbaboon]

Anyone aware of any oil services companies that are mainly aftermarket/consumables?

 

I am assuming you are looking for a pure play, because NOV has a decent aftermarket/consumables business which is part of their RIG technologies segment if I am not wrong.

 

You're right!  Just looking for some other ideas. 

Obviously not strictly comparable and haven't really looked at them yet: FLS and CLB are in my inbox.

[thefatbaboon]

Just finished the investor day of NOV and reading a few Ks.  Fascinating business and they seem (as much as one can tell such things for listening to presentations) to have a remarkable, energetic culture.  That said this is not, in my view, an aftermarket/consumables story.  Take their biggest segment Rigs as an example.  $200m average OEM construction revenue per vessel is estimated to result in $400m Aftermarket revenue over 25 years. In other words, about $17m per year.  Ratio is too weak in my view.  This seems like the OEM/AM split that one gets in above average cyclical businesses like gas turbine engines or elevators.  Enough AM to keep profitable through all points of the cycle, but not enough to take away the need to very carefully look at the cyclical (OEM) part to discover the levels of trough and across-cycle earnings.

 

But if I had a view about Rigs and wanted to invest in a cyclical builder in the rig space this would definitely be the first company I'd look at.

 

He's not there anymore but here's a lecture given by Pete Miller (the guy largely responsible for creating NOV)

 

[intensityjp]

I listened to the investor days too and was impressed by the company. 

 

A point that stuck in my head was that one of the speakers mentioned that a reduction in capex spending in the O&G sector does not affect all service companies equally.  He seemed to be implying that the industry leaders are somewhat insulated more so than the marginal provider.  NOV seems to certainly be  a leader more likely to keep more of the capex spend than smaller and less sophisticated competitors.

[physdude]

This struck me in today's earnings press release: "Since initiating a share buyback program in September 2014, the Company has repurchased 43.3 million shares or 10 percent of its shares outstanding, at an average price of $57.38 per share." Management is clearly of the opinion that the shares are seriously undervalued.

[rpadebet]

This struck me in today's earnings press release: "Since initiating a share buyback program in September 2014, the Company has repurchased 43.3 million shares or 10 percent of its shares outstanding, at an average price of $57.38 per share." Management is clearly of the opinion that the shares are seriously undervalued.

 

Yes, this is quite amazing. I hope the stock stays depressed and they buyback a bunch more. Looking past the next few quarters, given the reduction in rig count(down almost 50%), demand for oil should eventually outpace supply leading to restart of all this rig work and demand for NOV products.

As expected, 2015 is going to be a tough year, but I like the quality of this management team and they are doing a tremendous job buying back all these shares opportunistically.

[Jurgis]

NOV could be a good acquisition for BRK. But then BRK doesn't do hostile deals, NOV has no 5%+ owners (apart from BRK itself perhaps), and it's unlikely NOV would sell below $80 or so.

[boilermaker75]

Some downgrades today. I am going to take this opportunity to write some puts, probably 40- or 50-strikes with May 1 and May 8 expirations.

[rpadebet]

Some downgrades today. I am going to take this opportunity to write some puts, probably 40- or 50-strikes with May 1 and May 8 expirations.

 

Though the near term outlook here is gloomy, the management team on the call yesterday sounded very confident. These guys are looking to buy quite a few assets in this downturn (as they said, they are just waiting for sellers to reset their expectations lower).

If you are willing to look past the cycle, this is a great opportunity for long term investors.

[boilermaker75]

Some downgrades today. I am going to take this opportunity to write some puts, probably 40- or 50-strikes with May 1 and May 8 expirations.

 

Though the near term outlook here is gloomy, the management team on the call yesterday sounded very confident. These guys are looking to buy quite a few assets in this downturn (as they said, they are just waiting for sellers to reset their expectations lower).

If you are willing to look past the cycle, this is a great opportunity for long term investors.

 

That's my feeling this is a great place to think about buying. Easy job these analysts have, once the stock is way down put out a downgrade. I had a typo in my original message, I meant 49- and 50-strike puts, not 40-.

[DavidVY]

What about the fact that there are hundreds of rigs sitting idle in auction lots (selling for cents on the dollar)?

 

I don't think we'll see a boom in oil-drilling equipment (low demand) for a few years.

 

Id rather stick to essentials of oil business- PVF(pipes/valves/flanges). PVF companies have a large percentage of Maintenance, repair and operations (MRO) so they won't be as effected by the oil drilling slowdown

 

NOV just spun-off their PVF division : DNOW. Alternatively, you can purchase MRC Global.

[CorpRaider]

Any thoughts on likely targets?  HAL is reportedly not letting NOV and other real competitors bid on assets disposed of in connection with Baker Hughes acquisition.  OIS?

[rpadebet]

Any thoughts on likely targets?  HAL is reportedly not letting NOV and other real competitors bid on assets disposed of in connection with Baker Hughes acquisition.  OIS?

 

Listen to the call. There are general hints to let you go on a treasure hunt, but he didnt want to disclose what he is exactly looking at or what verticals he is looking at. He said he is open to all sorts of targets when the analyst was questioning him about his interest in service companies. I thought that was interesting.

 

My gut tells me they are looking at small to mid service/technology companies which can help bring the marginal cost of traditional oil drilling (non-shale) down. From the call, I got the feeling that lot of traditional drillers are having a tough time competing with shale because of the low marginal cost of shale oil. The industry trend is probably in that direction and I think NOV will do its part in helping the industry get there.

 

All my personal opinion btw....maybe i am reading too much into it.