NOV - National-Oilwell Varco

[Foreign Tuffett]

Doesn't NOV still have significant exposure regardless with their aftermarket segment?

 

Yes, but if memory serves it's not nearly large enough to carry the entire company.

 

Very good news for NOV today regarding the GE/NOV cooperation on FPSOs

[brendanb22]

Would love to hear the LONG case from a bull on here. I've definitely seen it in portfolios on here so know there are bull's lurking somewhere...

[wachtwoord]

Would love to hear the LONG case from a bull on here. I've definitely seen it in portfolios on here so know there are bull's lurking somewhere...

 

Huge moat, huge market share, good acquirer in down turns (historically) and oil will go back up. The only thing which could make this a mediocre investment is that as always I'm not sure on the timing. I'm very overweight on commodities at any rate.

[petec]

Out of interest, is your "oil will go back up" comment based on oil's fundamentals, or does it have more to do with monetary policy and inflation?

[wachtwoord]

Out of interest, is your "oil will go back up" comment based on oil's fundamentals, or does it have more to do with monetary policy and inflation?

 

Based on the economics of oil production and demand. With the current demand prices cannot stay at current levels otherwise supply will be too low to meet demand. Knowing these sort of systems the price will likely also overshoot to the upside.

[petec]

Out of interest, is your "oil will go back up" comment based on oil's fundamentals, or does it have more to do with monetary policy and inflation?

 

Based on the economics of oil production and demand. With the current demand prices cannot stay at current levels otherwise supply will be too low to meet demand. Knowing these sort of systems the price will likely also overshoot to the upside.

 

Thanks.

 

My gut sense is that the right price is in the 40s - seems clear to me that the marginal cost has come from somewhere around $70 into the 40s as technology has improved.  Time will tell!

[wachtwoord]

Out of interest, is your "oil will go back up" comment based on oil's fundamentals, or does it have more to do with monetary policy and inflation?

 

Based on the economics of oil production and demand. With the current demand prices cannot stay at current levels otherwise supply will be too low to meet demand. Knowing these sort of systems the price will likely also overshoot to the upside.

 

Thanks.

 

My gut sense is that the right price is in the 40s - seems clear to me that the marginal cost has come from somewhere around $70 into the 40s as technology has improved.  Time will tell!

 

As with any commodity long term price will go to marginal cost. I believe marginal cost is higher than $40 for the demand from the market (of course this depends on what the Saoudis do with their extreme low marginal cost). On top of that the production is going lower, so for new supply to be brought online price will need to be considerably above marginal cost for business to start into the venture to get a good ROIC. For that the price will need to be at least 50% above marginal cost and until that the market will be under-supplied (so it will happen eventually).

 

Of course I can be completely off on my timing (my cost basis for NOV is $49 and I don't want to increase my position because of risk and sizing). This is definitely not one of my successful investments thus far.

[petec]

Has anyone looked at this recently?

[petec]

This is not a complete thesis by any means, but I think there is a major cyclical opportunity here.

 

• Industry one stop shop. Traces its history back 159 years and has acquired significant market shares in almost every aspect of building or supplying oilfield service equipment. Industry joke is that NOV stands for No Other Vendor.
• Basic thesis:
  • It is easier for ESG to take money out of production than to electrify consumption overnight.
  • Several years of low oil and then unprecedented investment cuts in 2020 = 2020 challenged supply.
  • Demand will come back fast once covid ends.
  • Oil will rise.
  • Oilfield services is hypercyclical, as destocking and restocking exacerbates underlying trends. Even if new rigs don't get built, there will be a lot of demand for consumables, spares, and rig refits. If new rigs do get built, they will have to compete for plant space with NOV's growing wind power business.
  • NOV is fairly late cycle but the valuation is 1/5th of what it was at the peak and 1/3rd of what it was last time oil was at $60.
• Cycle
  • "Worst downturn the industry has ever seen"; capital spending virtually stopped. US rig count lowest on record, which goes back to WW2.  US frac fleet hit single digit utilisation. 100 companies with $100bn in debt filed for bankruptcy. Offshore FIDs were the lowest since 1960. Dayrates dropped to cash running costs, well below what's required to maintain rigs. Players are cannibalising equipment, postponing spending on spares and consumables, and hoarding cash - NOV's largest competitor in this environment is idled equipment. 1Q ARR was down 45% compared with 5 quarters ago. "The historical…events of 2020 have led to a substantial of well construction capability by the oilfield services industry…it stands to reason that the aggregate capacity to construct wells has been materially diminished in our view".
  • This is always temporary. $20tn of stimulus plus reconstructed household balance sheets and a huge desire to get back to normal - "I cannot conceptualise a more compelling recipe for a synchronised global economic recovery of a size that we have not seen since the 1950s postwar boom". Demand is coming back. Inventories are normalising faster than predicted. Spares and consumables will need to be restocked. "The oil and gas industry will again be called upon to grow." Starting to see early signs of this in 1q21 as rig and frac counts rise. Cannibalised equipment will need to be reactivated. Owners will demand significant dayrate increases to justify this cost. "This is the sweet spot of our business model".
  • Key risks to this thesis are Saudi and OPEC capacity, and shale productivity. On the first, it is notable that inventories are falling - i.e. artificially low supply has still been below artificially low demand. On the latter, things have changed. Capital is far more expensive. ESG is playing a role. E&Ps have consolidated. Labour costs are rising. Material growth from shale will be more challenging this time around.
• NOV is organised into three segments. All three rely on capital and consumables spend which "to varying degrees tend to be later-cycle businesses", although Wellbore has some real time activity also.
  • Wellbore Technologies
    • Lots of recognisable names in here - Grant Prideco pipe, ReedHycalog drill bits. They bought everything!
    • Has some real time activities so responds first, but also has later-cycle equipment that's subject to de-stocking and re-stocking dynamics.
    • In 1q21 7 out of 8 units saw sequential growth and they are adding manufacturing shifts.
    • Continued costs outs should allow incremental ebitda margins of 50% as revenue starts to grow.
  • Completion and Production Solutions (CAPS)
    • Huge number of subsegments - Fibreglass Systems, Intervention and Stimulation, Pressure Pumping, XL Systems (conductor pipe), Subsea Flexible Pipe, etc.
    • 1q21 book to bill of 127%, first above 100% since 4q19.
    • Decremental ebitda margin 30%. See 2q incremental margins of 20%.
  • Rig Technologies
    • Late cycle.
    • Lots of potential orders but they keep sliding to the right. "Distinct lack of urgency."
    • Spare part bookings up 22% sequentially in 1q21 "as the ability to cannibalise stacked rigs has nearly run its course" in the Middle East and US Land markets, but spares orders are still down 36% y/y.
    • Bankruptcies has affected orders - administrators don't order spares if they can help it.
    • Reactivating cold-stacked rigs is expensive and NOV benefits. Enquiries are rising.
• Renewables opportunity.
  • Net Zero is "the greatest economic opportunity of this century".
  • Huge overlap in skillsets - "we are experts in building large complex machinery with extreme precision in harsh environments at scale in remote parts of the world". Have experts in materials science, metallurgy, power systems, robotics.
  • Started to explore renewables several years ago. Tech isn't new. Just hasn't taken off before now due to cost and issues like intermittency, NIMBYism, and infrastructure hurdles. This creates customer pain points that NOV has focussed on solving.
  • NOV is most advanced in wind power.
    • Taller towers access stronger and more consistent wind, and allow for longer blades/greater swept area, which means more power. Taller towers are also expanding the areas where wind power works - possibly doubling or tripling the wind belt in the US - meaning more towers can be built and power can be generated closer to where consumption is. NOV has acquired a startup with a patented spiral welding technology that lowers tower production costs by 15% or more and can be used in the field, eliminating the logistical nightmare of transporting large diameter sections. They are building a production line in a NOV plant and have an order for 100 sections.
    • Erecting towers is also a pain point and the normal method - crawler cranes - is reaching its limit. NOV experience with desert and Arctic rigs means they have a solution using tower cranes and a unique mobility system that allows for safer lifting at higher heights. The same system can also reduce maintenance costs.
    • Offshore wind has several advantages - steadier wind, no need for road transport - and 40% of the global population lives within 60 miles of the coast so there is demand for power. Projects are more complex but NOV has unique experience in this environment. "NOV is the NOV of the offshore wind installation space": they already sell up to $80m of equipment per offshore wind construction vessel, and the majority of the world's offshore wind facilities were built using NOV-designed vessels with NOV-built equipment. NB the equipment is manufactured in the same plants that NOV's oilfield jacking systems, lifting systems, cranes etc. are built in, so demand for both could tighten capacity utilisation. By YE21 this will be a $200m ARR business and demand for new vessels is strong driven by:
      •  growing numbers of installations, which are forecast to double by 2025.
      • growing tower heights - suppliers have announced a 12MW system coming in 2022 which is the height of a 50-storey building, and a 14MW system coming in 2024, and very few existing vessels can handle these.
    • NOV is also looking at floating turbines for places without shallow coastal wares, which could be a multi-billion opportunity and uses the same cranes, winches, mooring systems, cable laying systems, chain connections and tensioners that NOV provide for oil rigs. NOV has a patent pending tri-floater, semi-submersible floating wind turbine foundation designed to use less steel than competing offerings and allow onsite turbine construction. Revenue per vessel is $25m and dozens of vessels are required per gigawatt.
  • NOV also has skillset fits in geothermal, carbon capture, composite piping for hydrogen (which makes steel brittle), etc.
• Financials & valuation
  • EBITDA breakeven in 1q20 - "not acceptable". NB decremental and incremental margins are high, both on operating leverage and (later in the cycle I think) mix.
  • $800m of costs will come out between 2019 and 2021, so margins can get back to prior percentages at much lower levels of revenue. 2022 ebitda could easily be teens in Wellbore and high single digit in the other two divisions, which will take a bit longer to get back to the teens.
  • Expect to be FCF positive for the year despite revenue growth, which drives working capital consumption.
  • $1.6bn in  cash, $1.85bn in debt. Next bond maturity December 2029.
  • Market cap is $6.3bn. Net income averaged >$2bn a year for the 8 years 2007-2014. Company has been lossmaking since, but mainly on intangibles writeoffs, and has taken out a lot of costs (down $12bn since the peak including $2bn in annual fixed costs) and working capital. It will be very interesting to see what they can earn if things go right.