valuedontlie Posted April 29, 2015 Share Posted April 29, 2015 This may not be the most appropriate way to view these but what I find interesting is if one is willing to look out many years, these are consistently high ROE businesses (obviously will fall off in the short-term) even prior to the commodity bull market. NOV and OIS both have generated consistent 12%+ ROEs and now trade at-or-below book value. If NOV can get back to 13-14% ROEs that would mean earnings of $6.25-6.75/share. At 13x (median multiple over 10-15 years), that would put the stock at $85/share. Even if it took 5-6 years to accomplish, you would be looking at 12-14% annual returns with the dividend. Link to comment Share on other sites More sharing options...
MaxDC Posted June 7, 2015 Share Posted June 7, 2015 Would you buy/add NOV now or do you think that it will tank further? Beside oil prices and capex of the oil industry which will rebound sooner or later, I think for micro timing 2 things look important to me. Would you rather wait for NOV to acquire certain businesses from HAL or Baker Hughes (drilling fluids, drill bits, etc) or act in advance? I don't know whats going on in Brazil, but do you think a cancellation of the Sete (financial vehicle of Petrobras) orders would be news to the market and hammer NOV down or is it already priced in? I think it trades at book value and one times sales (which would be less after any acquistion that moves the needle). Margins are outstanding and the scope of the business is expanding along the value chain which it has done for years. Management has done a terrific job at deploying capital and the times could not be better to use that. Buying shares at the current level or less seems attractive to me. Do you agree? Which factors do you think will move NOV? Link to comment Share on other sites More sharing options...
spartansaver Posted August 19, 2015 Share Posted August 19, 2015 Still trying to get a good understanding of oil before I put more money to work. At these prices though it seems like everyone is waiting for the dust to settle. This is a good/great company that as of last year's cf is trading at roughly 20% yield. Oil may go lower, but the in the future rigs will have to be built. Oil will have to be drilled and NOV and other service companies will be sitting ready to sell the shovels. It would be nice if they slashed the dividend and committed 100% to repurchases, but the is just wishful thinking. I'm hoping oil drops a bit further as from reading the journal it sounds like there is still some optimism out there. I like this company and CAM is another one. CAM seems to be very well positioned for deep sea drilling, but they have horrible current returns in that area. Also management at CAM seems very average. As I said still learning my way around the industry. Link to comment Share on other sites More sharing options...
BargainValueHunter Posted August 19, 2015 Share Posted August 19, 2015 Looks like Bruce is in now. Link to comment Share on other sites More sharing options...
handycap5 Posted August 21, 2015 Share Posted August 21, 2015 do you have any sense of how much of their op profits they make selling equipment for land rigs versus floaters? My impression, given the price points and their competitive position, was that they made a lot of money on the floaters. Link to comment Share on other sites More sharing options...
rpadebet Posted August 21, 2015 Share Posted August 21, 2015 This is a tough one to take a call on. NOV is a good business with good capital allocation and allocators. But ... Logically this business must operate at a lag to oil prices. Only if oil prices are high and stay high for some period of time will new build restart. they make money of new builds despite their claim that they can make money of consumables and repairs. those will just keep the lights on until Oil price actually bottoms out and turns, achieves a new plateau and stays there.. I feel there is enough time to analyze this, Oil prices don't seem to be bottoming out soon. I guess they will bottom only when we see some marginal players leave due to bankruptcy. Interest rate raises by Fed might speed up this process, but I am not sure the fed has the balls to do it especially in an election year coming up. Link to comment Share on other sites More sharing options...
spartansaver Posted August 21, 2015 Share Posted August 21, 2015 It seems that that is a very consensus thought on the street. Wait for oil prices to bottom and then invest. Taking a very long term perspective a lot of these equipment and service companies are not very leveraged giving a reasonable assumption they will still be operating when it does finally turn. There is also the opportunity for consolidation with some of the more leveraged companies. Oil is definitely not getting any cheaper to find and extract so I am comfortable believing that these prices are not sustainable. How long is anybody's game, but picking a few that are not significantly leveraged I believe will outperform. In regards to the aftermarket part of these businesses their economics are great and their moats seem to only be getting stronger. An airliner isn't going to ask any company to check out their rolls rolls engine, so why would an oil company do different with a BOP with the major liabilities of it failing. BP did a great job of sticking this point home after their last major spill. Link to comment Share on other sites More sharing options...
rpadebet Posted August 21, 2015 Share Posted August 21, 2015 It seems that that is a very consensus thought on the street. Wait for oil prices to bottom and then invest. Taking a very long term perspective a lot of these equipment and service companies are not very leveraged giving a reasonable assumption they will still be operating when it does finally turn. There is also the opportunity for consolidation with some of the more leveraged companies. Oil is definitely not getting any cheaper to find and extract so I am comfortable believing that these prices are not sustainable. How long is anybody's game, but picking a few that are not significantly leveraged I believe will outperform. In regards to the aftermarket part of these businesses their economics are great and their moats seem to only be getting stronger. An airliner isn't going to ask any company to check out their rolls rolls engine, so why would an oil company do different with a BOP with the major liabilities of it failing. BP did a great job of sticking this point home after their last major spill. Agree with very long term view these are winners. But you are basically swimming against the macro tide if you invest now and you don't know how long it will take to turn. Maybe it could turn in a year or it could be 4-5. Look at Nat Gas or other commodities, they all also fell hard few years back, but didn't show the U or V type recovery. It has mostly been L shaped. Look at housing which is not directly comparable, but the interest rate/debt incentives were such that extend and pretend was better than foreclosure/sell, that could happen here as well. Basically demand "might" slow down, but supply "has" to come down for prices to rise. Supply will come down only when some players are out of business. the OPEC cartel isn't functioning, the shale guys have their own incentives to continue pumping...it could be a long time I feel for oil to recover and longer for NOV to prosper. Link to comment Share on other sites More sharing options...
topofeaturellc Posted August 21, 2015 Share Posted August 21, 2015 A tremendous amount of the growth in oil cost inflation during boom times is from services price inflation. Think of it this way - for every dollar in incremental profit from price appreciation about half that went to service guys. That needs to be unwound. The question for someone like NOV is how much they will need to contribute to that deflation and what sort of normalized roic they will earn in that environment. Oil prices themselves mostly serve as a signal for this deflation. At some point it all depletes and we need offshore rigs and what not. So really the only question that matters about NOV today is how much of the invested capital is impaired and what a normalized return on that number is. I'd focus on how much the grew tangible capital over the last five years of so and write that down by some factor and then I'd look at long-term return on tangible capital -either median or a geometric average, and use that for a normal ROTC, and then want a nice low multiple to guard against my asset base or my returns being too high. Link to comment Share on other sites More sharing options...
spartansaver Posted August 21, 2015 Share Posted August 21, 2015 topofeaturellc - If oil cost inflation is largely passed to the service companies shouldn't their gross margins rise as oil rises? From looking at some of the top oil companies it looks like their margins have actually compressed to remained flate over the past 4-5 years. Is gross margin not the correct way to think of this scenario? Link to comment Share on other sites More sharing options...
topofeaturellc Posted August 21, 2015 Share Posted August 21, 2015 Margins at service guys went up. Gross margins at producers go down while absolute profit dollars go up. It's not passes to service guys, its caused by servcie guys pushing price Link to comment Share on other sites More sharing options...
topofeaturellc Posted August 21, 2015 Share Posted August 21, 2015 It's a spread business on the production side and a return on capital business on the other side. The issue as always is the capital base and the return. In a sense GM matters only because of the algebra Link to comment Share on other sites More sharing options...
spartansaver Posted August 21, 2015 Share Posted August 21, 2015 Margins at service guys went up. Gross margins at producers go down while absolute profit dollars go up. It's not passes to service guys, its caused by servcie guys pushing price Margins at service companies have not gone up though, they have remained relatively flat. Link to comment Share on other sites More sharing options...
topofeaturellc Posted August 21, 2015 Share Posted August 21, 2015 That is incorrect. Link to comment Share on other sites More sharing options...
spartansaver Posted August 21, 2015 Share Posted August 21, 2015 Just chose some of the top names and they all seem relatively flat over the past few years. Oil_equipment_and_service_margins.xlsx Link to comment Share on other sites More sharing options...
topofeaturellc Posted August 21, 2015 Share Posted August 21, 2015 You need to go back further. Oil was pretty much flattish on average for several years before the current decline. So yeah last five years pretty flat. I can open your attachment on my phone unfortunately. There is a strong relationship between oil prices, capex/barrel found, and service company returns. Link to comment Share on other sites More sharing options...
spartansaver Posted August 24, 2015 Share Posted August 24, 2015 Topofeaturellc, you were right. It seems that there is about a year to year and a half delay in margin impact for NOV. 25% Shave from Net PPE 2437.5M Avg Rev/Net PPE last 16 years 6.83 so round down to 6 (This has trended down recently likely due to bloating of net PPE) Avg Gross Margin past 19 years 25% so round down to 22.5% (last time margins were this low was in 1998 when oil adjusted for inflation was 27$ in 1997 and 17 in 1998)-(This also includes the distribution business in the past that was a high turnover low margin business) Current Quarter SG&A 404 so assume 425 per Q going forward Non Maint Dep of 250M 2437.5 * 6 * .225 - 1700 = 1590.625 *(1 - Tax Rate of 31%) = 1097.53 + 250 = 1347.53 Net Debt is a wash and the company is current trading at 14,210 so you're paying a 9.5% yield for a good business trading at a reasonable price with no growth factored in. Oil is getting more expensive to find and extract. This to me is a nice tailwind because industry leaders will have to build this more expensive equipment and the main question to me is if they can maintain the margins. Doing some work on CAM, I just want em to keep falling. I was really hoping the sell off would hit NOV. Link to comment Share on other sites More sharing options...
CorpRaider Posted August 26, 2015 Share Posted August 26, 2015 http://www.wsj.com/articles/schlumberger-to-buy-cameron-international-for-12-7-billion-1440584852 Link to comment Share on other sites More sharing options...
Phaceliacapital Posted August 26, 2015 Share Posted August 26, 2015 Good, management has the balls to move during the bottom of the cycle. Link to comment Share on other sites More sharing options...
spartansaver Posted September 24, 2015 Share Posted September 24, 2015 Took a tour of a plant within one of NOV's competitors and there were two things that struck me. The length of time that these companies actually get out of their equipment is amazing. There was a machining piece that a manager told me was probably close to 40 years. The second thing was that these pieces of equipment while highly capital intensive offer no true competitive advantage. These companies definitely have a competitive advantage and it is the way they are viewed by their customers who constantly return to them due to the many years of trust they have built creating reliable products. I felt very strongly after visiting the plant and hopefully it's not just me enjoying the tour. Link to comment Share on other sites More sharing options...
brendanb22 Posted July 5, 2016 Share Posted July 5, 2016 Has anybody revisited NOV recently? Trading at ~6x peak earnings as a best in class operator, as a recent acquirer. Down an additional 7% today on the news of further oil price declines as well. Link to comment Share on other sites More sharing options...
Foreign Tuffett Posted July 6, 2016 Share Posted July 6, 2016 Has anybody revisited NOV recently? Trading at ~6x peak earnings as a best in class operator, as a recent acquirer. Down an additional 7% today on the news of further oil price declines as well. The big question (IMO) with NOV is "when will demand for newbuild offshore drilling rigs (especially deepwater) pick up?" Some people in the industry think it might be a LONG time before this happens. Link to comment Share on other sites More sharing options...
MrB Posted July 6, 2016 Share Posted July 6, 2016 Has anybody revisited NOV recently? Trading at ~6x peak earnings as a best in class operator, as a recent acquirer. Down an additional 7% today on the news of further oil price declines as well. The big question (IMO) with NOV is "when will demand for newbuild offshore drilling rigs (especially deepwater) pick up?" Some people in the industry think it might be a LONG time before this happens. I think the question to answer is why would this downturn not be a repeat of the 80's/90's . From memory that was something like 15 years. Link to comment Share on other sites More sharing options...
Foreign Tuffett Posted July 6, 2016 Share Posted July 6, 2016 Has anybody revisited NOV recently? Trading at ~6x peak earnings as a best in class operator, as a recent acquirer. Down an additional 7% today on the news of further oil price declines as well. The big question (IMO) with NOV is "when will demand for newbuild offshore drilling rigs (especially deepwater) pick up?" Some people in the industry think it might be a LONG time before this happens. I think the question to answer is why would this downturn not be a repeat of the 80's/90's . From memory that was something like 15 years. These are somewhat similar questions, but NOV ultimately is a play on offshore drilling activity. A possible world exists in which oil prices rise, but offshore activity (and demand for new deepwater rigs) stays low. The emerging consensus is that the North American shale plays are more cost effective than deepwater drilling. Link to comment Share on other sites More sharing options...
brendanb22 Posted July 7, 2016 Share Posted July 7, 2016 Doesn't NOV still have significant exposure regardless with their aftermarket segment? Link to comment Share on other sites More sharing options...
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