National Oilwell Varco

[giofranchi]

It seems to be the only wide-moat company in the Morningstar’s universe to still deserve a 5-star rating (besides Applied Materials, Exelon, and Western Union, which seem destined to a perennial 5-star rating!). Price / Fair Value is just 0.65. Furthermore, its moat trend seems to be positive, and its management very shareholder oriented. Please, find the Morningstar’s analysis in attachment.

Anyone follows this company and knows it well?

Thank you,

 

giofranchi

National_Oilwell_Varco_Dec2012.pdf

[ASTA]

Hello Gio,

 

True story I almost bought this on Monday as I sold my GBLB and wanted to swap to this stock. However, being a cheap skate wanted to pay 64.89 but never happened. 

Regarding the company listened to some call's and was following Ted Weschler as he is most likely to have bought this for BRK spending 500h before he bought it is more then enough financial work then I could do. If it reaches this level again I will buy it I think. The company also intrigues me because of the monopoly it has and the ensuring natural resource boom in America.

Cheers, ASTA

 

[giofranchi]

Regarding the company listened to some call's and was following Ted Weschler as he is most likely to have bought this for BRK spending 500h before he bought it is more then enough financial work then I could do.

 

Hello ASTA! I wasn’t aware of the fact that Mr. Weschler bought this company for BRK! That’s a useful piece of information, and prompts me to dig deeper and investigate the company further!

Thank you very much,

 

giofranchi

[giofranchi]

NOV's CEO has just been elected Morningstar's CEO of the year:

 

Merrill (Pete) Miller, CEO of Hare holding National Oilwell Varco NOV, was this week announced as the winner of Morningstar's CEO of the Year award. National Oilwell Varco remains one of my absolute favorites today. Beyond the company having an outstanding management team, today we have a rare combination of a company with a standout competitive position (the joke that NOV stands for "No Other Vendor" adequately describes the situation) and a relatively inexpensive stock (around 10 times our 2013 earnings estimate).

 

giofranchi

[Phaceliacapital]

I follow it, was looking to start a thread but found this topic so happy to discuss :)

 

I think it's one of the three energy companies that Buffetts portfolio holds.

 

They are still net cash, have good FCFs, low-cost position and some switching costs.

 

We are still examining the competitors and the oil rig landscape before we enter a position though.

[boilermaker75]

I follow it, was looking to start a thread but found this topic so happy to discuss :)

 

I think it's one of the three energy companies that Buffetts portfolio holds.

 

They are still net cash, have good FCFs, low-cost position and some switching costs.

 

We are still examining the competitors and the oil rig landscape before we enter a position though.

 

What was the recent hit to operating cash flow of "other working capital" (1,340M), and hence to FCF? Some one time event?

 

I know I could pull up the quarterly reports but from your post I figured you have the answer.

[boilermaker75]

I follow it, was looking to start a thread but found this topic so happy to discuss :)

 

I think it's one of the three energy companies that Buffetts portfolio holds.

 

They are still net cash, have good FCFs, low-cost position and some switching costs.

 

We are still examining the competitors and the oil rig landscape before we enter a position though.

 

What was the recent hit to operating cash flow of "other working capital" (1,340M), and hence to FCF? Some one time event?

 

I know I could pull up the quarterly reports but from your post I figured you have the answer.

 

I had a few minutes to glance at the last 10-Q. It looks like acquisitions caused a big part of the hit to the TTM FCF,

 

In the nine months ended September 30, 2012, the Company completed twelve acquisitions for an aggregate purchase price of $2,305 million, net of cash acquired. These acquisitions included:

 

• The shares of NKT Flexibles I/S (“NKT”), a Denmark-based designer and manufacturer of flexible pipe products and systems for the offshore oil and gas industry, acquired on April 4, 2012.

 

• The shares of Enerflow Industries Inc. (U.S.) and certain assets of Enerflow Industries Inc. (Canada) (“Enerflow”), a Canada-based fabricator and manufacturer of pressure pumping, blending, and cementing equipment for use primarily in Canada and the U.S., acquired on May 16, 2012.

 

• The shares of Wilson Distribution Holdings (“Wilson”), a U.S.-based distributor of pipe, valves and fittings as well as mill, tool and safety products and services, acquired on May 31, 2012.

 

• The shares of CE Franklin Ltd. (“CE Franklin”), a Canada-based distributor of pipe, valves, flanges, fittings, production equipment, tubular products and other general oilfield supplies to oil and gas producers in Canada as well as to the oil sands, refining, heavy oil, petrochemical, forestry and mining industries, acquired on July 19, 2012.

 

So without these acquisitions the FCF for the TTM would be about $2B? Anyone been following these acquisitions? Was this a good use of cash?

 

TIA.

[Palantir]

A very interesting idea giofranchi! I'll need to chew on this.

[DCG]

It's been on my watchlist for a few years, but I've never owned it.

 

I'm curious what amount of it's book value is inventory or depreciating assets.

[giofranchi]

A new article on Seeking Alpha:

 

http://seekingalpha.com/article/1202381-national-oilwell-premier-e-p-service-company-at-bargain-valuation?source=feed

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[Phaceliacapital]

Apologies, I forgot about this thread.

 

The CF did get hit due to acquisitions, NOV has actually done over 300 acquisitions.

 

It is correct that TTM FCF would approach 2 bn without acquisitions.

[Yours Truly]

Hello Gio,

 

True story I almost bought this on Monday as I sold my GBLB and wanted to swap to this stock. However, being a cheap skate wanted to pay 64.89 but never happened. 

Regarding the company listened to some call's and was following Ted Weschler as he is most likely to have bought this for BRK spending 500h before he bought it is more then enough financial work then I could do. If it reaches this level again I will buy it I think. The company also intrigues me because of the monopoly it has and the ensuring natural resource boom in America.

Cheers, ASTA

 

How do you know it was Ted's pick instead of Todd's?

 

We surely can't tell yet but Ted has a tendancy to take heavily concentrated bets (DTV, DVA, LMCA).  If this company moves to the +1% of overall portfolio, then we can probably estimate that it's a Ted pick.

[ASTA]

Well I never said 100% did I :D

 

If you look at Ted's previous investments he likes roll ups witch also fits NOV.

Good forbid and its that other guy at BRK for got his name ;D

 

Win win in any case how bought it, still is a stamp of approval 3 times over.

 

 

[giofranchi]

Another article on Seeking Alpha:

 

http://seekingalpha.com/article/1218661-it-s-time-to-buy-national-oilwell-varco?source=email_investing_ideas&ifp=0

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[giofranchi]

A very interesting idea giofranchi! I'll need to chew on this.

 

Hi Palantir, and thank you very much for your kind remark!  :)

Sorry, I had missed it till now...

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[wachtwoord]

Thanks for the discussions in this thread, they helped me in my analysis of what I think is a great investment. I initiated a position today @ $66.32.

[Ross812]

From The Q4 2012 Wedgewood Client Letter:

 

When it comes to the global oil service business National Oilwell Varco is truly a jackof-all-trades. Over the many decades the Company has been uniquely successful through countless mergers and acquisitions by both vertically and horizontally integrating their plethora of products and services. Indeed, the Company has been so successful in offering a global one-stop-shop that their well-known industry sobriquet is “No Other

Vender.” The Company traces its roots to its founding in antebellum Houston in 1841. The Company’s two main predecessors, Oilwell Supply and National Supply were founded in 1862 and 1893, respectively. Varco took its formal name in 1915 from three key partners – Edgar Vuilleumiere, Walter Abegg and Baldwin Reinhold. Fastforwarding into the 20th century finds Oilwell Supply acquired by U.S. Steel in 1930 and in 1958 Armco Steel merged with National Supply. In 1987, National Supply merged

with USS Oilwell to become National Oilwell. The Company finally took its current name and form when in 2005 National Oilwell and Varco merged to become National Oilwell Varco.

 

The Company’s current, and enduring competitive advantage must be credited to the singular foresight and vision of CEO Pete Miller. Miller began his career at the Company in 1996, and was named CEO in 2001. Miller foresaw that the oil service business was woefully wedded in the past philosophy of custom drilling rigs and related custom repair parts and services. His revolutionary view was that manifold advances in oil well productivity and efficiency could be achieved via standardization. Furthermore, the first-mover advantage of the company which could lead the consolidation of this fragmented industry would be uniquely positioned – potentially reaping the benefits of less severe boom-bust orders, capturing a greater percentage of contract bill-of-goods and a concomitant stream of annuity-like service and repair part revenues. Miller and team thus began an orchestrated 15-year string of +300 deals – including nearly $6 billion over the past 18 months alone. Keystone Miller acquisitions include the $2.4 billion acquisition of Varco in 2005 and the $7.4 billion purchase of Grant Prideco in 2007.

 

Fast forward to late 2012, the Company stands astride the global oil services industry like no other. Leveraging over 800 worldwide manufacturing, sales and service centers, National Oilwell Varco is a global leader in providing major mechanical components and integrated solutions for both land and offshore drilling rigs. Post-Macondo, the Company’s integration of deep-sea rig technology, with the magnified emphasis of

safety, has put the Company in a class by itself. In addition, with a growing panoply of 139 brands, which include complete land drilling and well servicing rigs, tubular inspection and internal tubular coatings, drill string equipment, extensive lifting and handling equipment, and a broad offering of downhole drilling motors, bits and tools, as well as supply chain services through though the Company’s network of distribution

service centers, all located near major drilling and production activity, it is literally impossible to drill or operate an oil well or rig without calling Houston. The tale of the standardization-consolidation tape underscores Miller’s vision. Little more than ten years ago the Company could only scratch out middling single-digit pre-tax operating margins.

 

Over the past few years the Company has consistently generated pre-tax operating margins of around 19%-20%. The Company has also cut their financial leverage by 25% over the past decade. Returns on equity and invested capital have doubled has well. The stock was essentially flat in 2012 reflecting the continued decline in North Americain both oil and gas rig count. U.S. rig count has doubled since the mid-2009 bottom, plus (according to CFO Clay Williams) an “unprecedented surge” in U.S. oil production has created a “new parsimoniousness…sweeping through the North American oil complex.” Rig counts are down over 168 since the beginning of 2012. Due to an over-supplied market and “fierce” price competition the Company’s new North American rig orders have ground to a halt.

 

A notable bright spot in North America is the Company’s omnipresent in the booming shale industry – which continues to be a unique American success story. The EIA recently reported that due to the surge in U.S. energy production (led by North Dakota and Texas) net oil imports in 2012 would account for little more than 40% of U.S. oil consumption – the lowest dependence in foreign oil since 1992. The oil production in Texas has doubled over the past three years and has reached a level of output last

recorded in 1987. Not to be outdone, Pennsylvania’s natural gas production has quadrupled since just 2009. A renaissance is emerging in the cost-competiveness in U.S. manufacturing due to the “flipping of the energy equation” with abundant and cheap natural gas. Credit such cutting edge technology such as expanded horizontal drilling and hydraulic fracturing. National Oilwell Varco is a leader in both technologies. (On a related note: Berkshire Hathaway owned Burlington Northern railroad expects to boost daily crude-oil shipments in 2013 by 40% to 700,000 barrels – in large part from Bakken shale. In addition, Union Tank Car Company – which is owned by Chicago-based Marmon; which in turn is 60% owned by Berkshire – is scrambling to increase their +80,000 fleet of leased tank cars).

 

However, outside of the gloom in North America, the Company has reported extensive customer activity in nearly every corner of the globe. Key international markets include Argentina, Kuwait, Algeria, Saudi Arabia, Brazil, Oman, Iraq and Indonesia. The Company has increased its investments in Eastern Europe, Russia, Africa and Latin America. The sweet spot for the Company continues to be deepwater offshore. New technologies are driving the fleet growth of next generation large deepwater rigs. Once again, from CFO Williams, “Shipyards are underemployed, hungry, and aggressive on pricing. Deepwater day rates are high and rising. Capital is available and cheap. Construction time is shortening, and execution risk is approaching zero, at least for our customers. Importantly, this situation has been stable for eight-plus quarters, and our deepwater drilling contractor customers seem to be exhibiting a growing confidence with what we hope is a new era.”

 

We remain cognizant that the oil ‘bidness is not for the faint of heart – for both companies and investors. We also continue to be of the opinion that the best business models in this industry are the best-in-technology-class service companies. We believe we own two of the very best in both National Oilwell Varco and Schlumberger. That said, when it comes to the shares of such companies, we continue to give wide berth in swings of valuation in our purchase and sales – particularly our purchases. While the

valuation of the Company shares are, in our opinion, not demanding at current prices, we require a larger margin of safety to increase our current holdings. Miller will be retiring in 2013. In our opinion, the Company is in good hands with a depth and breath of seasoned executives. Company veteran CFO Clay Williams will take the reigns as the new COO. Miller’s legacy and culture is firmly ensconced at the Company. Fittingly, Morningstar named Miller as their CEO of the year. As homage to Rockefeller’s Standard Oil, Miller’s last act as CEO should be the renaming of National Oilwell Varco to Standard Oilwell.

[Phaceliacapital]

Very interesting thanks!

[giofranchi]

Thank you, Ross!

Very interesting!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[compoundinglife]

From a different thread....

 

AAPL and NOV

 

Compoundinglife -- can you elaborate a bit more on NOV?  I've taken a look at the company and it looks very interesting.  However, I struggle with trying to come up with a (rough estimate) of NOV's earnings power.  You know, just dealing with the meteoric rise in profits over say the last 10 years -- a more than 10-fold increase -- is a bit daunting.

 

Also, I notice that while gross and operating margins are very high, the company's RoE is less impressive (10-12% 10-year average).  Presumably the reason is the goodwill created by their acquisitions, which would seem to have enormously helped in creating their pre-eminent position in the industry.  However it begs the question whether they've overpaid for deals and whether they feel a need to continue the acquisition strategy for years into the future.  What are your thoughts on that?

 

Finally, everything you read about NOV mentions their high market shares (NOV = No Other Vendor).  Have you been able to do any channel checks or to speak to any industry guys?  I'd be really interested to know whether this is just company spin, or whether there truly are high barriers for competitors?

 

[sorry, not trying to hijack this "What are you buying today?" thread.  Anyone want to volunteer starting a NOV investment idea thread?  I'm sure there would be lots of interest in it.]

 

Thanks

 

So here is my understanding and thoughts on NOV, and I will start by saying I am a newbe with regards to oil field service companies so any feedback or criticism is more than welcome.

 

I have no scuttlebutt from industry folks. I would be interested to hear what other folks on the board may have in that regard.

 

What I like is that NOV has gone to great lengths to offer their customers an all in one solution for their drilling rigs and had the vision to see that this was going to be a winning strategy in a very fragmented industry. They have done this through tons (300) of acquisitions. Lots of M&A activity is scary but it seems like the M&A is what has really made them a one stop shop and built their moat. It is different from companies like Tycho for example that would buy companies just to  spin them off years later.

 

It seems to me that M&A will continue. Maybe more in the FPSO space? I remember reading somewhere (maybe in this thread) that management considers M&A a full time thing. They stand to benefit by doing the same thing they did in the drilling space in the FPSO space (standardisation, one stop shopping) . Yes the historical growth in their business is huge and the next 10 years will not see the same growth. But at todays price it seems cheap for a company whose services will be needed for the foreseeable future, has a good growth track record, a solid balance sheet, and a decent moat and the opportunity to do what they did for rigs in the FPSO space. It will be interesting to watch how they progress there.

 

With regards to your question about earnings power, I am not sure what their future earnings power will be. I think they will earn reasonably more 5 years from now and I think the price does not reflect that.

 

I came across it when it popped up the Berkshire on the fillings, looked at the value line report and 10 year numbers, looked at the 10-K, read a conf. call transcript and decided I would pick some up at $67 or less. I realize this is a pretty shallow analysis but that is the extent of my work on this company. 

[WhoIsWarren]

Anyone want to volunteer starting a NOV investment idea thread?  I'm sure there would be lots of interest in it.

 

Thanks

 

Doh -- I actually searched for a NOV thread and couldn't find one.  Sorry!

 

So here is my understanding and thoughts on NOV, and I will start by saying I am a newbe with regards to oil field service companies so any feedback or criticism is more than welcome.

 

I have no scuttlebutt from industry folks. I would be interested to hear what other folks on the board may have in that regard.

 

What I like is that NOV has gone to great lengths to offer their customers an all in one solution for their drilling rigs and had the vision to see that this was going to be a winning strategy in a very fragmented industry. They have done this through tons (300) of acquisitions. Lots of M&A activity is scary but it seems like the M&A is what has really made them a one stop shop and built their moat. It is different from companies like Tycho for example that would buy companies just to  spin them off years later.

 

It seems to me that M&A will continue. Maybe more in the FPSO space? I remember reading somewhere (maybe in this thread) that management considers M&A a full time thing. They stand to benefit by doing the same thing they did in the drilling space in the FPSO space (standardisation, one stop shopping) . Yes the historical growth in their business is huge and the next 10 years will not see the same growth. But at todays price it seems cheap for a company whose services will be needed for the foreseeable future, has a good growth track record, a solid balance sheet, and a decent moat and the opportunity to do what they did for rigs in the FPSO space. It will be interesting to watch how they progress there.

 

With regards to your question about earnings power, I am not sure what their future earnings power will be. I think they will earn reasonably more 5 years from now and I think the price does not reflect that.

 

I came across it when it popped up the Berkshire on the fillings, looked at the value line report and 10 year numbers, looked at the 10-K, read a conf. call transcript and decided I would pick some up at $67 or less. I realize this is a pretty shallow analysis but that is the extent of my work on this company. 

 

Thanks for your thoughts compoundinglife.  I think the way you are approaching their earnings power, as unscientific as it is (and I mean no disrespect here), is probably the best one can do i.e. they have a tremendous moat, and there will be growth in industry spending, which will lead them to "earn reasonably more 5 years from now".

 

I look forward to hearing from others.

 

Thanks

[jouni1]

this is one of my favourite ideas at the moment. thinking of adding some more after the recent pullback. if managed right they should be making a lot more money in the near future. as compoundinglife said, i don't think the price reflects that either.

 

anybody have any thoughts on this?

 

thanks!

[CorpRaider]

NOV showed up as one of the top favorites among surveyed money managers in Barron's semi-annual survey. 

[Phaceliacapital]

It is also a top pick in Morningstar and the CEO was named CEO of the year last year (which is where we got to know NOV).

[boilermaker75]

earnings out,

 

http://finance.yahoo.com/news/national-oilwell-varco-announces-first-110000364.html