National Oilwell Varco

[muscleman]

Thank you for this idea. I sold my MBI position and got a 10% position in NOV this morning.

I like the idea of selling pants and shovels to gold diggers instead of buying the gold diggers themselves.

[handycap5]

One of the things that gives me pause with NOV is the concern that they sell a long lived capital good which has already gone through a huge boom. Just as an example, when I looked at the capex of Diamond, Ensco, Nabors, Rowan, and Transocean, they together had $1.6B in capex in 2003, but averaged ~$5.7B in each of the years 2008-2011 (I'm sure 2012 was similar). How do you get comfortable that you are not purchasing a capital goods manufacturer that is not a decade into a very strong cycle which will inevitably turn down? thanks in advance.

[muscleman]

One of the things that gives me pause with NOV is the concern that they sell a long lived capital good which has already gone through a huge boom. Just as an example, when I looked at the capex of Diamond, Ensco, Nabors, Rowan, and Transocean, they together had $1.6B in capex in 2003, but averaged ~$5.7B in each of the years 2008-2011 (I'm sure 2012 was similar). How do you get comfortable that you are not purchasing a capital goods manufacturer that is not a decade into a very strong cycle which will inevitably turn down? thanks in advance.

 

Horizontal hydraulic frac for oil and gas industry just started getting hot only recently. This will unlock a ton of new reserves that were uneconomic to drill.

It is hard to say when is the top of the cycle, but it is hard to believe that the cycle will end so soon.

I will look more into this interesting question. I hope other people who have a better perspective into the industry could help me understand it.

[handycap5]

I infer from your response that you are focused on the NA land market. I note that rig count has been steady over last year, with increased oil directed activity absorbing a 50% drop in gas directed drilling because of increased efficiencies.  Not sure how many more land rigs we need. I believe that NOV makes monopoly like profits on its equipment built for floaters, which is where I was focusing my question. If you think this is wrong, let me know.

[giofranchi]

http://www.gurufocus.com/news/217564/nov--a-good-time-to-buy

 

giofranchi

[muscleman]

I infer from your response that you are focused on the NA land market. I note that rig count has been steady over last year, with increased oil directed activity absorbing a 50% drop in gas directed drilling because of increased efficiencies.  Not sure how many more land rigs we need. I believe that NOV makes monopoly like profits on its equipment built for floaters, which is where I was focusing my question. If you think this is wrong, let me know.

 

I think you are right.

The gas companies took their rigs to drill oil wells, so the total land rig count is flat.

In the longer term however, I think the trend is very bullish. When gas price goes up to $7 again, there will be lots of tight gas well drilled.

[SwedishValue]

Ted/Todd (probably Ted) upped their stake significantly last quarter at levels similar or higher than present levels. I'm starting to look into the company as I have come to realize the nice and financially fattening aspect of coattailing people I admire for their capital allocation skills.

[Palantir]

I want to coattail on to the 3 Wise Men of Berkshire. But...I can't bridge the valuation...nothing stands out. Looks like I'll have to do some original thinking.......eh.

[muscleman]

I want to coattail on to the 3 Wise Men of Berkshire. But...I can't bridge the valuation...nothing stands out. Looks like I'll have to do some original thinking.......eh.

 

What growth do you expect from their future EPS? That is the key.

When Buffet acquired the Northern SanaFe, It was some PE like 11, which is not very cheap, but look at the EPS growth since then...

 

If NOV grows the EPS by 20% for the next few years, this will be a huge win. If the EPS is flat, you won't lose money by buying at 11 PE. Of course if the EPS drops, you will lose money.

[muscleman]

http://online.wsj.com/article/SB10001424127887324767004578489130300876450.html

 

How much will this impact NOV? Who will have the biggest impact?

[Palantir]

I want to coattail on to the 3 Wise Men of Berkshire. But...I can't bridge the valuation...nothing stands out. Looks like I'll have to do some original thinking.......eh.

 

What growth do you expect from their future EPS? That is the key.

When Buffet acquired the Northern SanaFe, It was some PE like 11, which is not very cheap, but look at the EPS growth since then...

 

If NOV grows the EPS by 20% for the next few years, this will be a huge win. If the EPS is flat, you won't lose money by buying at 11 PE. Of course if the EPS drops, you will lose money.

 

That's a fair statement, what's your growth estimate? I personally prefer to use FCFE rather than Net income, and from that angle, the earnings multiple doesn't come out nearly as generous.

[muscleman]

I want to coattail on to the 3 Wise Men of Berkshire. But...I can't bridge the valuation...nothing stands out. Looks like I'll have to do some original thinking.......eh.

 

What growth do you expect from their future EPS? That is the key.

When Buffet acquired the Northern SanaFe, It was some PE like 11, which is not very cheap, but look at the EPS growth since then...

 

If NOV grows the EPS by 20% for the next few years, this will be a huge win. If the EPS is flat, you won't lose money by buying at 11 PE. Of course if the EPS drops, you will lose money.

 

That's a fair statement, what's your growth estimate? I personally prefer to use FCFE rather than Net income, and from that angle, the earnings multiple doesn't come out nearly as generous.

 

Usually don't growth companies have less FCF than the EPS? I guess you are valuing it as a mature business that doesn't grow and generate a ton of FCF each year. They need the cash to grow their business. Their revenue per share growth has been very high in the past 10 years.

The real question is whether their real business economics is good? This could be masked by the growth, so it is not easy to figure out. I am still diving into it.

I think it is obvious that the shale oil and gas drilling will be booming for the next decade, so it will be nice if we can benefit from it. :)

[Palantir]

You're right, perhaps FCFE is the wrong way to look at this. If we take the basic OCF calculation, and ignore the effects of working capital management and subtract CapX, we should get about 2B in *modified proxy for* FCFE right?

 

m-FCFE = 2B

Growth multiple = 10+5(10% growth/2)

Debt = 2B

we get (2*15)-2= 28B, this should give us a 10% return, estimated conservatively.

 

Since the volatility in OCF is due to WorkingCap management, do you think it's theoretically sound to ignore the movements in WC to estimate owner earnings?

[muscleman]

You're right, perhaps FCFE is the wrong way to look at this. If we take the basic OCF calculation, and ignore the effects of working capital management and subtract CapX, we should get about 2B in *modified proxy for* FCFE right?

 

m-FCFE = 2B

Growth multiple = 10+5(10% growth/2)

Debt = 2B

we get (2*15)-2= 28B, this should give us a 10% return, estimated conservatively.

 

Since the volatility in OCF is due to WorkingCap management, do you think it's theoretically sound to ignore the movements in WC to estimate owner earnings?

 

I am not able to answer this question with high confidence. For companies that acquire a lot of other companies, when they acquire a company with a lot of account receivables and then slowly collect those receivables, this will show up as their operating cash flow. This is a nice way to generate fake operating cash flow (But at the same time you will see a lot of cash used in investing activities. It is like cash changed from one hand to another). When I read an accounting book that taught me these tricks in 2011, I checked CRM's statements as the exercise, and I could see its operating cash flow almost entirely come from liquidating of account receivables that they got from acquisitions.

In case of NOV, it made over 300 acquisitions last year, so I couldn't tell if this is the case here. But since people said that Tedd or Tod spent 500 hours on this, I think it is safe to assume the accounting books are good.

So I think we can estimate that your valuation is approximately correct, and should be conservative. If they stop the growth, the current valuation justifies itself. What I care about more is whether they are the one who will benefit most from the US shale oil and gas boom in the next 10 years.

[Mephistopheles]

When I read an accounting book that taught me these tricks in 2011, I checked CRM's statements as the exercise, and I could see its operating cash flow almost entirely come from liquidating of account receivables that they got from acquisitions.

 

Would you mind sharing the name of the accounting book? :)

[muscleman]

When I read an accounting book that taught me these tricks in 2011, I checked CRM's statements as the exercise, and I could see its operating cash flow almost entirely come from liquidating of account receivables that they got from acquisitions.

 

Would you mind sharing the name of the accounting book? :)

 

Financial Shenanigans-- how to detect accounting gimmicks and frauds

[compoundinglife]

Dividend hiked 100% to .26 cents a share:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=97690&p=irol-newsArticle_print&ID=1822079&highlight=

[Mephistopheles]

When I read an accounting book that taught me these tricks in 2011, I checked CRM's statements as the exercise, and I could see its operating cash flow almost entirely come from liquidating of account receivables that they got from acquisitions.

 

Would you mind sharing the name of the accounting book? :)

 

Financial Shenanigans-- how to detect accounting gimmicks and frauds

 

Ah thanks, I've always wanted to read this one.

[no_free_lunch]

I am by no means an expert on oil and gas but I have certainly been educating myself since before and after I bought into this one.  It is true that there has been a tremendous amount of drilling over the past decade, and production of both oil and gas has started to increase.  However, it really seems that with the high depletion rates of the wells, that oil production hasn't been solved we are simply moving to a stage where continued high levels of drillling will be necessary.  That bodes well for NOV in my opinion.

 

Tight oil, while significant, will help make up for declines from conventional fields, rather than result in a boom in world oil production, he said.

 

The other overlooked aspect is that tight oil is capital intensive and initial production declines rapidly.

..

In Canada, and in many U.S. fields, production from tight oil fields declines by 65% the first year and by a total of 75% within two years, he said. With such steep declines, producers have to invest in new wells every two to three years just to keep production levels flat.

 

For example, the brokerage estimates that up to $15-billion has been spent by industry to add approximately 500,000 barrels a day of production from the North Dakota Bakken region. To add three million barrels per day of production from fields across the U.S., it would require $75-billion to $100-billion of capital spending every couple of years.

 

http://business.financialpost.com/2012/07/21/will-tight-oil-change-the-world/?__lsa=3fff-2c3b

[no_free_lunch]

In addition to my previous comments regarding higher production drop-off rates with shale oil, I am also coming across frequent comments that the best quality assets are being developed first.  As a result, you may also have to contend with lower average production from new wells as time goes on.  Again, I view this as positive for the oil service/equipment companies.  Demand for oil/gas is not going away anytime soon so if more drilling is needed then it will simply have to happen.

 

Figure 13 shows a worrying development for newer wells in the Bakken formation. Productivity as expressed by total first 12 month production has shown steep declines for newer wells. The productivity was growing until the summer of 2010 where it reached a high. Since the summer of 2010 to the summer of 2011 average first year productivity for newer wells in Bakken declined around 25%!

 

http://www.theoildrum.com/node/9506

[muscleman]

http://www.nasdaq.com/article/national-oilwell-slips-to-strong-sell-analyst-blog-cm254127

 

Zacks downgrade to strong sell.

This is a bit weird to be hated as much as a strong sell by analysts. :o

[wachtwoord]

http://www.nasdaq.com/article/national-oilwell-slips-to-strong-sell-analyst-blog-cm254127

 

Zacks downgrade to strong sell.

This is a bit weird to be hated as much as a strong sell by analysts. :o

 

If the downgrades cause a significant retreat in share price I will increase my position.

[boilermaker75]

Down on earnings,

 

http://finance.yahoo.com/news/national-oilwell-2q-net-income-133610387.html

 

Thinking about writing the September 67.5-strike puts.

[jouni1]

http://fuelfix.com/blog/2013/11/14/miller-to-step-down-as-ceo-at-national-oilwell-varco/

 

http://fuelfix.com/blog/2013/11/25/nov-names-leaders-for-new-company/

 

succession plans and short comments from the new ceos.

 

found it interesting that miller will be joining the new company as executive chairman.

 

any thoughts on the spin off? before i was thinking i'd probably sell the shares but might have to look into this a bit more.

[saltybit]

Looks like the spinoff is happening this coming week.

 

The website for Distribution Now is already up, and a separate 10-Q (for the spinoff) is posted.

 

10-Q

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTQ0Mjg0fENoaWxkSUQ9MjM1NDU1fFR5cGU9MQ==&t=1

 

IR webpage

http://ir.distributionnow.com/phoenix.zhtml?c=252871&p=irol-IRHome