Calling National-Oilwell Varco, Inc. (NYSE:NOV) the “picks and shovels” of the oil industry is certainly appropriate. While not in the business of producing oil themselves, the products and services they provide are critically important to those who are. Virtually every oil rig in the world utilizes the products of National-Oilwell Varco, Inc. (NYSE:NOV). They operate in 3 business segments. The Rig Technology segment generates the most revenues and profits for NOV. This segment is involved with the design, manufacturing, and selling of equipment related to the construction of oil and gas wells. Whenever a new oil well is being built you can bet National-Oilwell Varco, Inc. (NYSE:NOV)’s products are being used. Once the wells are built producers need equipment to extract the oil, using things like drills, pumps, and specially tailored chemical solutions. National Oilwell Varco services these needs through their Petroleum Services and Supplies segment. During the process of producing oil the equipment being used takes some serious punishment. Fortunately the Distribution and Transmission segment of NOV is there to provide the maintenance, repairs, and spare parts for the world’s oil rigs. A wide variety of factors exist that support the conclusion that National-Oilwell Varco, Inc. (NYSE:NOV) is an attractive investment–here are 3 that I find especially convincing.
Management at NOV has repeatedly stated in their filings with the SEC that they are pursuing an aggressive growth strategy and plan to continue to do so in the future. Just last week they completed a merger with Robbins & Myers, Inc. (NYSE:RBN), for a price that represents about 8.8% of the market cap of NOV ($2.5 billion). Robbins and Myers (NYSE:RBN) has no debt, and over $200 million in cash. Better yet, cash from continuing operations over the past 5 years has been $491.3 million, growing at a 15.8% rate per year over the past 5 years. The people running NOV did good by their investors when they bought a company whose business nicely compliments their own and is rapidly increasing the rate at which they generate profits.
Strong Working Capital Position
One piece of NOV’s balance sheet that struck me as being particularly attractive was working capital. In “The Intelligent Investor” Ben Graham proposed that a company is worth at least as much as their working capital value. In the case of NOV that number is $10.029 billion. Over the past 5 years working capital is up an astonishing 248%! A working capital position that represents a third of market cap, and has grown at a 49.7% annual rate over the past 5 years, is a very positive sign.
Can You Say Moat?
National Oilwell Varco has an estimated 60% market share in oil rig equipment. The nickname “no other vendor,” a play on the ticker symbol, is an accurate description indeed. A history of acquisitions stretching back to the 1980’s has resulted in the oil rig equipment industry being consolidated to a large degree. Luckily for investors of National Oilwell Varco that consolidation has transformed NOV into the hulking giant of the industry. At this point the threat of new entrants into the market is virtually non-existent. Decades of being in the industry has allowed NOV to build up an extensive customer base and become an efficient low cost producer. Attempting to compete with what the folks at NOV have created without economies of scale or a reputation for excellence is financial suicide.
