Kevin Cope of Hutchinson Capital Management presented his in-depth investment thesis on National Oilwell Varco (US: NOV) at Best Ideas 2019.

Thesis summary:

National Oilwell Varco is the dominant supplier of the equipment used by oil and gas exploration companies to find and extract energy resources. With #1 market share in 80% of its 28 product lines, and no position lower than #3, the company has the scale and financial resources to adapt to the changing energy exploration market. As E&P companies have transitioned their capex budgets from large offshore projects to unconventional land drilling, the intensity of the equipment they consume has risen sharply. NOV has “followed the money” and transitioned their product offerings to match client needs.

NOV offers an opportunity to buy a company in the late stages of transition at generationally low industry conditions. This investment may appeal to (i) long-term buyers who look through the cycle, and (ii) opportunistic investors who transact within the cycle to take advantage of valuations that reflect overly pessimistic expectations.

The devastating downcycle for oil-related companies, which began in June 2014, has been so severe that it necessitated transformation for providers like National Oilwell Varco. The company’s superb management team navigated the treacherous cycle while transforming the company from one dependent on large offshore rig construction to one more broadly diversified. The company has a massive installed base with stable proprietary aftermarket revenue.

At the recent market quotation, investors are getting stable cash flow from the onshore business plus a free embedded option on the offshore recovery. NOV’s business has low capital intensity but sells to clients that commit large sums of capital to their businesses.

Strong FCF generation enabled NOV to pivot the business model toward shifting E&P spend while also developing the emerging technologies necessary to extend its competitive advantage.

We use long-term cash Economic Value Added models to estimate intrinsic value. Traditional multiple analysis is not constructive for this cyclical company that has undergone such a significant transformation.

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About the instructor:

Kevin Cope received a B.S. degree in Commerce and a B.A. degree in German and from Washington and Lee University in Lexington, VA. Kevin joined Hutchinson Capital Management in September 2015 as a Senior Research Analyst. Prior to joining the firm, he served as a Portfolio Manager and Senior Research Analyst at Cheyne Capital Management, a London-based investment firm. Kevin has more than 20 years of asset management experience working on behalf of both individuals and institutional clients.

As CIO, Kevin serves as the Director of Research with the responsibility for overseeing the equity portfolio management process. He is a member of the CFA Institute and the CFA Societies of San Francisco and New York. Kevin lives in Marin County with his wife and three children.