National Oilwell Varco (NOV): $78

Summary

National Oilwell Varco (NOV) is a solid company about to undergo a corporate split and a significant realignment of management personnel and capital allocation philosophy. NOV currently is available at an attractive price due to some recent operational missteps (possibly from too much business), concerns about pending order declines, and falling North American rig counts.  I think these concerns will fade or are more than priced in and that the pending split will highlight that Core NOV is on the verge of demonstrating significant positive earnings leverage and shareholder friendly capital actions.  The focus of this write-up is the Core NOV Remainco, as the Distribution Spinco is relatively small, although I do think Spinco has significant margin upside and multiple acquisition opportunities in a consolidating industry.

NOV has a net cash balance sheet and is solidly profitable today with upside to margins in the core Rig Tech segment and substantial FCF ($6/7.50 in ‘14/’15)as capex tapers.

Note: jessie993 wrote a good piece on NOV about a year ago at $70.   Since that write-up, NOV has stumbled a bit in managing high demand for offshore floaters, but also announced the management change and the spinoff of distribution.

3 “Core” segments:

Rig Tech: global market leader in offshore floating rigs, huge $16B backlog. Actually had too much business last year and took temporary margin hit to hit production promises.   EBITDA $1.8B/2.0B in ‘14E/”15E.

Aftermarket:  High margin, long term growth business, previously buried within Rig Tech. Would trade at very high multiple if standalone.  They will not and should not actually separate Aftermarket but the new disclosure gives enough detail to place a more appropriate value here. EBITDA $1B in ’14, growing close to 10% with very high margins (30%?) and ROIC.

Petroleum Service & Supplies: Includes completion and production and drill pipes, drill bits and other products. EBITDA close to $2B in ’14, with upside if NA market activity improves.

Distribution Spinco:  I value at $6-7 /share at 8-9X ebitda, at the low end of peer group.  I did not spend much time on distribution in this write-up but basically am comfortable that at $6-7 it will not move the needle much if the other businesses deliver.

Thesis

 A change in leadership at the core company (old CEO going with much smaller distribution spinco as chairman) will result in a significant change in capital allocation philosophy and result in more acquisition discipline and more capital coming back to shareholders in dividends and buybacks.

The newly elevated management team is likely to materially raise the dividend and initiate a modest buyback, something the prior CEO refused to even discuss.  The dividend , currently $1.04 (1.3% yld) could easily jump 50% near term.  The buyback is less certain but the new CEO, Clay Williams, was previously the CFO and clearly “gets” financial discipline.

NOV recently released significant detail about the results of its 3 core segments and is also likely to highlight the attractive outlook and return profile of these businesses following the spinoff of the lower margin distribution business in the next few months.

The Form 10 has been filed and is awaiting SEC comments. Spinco timing is likely May, but could be April if Form 10 is “clean”.

A reasonable SOTP can get well north of $90 within a year given where peers trade.  This values Rig Tech at 8X ($36/share), Aftermarket at 10X ($25), PS&S & Corp Exp at 7X ($26), assumes yearend net cash of over $5 and values Dist at $6.  This SOTP excludes the impact of buybacks which are likely to be relatively modest at least initially.  We would not be shocked to see some acquisitions but expect greater discipline/value accretion by the new CEO.

In the interest of time given the pending spinoff, I have not included extensive business descriptions (given existing research/company presentations) or consolidated numbers (see recent segment and Form 10 data) but am happy to discuss further in Q&A if folks are interested.