The Motley Foolies are running an ad this week that teases us about a stock Warren Buffett has been buying — his “new toy” is something in the oil services business, and they’re calling it a “no brainer”.
Like many of their recent ads, this one’s signed by someone other than the Gardner brothers who run the Stock Advisor newsletter being pitched — it happens to be Bryan White this time around, he’s one of their analysts, and he’s saying that he expects this stock to skyrocket as soon as June 5 as a Congressional committee reviews the Safeguards Act of 2013.
So, naturally, a bit of urgency — after all, without urgency you could take a few minutes to check with your friendly neighborhood Stock Gumshoe and do your own research … but heck, if they’re saying it could skyrocket by tomorrow do you have time to wait?
Don’t worry, we’ll get you an answer before then. And I’ll throw in a little hint up front for you: it’s a $30 billion company, and usually with stocks that large you’ve got a bit of time to think things over before they “skyrocket” … depending, of course, on what your definition of “skyrocket” is.
So without further ado, here’s how the ad is introduced:
“Don’t Outsmart Yourself on This One…
“President Obama is powerless to stop it.
“Exxon, Shell, and BP are digging deep into their pockets for it. (In fact, they’re required by law to cough up $41,000 an hour.) And oil-drunk dictators from Russia, to Saudi Arabia, to Venezuela are hopping mad about it.
“It looks like an octopus wearing a Mardi Gras crown. It sounds like 1,000 Harley Davidsons revving up at a green light. And it feels like the no-brainer investing opportunity of the century.”
So that’s Warren Buffett’s “new toy” — how about some more details from the ad?
- “If a company rents out its high-tech tools for $41,000 an hour… and demand is so hot that the line to get them is three years long…
- If Warren Buffett’s investment company Berkshire Hathaway has already bought 2.19 million shares of its stock this spring… without breathing a word about it to anyone in public…
- If it’s positioned front and center at the intersection of the two biggest energy mega-trends to come along in a century… helping to make the United States a net exporter of oil by the end of 2013… and completely energy independent within a decade…
- If Obama is waving the white flag on trying to stop it… because he’s happy enough that it’s forcing Big Oil companies like Exxon, Shell, and BP to clean up their environmental act…
- If it’s making Venezuelan dictator Hugo Chavez spin in his grave… and hanging other anti-democratic dirtbags like Vladimir Putin & the Saudi Arabian royal family out to dry for good…
Then I’m investing!”
Well, if you’re at all savvy in the ways of the SEC and their filings and have a few minutes to kill, that’s enough to feed your own personal Thinkolator, should you have one lying around in the garage — you can just check Berkshire’s quarterly 13F filings to see what Warren Buffett’s company has been buying and selling over time and you’ll see which stock they added 2.19 million shares of in the last quarter (these are always dated reports — they come out 45 days after the quarter end, and unless the manager is a really major holder and therefore an “insider” they don’t have to report changes more frequently).
Should I let the cat out of the bag so early on here? OK, fine — this is National Oilwell Varco (NOV).
And yes, Berkshire Hathaway’s position in NOV increased by 2,189,500 shares in the first quarter of this year — that’s not one of Berkshire’s larger stock positions, so the likelihood is that the decisions on this are probably being initiated by one of the other investment managers that Berkshire brought on in recent years and not by Mr. Buffett himself (he tends to focus on the large multi-billion-dollar deals and investments and on the massive foundational holdings of the company) … though since the two managers, Todd Coombs and Ted Weschler, have recently been generating better returns than Warren’s stock picks perhaps that’s not a bad thing (that underperformance of Buffett is not surprising, of course, particularly in the short term — the new guys are managing far less money and don’t have old legacy positions with embedded gains).
Berkshire’s position in NOV was apparently initiated back in the second quarter last year, at prices averaging about $70 a share, which is where the stock is now — and I haven’t checked what prices they might have paid in the first quarter of this year as they increased the position, but the stock price ranged from about $66-74 during that quarter so the average cost for Berkshire is probably still near the current $70 price.
National Oilwell Varco is a pretty ubiquitous company in oil services, particularly in their core niche of high-tech equipment for drilling and completion operations. Reportedly 90% of the drilling rigs in operation now have some kind of NOV equipment on them, and though they do sell and lease rigs and provide a variety of oilfield services, their biggest profit driver is the high-tech equipment that’s used on all kinds of rigs.
And while international demand for rigs and equipment is apparently still growing in many regions where shale or horizontal drilling is just starting up (like Russia, where there’s a recent story about NOV angling for sales), NOV, like most of the drilling services and equipment companies, has seen tighter competition and slack demand for rigs in the United States and Canada over the last year or two as capacity was ramped up in many areas in anticipation of the continuing the shale boom but the natural gas-focused projects have in some cases been delayed or halted due to low prices.
So NOV has still been able to grow revenue year over year, but their earnings and earnings per share fell sequentially in this last quarter and are also down a bit year-over-year, which brought a miss on the last quarterly report and has helped to keep a lid on the stock price (though some of the underperformance was from what they call “one time” issues).
Which means it’s not a hot growth name or a big investor darling at the moment, but it has been a Motley Fool pick for years and has a strong market position, and it’s currently pretty inexpensive with a forward PE that’s slightly less than giant industry leader Schlumberger (SLB) and about the same as Halliburton (HAL) — none of those biggies has been growing earnings rapidly recently, but NOV has at least been growing sales a bit faster. Most of the larger oil services stocks have migrated to trading at a forward PE of between 10-12 or thereabouts, even firms that are struggling a bit more like Weatherford International (WFT), so the soft North American market has everyone somewhat worried about growth.
NOV pays a small dividend that tallies up at about 1.5% right now even after they announced a doubling of the dividend this past quarter, but they have been a consistent dividend raiser over the last several years and could easily pay out far more if they wished — that’s less than a 20% earnings payout.
Their balance sheet is excellent, with only a small debt position and a pretty low price/book ratio of 1.5, though a lot of that is from the big “goodwill” slug associated with the many smaller drilling technology companies they’ve acquired over the years. They tend to put their cash flow back into acquisitions, and they probably pay their executives too much and don’t have enough insider ownership for my preferences, but the Berkshire Hathaway position increase and their generally decent value right now is a nice notch in their favor, along with the strong market position and the likelihood that more high-tech drilling equipment will be required for the world’s oil explorers and producers in the years ahead.
Will the latest Congressional hearings about drilling technology cause these shares to spike this week? Well, that’s not so easy to predict but I’d be shocked if the stock moved aggressively based on whatever this new regulation or chatter about it might be.
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The “Safeguards” act proposed in Congress is real, though that’s another of the idiotic acronyms that our elected officials seem to love so much — the full name is the “Secure All Facilities to Effectively Guard the United States Against and Respond to Dangerous Spills Act of 2013,’ and it seems to largely be about just that, tightening up the laws about preventing and dealing with oil spills. Not surprisingly, it was introduced by Bill Young, a Representative from Florida, where concern about oil spills is high — it has no cosponsors and the places I’ve checked indicate that it has no more than a 1% chance of being passed into law. The bill has been referred to committees and subcommittees, but I haven’t seen a hearing scheduled — there is a hearing on Thursday of a bill that wants to expand offshore energy exploration and production on the Outer Continental Shelf, though I don’t suppose one subcommittee hearing is suddenly going to move the ball on that extremely contentious issue.
Though frankly, whether this bill is passed or not, it would be surprising if any extension of offshore drilling weren’t accompanied by requirements for higher-tech equipment for stronger or more redundant safety and blowout/spill prevention, and I think it’s clear that offshore drillers in particular are focused on ordering newer or more upgraded rigs to make sure the equipment is as safe and low-liability as they can get — no one wants to be responsible for a major spill, or to be dragged through court and through the headlines over it for years as BP and Transocean and Cameron were for the Deepwater Horizon explosion and blowout.
Will that drive NOV’s earnings sharply higher in the near term? Well, that I don’t know — they do have equipment on thousands of offshore rigs, though they don’t own the rigs, and there are a lot of big and expensive rigs being built over the next few years that will feature NOV equipment (they can get hundreds of millions of dollars of equipment onto each one of the latest generation of deepwater rigs). On the flip side, the other competitors in the industry haven’t exactly been caught napping — Cameron has a joint venture deal with Schlumberger called OneSubsea that is pushing technology and services, and they seem to be growing as a competitor in bidding for big rig technology packages with manufacturers, so I don’t know if that will hamper their ability to win business. I have no idea what their technological advantage is in any of their specific equipment offerings.
The target price of the average analyst for NOV is about $84, and the “fair value” cited by the Morningstar analyst is $85 (they called NOV’s Pete Miller their “CEO of the Year” last year, too, so they think management is excellent — though they cut their fair value from $98 after the last quarter’s weakness), so there’s certainly potential upside if those folks are right. It’s a strong company in a competitive business that’s driven to large degree by enthusiasm for oil and gas drilling — you can see what happened with the decreasing rig count in the US and Canada over the last year or so bringing earnings down for them and most of their competitors, so there are challenges from competing firms and competing technology advances, but my impression is that the biggest reasonable downside to fear for NOV is probably further weakness in gas or, in the worst case, simultaneously falling oil and gas prices that substantially decrease investment by oil companies.
The last time I wrote about this stock as a teaser pick was more than two years ago, and at the time it carried more of a premium valuation and a share price about $10 above where it now stands … I’m more comfortable with it now that it’s lost some of that premium valuation, but with most oil services stocks pretty cheap now you can’t say that it’s a real obvious bargain — then again, the cheapest stocks usually are a lot hairier than NOV, and there’s something to be said for Warren Buffett’s oft-quoted maxim that he’d rather buy a great company at a good price than a good company at a great price. (OK, the actual quote, from his 1989 letter, is “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”)
That’s all I can tell you about National Oilwell Varco and the Motley Fool’s tease of this stock — I don’t own it, it looks like a reasonable buy for the sector but I’m not going to buy it immediately, and your opinions and decisions, of course, are what matters for your money — so what do you think about this one? Is it really the “Number 1 Investment No-Brainer of the Century?” Let us know with a comment below.