Sunday, August 21, 2016

Adding National Oilwell Varco (NOV) to the portfolio

Earlier this year when I said I though oil had bottomed I suggested buying best of breed shale driller EOG Resources. That particular pick is now up approximately 20% and I expect even more as oil prices head higher over the next few years.

I have talked before about buying the Levi Strauss businesses. These are the companies that sell the tools to extract natural resources to the drillers and miners. This is how Levi Strauss made his fortune. This is what NOV does.

In this vein I am adding National Oilwell Varco (NOV) to my portfolio. NOV is a full service oilfield equipment and service supplier. They build rigs, service rigs, provide various completion services, and basically are involved in all facets of drilling and completion of oil and gas wells.

Due to the drop in oil prices and capital investment cuts by oil and gas exploration companies you can imagine that NOV's business has suffered. In fact they have lost money the last three quarters and has seen its stock price drop around 60%.

However, as I have argued in the past these commodity markets are very cyclical markets and I believe that the lack of investment in new production will eventually lead to less supply and higher prices. Eventual higher prices will lead to a cycle of drilling and investment into new wells being drilled. This is a certainty as it has been for the last 100 years. Booms follow busts in the oil patch.

So the basic idea is that we buy now in anticipation in a recovery in oilfield activity which will eventually benefit NOV's various businesses. What I like about NOV is it is the best of breed. It is large company and it will be survivor and will be around for the next upswing in the oil market.

Although we are not likely to catch the exact bottom we do know that we are seeing some initial signs of a turnaround in the oil market. This is what being contrarian is all about. If one waits until everyone is convinced of a definite turnaround the stock will have already moved in anticipation of the recovery. In fact, we are already seeing the stock move higher in the chart of NOV as it appears to have put in a bottom.

The company has been very aggressive in downsizing and laying off people and closing offices during the downturn. This will probably continue for the next several quarters. However, the company is in no danger of going away and the management has said it will be looking to acquire other oilfield services companies during this downturn.

This is currently a high conviction speculation on an eventual rise in oil prices which leads to an increase in drilling activity. Oil after all is a depleting asset and every barrel produced has to be replaced. With low prices that has not been happening. Hopefully we have our timing right and we close to the bottom for this cycle.

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