By Alex Gavrish, Etalon Investment Research; author of “Wall Street: Back to Basics”
Oil Industry Sell-off: Where Are You, Warren?
Exactly when such important events in the economy happening, Warren Buffett is not here. Our investment guru – where are you? We need your advice. We don’t know what to do. Oil price decline caught many by surprise. Energy sector stocks are in a complete mess. What should we do – buy, sell, or wait? We got so used to your guru advice that this silence is very disturbing. Please say something.
What can past market crashes teach us about the current one?
Not only Warren Buffett is silent: almost no major hedge fund manager or other high profile investor made any meaningful comments on recent developments or discussed possible investment opportunities in the sector. Without any guru advice out there available, one has no choice but to start thinking by himself. Lets take a brief review of some key events that might help one in this process.
Halliburton merges with Baker Hughes
Halliburton Company (NYSE:HAL) and Baker Hughes Incorporated (NYSE:BHI) recently announced they will merge. Analysts’ as well as media’s reaction to merger varied greatly. From a positively biased conclusions that the transaction is a sign of confidence on part of industry CEO’s to negative perception: the fact that such large deal was closed in a matter of weeks points to companies’ fears for their future after a steep decline in oil price. It is clear, though, that transaction is done to compensate for lower profitability going forward.
Berkshire Hathaway acquires business unit from Weatherford
On December 1st, 2014, Weatherford International Plc (NYSE:WFT) announced that it signed an agreement with an affiliate of The Lubrizol Corporation, a Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) company, for the sale of the Company’s engineered chemistry and Integrity drilling fluids business. The businesses will be sold for $825 million in cash and earnout that is tied to the post-closing performance of the businesses. The deal is, of course, marginal for Berkshire Hathaway. Nevertheless, according to Warren Buffett, such bolt-on acquisitions are an important part of the overall investment strategy. Despite the fact that timing of the transaction is clearly related to recent declines in oil price, it is hard to say that it reflects the idea that now is the time to make outright investments in the sector. The chemicals and drilling fluids businesses are a niche that may not be impacted so much by capex expenditure cuts as other segments, and therefore is relatively conservative.
Where is the opportunity?
Until Warren Buffett and other investment gurus will share with us their priceless insights into oil sector stocks and investments, we need to think on our own. A good place to start, in my view, is oil equipment and services sector, and specifically, shares of National-Oilwell Varco, Inc. (NYSE:NOV). First, it is a high-quality, wide-moat company with leading market position in all of the segments it operates.
Second, it should be less impacted by oil price decline compared to E&P companies or even to services names, such as Nabors Industries Ltd (which declined almost 62% since June 2014). Recent share price performance indicates that National Oilwell Varco is stronger than oil services and equipment sector in general: while iShares U.S. Oil Equipment & Services ETF declined 37.2% from its June 30th, 2014 high, shares of National Oilwell Varco declined by only 22.6%.
Third, on September 30th, 2014, company announced that its Board of Directors authorized a share repurchase program to purchase up to $3 billion of the company’s outstanding common shares. This announcement is timely and should certainly be viewed by shareholders in positive light. National-Oilwell Varco, Inc also pays a regular quarterly dividend of $0.46 per share, which currently provides a 2.9% annual dividend yield. Fourth, some analysts believe that more deals are soon to come, and company can be a possible target, and could be acquired by General Electric Company, for example.
Needless to say, company has a clean balance sheet without net debt and attractive valuation. Shares of National Oilwell Varco therefor present an attractive investment opportunity for long-term, value-oriented investors that want to react to recent oil price decline in a calculated and conservative way.