Commentary
National Oilwell Varco (NOV)
NOV is a global leader in the provision of equipment and components used in oil and gas drilling and production. The company’s operations are tied to capex spend in the oil and gas industry which has been depressed for the past five years. NOV has a dominant position in rig technology for the offshore industry but also has a strong position in equipment for unconventional shale drilling. Its broad array of highly specialised equipment has helped protect it from one of the longest downturns in its 160-year history.
Back in 2014, NOV was generating $4.5bn in operating profit on $20bn of revenue using just $8bn of tangible equity, and its market capitalisation was over $30bn. This severe downturn has reduced revenue by two thirds with the company making a small operating profit and the market capitalisation falling to below $5bn.
NOV has consistently generated free cash flow through the downturn and even last quarter, when the oil market was in disarray, it was able to generate over $300m. It has a strong balance sheet with a solid order book. Standardisation of equipment across the oil and gas industry is benefitting the company because of its market leadership. When the recovery comes, NOV will be particularly well placed.
J D Wetherspoon (JDW)
JDW released a trading update during the month. More than 95% of the estate is now open and JDW has seen sales gradually improve. Like-for-like sales were down 17% over the reporting period (up to the middle of August) although this included a considerable benefit from the ‘Eat Out To Help out’ scheme. JDW expects a period of more subdued sales once this scheme ends.
JDW has a leading position with the UK pub sector, with a strong consumer following and a well-located, largely freehold estate. It is the low-cost, volume operator which should allow a quicker return to former profitability. Having above average size pubs with outside space helps to maintain social distancing. The company remains in a sound financial position having received a waiver of bank covenants, as well as completing a share placing and utilising the government loan scheme. JDW is trading on a historic free cash flow yield of over 10% and currently is cash flow positive.
Portfolio
We had positive results from a good number of holdings in the month which helped drive performance, but even after the moves there is still huge recovery potential. Out of 24 holdings, 17 are still lower than they were at the start of the year and the average fall for those holdings year-to-date is 39%. Although the portfolio is down 14% this year, if it reaches our target then it would be 46% higher than at the start of the year and we would hope that fair value would grow at a healthy clip from there over time. On our view of recovered earnings, it is on just nine times.
Commentary
The strategy had a good month with over half the holdings producing double digit returns and only three stocks negative: Oceaneering, Stagecoach and Fairfax Financial Holdings. We have written about these three recently and there were no updates from them in the month. We sold Petroleum Geo-Services, replacing it with National Oilwell Varco, which is discussed below. Wetherspoon released a trading update and is also discussed.
Petroleum Geo-Services (PGS)
PGS will go down as one of our worst mistakes. We purchased the position in 2014 after a fall in the company’s share price driven by weakness in the oil market. PGS had the youngest and most efficient ships used for acquiring seismic data for the offshore oil and gas industry. The company also had a valuable library of acquired data and was making good returns on capital. We knew the offshore industry was in for a few tough years as the emergence of shale in the United States had led to a glut of supply. We also were aware of the need to shift away from hydro-carbons towards renewables in the long run but, on balance, we felt that offshore oil and gas would be required for at least a few decades in order to meet demand and PGS would come out stronger as weaker competitors, such as CGG, would be forced to leave the industry.
The downturn in the oil and gas industry has been longer and the size of the shale opportunity in the United States has been larger than we originally expected. While CGG and Schlumberger have exited, PGS has suffered considerably with losses weakening the balance sheet. We still are confident the offshore industry will recover from here but are less confident that holders in PGS common equity have the time needed to wait for that recovery. We felt the risk reward was better in National Oilwell Varco which will also benefit from a recovery in the oil market but does not have the balance sheet risk.
Commentary
National Oilwell Varco (NOV)
NOV is a global leader in the provision of equipment and components used in oil and gas drilling and production. The company’s operations are tied to capex spend in the oil and gas industry which has been depressed for the past five years. NOV has a dominant position in rig technology for the offshore industry but also has a strong position in equipment for unconventional shale drilling. Its broad array of highly specialised equipment has helped protect it from one of the longest downturns in its 160-year history.
Back in 2014, NOV was generating $4.5bn in operating profit on $20bn of revenue using just $8bn of tangible equity, and its market capitalisation was over $30bn. This severe downturn has reduced revenue by two thirds with the company making a small operating profit and the market capitalisation falling to below $5bn.
NOV has consistently generated free cash flow through the downturn and even last quarter, when the oil market was in disarray, it was able to generate over $300m. It has a strong balance sheet with a solid order book. Standardisation of equipment across the oil and gas industry is benefitting the company because of its market leadership. When the recovery comes, NOV will be particularly well placed.
J D Wetherspoon (JDW)
JDW released a trading update during the month. More than 95% of the estate is now open and JDW has seen sales gradually improve. Like-for-like sales were down 17% over the reporting period (up to the middle of August) although this included a considerable benefit from the ‘Eat Out To Help out’ scheme. JDW expects a period of more subdued sales once this scheme ends.
JDW has a leading position with the UK pub sector, with a strong consumer following and a well-located, largely freehold estate. It is the low-cost, volume operator which should allow a quicker return to former profitability. Having above average size pubs with outside space helps to maintain social distancing. The company remains in a sound financial position having received a waiver of bank covenants, as well as completing a share placing and utilising the government loan scheme. JDW is trading on a historic free cash flow yield of over 10% and currently is cash flow positive.
Portfolio
We had positive results from a good number of holdings in the month which helped drive performance, but even after the moves there is still huge recovery potential. Out of 24 holdings, 17 are still lower than they were at the start of the year and the average fall for those holdings year-to-date is 39%. Although the portfolio is down 14% this year, if it reaches our target then it would be 46% higher than at the start of the year and we would hope that fair value would grow at a healthy clip from there over time. On our view of recovered earnings, it is on just nine times.
Commentary
Commentary
Commentary
Commentary