Supply naturally depletes. Oil and natural gas reserves naturally deplete. Meanwhile, demand for oil and gas will not dissipate; in fact, it increases, especially with the conversion we are seeing to natural gas for utilities. Today, we have a situation where the selling price of these commodities is lower than the price to produce them. This can’t last – something has to give. Demand will go up, and price must rise to entice producers to supply more. When? We don’t know.
So to answer your question on DNOW (NOW, Financial), we acquired shares in that company as well as its competitor MRC Global (MRC, Financial). These two companies comprise 5% of the Fairholme Fund (Trades, Portfolio)’s assets, and they are two of the largest players in North America in the energy supplies and distribution segment. They are not making much money in the current environment, but we paid cheap multiples of assets on their balance sheet. The segment is completely fragmented, providing quite an advantage to these companies given their size and scale, and they both are well run.
They lead an industry that is ripe for consolidation. Any uptick in oilfield activity causes the phones to start ringing at these two companies. The parts and supplies they provide are essential to the industry. I believe these two companies should ultimately come together to maximize value for all their shareholders, and we have communicated our views to each company that they should merge.
From Bruce Berkowitz (Trades, Portfolio)'s Fairholme Capital Management Public Conference Call Feb. 23, 2016.
