Now Inc.: A Debt-Free Dominant Distributor in a Hated Sector

This distributor to the oil and gas industry has no debt and is selling at below tangible book value

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Praveen Chawla
Oct 14, 2020
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NOW Inc. (DNOW) is a global distributor of equipment and a service provider for the oil and gas industry. It has a legacy 150+ years of operating history and supports major land and offshore operations for all the key energy producing regions around the world.

NOW Inc. has a network of energy centers, supply chain services and process solutions locations complemented with an online commerce channel. The Key markets are Europe, the former Soviet Union region, Latin America, the Middle East, North America and Southeast Asia. It has distribution centers in the following locations: Houston, Texas, United States; Beulah, North Dakota, United States; Casper, Wyoming, United States; Edmonton, Canada; Alberta Estevan, Canada; Saskatchewan, Canada; Aberdeen, Scotland; Jebel Ali, United Arab Emirates; and Jurong, Singapore.

NOW Inc. was spun out of National Oilwell Varco (NOV), a major oil services company, in May 2014. Since its inception the stock has declined steadily (from ~$30) and is now a fraction of where it started from.

This was caused by the difficult environment facing the oil and gas industry, where capital expenditures had been slashed due to low prices for the commodities. Book value has also come down as the company shrunk its inventory and working capital to cope with the environment, and it had to take large asset impairment charges in 2015, 2019 and 2020.

The following chart gives a schematic of the income statement from 2014. In hindsight it looks like the peak revenue and income occurred in the year of the spin-off (2014). The company has lost money in five of its seven years of existence.

However a detailed look at the operating cash flow chart below shows that operating and free cash flow has been quite resilient and Now Inc. has been able to adjust its working capital to adjust to the downturn. The orange line below represents core FCF, which is Free Cash Flow without changes to working capital.

The current balance sheet (shown below) is in solid shape, with no long term debt. Therefore I think there is high probability that the company will survive the current downturn. Even thought the Gurufocus system gives a low Altman Z-score of 0.98, a closer look at the balance sheet and liquidity resources available to the company dispels my concerns on potential bankruptcy.

Conclusion

Now Inc. seems to be financially solid and a good way to participate in the deeply undervalued cyclical oil and gas sector.

Since the oil price collapse earlier this year, the price of oil has risen back to the $40s. As the world recovers from the pandemic, demand for petroleum will surely recover. Now Inc. Is deeply undervalued and currently selling for below tangible book value and around Net Current Asset Value. The last time oil prices were at $40, the stock price was in the high to mid-teens. I expect it to attain that level ($15 to $20) in 12 to 18 months.

Disclosure: The author is long Now, Inc via stock options.

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I am a full-time investor now, investing my own money. I spent most of my working life in the pharmaceutical industry.