This Top 10 Stock Will Benefit From the Energy Boom

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Oil and natural gas consumption around the world continues to increase dramatically. Oil and gas power emerging market growth with plentiful, cheap energy while also driving the economies, security, and independence of entire regions. This global trend shows few signs of slowing, with growth in worldwide population and the economies in emerging market out-pacing efforts to focus on energy efficiency. What is less clear is the mix of how these resources will be used in the future. For example, the United States has the ability to gain energy independence through expanded use of its own natural resources.  However, questions relating to the safety of fracking, difficulties with offshore drilling, and the environmental impact of oil and gas production (and the occasional oil spill!) make it uncertain as to exactly where these resources will be extracted.  It is a safe bet, however, that resources will be extracted to continue to power the world. 

Rather than making a specific bet on an offshore drilling company or a firm with shale gas assets, it is far less risky to bet on the simple fact that oil and gas consumption will increase. That is the exact investment thesis behind the eighth stock on the Top 10 list, National Oilwell Varco (NYSE: NOV)

A classic "pick and shovel" company

Like the old investing adage that the most profit was made during the gold rush by the companies that sold the picks and shovels (and not the miners), National Oilwell provides a complete suite of products and services in the oil rig industry. Through a tremendously ambitious expansion plan over the past ten to fifteen years, National Oilwell has consolidated an extremely fragmented market to create a dominant position that allows the company to leverage its scale and expertise to beat the competition both in terms of innovation and efficiency.

The well-publicized boom in drilling has helped National Oilwell fuel its growth even further. More recently, the company has undertaken aggressive plans to expand into adjacent lines of business that are equally as fragmented as the company's core business was a decade ago. For example, National Oilwell has commenced a meaningful expansion into the floating, production, storage, and offloading (FPSO) area of the oil production industry with a number of acquisitions, including the $673 million acquisition of NKT Flexibles last year.

With each acquisition, National Oilwell can provide a higher percentage of the equipment that goes into each highly-specialized FPSO vessel. This is particularly important, since many industry experts expect FPSO to be an area of high growth as the current boom in offshore drilling begins translating into more significant production activity. Just like it did with oil rigs, National Oilwell can take a market leadership position that will help the company drive profits through standardization, scale, and efficiency.

NOV - "no other vendor"

National Oilwell's reputation as the one-stop shop for drilling needs has earned it the nickname "no other vendor" when it comes to rigs and related equipment. Here's a comparison of the company to some of its peers in the oil services industry using an assortment of valuation metrics:

<table> <tbody> <tr> <td> </td> <td><strong>NOV</strong></td> <td><strong>SLB</strong></td> <td><strong>HAL</strong></td> <td><strong>WFT</strong></td> <td><strong>BHI</strong></td> </tr> <tr> <td>CAPS Rating</td> <td>5 stars</td> <td>5 stars </td> <td>4 stars </td> <td>4 stars </td> <td>4 stars </td> </tr> <tr> <td> <p>Share Price</p> </td> <td>$73.66 </td> <td>$78.60 </td> <td>$40.20 </td> <td>$13.36 </td> <td>$44.95 </td> </tr> <tr> <td>Market Capitalization (in billions)</td> <td>$31.4 </td> <td>$105.2 </td> <td>$37.3 </td> <td>$10.2 </td> <td>$19.8 </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>TTM Price to Sales Ratio</td> <td>1.61 </td> <td>2.50 </td> <td>1.32 </td> <td>0.67 </td> <td>0.96 </td> </tr> <tr> <td>TTM EBITDA Margin </td> <td>22.1% </td> <td>25.8% </td> <td>21.8% </td> <td>17.3% </td> <td>18.9% </td> </tr> <tr> <td>TTM Price to Earnings Ratio</td> <td>13.10 </td> <td>19.30 </td> <td>14.71 </td> <td>N/A </td> <td>15.28 </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td>Price to Book Ratio</td> <td>1.61</td> <td>3.08</td> <td>2.46</td> <td>1.13</td> <td>1.19</td> </tr> <tr> <td>Debt to Equity Ratio</td> <td>0.08</td> <td>0.33 </td> <td>0.32 </td> <td>1.00 </td> <td>0.30 </td> </tr> <tr> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> <td> </td> </tr> <tr> <td colspan="6">Source: Motley Fool CAPS - 1/30/13</td> </tr> </tbody> </table>

Looking at the table above, it may not seem obvious why National Oilwell was selected as the best of this group; all five stocks have CAPS ratings of four or five stars, which is a pretty strong vote of confidence for the industry as a whole. Larger services providers Schlumberger (NYSE: SLB) and Halliburton (NYSE: HAL) have more exposure to the boom and bust cyclicality of the services aspect of oil and gas drilling. Meanwhile, National Oilwell is less exposed to risk associated with whether a particular well turns out to be productive or not, how efficiently the projects are managed, and exposure to liability for environmental or other issues that arise from a project.

While Weatherford International (NYSE: WFT) and Baker Hughes (NYSE: BHI) are a little bit more comparable to National Oilwell, neither company has the scale and ubiquity of National Oilwell. This competitive advantage has come from the acquisitions noted above, which have driven tremendous revenue growth that stands out from a group of companies with stellar growth in their own right during the past decade:

<img src="" />

NOV Revenue TTM data by YCharts

Even more significantly for investors, this dramatic growth has also translated into market beating returns:

<img src="" />

NOV data by YCharts

National Oilwell is a Top 10 stock

National Oilwell has proven repeatedly that it can successfully identify accretive acquisition opportunities. This uncommon skill has allowed the company to rapidly consolidate a fragmented industry, and now puts the company in a position to continue expansion into adjacent businesses. National Oilwell is poised to use its scale and expertise to continue its industry dominance. Equally important is the fact that the investment thesis has less risk than most other companies in the larger oil and gas industry. While the share price has some correlation to the price of oil as noted in the chart above, the success of the business is ultimately more insulated from swings in oil prices and instead is more closely aligned to the premise that ongoing consumption of oil and gas will continue to grow worldwide. That's a lot of upside with minimal downside, making this an excellent addition to the Top 10 stocks.  

For more on the Top 10 Stocks, follow the links below:

  1. Apple
  2. Diageo
  3. Coca-Cola
  4. Chipotle Mexican Grill
  5. Costco Wholesale
  6. 3D Systems
  7. Canadian National Railway
  8. National Oilwell Varco
    More to come! 

BrewCrewFool owns shares of National Oilwell Varco. The Motley Fool recommends Halliburton and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus