Must-know: Berkshire Hathaway adds new position in Now Inc.
Overview: Berkshire Hathaway's second quarter 13F filing (Part 3 of 7)
Berkshire Hathaway and Now Inc.
Warren Buffett’s Berkshire Hathaway initiated new positions in Charter Communication (CHTR) and Now Inc. (DNOW). Notable positions that increased during the quarter were Suncor Energy Inc. (SU), and Verizon Communications (VZ). The fund lowered its position significantly in Graham Holdings (or GHC) and slightly in ConocoPhillips (or COP).
Berkshire Hathaway bought a small position in Now Inc. (DNOW) last quarter. The position accounts for 0.06% of the fund’s total second quarter portfolio. Now provides products and supply chain solutions for the energy industry.
It was spun off from oilfield equipment provider National Oilwell Varco Inc. (NOV). Berkshire also owns shares worth ~$600 million in National Oilwell Varco. It accounts for 0.56% of the fund’s total second quarter portfolio.
Now is an oil and gas industry. It offers global products including consumable maintenance, repair and operating (or MRO) supplies, pipe, valves, fittings, flanges, line pipe, electrical, artificial lift solutions, mill tools, safety supplies, and spare parts. Its products support customers’ operations.
Its energy products are needed throughout all oil and gas industry sectors—from upstream drilling, completion, and production to midstream infrastructure development and downstream petroleum refining. Its energy products are needed in other industries like chemical processing, power generation, and industrial manufacturing operations.
Its supply chain solutions include outsourcing the functions of procurement, inventory and warehouse management, logistics, business process, and performance metrics reporting. It operates mainly under the DistributionNOW and Wilson Export brands.
What drives demand for Now’s products
In its filing, Now said that around half of its revenue is attributed to multi-year maintenance repair and overhaul (or MRO) arrangements. MRO arrangements are generally repetitive activities that address recurring maintenance, repair, operational work, well hookups, and drilling activities.
Project activities—including facility expansions, exploration, and new construction projects—are usually associated with customers’ capital expenditure budgets. The activities can also be associated with their construction partners. Demand is driven by the level of oil and gas drilling, servicing, and production refining. It’s also driven by petrochemical activities and other macroeconomic factors.
Spinoff thesis
A filing from Now said a separation from NOV will allow each company to pursue a focused, industry-specific strategy. It will enable each companies’ management to concentrate resources on particular market segments, customers, and core businesses. They will have the ability to anticipate and respond to changing markets and opportunities.
The spinoff will also eliminate competition for capital between Now’s business and NOV’s other businesses. It will allow direct and efficient access to capital. It will also provide each companies’ investors with a targeted investment opportunity.
The company operates under three reportable segments—United States, Canada, and International. It believes the total addressable market for its core oil and gas industry offering is estimated to be ~$20 billion in North America and significantly larger globally.
Second quarter results impacted by ERP implementation
Now’s latest second quarter results came below estimates. Revenues for 2Q14 were $952 million—a decline of 12% from 1Q14 and a decline of 11% from 2Q13. Net income was $27 million, or $0.25 per fully diluted share—compared to the first quarter ending March 31, 2014, with net income of $41 million, or $0.38 per fully diluted share.
Now said it migrated all of its business onto one Enterprise Resource Planning (or ERP) platform in 2Q14 to enhance operational and back-office performance. Results were impacted by this implementation in addition to the effects associated with the spinoff activities.
U.S. revenues fell due to its central U.S. pipe yard relocation, reduced project revenues, employees being focused on ERP training over branch responsibilities, and the implementation and training associated with learning a new quoting system in 2014.
Canadian revenue was impacted by a reduction in projects that weren’t repeated at the same level in 2014. Work was pushed out to future periods.
International revenue increased. It was driven by strong growth in Asia. It was also driven by other 1Q14 valve projects.
Acquisitions could drive future growth opportunities
In terms of outlook, Now said in its 10Q that it believes “we are well positioned and should benefit from our global infrastructure, broad product offering, diverse customer base, strong balance sheet and capitalization and access to credit. In the event of a market downturn, we also believe that our long history of cost control and downsizing in response to slowing market conditions, and of executing strategic acquisitions will enable us to capitalize on new opportunities to effect new organic growth and acquisition initiatives.”
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