I have avoided energy sector for more than a year now. My main issue is shale is not a viable business model for the most part. In addition, I could not find a good vehicle to play energy.
Most of the shale e&p have perpetual negative cash flows and high debt. Shale service sector has no pricing power with over capacity. Even large services are no better.
I was looking for a low risk company to play energy recovery with no debt, positive FCF and low maintenance capex (which is trading cheap as well). I think I have found one.
DNOW distributes supplies to the energy sector from upstream to downstream. Revenue split between upstream, midstream & downstream is 51% : 30% : 19%. Distribution is a decent business to be in when there are hundreds of suppliers and consumers (like energy).
DNOW has zero debt. They are consistently cash flow positive and have minimal maintenance capex. Everything I have been looking for.
To make things even better. Its trading at near net-net valuation based on just current assets.
As of end Q2 2020:
Total Current Assets = $898mio (cash 269, AR 242, Inventory 370…)
Total Liabilities (current + non current) = $322mio (AP 245…)
Total Current Assets – All Liabilities = $576mio
Market cap as of last close is $581mio
In my opinion, their liquidation value should be greater than current market cap considering their $171mio long term assets.
Historically, DNOW find support around 0.85 price to book. Current price to book is 0.78.
What about a cash flow valuation?
Trailing 12month free cash flow has been $235mio. Based on this DNOW trades at 2.5X P/FCF & 1.6 EV/FCF.
Its better to look at FCF over a full cycle as change is working capital in a particular year impacts FCF a lot for a distribution business. FCF over the energy cycle 2015 - 2019 below.
FCF = 2015 +$313mio, 2016 +$231mio, 2017 -$119mio, 2018 +62mio 2019 +$212mio
Average FCF over 2015-2019 cycle $139.8mio.
Based on this avg full cycle FCF, DNOW trades at 4.2X P/FCF & 2.6 EV/FCF.
Technically, DNOW bounced right at march lows and provides a good entry point here with limited downside.
Bottom Line: DNOW is an energy stock with zero debt, consistent +ve FCF & low capex needs trading at net-net valuation based on only current assets.