market folly

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Stephen Anness of Invesco Perpetual who pitched a long of National Oilwell Varco (NYSE:NOV).


Stephen Anness' London Value Investor Conference Presentation

Oil stocks have sold off because of the fear of the challenge from electric vehicles and new supply from US shale.  Going back to the 1950s, Energy stocks are trading at a 40% discount to their average price to book value.  The death of oil has been exaggerated. Battery technology has been slow to develop and is not about to replace oil. Batteries are not good at storing energy compared to oil. Petrol is a 50x better store of energy than the best lithium-ion batteries.

Cobalt is a critical component for the cathode. Current production of 130Kt per year is sufficient for only 5.4m vehicles. If all the potential cobalt mines were opened that would allow only 12m EV vehicles in 5 years’ time.  The move to battery power creates serious security issues because 60% of the world’s supply of cobalt is located in one country, The Democratic Republic of Congo.  Because of the growing demand for cars generally, even if a quarter of those were EVs by 2025 – a high estimate - there would still be demand for a growth in ICE vehicles. ICE car sales are therefore likely to rise in the coming years.  Only 20% of oil demand comes from cars anyway. Trucks 24%; other transport (aircraft, ships) 12%; Industry 28%; power 5%.

Oil consumption is still rising whilst net reserves are falling. Increased demand will come from China, Latin America, India. Last year was the worst year for conventional oil discoveries since 1940. In the recent downturn the industry has reduced capex by about $700bn.

National Oilwell Varco is a US based company. Stephen Anness’s fund started purchasing NOV shares in late 2016. The shares trade at a similar price today.  It would be difficult to build an oil rig without using NOV products. It has 70% market share in some areas.  NOV has a strong balance sheet. They have been free cash flow positive for 14 of the last 15 years.  FCF averaged 11% per year over 15 years.  NOV is seen by analysts as an off-shore business. NOV’s off-shore revenues have collapsed from $21bn to $7bn and they have made some on-shore acquisitions. Today, two-thirds of its revenues come from on-shore. The change has not been recognised by analysts.


Be sure to check out the rest of the presentations from the London Value Investor Conference 2018.