Let’s Pump Some Dividends, NOV

We want to PUMP you up! (Hans and Franz, SNL) We are going to pump you up with oil. And gas. No, not gas from the magical fruit. Yes, beans are natural, but again, no. And yes, farts are a source of natural gas. But again, not what we are investing in.

Gasoline Price

Now that we opened a window to clear out the room, let talk about investing. Right now, gas is cheap at the gas station. That is good for my wallet, but a lot of oil and gas companies are struggling. These companies are losing lots of money, and some have even declared bankruptcy.  However, survival of the fittest will allow the strong ones to survive. If we can pick a strong one, in a few years, we could make a bunch of money.

Peak Oil

There is a lot of augments about peak oil production. A lot of technology has extended when it will happen, or if it is right now.  But what about peak oil consumption. Cars are more fuel-efficient every year. Semi-trucks are able to use liquid natural gas and is being used in increasing amounts. Electric cars are becoming more economical every year.  But even with these trends, oil will be used for a long time.  And even if the amount of oil needed goes down, mergers and bankruptcies will balance the oil demand and supply curves.


Peak Electricity

Also, I believe we are very far from peak electricity usage. Electric cars use electricity, I know, duh, right.  More and more items are using electricity, like all of the Internet of Things here and what has yet to come. And one of the big trends is using more natural gas to make electricity. It is cheaper and cleaner than coal. While renewables may over take this over in a decade or 2, this still leaves a long time to make money. And even when wind or solar reaches max potential usage, we still need power plants for when the sun goes down and wind stops.  While more solutions will overcome these limitations in the future, we can still make money for a long time.

Gold Rush

During the gold rush, would you rather be a gold miner or the one who supplies the gold miners. A gold miner may find gold and become rich. But the gold miners who only did ok or did not find any gold still needed clothes, shovels, picks, and whatever other equipment they needed. So we are going to invest in an equipment maker of oil rigs. Even though prices for oil and natural gas are low, they will rebound. And they do not need oil prices to go through the moon again for new equipment to be purchased.

Pump Some Dividends

National Oilwell Varco (NOV) makes gas and oil rigs. They were prepared for the downturn by having cash ready for bad times. 2 years ago, they were trading in the $70 range. Now they are in the $30, or a 60% discount, and a good sale is always nice. During the great recession, they went down to $24, which is still a chance of another 30% price decrease. With oil and/or natural gas rebounding eventually, we have the patience to wait. When times become good again, these shares could easily double, making them expensive to buy. We rather buy them when times are tough and wait, being that they are a cyclical company. They also have a 5.7% dividend yield with a 7-year dividend growth streak. Although, to be fair, this nice dividend is at risk. Many oil companies have cut their dividends. And considering other companies that did not think they would cut their dividend, like Kinder Morgan (KMI) for example, we must recognize the risk in this group. We have decided that we are willing to take on this added risk.

Purchase

We bought 9 shares for $299.50, including commission. We will get $16.56 a year in dividends to start. While increases will probably be slow to start, when things pick up, this could quickly become a very high yielder for me. Again, realizing that there is a greater than average risk of a dividend cut. A 5.7% dividend to start with is nothing to blow gas or smoke at.

 

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2 thoughts on “Let’s Pump Some Dividends, NOV

  1. I have a relatively large position in NOV (500+ shares). I’m really hoping they can weather this price drop and come out stronger without cutting the dividend. The drillers can only cannibalize unused rigs for spare parts for so long until they need to buy new parts. Hopefully that time will be coming soon to replenish the backlog. The ride back up should be nice.

    1. While I have fewer shares, I also hope they do not cut. My guess is that it depends on if oil recovers in 1 or 3 years.
      Best of luck to you.

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