Highlights:
* National-Oilwell Varco (NYSE:NOV) is a high quality, wide moat oil services stock currently selling near multiples last seen in prior recessions.
* In September, 2014, NOV announced a share buyback program for up to $3 billion (10%) of the company’s outstanding shares.
* As of 2Q14, Warren Buffet’s Berkshire Hathaway owns approx. 1.5% of NOV’s shares, bought mostly in 2012 at slightly higher prices than today.
* I calculate NOV’s Intrinsic Value at $92 per share, with today’s $61 price offering significant upside.

Company:
National Oilwell Varco Inc. (NOV) is a U.S. company that provides oilfield services, equipment and parts used in oil and gas (O&G) drilling and production. The company conducts operations in more than 1,200 locations across six continents.

NOV’s closest peers and competitors include companies like Schlumberger (SLB) and Halliburton (HAL).  Some industry analysts have suggested NOV would be a wonderful takeover target.

NOV’s fortunes are tied to O&G prices, which affect exploration and production companies’ inclination to drill for oil and gas.  Citigroup analyst Scott Gruber suggests we may be nearing “peak pessimism” for oil services stocks.  Meanwhile, Gruber says oil services stocks tend to stop falling as oil reaches “unsustainably low” levels, and investors appear to be through much of their selling as valuations have fallen so low.

Valuation:
In the last decade, NOV has grown revenues more than 10-fold .  Meanwhile profit margins have nearly doubled, leading to a veritable oil gusher of earnings and free cash flow.  NOV has almost no debt and easily supports its current 2.9% dividend yield.  By all accounts it is a well managed company and has caught the attention of Warren Buffet, who’s Berkshire Hathaway currently owns about 1.5% of shares.

My discounted cash flow valuation for NOV, applying my interpretation of Buffet’s ‘Three Pillars of Value’ methodology, is:

NOV just misses on a few of my valuation targets.  Normalized Free Cash Flow Yield is just below my desired 10% threshold, and Price to Peak Earnings is just a hair above my target of 10.  Yet given this is a wonderful a company at what I consider a very fair price, I initiated a position today.  If 2015 turns into a bear market/recession, then perhaps NOV price moves lower.  But I consider this a long-term position, and hopefully will have the fortitude to add to the position if the price falls further.

Allocation:
At today’s price of $61.50, NOV is offering a 33% discount to Intrinsic Value.  I used my Kelly Formula spreadsheet to determine a 4% portfolio allocation.

Technical:
I did not analyze NOV to see what Technical Analysis had to say about the stock.

Summary:
This is the second energy-related stock (CBI being the other) which I’ve recently purchased.  Both are in Berkshire Hathaway’s portfolio as well, and I feel fortunate to have been able to purchase each at less than the reported entry prices for Berkshire.  The dramatic fall in oil prices is offering a great opportunity to long-term investors.