NOV is an oil & gas equipment & service company that provides a cornucopia of diversified and comprehensive products to the upstream energy sector. NOVs three revenue segments are: Rig Technology (48.6% of FY2013 sales); Petroleum Services & Supplies (30%); and Distribution & Transmission (21.4%). NOV has 64,000 employees who operate more than 800 manufacturing and sales centers across the globe. NOV is truly diversified geographically with revenue generated from the United States (35% of FY2013 sales), Other (20.9%), South Korea (14.1%), Singapore (8.1%), Canada (6.1%), Norway (4.8%), China (4.4%), Brazil (3.5%), and the UK (3.1%). INVESTMENT THESIS
While NOVs EV/EBITDA multiple historically trades at an average discount of 9.4% to the index of its peers on a three- year basis. This discount has recently expanded to ~20% because of: 1) Declining margins across its revenue segments; 2) Investors awaiting the completion of the spin-off of NOVs Distribution & transmission segment; and 3) draconian market reaction to its recent earnings announcement and accompanying guidance for short-term decline in rig technology backlog, which sent shares down 7.4% on the day. This pull-back provides the Owl Fund with an attractive entry point to invest in NOV, the largest and most experienced equipment provider to the Oil & Gas industry. NOV maintains a wide economic moat derived through brand equity, economies of scale and scope across the energy sector value chain, and a successful M&A track record. As an Equipment & Service provider, NOV earns its revenue free from direct commodity price volatility and possesses long-term industry tailwinds in global deepwater E&P spending and shale gas development. NOV will witness modest multiple expansion in the short-term as the spin-off of its Distribution & Transmission segment focuses NOV into a higher margin business overall and the company distributes cash raised to shareholders. NOV also expects to realize the first revenues from its flexible plant in Brazil in 2Q2014 which had seen challenges becoming operational. Based on the aforementioned catalysts, NOV provides exceptional value and opportunity for the Owl Fund. We rate the company a strong Buy with a price target of $92.73 indicating a 18.7% return.
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National Oilwell Varco Exchange: NYSE Ticker: NOV Target Price: $92.73 Current Price: $78.11
Sector Outperform Recommendation: BUY
All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl Fund does and seeks to do business with companies covered in its research reports.
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Page 2 CATALYSTS
Presently, NOV is in a transformational time in its history. The company has been battling short-term headwinds while juggling the restructuring of its business into new reporting segments, integrating past acquisitions, and completing a spin-off. Investors are ripe with uncertainty, but with many growth prospects, industry-leading management, and long-term growth prospects, we feel there is no better time to enter into a position in this undervalued stock. Below is a synopsis of catalysts which will drive NOV to its fair value.
Rig Technology Margin Expansion NOVs rig technology segment is the highest operating margin segment (24-25%) which includes both offshore and onshore equipment. Margins, however, have been compressed by a storm of factors including: less favorable product mix, absence of learning effect efficiency from the launch of new rig floor layouts, a congested supply chain from a bloated backlog, poor pricing within the backlog, and other related marginal cost increases. These factors caused margins to compress precipitously from 26% in 2011, to 21.1% as of 1Q2014. While it has taken considerable time and effort to correct this downtrend, NOV will see steadily increasing margins through the remainder of FY2014 to a level of ~24% by the exit of FY2015. Key drivers to margin increase is the return to a more favorable product mix thanks to returning onshore demand, an alleviating backlog, fruition of past capacity expansions, and the return of learning effect.
Distribution Segment Spin-Off NOV announced the spin-off of 85% of its Distribution & Transmission segment which is expected to be $4.5 billion of the current business. This spin-off will unlock value for shareholders in a multitude of ways. Higher Margins Overall: By spinning off the lower margin (4.8% operating margin in FY2013) distribution segment, NOV will realize immediate higher margins overall, aligning it more closely with the higher valuations of its pure equipment manufacturing peers. Refocusing on Core Competencies: NOV believes this business has enough legs to run on its own and by focusing on its core equipment and services business it can realize financial and operational improvements more quickly. M&A Activity / Cash Return: This spin-off will yield immediate cash flow to NOV which can be deployed to the benefit of shareholders either through capital return or growth. NOVs Board of Directors believes investing in future returns of the business is paramount which is indicative of NOVs acquisitive nature (27 acquisitions since 2009). Management and IR have both guided that NOV paused M&A activity after its $2.4B acquisition of Robbins & Myers in 2012 and has since fully digested its integration. NOV is currently seeking new deals which will differentiate its product offering or improve its cost structure. Concerning returns to shareholders, the company favors dividend increases over buybacks. NOV increased its dividend 100% in May of 2013 to its present yield of 1.3%, representing a dividend payout ratio of merely 16.7%, leaving ECONOMIC MOAT Summary: NOV has a wide economic moat Brand Equity: NOV has been an industry leader for over 140 years. Its name commands significant brand name recognition and a great reputation. Its products serve as benchmark for other providers. Depth of Installment Base: Due to NOVs dominant market share, it has many legacy products out on the market which require routine maintenance and workover. As more products are sold, NOV grows its recurring revenue base more than its smaller competitors. Customers incur higher switching costs because maintenance is contracted by NOV upon purchase. Scale: NOV has a dominant market share and its products can be found in 90% of the worlds deepwater rigs. This scale was achieved when NOV moved the drilling industry to accept more standard rig designs. As NOV build more new design rigs, it will again realize learning curve effects, similar to
RISKS E&P Capital Spending: National and International oil company spending in deepwater and unconventional shale plays impacts their spending on capital equipment. Contract Driller Day Rates: Supply & demand forces in the contract drilling space has a lagging impact on demand for NOVs rig technology segments, particularly in new builds. M&A Risk: Despite its track record of moving efficiently through M&A processes, NOV runs the risk of overpaying for future acquisitions or failing to integrate legacy infrastructure in a timely fashion. Commodity Price Volatility: Although indirectly affected by commodity price changes, NOV remains susceptible to major swings in oil commodity markets.
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Page 3 NOV ample running room to distribute FCF to shareholders while also growing the business.
Brazil Flexibles Plant Completion NOV made its largest capital expenditure ever in the building of a flexible plant in Brazil, which is expected to come online in 2Q2014. This new plant will add capacity to NOVs Petroleum Service & Supply segment, boosting revenue and margins. NOV is capitalizing on the explosion of drilling activity in South America, particulary in Brazil and Argentina. The plants location in Brazil will allow NOV to get its flexible products to market faster, reduce shipping costs, and be more responsive to shifting supply and demand forces in the area.
BUSINESS SEGMENTS Rig technology: (48% of the revenue, 60.8% operating income) This segment generated more than $11.7B in revenue for the FY 2013 which represents a 16% increase on a YOY scale. The rig technology segment designs, manufactures, sells and services systems for the drilling, completion and servicing of oil and gas wells. Most of the products result from a high-engineered work which automates productions. The demand from this segment is mainly driven by the capital spending of the drilling contractors, oilfield service companies and oil & gas companies. NOV has made strategic acquisition in this domain in order to enlarge its product portfolio and its geographic expansion as well. Petroleum Services & Supplies (30% of the revenue. 32.4% operating income) This segment generated more than $11.7B in revenues during the FY 2013 which is an increase of 3% on a YOY scale. This segment provides different consumable goods and services used in oil & gas wells. This segment manufactures rents and sells different equipment used to achieve drilling operations. Demand from this segment is directly linked by the level of oilfield drilling activity in the whole industry. Distribution & Transmission (22% of the revenue, 6.8% operating income) This segment generated more than $5.1B in revenue which represents a 30% increase from 2012. This segment provides pipe, maintenance and repair for onshore and offshore drilling locations, pipeline operations and industrial sites. Demand for this segment is linked to the level of drilling, servicing, and oil & gas production activities. In a same way, this segment is influenced by the US economy as well as government regulations and policies.
INDUSTRY OVERVIEW
NOV, or No Other Vendor, has been a dominant player in the oil & gas equipment &services business for over 140 years. 90% of the worlds onshore and offshore rigs have a piece of NOV equipment onboard and NOVs growing installed base of products provides its economic moat of high switching costs for customers. NOV superior products and global presence allows them to produce and service its products anywhere in the world.
Offshore Themes NOV manufactures offshore drilling rigs capable of drilling for oil at a variety of depths and mostly fall into one of three categories: jack-ups, floaters, and drill ships. Each are used to drill for oil at different depths and in different scenarios depending on the reserves location.
Worldwide Jack-up Fleet Aging Overall, the jack-up rig fleet is aging, with 68% of the fleet over twenty years old. More and more drilling operators are retiring these aging rigs in favor for newer, more technically advanced rigs. These newer rigs drill oil more efficiently, require less maintenance, utilize more automation, and are above all, safer. As a result, newer rigs garner higher day rates, which is imperative in the current high-supply rig environment. Simply put, newer rigs have contracts and older do not. Operators with older fleets see their rigs go un-
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Page 4 contracted and they are forced to stack them, or take them offline as to avoid burning through cash keeping them online without cash flow. NOV delivers about 50 jack-ups to the market each year as this tailwind sends them more business.
Deep and Ultra-Deepwater is the Future E&P companies target and develop reserves providing the lowest marginal cost barrel of oil. As a result, shallower more easily accessible reserves are developed and depleted before deep, more expensive to develop reserves are produced. As fewer shallow reserves remain, and oil prices are above $80/barrel, more unconventional deepwater reserves are economic to produce. These deepwater plays cannot be accessed by jack-ups and can only be tapped by floaters or highly sophisticated rigs that float at the oceans surface and remain in position using global positioning systems. These highly advanced rigs are very expensive and also provide higher margins for manufacturers like NOV. A key trend supporting NOV in the long-term is the build-out of national and international oil companys deepwater fleets.
Onshore Themes
Proliferation of Shales Recent technological advancements have led to a natural gas boom in the United States and across the globe as E&Ps can extract unconventional oil & gas economically. NOV markets a diversified product mix of onshore rigs, drill bits, top drives, coil tubing, downhole tools, flexible pipes, and all other necessary components to extract oil & gas. NOVs products are heavily used in E&P companys multi-stage hydraulic fracturing operations throughout the world. Natural gas drilling has shifted to a 24/7/365 activity which is seen in increasing levels of utilization. As more wells are drilled , average footage drilled per well is increased, and equipment is worked harder, NOV sees more business in its onshore newbuild, workover, and consumables business segments.
ACQUISITIONS
NOV is a highly acquisitive company having made 27 acquisitions since 2009. NOVs most notable acquisition was made in August of 2012 when they acquired Robbins & Myers. The deal was worth $2.4 billion and was NOVs largest acquisition of all time. NOV used $1.1 billion in cash to pay for the acquisition, and borrowed approximately $1.4 billion under the $3.5 billion revolving credit facility. Prior to the Robbins & Myers acquisition, NOV held very low debt levels. Robbins & Myers stood as a leading supplier of engineered, application-critical equipment and systems in global energy, chemical and other industrial markets. NOV acquired Robbins & Myers in an attempt to expand its product offerings and customer base. Earlier in 2012, NOV also acquired Wilson International for $800 million, NOV plans to use Wilson International as the distribution arm of its business. The acquisition of Wilson International, Robbins & Myers, and CE Franklin led to a 30% increase in revenue for NOVs distribution and transmission segment. NOV expects to fund future cash acquisitions primarily with cash flow from operations and borrowings, including the un- borrowed portion of the revolving credit facility or new debt issuances; however NOV may also issue additional equity either directly or in connection with acquisitions. The table on the right shows NOVs most significant acquisitions.
Company Date Deal Value ($ mil) EV/Net Sales Robbins & Myers 2012 $2,435 2.39 Wilson International 2012 $800 N/A NKT Flexibles 2012 $672 141.79 CE Franklin LTD 2012 $213 0.39 Ameron International Corp 2011 $640 1.28 Scomi Oiltools-Certain Assets 2011 $25 N/A Advanced Production & Loading 2010 $431 N/A Prosafe PLC-Turret, Swivel 2010 $165 N/A Amber Lone Star Fluid Svcs LLC 2010 $48 N/A Hochang Machinery Ind Co LTD 2009 $160 N/A NOV M&A
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Page 5 FINANCIALS
Revenue In FY2013, NOV earned total revenue of $22.9B (3-year CAGR 23.5%). Most revenue (48.6%) was earned by NOVs Rig Technology segment. This segment grew 16% YOY in FY2013 (That segment has been strongly supported by major capital expenditures accomplished through the cash flow generated by contractors and services from drilling activities, completion, increase in rigs construction and recent update of old equipment by major oil companies. The segment also experienced an increase in its backlog revenue by 14% YOY. The aftermarket segment mainly composes non-backlog, workover revenue increased by 15% YOY compare to 2012. In 2013, the acquisition of Robbins & Myers definitely helped to increase the revenue of the Rig Technology segment. Moving forward, NOV closed four orders deep-water floating rig equipment packages, and twenty five drilling equipment packages for jack-up rigs which contributed $3.6B during the 4Q2013. NOV expects long term future revenue growth for offshore rig construction as E&P build out their deepwater fleets. Additionally, after NOV completes its spin-off, the company will realize be able to drive growth in key markets such as China, Russia, Mexico, Argentina, and Canada given the distribution businesses greater reach. For the Petroleum Services and Supplies the slight increase of 3% in revenue on a YOY scale has been allowed thanks to the drilling and completions activities in Canada which overall off-set the cyclical slow-down in the US. Thanks to this increase in demand from Canada, NOV has been able to expand itself by 1% in this segment. However, oversupply in the United States combined with a flat rig count contributed flat demand for drill pipe as well as downhole tools. Finally,the international segment experienced the biggest increase in revenue by 18% due to large year-end projects shipments where the international rig count increased by 5% YOY. The distribution & transmission segment experienced 30% growth . This increase is the result of the Wilson acquisition which occurred during the 2 nd Q of 2012 followed by the acquisition of Franklin in the 3 rd Q 2012. However, the US segment decreased by 8% YOY due to bad weather conditions which caused fewer billing days available in the 4thQ 2013.
Backlog - a Glimpse into the Future NOVs backlog currently stands at a record high $16.3B, growing at a 5-year CAGR of 20%, with 93% allocated to offshore equipment and 94% destined for international markets. NOVs backlog only comprises rig technology capital equipment orders of $250,000 or more and these orders also require a down payment. As mentioned above, NOVs rig technology sector constructs jack-ups, floaters, and other offshore rigs, along with other long-term projects which require +2 years to complete depending on levels of customization, learning curve effect of skilled workers, and supply chain efficiencies. As new orders are received, they are moved into a queue. This queue is moved into work in progress and as orders are completed they are billed and recognized as revenue. As NOVs backlog serves as a leading indicator of guaranteed future revenue, the market pays close attention to not only its value, but its growth. Slowing backlog growth can be an indicator of softening demand for a manufacturer, yet there is some devil in this statistics details. Too large of a backlog can impact a companys supply chain and increase marginal costs. NOVs huge backlog was detrimental to margins in the near term.
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Page 6 Book-to-Bill Ratio The Book-to-bill ratio is an industry-specific ratio expressed as # of incoming orders to backlog : # of completed orders exiting the backlog. Aside from monitoring backlog value on an absolute basis, this ratio values it on a relative basis, with a ratio less than one indicating shrinking backlog and a ratio greater than one indicating a growing backlog. EBITDA
Since FY2010, NOVs EBITDA has been growing at a CAGR of 21% until FY2012. Since then, EBITDA has stayed flat at $4.25B. NOV is expected to reach an EBITDA level of $5.2B in 2015 which will represent 20% growth during the period. This impressive growth will be the result of a resurgence in onshore demand for rigs and consumables, as well as expected EBITDA from future acquisitions.
Margins
NOV currently maintains a 24% gross margin for 2013 and an 18.5% EBITDA margin, and a 10.3% net income margin for the first quarter of 2014. Our DCF model projects a gross margin expansion leaving the gross margin at 25% and a 19.5% EBITDA margin. This is indicative of the completed spin-off of its distribution segment. NOVs rig technology margins have steadily declined since mid-2010 due to an adverse mix shift in the segment, lower-margin acquisitions, and taking on additional expenses in order to support several strategic growth initiatives. The adverse mix shift was a result of offshore contracts contracted at higher prices in 2007 and 2008 which were then completed in low cost environments in 2009 and 2010. As these projects have reached completion and been replaced with lower priced projects, rig technology margins have experienced a steady decline. NOV has moved through the lower-margined segment of its backlog and will recognize higher margins going forward in FY2014. Margins will NOVs petroleum services segment experienced increased revenue of $155 million operating profit of $23 million YoY in 2013 despite flat demand, as a result pricing pressure and under absorbed facilities continued to pressure margins. Overall, as commodity prices rise and drilling activity increases in North America and internationally, NOVs margins should rebound. Orders for new deep-water drilling rigs have steadily risen and the rig technology segment continues to enjoy high day rates for offshore rigs. Despite the positive outlook, NOVs margins may have difficulty expanding beyond current levels due to due to lower- margin contributions from recent subsea production equipment acquisitions, a bearish outlook for land drilling, workover and pressure pumping equipment markets in North America. Low gas and natural gas liquids prices as well as higher costs of execution due to significantly compressed
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Page 7 project timelines may also hurt margins. A steady flow through of lower priced projects and incremental expenses to support long-term strategic growth initiatives will also contribute to margin stagnation. Earnings
NOV recently reported earnings, with a Q1 EPS figure of $1.40, two cents above analyst estimates. NOV posted quarterly revenue results of $5.78 billion missing the consensus estimate of $5.8 billion. The revenue figure translates to a 6% decrease quarter over quarter. Despite the miss on revenue, the company saw backlog for capital equipment orders for its Rig Technology segment at March 31, 2014 reach an all-time record of $16.35 billion, a one percent increase from the 4Q 2013, and 27% from the previous years same quarter. New Rig Technology orders during the quarter were $2.33 billion further showing the strong demand for oilfield equipment and NOVs dominant position in the market. Dividend
NOV has been consitently paying dividends to its shareholders for the past 10 years. In the previous quarter, NOV announced a strong dividend on February 27, 2014 of $0.26/share. That is a 100% increase relative to its previous years dividends. The strong dividend increase can be attributed to NOVs ongoing and accomplished investment in different technologies, new products and facilities. However, investors must ask, can NOV sustain this increase in dividends. NOV has been able to generate a strong cash flow which can cover both dividend payments as well as capital requirements. By the end of the FY 2013, NOVs operating cash flow was $3.3B, however dividends were only $389M and Capex was $669 million. NOV is only paying a mere 16.7% of its net income in dividends. Moving forward, the spin-off from its distribution and transmission segment will help NOV focus on its two main other segments. Through recent acquisitions and investments the company faces solid financial health; the strong dividend growth is certainly repeatable. As NOV prefers to return cash to shareholders in the form of dividend increases, it typically does not do initiate share repurchases. Debt
Total Debt: $4.78 Billion Debt to Equity: 14.17% Interest Coverage Ratio: 30.8
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Page 8 At the end of the FY 2013, NOV had accumulated a total debt of $3,149M vs. $3,148M in 2012. Looking back even further one can see that the total debt increased significantly going from $159 million in 2011 to $3,149M today. This significant increase can be explained by the fact that NOV has made several strategic acquisitions since 2012 as well as new technologic developments. The current debt-to-equity ratio is 14.17%, below the industry average. NOV has also been able to keep sustain a quick ratio of 1.04 meaning that the company will have no problems meeting its short term obligations. Free Cash Flow
NOVs free cash flow reaches $2.7B which provides the company a stablity and security to cover the dividend payments. NOVs free cash flow has significantly increased since June 2013 going from $40M to $2.7B, this translates to an increase of 6650% in a period of less than a year. This increase has been made possible due to new record highs in the change in inventory as inventory increasing by 943% going from -$492 million between 2012 and 2013, reaching approximately $500 million. Moving forward free cash flow is expected to slightly decrease during the FY2014 and is expected to rebound in FY2015 to reach almost $3B. The decrease in 2012 can be attributed to a decrease in cash from operating activities. NOV saw its accounts receivable decrease by more than 100% going from - $474M in 2011 to -$1149M in 2012 as well as its change in inventories which decreased by 100% going from -$591M in 2011 to -$1061M in 2012 and change in Inc. Taxes which decreased by 244% going from $283M in 2011 to - $409 in 2013. NOV has already recovered from this decrease and is expected to move higher in 2015 due to its spin-off and its backlog orders which will help the company elevate its margins.
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Page 9 PEER GROUP IDENTIFICATION This peer group includes the other members of the S&P 500 Oil & Gas Equipment & Services index which were chosen based on related business operations and geographic distribution. Baker Hughes Inc. (NYSE: BHI) Cameron International Corp. (NYSE: CAM) FMC Technologies Inc. (NYSE: FTI) Halliburton Co. (NYSE: HAL) TARGET PRICE After deriving price targets using historical average valuation ($92.73), implied relative valuation ($95.32), and DCF valuation (EM: $93.16; GP: $93.82), we opted for the most conservative of our results: Historical Valuation. Historical Average Target Price = $92.73 Target Multiple EV/EBITDA = 8.0x NTM Consensus EBITDA = $4,903mm Projected Capital Return: 18.7%
VALUATION
UNDERVALUATION
On a 3-year EV/EBITDA basis, NOV has deviated below where it normally trades on a historical average and relative to its peer group. Given NOVs pending D&T segment spin-off and expected cash return to shareholders, strong earnings potential, and strong FCF we believe NOVs shares are currently undervalued and present a favorable risk/reward scenario. NOV has clearly been hurt by declining demand for new rigs within the U.S. onshore market and recent operating margin disappointments; both factors have significantly weighed down the stock. Investors have overreacted to the soft conditions now seen in U.S. land drilling, where rig counts have dropped. Towards the end of 2012, the stock was cut from equal weight to overweight due to NOV providing guidance that backlog had peaked and was decreasing, however the speculation was false. At the beginning of 2013, NOV had reported that rig technology sales were down 10%, this led to shares being sold off 6.2%, NOV subsequently announced that they were acquiring Robbins & Myers. Recently, NOV was subject to a hard sell off as investors overreacted to disappointing earnings, and weak guidance. Revenue for the first quarter of 2014 was down 6% in a sequential basis. While the backlog of equipment orders came in $16.35 billion the market was disappointed with new orders being booked which came in at just $2.33 billion. Without the adequate capacity, NOVs large backlog strained its supply chain and created marginal cost increases. Management stated that NOV processed $8.7B of its backlog in 2013 and expects to bill $8.8B in 2014. The current $16.3B backlog total effectively represents two years of revenue for NOV. In the recent 1Q2014 earnings call, management highlighted that NOV currently has a record backlog value, which it guided would deflate to about $14B to $15B by the end of FY2014. Along with missing margins, when investors heard this guidance, they overreacted and sold off NOV.
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Page 10 Comparable Analysis
Peer Group Identification
Baker Hughes Inc. (NYSE:BHI) - Baker Hughes supplies oilfield services with high-performance drilling, evaluation and completions, production technology and reservoir consulting in more than 80 different countries. Thanks to its solutions, Baker Hughes are considerably reducing costs and risk as well as improving productivity for its clients in the oil and gas industry. Cameron International Corp (NYSE: CAM) - Cameron International Corp is a leading supplier and manufacturer of flow equipment products, systems and services in the oil and gas industry operating at a worldwide scale. However, 2/3 of its business comes from operations located outside the United States. They are operating through 3 main segments which are: DPS (Drilling and production systems), V&M (Valves and Measurement) and PCS (Process & Compression Systems). FMC Technologies Inc. (NYSE: FTI) FMC Technologies Inc. supplies energy technology solutions for subsea production and processing systems, surface wellhead systems, high pressure fluid control equipment, measurement solutions and loading systems for the oil & gas industry. FTI is currently operating across 30 production sites through 17 different countries. Halliburton Co. (NYSE: HAL) - Halliburton is the worlds largest supplier of services and products for the production of oil and natural gas, development and exploration in the upstream industry through more than 80 different countries. Their main geographic locations are divided between North America, Latin America, Europe, Africa, and Middle East/Asia.
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Page 12 DISCLAIMER This report is prepared strictly for educational purposes and should not be used as an actual investment guide. The forward looking statements contained within are simply the authors opinions. The writer does not own any National Oilwell Varco Inc. stock. TUIA STATEMENT Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his tireless dedication to educating students in real-world principles of economics and business, the William C. Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging, practical learning experience. Managed by Fox School of Business graduate and undergraduate students with oversight from its Board of Directors, the WCD Owl Funds goals are threefold: Provide students with hands-on investment management experience Enable students to work in a team-based setting in consultation with investment professionals. Connect student participants with nationally recognized money managers and financial institutions
Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs and partial scholarships for student participants.