$DNOW：这家“无聊”的分销商，凭2029年业绩可能翻倍 | Firebird Management

You're about to listen to yet another value podcast with your host me, Andrew Walker. Today I have Steve Gorelik on from Firebird. This is his third time on the podcast, and we're talking about DNOW. DNOW is a distributor mainly focused on oil and gas. DNOW is in upstream, midstream, and downstream; they're all over oil and gas.

When Steve told me what we were talking about, I said it's funny because distributors are such a boring business. You say you've got a distributor, and there's not a ton to talk about. But while they're boring, talk to a private-equity firm about a distribution group and they're anything but boring to the private-equity firm, because these businesses are low-capex, very sticky, very difficult to replicate, and have huge roll-up opportunities.

Think about Fastenal or WESCO. These are businesses that, in both the private and public markets, have returned fortunes because if you can just buy them and hold them, they tend to do really well. Steve has a really interesting view on DNOW. This was spun off 10 years ago, and he thinks the environment is setting up with trough multiples, trough valuation, and trough everything. They point this out in their proxy, too, and they just did a merger; the integration is behind them, and free cash flow is set to explode. I think he lays out why he thinks the stock could really work from here over the next few years.

So, we're going to get to Steve in one second, and I will include a link, I believe, to both his Substack and a presentation, the DNOW presentation, in the show notes so you can go look at those in the show notes. First, a word from our sponsors. Today's podcast is sponsored by fiscal.ai. Fiscal.ai is the modern financial data provider for global equities. Look, that's what they have me tell you. But let me tell you how I've been using fiscal.ai. And I'll remind you: I'm a customer. I paid with my own money to connect to the fiscal.ai API. There's two things that I've really found it useful for.

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All right. Hello and welcome to the Another Value Podcast. I'm your host Andrew Walker. With me today, I'm happy to have on for the third time, Steve Gorelik from Pirate Road Management. How's it going, Steve?

It's going pretty well. Thanks for having me back.

I'm super excited for this. I really liked the last one we did on Molina. This might not be quite as juicy, but it's still a very interesting name that I've had a lot of notes on over the years. We'll get there in a second, but first disclaimer. Remind everyone nothing on this podcast investing advice always true. Please check out the disclaimer in the show notes or at the end of the show.

The company we want to talk about today is DNOW. The ticker is DNOW—D-N-O-W. I'll toss it over to you: What is DNOW, and why is it so interesting?

It's going pretty well. Thanks for having me back.

DNOW is an oil-and-gas distributor. It was spun off a few years ago from National Oilwell Varco, or NOV. It used to be their in-house distributor, while NOV was a producer of certain equipment for the oil-and-gas industry. They spun off this company, which is quite a different business: an oil-and-gas distribution business. Historically, they have been primarily in what's called upstream and midstream. So you're thinking about extracting oil and then pipelines and things like that.

After the company was spun out and became a separate public company, it has been growing primarily through acquisitions. In a typical distribution business, you quite often see a lot of fragmentation in the industry, with a lot of mom-and-pop shops that have particular relationships with particular clients. It makes sense for a larger player with a cheaper cost of funding to acquire those smaller companies and consolidate the orders into fewer centers, making them more efficient. As a result, you get fairly good, efficient growth and returns on capital. This is a playbook we've seen for high-quality distributors in many different industries, and I think oil and gas is no different.

This is private-equity roll-up 101, right? Distributors, lots of leverage, roll them up, and IPO into the public markets that love these.

I would say the leverage point is quite interesting because, up until recently—and we're going to get to that transaction, I'm sure—the company actually did not have a lot of leverage. The transactions they were financing were being done at a relatively low multiple, especially once you take into account the synergies they had produced from the combined companies.

The company actually did not have a lot of leverage until recently, and it still doesn't. But now it does have some debt that it acquired in this latest acquisition, which is a big part of what's going on right now and what makes the company attractive, as well as the potential here.

I want to get to the acquisition and the present day. I know one of the reasons you came on is because you pitched this at a conference, and people came to you and said, “Steve, this is a really good pitch. Go on the podcast and talk about the pitch.”

But I do want to back up a bit. I remember this company; it was spun off in late 2014, around when I was starting as a public-markets-focused professional investor, let's say. I remember this company getting pitched back then, right? What does everyone like? Spin-offs. A spin-off that was captive to one customer, a distributor, with a big roll-up opportunity—everybody loved this.

If I just look at it, the stock spun off at $35. Within a year, it was trading at $13. As you and I are talking today, it's trading at $15.70, right? So the stock is down from the spin-off and flat over a 10-year period. I know people who took 10% positions when this spun off and loved it: “This is going to the moon.” Why hasn't this worked over the past 10 years?

I think that's where the macro part of the story comes in. I think that also makes it quite interesting, because 2014 happens to be probably the last peak of oil-and-gas investment globally.

One of the ways that you measure the intensity of how many people are looking for oil—there's a lot of it in the shale plays we have in the country—is by the number of rigs operating in the United States. Back in 2014, there were 1,800 rigs in operation looking for oil and gas and trying to extract it. Today, that number is below 600.

That is the explanation for why this company has been operating in an environment in which the addressable market has shrunk dramatically. We didn't own it in 2014, and arguably it was a good company. We can discuss what happened after that and how hard they had to work to stay in place from a point of view of their earnings. The earnings they generated came in an environment in which the addressable market had shrunk dramatically.

This is not the type of company that would be interesting to me if I believed this was a market that would continue to shrink from here. But I think there is something happening here. I don't know if you feel comfortable switching to that right now; we can get to that later. What is happening today in the oil-and-gas markets is that we have the potential to at least stabilize, if not grow, investment in oil and gas from here.

Let's step back for a second. What do they do?

For upstream and midstream, they sell essential parts. A lot of these are consumables for companies that are trying to get oil out of the ground.

I think the major reason for that is what is happening with the Strait of Hormuz and Iran. If you look at the historical periods of disruption, we have to go back to the 1970s, when it was somewhat similar. You had the Iranian Revolution and then the oil embargo. In both cases, what was disrupted, or impacted at the time, was about 7% of oil and gas production in the world.

As a result of that disruption and its impact on the global economy, the world realized that it cannot rely on supply coming from a particular area when supply and demand are so tightly balanced. Today, daily consumption of oil is something like 102 million barrels per day, while production is around 103 or 104 million barrels per day. The world looks at that and says, “There’s excess oil,” but we’re also operating at 99% capacity utilization.

When we have a disruption like we have today, where 20% of the supply is shut down—not 7%, as we were talking about the last time—that results in massive investment in oil and gas exploration in other places, so we’re not too dependent on the Middle East. That investment benefited a lot of companies around the world that participated in oil and gas investment, including the distributors that were there at the time.

As a result, there were massive finds of oil, including the Gulf of Mexico, a lot of the fields in Mexico and Cantarell, and North Sea oil. None of those sources were really on the map in terms of where the oil was coming from before the 1970s. Once the world realized that it could not depend on one region, or at least not as much as it used to, that exploration and investment happened.

Today, 20% of the supply has been shut down, not 7%. I would argue that we saw the impact of that. You saw the airlines in Asia not really knowing where they were going to get jet fuel or whether they could operate 2 or 3 months down the road. They seem to have worked it out more or less, but there were different reasons why, despite the fact that 20% of the supply was disrupted, the impact has not been more severe.

It looks like a lot of inventories, especially in places like China, have been drawn down. That is not sustainable. You start seeing changes because there are quite long lead times from the time you decide that you need to look for oil until you actually start investing in it. We’re starting to see an increase in investment as well, because the current level of investment, if we go back to 2014, is 40% below 2014 levels globally, both in nominal and real dollar terms.

That was just enough to keep oil at a level where supply matched demand. If you want to have a bit more spare capacity to make sure that your economy doesn’t go off the rails, you’re going to start looking for oil in other places. We’re starting to see that as well.

In the U.S., we’re talking about rig counts. I think we’re around 590 right now. Six months ago, we were at 530, so we’re already seeing about a 10% increase in the number of rigs in the United States. That is actually helping companies like DNOW. You don’t see that yet, but they just reported Q2, which already showed around 10% growth quarter over quarter in revenues, for various reasons. I think it’s just the beginning of what we could be seeing from this company.

Let me hop in here, and I want to mention 2 things before I do. Number 1, you and I had this podcast planned a month or a month and a half ago. They reported earnings last week, and the stock is up around 10% to 15%. We’ll talk about price targets and everything, so there has been a jump. But I don’t think you’re taking a victory lap. I’ve had people come on when the stock is up 20% and want to take a victory lap. I don’t think that’s what you’re doing. I think, as you said, you think this is just getting started.

The reason I mention last week’s earnings is that I read them to prepare for this, and you could hear the CEO come on and say, “Business is firing on all cylinders.” There’s all this interest and all this sort of stuff. But let me try to gently push back on this. I definitely hear you, but at the same time, even before this, you had 2022 with Russia and Ukraine. I don’t think people thought there was going to be a tremendous amount of investment. I think we were in a “drill, baby, drill” environment for a large part of the DNOW thesis.

If you had said, “The world is going to increase investment in spare capacity,” I might say yes, and I might say no. But is that really going to come from the U.S.? Is there so much slack in the U.S.? A lot of the energy bulls, before Ukraine and before the Strait of Hormuz, were pointing to U.S. shale and saying, “Shale is kind of rolling over. All these wells are tapped out. We’re actually going to start declining.”

Even if you are right that there’s going to be this big investment, energy is all about signals. Oil at $80 is sending a signal: “Drill, baby, drill.” Oil at $60 or $65 is sending a signal: “Maybe run these for cash flow.” Oil is at $80 right now, but even if it’s “drill, baby, drill,” isn’t that going to happen outside the U.S.? Or are you betting on this macro trend going somewhere else?

No, that’s a great question. I think it’s going to be a combination of both, because people are going to be looking for oil anywhere they can find it. You mentioned oil prices of $60 and $80—we saw $100, and I think we’re around $90 today. What’s interesting is that if you look at the price of Brent out to 2030 in the futures market, it actually hasn’t moved that much. I think in January we were at $65, and now we’re at something like $68. I haven’t looked at these numbers in a couple of days, but when I looked at them, it was surprising to me how complacent the world seems to be that oil is going to be there by 2030.

In the short term, why might we see investment in places like shale? These are projects that have smaller upfront investments and faster payback periods. There are certain projects that may have been economical at $80 but not economical at $60, and I think that’s part of the reason you’re seeing an increase in rigs in the U.S. right now. These are the types of projects that are being tapped.

As far as U.S. oil and gas rolling over, part of the argument is that production in the U.S. kept growing despite the number of rigs coming down over the years. Each rig was becoming more and more efficient because it was producing more and more oil. Essentially, it was becoming better at extracting oil and gas from the same place. It seems like that may be starting to tap out to some extent.

In order to keep production at the same level, I think you might actually need more rigs as well. That’s part of the argument there. But to me, we’re getting so much into the macro. This is partially just a company-specific story as well. If we’re going to get the macro angle here, then I think this could work very well. But even without it, I think this is a company that has shown—if you look at its results over the last 5 years or so—that in an environment in which oil and gas investment has been declining, it still managed to do pretty well. It still managed to increase its profit margins and its profitability as well.

No, I completely hear you on the macro versus micro. You talked a lot about the macro, and I’m just trying to follow where the conversation goes. Let’s turn a little bit more to the micro. You laid out a big piece of it with oil and gas, but they did the MRC Global acquisition.

I’ll open the door for you to talk about MRC Global, but I’ll just note that it’s funny: I had Claude go through all my notes as I was preparing for this podcast, and it said, “You don’t have crazy amounts of notes on DNOW, but you have a lot of notes on MRC Global from a couple of years ago.” One of the notes says, “MRC Global and DNOW would be a perfect fit.”

On top of the oil and gas opportunity, MRC Global had, as you alluded to, a lot of midstream exposure. That midstream exposure is really interesting because they say on the call, “Hey, it got us a lot of water exposure, water maintenance, and water projects.” It also got them some data center exposure from the midstream business, especially with gas going to data centers. When you say water and data centers, I think people’s ears perk up.

I’d love to ask you about the MRC Global–DNOW merger overall. I think that can get us to the IT integration, the synergies, and all that sort of stuff, as well as some of the businesses that came with MRC Global that I think are really where the puck is going. We can talk about those if that makes sense.

Sure. In terms of the combination of the 2 companies, I think you’re absolutely right. If you look at it purely on paper, the combination of the 2 companies makes sense. DNOW historically was in upstream and midstream. It was involved in getting the oil out of the ground and the pipes, and then MRC was mostly in downstream and utilities.

So downstream is petrochemical companies, refineries, etc., and utilities are utilities, right? What you're talking about is a supplier that all of a sudden would be able to cover the whole oil and gas supply chain, from getting oil out of the ground to getting the product or electricity into your home or business, etc. But within that, some things are actually similar: some of the parts are similar, some of the customers are similar, and other customers are different. If you think about what an oil well needs versus what a refinery needs, it is not the same thing. Some parts are pipes; some of it has something very specific.

From that point of view, the combination makes sense: you can serve some things more efficiently. Also, within MRC, they did have parts of the business that were serving upstream and midstream as well. I think the way the company has been thinking about it is that they would combine that part of MRC with DNOW, and then have the downstream and utility businesses as added businesses. That expands the size of the company and arguably makes the company more efficient, allowing you to spread the G&A costs better, etc.

From the point of view of the combined company, they were never—as far as I remember, I don't think they were ever—talking about cross-selling opportunities or things like that. They were talking about synergies from the point of view of efficiencies and how the combined company could generate about $75 million. If you look at 2024, the last year that the 2 companies were separate, I think DNOW had about $150 million of EBITDA, and MRC had $175 million of EBITDA. They said that between the 2, they would have about $75 million of EBITDA synergies. That's actually a meaningful number; it's about increasing the combined company's EBITDA by about 20%. That was the logic behind the merger. So it does make sense to have the companies together, at least strategically.

But what happened in between is that, while DNOW was in the process of buying MRC—after DNOW had agreed to buy MRC—they also inherited not just this relatively synergistic business but an ERP system implementation that wasn't going very well. I mean, as soon as you say “ERP implementation,” right, and I'm reading—somebody asks a question about ERP or SAP, I can't remember—every investor sees that and is like, “Oh my God, just put a gun in my mouth,” right? You've got to run.

You've got to run. I mean, one day I'll learn my lesson, right? But whenever you see an ERP implementation, quite often you will see that it's delayed. And especially for a distributor, why is it so meaningful? A distributor has low margins to start with, right? So if you have something that disrupts your margins even by 2% or 3%, or if it disrupts your working capital—you cannot deliver your orders, or your inventory starts blowing out because of this ERP implementation—it could be deadly if the business is not set up for it.

But then the flip side is: why do people do it in the first place? Because we're not the only ones who are smart enough to figure out that ERP implementation is dangerous. The businesses that engage in it know that there's a value to be had at some point. And this was the argument from MRC, I believe: before they engaged in this SAP—this ERP implementation, which was actually Oracle—they had a homegrown system that they had put together. They developed it, and it was working well enough, but at some point the company had become too cumbersome and convoluted for them to continue using the homegrown ERP. So they decided to bite the bullet. They found that Oracle was the best solution for them and went ahead with it. Then it turned out that getting from point A to point B was a lot more difficult than they expected.

So you mentioned, when we were talking about the 2 separately, I think it's $150 million on one side and $175 million on the other side of EBITDA, and they're guiding to $70 million to $75 million of EBITDA synergies. Separately, the 2 businesses do $325 million in EBITDA; with the synergies, you'd have them at about $400 million, right? I'm just looking at the numbers. In 2025, the businesses closed intra-year, but $227 million of EBITDA is the reported number. They're guiding this year to, I think, $230 million in EBITDA. Am I off?

On the call, management was asked, and they said, “Hey, you guys have kind of given a target of $350 million for 2027, for next year.” Right now, I understand all the synergies haven't kicked in. I think they said on the call that $30 million of the $70 million are kicking in this year, but that would mean more are kicking in next year. When I see that $350 million number that they're talking about, that's kind of what the businesses separately did in 2024. The synergies are kicking in—I mean, probably $50 million of the $70 million kicks in next year, maybe more. I look at that and say, “Hey, 2024 wasn't exactly a banner year for oil and gas capex.”

Yeah.

So why is 2027 like—Steve's here telling me the businesses with synergies did, or would have done, $400 million in 2024. We're below that in 2027, and this is a business where, again, I mentioned the Q2 call; it sounds like demand's going great. So why aren't we seeing this flow through the EBITDA numbers right now?

I think it's a great question. I'll make it even more compelling, because what the company said when they were reporting 2025—which was when all these problems related to MRC were appearing—they said, “If DNOW were a standalone company, we would make $200 million in 2025.” So we know that MRC made $175 million the year before. Then the question is: What is happening there?

I think what's happening is that, at first, they had to throw about $8 million to $9 million per quarter into what seemed like literally manually filling orders while they were figuring out the MRC ERP systems. That was the case in the first 2 quarters of this year, and they said, “Starting in Q3, it should be down to about $1 million, and eventually it should be going up.” It suggests that they have stabilized.

I do think that they're being very conservative about their projections for next year because they're still in the middle of trying to figure out what the combined company is going to look like. They do not want to be in a situation where they overpromise in order to deliver.

As far as your question: between where we were in the middle of 2025 and where we are from a point of view of demand at the end of 2026 and maybe halfway through 2027, if you asked just the question, “Should these companies be making more money or less money?” I think the answer should be more. So I think part of it is that they're being conservative, and they're still trying to figure things out. They do not want to be in a situation where they disappoint the market again, which is what they did when they reported 2025 and all these problems with MRC appeared. The stock was down something like 40%, either the same day or within a couple of days, but it was a pretty massive drop.

It's funny, because I've got the 10-year chart pulled up, and you can't even see a 40% drop on this, though I do see, as you're looking: January 30, $15 per share; February 27, $12. So clearly a big drop in there.

Well, I think it was $17 before. Starting the year, it was closer to $17, wasn't it?

You're probably right. It's because it's on the 10-year view, just because I had it pulled back. Let's go to valuation, right? I've had the benefit of seeing your valuation file, so I know how you think about the long-term valuation, the 2029 exit. I'd love it if you talked about that, but I'll just frame it.

As you and I are talking, the stock is trading at $16.50, which gives it about a $3 billion market cap, and they've got about—let's just round it up to make the numbers really simple—about $500 million of net debt. So, $3.5 billion of EV, which I said to round up because they've kind of soft-targeted $350 million-plus of EBITDA for 2027. So you're right at 10× EBITDA on 2027 numbers, on the numbers I laid out.

Now, this is a distribution business, and one of the reasons private equity loves distribution businesses is, A, the roll-up opportunities, but B, very low capex. So on $350 million of EBITDA, you're probably talking $20 million of capex. So EBITDA is a great proxy for unlevered free cash flow here. I'll caveat with that. But when I say $3.5 billion EV and $350 million of next-year EBITDA, I don't say, “Hey, super-deep value.” So I'd love for you to just lay out how you think about the valuation here.

Sure. So, I mean, you mentioned ValueX, and I know we spoke before. The way that I'm usually trying to think about the business is from the point of view of free-cash-flow yield—what kind of yield these businesses are generating—and the big question is what they do with the money. We can definitely talk about that, but to me, the free-cash-flow yield is the North Star when I'm trying to figure out whether this company is being attractively priced or not.

And so, one other thing: I’m not trying to get into the game of figuring out what this company is worth relative to its peers. I want to look at what the market has paid historically for this company, or for this type of company. What does the market usually pay for it?

Historically, this number was quite volatile, but it averages out. On average, for DNOW, the market was willing to pay about a 5% to 6% free cash flow yield. You could also call it 17 times free cash flow or 20 times free cash flow. That was the kind of multiple the market historically said, “We’re comfortable paying for this business.”

Yes, it’s volatile, but as you said, it’s capital-light. Quite a bit of it is a very sticky business. Even if you go back to what happened with MRC, they barely lost any customers, right? In an environment where your customer is not delivering—or your distributor is not delivering to you the parts that they’re supposed to—if you’re not leaving, you’re sticking, and they barely lost any customers.

If you’re reading through some DNOW transcripts and talking to some of their clients, you kind of realize that customers stay because, A, they were told, “Okay, this is—we’ll figure it out,” but in order for them to try to figure out an alternative, that would have been too difficult. This is a sticky business. It’s arguably a high-quality business, and the market historically has paid about a 6% free cash flow yield.

So, if we’re looking out to—even if we go with the $350 million number—and, as you mentioned, there’s very little capex, the company, with MRC, inherited some debt. Before that, there was no debt. Right now, they’re paying, I think, about $30 million a year in interest on that debt from MRC. They said they’ll try to pay down the debt; they’re generating cash flow and will try to pay that down.

That will probably go down to about $20 million. But figure, with $350 million of EBITDA by the end of 2027, this company should be making about $300 million of free cash flow.

Yep. Yep. Absolutely.

So that means in 2027, at today’s price, you’re getting about a 10% free cash flow yield.

Well, $350 million—I’ll just do it in my head real quick. So, $350 million minus $20 million of capex is $330 million, minus $20 million, on your numbers, of interest is $310 million. We can talk about whether you should do that, but then they’re going to pay taxes, right? So, aren’t we taking $310 million down to, like, $250 million after tax? Am I thinking about that correctly?

You are, but then you can add back the stock-based compensation because that’s a noncash item, right? From a cash flow point of view, you’re adding that back in. So, based on the numbers that I have, I think it was coming out to be about $300 million.

Okay. That’s cool. And I do know they have also talked about—I mean, this would be one-time, not sustainable—but they have talked about, “Hey, we’ve got another $50 million of inventory reductions to go,” and all that sort of stuff.

But that will go toward paying down debt, so that reduces the interest.

Cool. So, $300 million of cash flow is kind of what you’re saying for 2027?

Yes. And that is based on the EBITDA number that I would argue should be relatively easy for them to achieve.

Yep. So, again, $300 million of free cash flow. That’s kind of an equity number. This is a $3 billion market cap company. I look at it and I say, “Okay, Steve, historically, this trades at a 5% to 6% free cash flow yield to equity. That’s 17 to 20 times free cash flow. You’re buying this at 10 times 2027 cash flow.”

On one hand, that sounds attractive, right? Let’s do that math real fast. That’s like a double if you get to 20 times the extra free cash flow. On the other hand, you look at this today: distribution business, not a huge amount of growth and stuff. Why isn’t the right number 10? Ten is pretty low for a steady, high-free-cash-flow business, but why isn’t the right number 12? Why isn’t it 14? Why isn’t it 15? Are we relying a lot on multiple expansion, I guess, is what I would say.

It’s a great question. I think that’s one of the key questions of what’s going to happen here. And I think what helps with this company is that the way they’ve been allocating capital in the past has been relatively efficient. Where has the capital been going? It’s been going toward acquisitions, which, up until MRC, if you looked at the acquisitions they had done, usually—especially after you include the synergies—they seemed to be buying companies at about 4 to 5 times EBITDA.

So, if you’re a company that is able to buy growth at 4 to 5 times EBITDA through your own efforts—not because it’s available to everyone—and you yourself are trading at, I don’t know, 8 or 9 times EBITDA, then through that you’re actually adding value. The free cash flow yield that you’re getting on those acquisitions is adding to that.

That is something I always struggle with, right? This is the curse of the acquisitive compounder. If you’re trading at 100 times EBITDA, people are baking in that these guys are going to be able to really roll up the industry accretively, right?

Well, it does remind me of the ’70s, right? We traded at a high multiple, issued stock to go buy stuff at a cheaper multiple, so we grow and get a higher multiple. And I do hear you there—these are accretive acquisitions—but how much do you build in the value creation of that into the multiple? It’s just a little chicken-or-the-egg situation, or you kind of run into an infinite-loop paradox.

You’re right. But I think that partially explains why this company historically has been trading at a 6% free cash flow yield and not 10%, right? Because we’re going from a steady-state, zero-growth business to a business that is growing, partially maybe because of the acquisitions, that could be growing at 3% to 5% per year. Once you have that, that does deserve a higher multiple.

The other interesting thing here—and I’m just pulling it up as we speak—is that they have a very balanced capital allocation program, right? As you said, I don’t think they want to run with much debt. They do have some debt right now. They are paying back a little bit of debt, but they’re also buying back stock while they’re doing it.

So, you kind of get the best of all worlds, right? They bought back $75 million of stock in the first half of the year. Again, this is a $3 billion market cap company. They were actually lower when they bought it; they timed their repurchase very well. But buying $75 million in the first half of the year—$150 million a year—that’s 5% of the company.

So, you get the buyback, and you get a little bit of debt reduction. If you’re valuing it on the free cash flow to equity story, the debt reduction decreases the interest expense, which lets you buy back more shares. So, you kind of get the best of all worlds. And, by the way, they can keep doing some bolt-on acquisitions with the balance sheet and the cash flow they generate. So, they’ve kind of got all of that at that point.

And yeah, that’s exactly it, right? If you look at the history of the buybacks that they’ve done, they weren’t doing buybacks when they were trading at $30 a share. They were doing buybacks when they were trading at $10, $11, or $12, and then they leaned into it early.

At the time, this was interesting and ballsy to some extent: when they were going through this massive problem of trying to figure out the ERP implementation for MRC, they still had enough confidence to say, “Okay, we’re going to take $50 million.” Their working capital was growing, but they said, “We have enough confidence in this business to buy back $50 million worth of shares in Q1,” because they wanted to take advantage of the share price being around $11 or $12, or wherever it was at the time. They’ve been opportunistic and have historically shown themselves to be pretty smart about when they’re buying back shares.

You know, the other thing here is David Cherechinsky. As an Eastern European, you might be able to say his last name better than me. Cherechinsky—is that it?

Yeah, yeah, that’s close enough.

He owns a million shares—I think over a million shares. With the stock at $16, that’s $16 million worth of stock ownership. I think he gets paid nicely, but you do have a decent bit of insider ownership for a spin-off, or a company that’s not capital-intensive but has grown through acquisitions.

It’s not huge, but—

Yeah.

What else should we be talking about here?

No, I think we covered most of it. I think there is one question that people would have. Again, not to get too much into the weeds, but obviously, in the last couple of calls, a lot of the questions were about, okay, what is the company going to be doing as far as the ERP, and why did they buy a company that was installing a different ERP?

DNOW itself is on SAP ERP, and MRC was installing Oracle, so they knew they were coming into it with 2 different systems. I don’t think they realized how bad it was going to be, but they came into it knowing there were 2 different systems.

And what they’re saying now is quite interesting: They’re going to move some of the centers, and they’ve already moved 17 out of the 20 that they were expecting to move to SAP, while they’re going to keep the others on Oracle. The question is, why is that? I had some conversations with people at consulting companies that normally do these types of implementations, trying to figure out, “Okay, is it normal to run companies side by side with 2 different ERP systems?” What I was told is that it really depends on what kind of business this is in. In some cases, it could be that the Oracle ERP is best for a particular type of business.

This is just another reminder that the business they got into with MRC, which is more downstream and utilities-focused, is a slightly different business than upstream. That’s why they’re deciding to keep that Oracle ERP for that business for now and try to make it work. This is the business that the MRC management made a decision to improve before it was bought by DNOW, by implementing this. There are a lot of moving parts here, but I think, given the macro background switching from a headwind to a tailwind and the people involved here—with David Cherechinsky being there, he’s been at DNOW for, I think, over 25 years and has a pretty good history of prior acquisitions they’ve made in the past—you’re getting into a situation in which there are a few ways to win from here.

The stock has done a little better since they reported Q1 and showed Q2 stabilizing, but you could be in a situation in which things might start going the right way for the company, as opposed to swimming against the tide, which they’ve been doing since they listed it.

As I was looking at the beneficial ownership, it is funny because, just to what you’re saying, they’ve got a little thing that says, “Hey, since we spun off, U.S. rigs were 1,917 rigs when we spun off in the U.S., and that’s 571 at the time they were writing their proxy.” You look at that and you’re like, “Hey, as you’re saying, this company has been running into headwinds.” I don’t think anyone’s calling for 1,900 rigs in the U.S. again, but if you just stabilize and start ticking back up, the financials could really shine through.

And it’s still a highly fragmented industry here, right? We had a combination of the 2 largest players, but I don’t remember the market-share numbers. I know it’s below 20%.

Do you want to talk real quickly about your 2029 price target, just so people can see why you’re so excited about this and maybe get as excited themselves?

Well, we already talked about it to some extent, but when I was looking at 2029, it’s just a matter of what kind of companies can be earning on a free-cash-flow basis. If you put a 6% free-cash-flow-yield multiple on that, you can get to about $30 to $32 per share by 2028 or 2029.

Do you think this company should be public?

It’s a good question. I think if being public lowers its cost of capital, then yes. But if it does not, then maybe, given how volatile the business they’re in is, it should be private.

I just asked because, again, a through line of this conversation has been that private equity loves these businesses.

Yeah. They slap a lot of leverage on them, and then they do the roll-up that you’re talking about, right? This is a business where the management team does not want a lot of leverage. They’re paying their leverage down. I think they’re already well under 2×, and they’re going to be well under 2× leverage.

If this was a private-equity portfolio company, 4× to 6× is probably where they’d be levering this thing up. That would create a lot of tax shield on the interest expense and really juice the equity. I say that because, first, I think there would be private-equity interest, and, second, when you look at the shareholder roster—and I won’t call out any specific people—you’ve got a lot of shareholders who I remember were involved in MRC, and they were saying MRC belongs with either DNOW or a private-equity firm.

In the past quarter or 2, I see a lot of firms that have been adding to DNOW, and I have to imagine part of their thought is that this would be either better as a private-equity-controlled company or run like a private-equity company in the market.

I’m guessing, to some extent, that for private equity to get involved in DNOW, they would want to see growth in the addressable end market. You do not want the flip side of what happens when you have a highly levered company in a shrinking market, when you have a melting ice cube—and it’s gotten a lot of people into trouble, both in the public and private markets. So I don’t think people want to touch that.

I do agree with you, but I think I might push back, just because, again, they’re talking about data-center growth, and that’s real. The midstream play in particular has a lot of growth, and they’re talking about utility growth and water growth. Again, those are real, and those really play into the data-center side.

I could see a private-equity firm saying, “Hey, the rig side is our base, and if we get any upside there, that’s the cherry on top. But let’s lever this up, and we’re going to get growth from the midstream, the data center, and all that sort of stuff. Let’s lever this thing up and take that growth, and we’ll get a cherry on top. We’ll get a call option on oil and gas exploration,” if that makes sense.

Yeah. Look, there’s this other distribution company that I like, WESCO, which is an electric-parts distributor, that all of a sudden has become a play on data centers. Their sales went from a business that was growing, call it, 2% to 3% per year, to 8% to 10% per year, and the multiple expanded.

I’m not in any way underwriting this scenario, but DNOW, especially with the addition of MRC, could be in all the right places if we’re going to see the type of investment that is being talked about in utilities, refineries, data centers, et cetera. If all of that is going to come to fruition over the next 5 years, upstream oil and gas should benefit as well.

And then we talked about the numbers—what did the 2 companies look like on a standalone basis, even before the synergies and even before all of this change in demand? Just on your point on WESCO, it is crazy because I was flipping through some other distributors.

Again, every investor—you say this is just my personal experience—when you’re 25, somebody says “distributors,” and you think, “That’s the dumbest, most boring business.” When you’re 30, it’s, “What’s the chart of Fastenal look like again?” By the time you’re 35, you’re like, “Oh,” and you kind of get why—

I love distributors. You mentioned WESCO and Fastenal. Fastenal’s organic growth has accelerated from basically around zero to high single digits, low double digits, because there’s this huge AI boom. All these distributors are enormous beneficiaries—not in a meme-stock way, but probably in a more sustainable way.

Forget—just step back. Why are distributors interesting? You have Bezos saying, “Your margin is my opportunity.” Nobody wants to get involved in a business that delivers to you 3%, 5%, 6% EBITDA margins, because in order for you to do that, you have to do really well, and all you get is 3%, 5%, 6% EBITDA margin, right?

So your natural level of competition—I don’t think you’re going to have a lot of people saying, “Oh, I want to build a new distributor now.” The low margin is an opportunity, because you think of some of these guys: “Hey, if you uninstall the box and someone comes and installs the box, the customer payback period is like 3 years.” It’s just a terrible business, except for the guy who’s already installed in there, who’s been with you for 20 years.

And, by the way, do you want to risk losing the guy who’s been selling you screws for 7 years? I’m sure he’s not your best friend, à la plastic surgeon with the guy who’s selling him Botox, but you know the guy. Your screws are always there. If your screws aren’t there, you lose a day on the job, so you lose tens of thousands in revenue for a $2 screw. No, it’s kind of risky.

With upstream oil and gas, you take it to the next level. What happens when your well doesn’t—when you can’t pump for a day? You lose a lot of—

Millions in revenue. And, by the way, for a screw that costs nothing, the guy’s making a 5% EBITDA margin on it. It’s not a lot, right?

Steve, this has been great. I appreciate you coming on. This is time number 3—2 more, and we’re going to have to get you that—

I have the hat. I have the hat.

We’ll get you a polo for 2 more. But this has been awesome. Do you want to include a link to the write-up or anything somewhere that I should link to, or can we talk about that?

We can talk about it offline, but yes.

If he decides to, there will be a link in the show notes. If not, you can just go—you know, they’ve got the presentation, they’ve got the earnings call, and everything. So, Steve Gorelik, this has been great, and we will chat soon. Thanks again.

A quick disclaimer: nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.