Customer-Driven Model Drives Market Share Gains
DNOW’s FY23 financial results benefited from the initiatives management put in place several years ago to position the company as a strategic supply chain partner for its vendors and customers. FY23 revenue increased 9% Y/Y, including +20% and +11% gains in its drilling and production and fittings and flanges product lines. Capital spending cycles across all segments of the energy industry drive the majority of DNOW’s revenue. Revenue gains per average working rig suggest DNOW’s fulfillment model is contributing to market share gains despite the headwinds of a lower average US rig count in FY23. FY23 US revenue per rig averaged $6,955/day, representing a 7% lift from the pre-pandemic year of 2019. Notably, the increase corresponds to a 27% decrease in the average US rig count. Y/Y, US revenue per rig increased 15%, while the average US rig count declined 4%. DNOW completed the all-cash acquisition of Whitco Supply, LLC on March 12, 2024. Whitco’s valve/actuator packages are expected to enhance DNOW’s midstream exposure through both its Energy Centers and Process Solutions businesses. Much of DNOW’s existing product catalogue can meet the project needs of customers participating in the energy evolution. The company’s catalogue can supply products to a wide variety of industry applications that involve the movement and measurement of fluid. Many of the companies pursuing evolution projects are existing DNOW customers. DNOW is leveraging the 4Q22 acquisition of EcoVapor to serve customers in the RNG markets in addition to the traditional oil & gas markets. DNOW is supplying numerous EcoVapor E1200 ZerO2 units to treat landfill gas that enters the market as RNG. Our FY24 estimates are built on a 2% Y/Y revenue increase and a 1% Y/Y adjusted EBITDA increase. For now, management’s guidance and our model exclude the impact of the Whitco acquisition. We expect management to discuss the financial impact of the transaction on its upcoming 1Q24 earnings call. Management expects to generate ~$150 million of free cash flow in FY24. Our FY24 adjusted EBITDA estimate of $187 million suggests a high conversion rate. In FY23, DNOW generated $171 million of free cash flow on adjusted EBITDA of $184 million. DNOW’s strong free cash flow outlook and liquidity position ($626 million as of December 31, 2023) could support incremental accretive acquisitions, including Whitco, and return cash to shareholders.
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