DNOW's Whitco Acquisition Fuels Growth Amid Stagnant US Macro Outlook

Distribution Now (DNOW) 2Q24 Financial Results, Analysis & Outlook

Key Takeaways

• My 2H24 US onshore forecast anticipates a 3% decline in drilling and frac crew activity, leading to ~5,100 wells drilled and completed with $46.3B in total Capex. DNOW’s US-segmented revenue is expected to exceed $500MM per quarter in 3Q and 4Q24.

• Canadian D&C activity looks promising, with a surge in oil-driven rig activity, particularly in Central and Northeastern AB. Total Capex in Canada is projected at $21.2B for 2H24, accounting for 53% of the year’s spending. DNOW’s Canadian revenue is forecasted to approach $78-$79MM per quarter in 3Q and 4Q24.

• With US, Canadian, and international revenue projections, DNOW’s FY24 total revenue is expected to reach ~$2.5B , marking a 7.5% YoY growth.

2Q24 Recap

DNOW reported strong 2Q results, achieving $633MM in revenue, a sequential increase of $70MM and a YoY increase of $39MM, primarily driven by the Whitco acquisition and midstream revenue growth. The company delivered $50MM in EBITDA, representing 8% of revenue, and delivered Net Income post non-controlling interest of $24MM.

As part of DNOW’s capital allocation strategy, the company repurchased $10MM worth of shares, bringing the total share buybacks in the first half of 2024 to $67MM. With a cash position of $197MM and no debt, DNOW appears to be comfortably on track to complete its $80MM share buyback program by YE24. Expect to see further guidance in November regarding further share buyback plans beyond the existing $80MM buyback program.

Across the company’s operating expenses, DNOW’s Cost of Products realized an increase to 78% of Revenue, up one percent from the previous five quarters (77% of Revenue). This step-up in Cost of Products can largely be attributed to the associated product integration costs and accounting-related activities from integrating Whitco’s inventory. Same time, product price softness, particularly with line pipe could be flattening out following the declining price trend over the past 18-24 months, though any increase in overall product costs would likely be contingent upon increased D&C activity demand. Lastly, DNOW’s Warehousing, Selling and Administration costs decreased sequentially from 17.9% of Revenue in 1Q24 to 16.6% in 2Q24, though consistent on a YoY basis as 1Q23 posted a similar metric of 16.5% of Revenue.

DNOW’s leadership team highlighted the success of the company’s quarterly results amid the post-close integration of Whitco, while also growing revenue in a relatively static oil and gas sector. My upstream research of the US and Canadian E&P sectors certainly supports an aggregated maintenance capital strategy with US onshore production among the seven US basins forecasted to grow 3% YoY (from 30.0Mboepd in FY23 to 30.9Mboepd in FY24), while Canada’s national-level production is also forecasted to grow ~3% YoY (from 8.5Mboepd in FY23 to 8.8Mboepd in FY24). So what does the second half of 2024 look like for DNOW as well as the US and Canadian oil and gas sectors? Let’s investigate.

Crude Calcs and Forecasts

I previously discussed the strong statistical relationship between my national-level Total Capex forecast with DNOW’s quarterly revenues (link). While rig count is certainly a critical factor as DNOW noted in its 2Q24 supplement, “Second Quarter Takeaways” (link), the unique characteristics of each basin, coupled with all aspects of D&C activity equate to a more tightly bound relationship with DNOW’s US segmented revenue.

The strong correlation from 1Q20 to 4Q23 also provides directional guidance to the scale of quarterly revenue that the Whitco acquisition generates, as well as DNOW’s sales growth with midstream operators and energy evolution-related projects. With a full quarter in the books, the model-to-actuals variance equates to ~$125MM for 2Q. In turn, the annualized run rate on this variance implies ~$500MM attributed to Whitco Supply/midstream/energy evolution sales growth.

2H24 United States Capex and D&C Activity Forecast

Looking ahead to the second half of 2024, my D&C activity forecast suggests a slowdown in both drilling and frac crew activity with average rig and frac crew counts declining -3% from 1H24. This equates to ~5,100 wells drilled and completed through 2H24, totaling ~$42.1B in D&C Capex and ~$4.2B in non-D&C Capex.

As it relates to DNOW’s quarterly performance, my forecast anticipates US-segmented revenue to reach and exceed the ~$500MM threshold for 3Q24 and 4Q24, leading to FY24 US revenue in the ~$1.6B-$1.7B range.

2H24 Canada Capex and D&C Activity Forecast

For Canada, 2H24 D&C activity is more optimistic with oil-related rig activity surging beyond the three-year range. Central AB and the Lloydminster corridor, coupled with Oil Sands-related activity are driving the surge in rig growth. And while natural gas prices have remained stagnant through the summer and into early September, seasonality with the upcoming Fall/Winter season appears to be boosting futures price contracts to the ~$1.50/GJ range through 4Q24. In turn, expectations are for gas-related rig activity to remain within the lower end of the three-year range as noted below.

For Canadian D&C activity in 2H24, I’m anticipating the oil-driven D&C activity to continue while gas-related completions accelerating as we approach year-end. My FY24 Canadian Total Capex forecast is ~$40B, with 2H24 capital spend accounting for 53% of full-year spend activity. As it relates to DNOW’s Canadian quarterly revenue forecast, I’m anticipating revenue to reach upwards of $78/$79MM for each quarter.

My summary of Canadian 2H24 activity and spend is as follows:

FY24 Revenue Outlook and Forecasted Revenue by Product

With the US and Canadian revenue forecasts outlined above, coupled with anticipated International revenues achieving ~$130MM in 2H24, FY24 revenue is tracking towards the ~$2,500MM benchmark, representing 7.5% YoY growth. Incorporating the FY24 revenue target with DNOW’s production segmentation percentages from its 2023 Annual Report, implied FY24 revenue by product line is forecasted as follows:

DNOW Actuals & Forecasted Financial Statement Model Estimates

If you have read to this point in the post - thank you, I really appreciate it and hope my analysis provided you with some quality insights. If you have any questions or want to discuss my forecasts/data sets, feel free to email me at [email protected].

Companies Mentioned

• DNOW, Inc. (DNOW)

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