$DNOW: the boring distributor that could double on 2029 numbers | Firebird Management

Summary

• Steve Gorelik’s core call: DNOW (~$16, ~$3B cap) is a “boring” oil-and-gas distributor that can roughly double to ~$30–32 by 2028–2029, simply by earning ~$300M of free cash flow in 2027 and re-rating to its historical 5–6% FCF yield (17–20x) from today’s ~10%. The stock spun off from National Oilwell Varco at $35 in late 2014 and has gone nowhere for a decade — not because the business is bad, but because US rigs collapsed from 1,800 to under 600 and the company “had to work hard to stay in place.”
• The macro leg is a possible 1970s replay: the Strait of Hormuz/Iran disruption took out 20% of world oil supply versus the ~7% disrupted by the Iranian revolution and embargo — events that triggered the investment wave that found the Gulf of Mexico, Cantarell, and North Sea oil. With consumption ~102M bbl/day against 103–104M of production, “we’re operating at 99% capacity utilization,” global investment sits 40% below 2014 in both nominal and real dollar terms, and Gorelik finds it “surprising… how complacent the world seems to be” with 2030 Brent futures barely moving from $65 to ~$68. Inventories, especially in China, appear to have been drawn down, which Gorelik says is not sustainable.
• The MRC Global merger makes DNOW a full-chain supplier — DNOW’s upstream/midstream plus MRC’s downstream/utilities — with 2024 standalone EBITDA of $150M + $175M and $75M of targeted synergies, a ~20% uplift. Walker also highlights water-infrastructure and data-center exposure associated with MRC’s midstream/utility business, but the deal came with an inherited Oracle ERP implementation that was costing $8–9M per quarter in manual order-filling and coincided with a roughly 40% stock drop — now guided down to ~$1M with 17 of 20 centers migrated to SAP.
• Walker argues the 2027 guide of $350M EBITDA may be conservative: the two companies plus synergies would have earned ~$400M on 2024’s numbers, and 2024 “wasn’t exactly a banner year for oil and gas capex.” Gorelik sharpens it — DNOW said it would have made $200M standalone in 2025 and MRC did $175M the year before — and reads the gap as management refusing to “overpromise” after the ERP disclosure drop; asked whether demand into 2027 should mean more money or less, “the answer should be more.”
• Andrew Walker’s key pushback: the double “is relying a lot on multiple expansion,” and pricing in accretive M&A is “the curse of the acquisitive compounder… an infinite loop paradox” reminiscent of the 1970s. Gorelik’s answer is that buying at 4–5x post-synergy EBITDA while trading at 8–9x is genuine value creation that turns a zero-growth business into a 3–5% grower — which is exactly why the market historically paid a 6% yield, not 10%.
• Capital allocation is the tell: $75M of buybacks in the first half of the year (~5% annualized pace) executed at $10–12 not $30 — including a “ballsy” $50M in Q1 mid-ERP-crisis — plus debt paydown toward well under 2x leverage. Walker notes a private-equity owner would run this at 4–6x and that some firms have been adding to DNOW; he also recalls MRC-linked shareholders who had argued MRC belonged with either DNOW or a private-equity firm. Gorelik hedges that PE needs to see TAM growth rather than a “melting ice cube,” while Walker counters the data-center/utility/water growth is real, with oil upside as “a cherry on top” — the Wesco playbook, where a 2–3% grower became an 8–10% grower with multiple expansion.

Deep dive

1. A ten-year loser spin-off where the market, not the business, was the problem

• Walker’s setup frames the whole genre: distributors are boring to public investors but “anything but boring” to private equity — low capex, sticky, hard to replicate, enormous rollup runway, the Fastenal/Wesco fortune machine. DNOW, spun from National Oilwell Varco (NOV) as its in-house distributor in late 2014 at $35, traded at $13 within a year and sits at ~$16 today.
• Gorelik’s explanation for the dead decade: 2014 was “probably the last peak of oil and gas investment globally.” US rigs went from 1,800 to below 600, and global investment in both nominal and real dollar terms is 40% below 2014. The earnings DNOW generated came in an addressable market that “shrunk dramatically” — the company grew margins through acquisitions of mom-and-pop shops at low multiples just to stand still.
• His honest gate on the thesis: “If I would believe that this is the market that will continue to shrink from here, this would not be interesting to me.”

2. The Hormuz thesis — 20% of supply disrupted versus the 7% that remade the 1970s

• The load-bearing analogy: the Iranian revolution and the oil embargo each disrupted about 7% of world production, and the resulting scramble for non-Middle-East supply produced “massive finds” — Gulf of Mexico, Cantarell in Mexico, North Sea — that “weren’t really on the map” before the 1970s. Today’s disruption is 20% of supply; Gorelik says inventories, especially in China, appear to have been drawn down to cushion the impact, but calls that unsustainable.
• The tightness math: consumption ~102M barrels/day against 103–104M of production — “we’re operating at 99% capacity utilization” — and long lead times mean investment decisions precede actual activity by a substantial period. Early evidence: US rig count up from 530 six months ago to ~590, and DNOW’s Q2 already showed ~10% quarter-over-quarter growth.
• The complacency trade: 2030 Brent futures moved only from $65 in January to ~$68 — “it was surprising to me how complacent the world seems to be” that the oil will simply be there.

3. Walker’s macro pushback: even if capex returns, why would it land in US shale?

• The challenge, in full: energy bulls pre-Ukraine were arguing shale was “rolling over,” wells tapped out; oil at $80 signals drill-baby-drill but $60–65 signals run-for-cash-flow — so isn’t the incremental investment going abroad, making DNOW a bet on someone else’s macro?
• Gorelik’s two-part answer: it’s both, but shale projects have “smaller upfront investment and faster payback,” so projects economical at $80 but not $60 are being tapped first — that’s what the rig recovery already shows. And the per-rig efficiency gains that let US production grow while rig counts fell “may be starting to tap out,” meaning flat production alone requires more rigs.
• His retreat from macro to micro, worth keeping: even without the oil cycle, over the last five years of declining investment DNOW “still managed to increase their profit margins” — the macro is the kicker, not the whole thesis.

4. MRC Global: a perfect strategic fit shackled to an Oracle ERP fire

• The fit: DNOW was upstream/midstream, MRC mostly downstream (refineries, petrochemical) and utilities — combined, “a supplier that all of a sudden would be able to cover the whole oil and gas supply chain.” 2024 standalone EBITDA: DNOW ~$150M, MRC $175M, with $75M of guided synergies — a ~20% uplift from efficiencies, notably not cross-selling. Walker’s old research note said “MRC Global and DNOW would be a perfect fit,” and he highlighted water-maintenance/projects and data-center exposure associated with MRC’s midstream/utility business.
• The inherited problem: MRC was migrating from a homegrown system to Oracle while DNOW runs SAP. Walker’s reflex — “you see ERP implementation and you’re like, oh my god, just put a gun in my mouth” — and Gorelik’s mechanism for why it’s existential for a distributor: low margins plus working-capital disruption mean a 2–3% margin hit or an inventory blowout “could be deadly.”
• The cost and the fix: $8–9M per quarter spent “literally manually filling orders” during the first two quarters of the year, guided to ~$1M from Q3; the disclosure coincided with a roughly 40% stock drop (roughly $17 to $12). Now 17 of 20 centers have moved to SAP, with downstream/utilities deliberately staying on Oracle — consultants told Gorelik running two ERPs side by side can be correct when the underlying businesses differ.
• The stickiness proof buried in the mess: MRC “barely lost any customers” even while failing to deliver — customers stayed because “trying to figure out an alternative would have been too difficult.”

5. Why the 2027 guide may be conservative against 2024’s own numbers

• Walker’s math, put directly to Gorelik: with the businesses closing intra-year, reported combined EBITDA was $227M in 2025, and Walker recalled management guiding the current year to ~$230M; the 2027 soft target is $350M — but the two businesses plus synergies would have done ~$400M on 2024, which “wasn’t exactly a banner year for oil and gas capex.” Why isn’t the recovery showing up?
• Gorelik makes the puzzle sharper before answering it: DNOW said it would have earned $200M standalone in 2025, and MRC made $175M the year before. His read: management is “being very conservative” mid-integration and “do not want to be in a situation where they overpromise” — they already disappointed the market once with the ERP disclosure and won’t do it again.
• The directional test he applies instead: comparing demand in mid-2025 to end-2026, “should these companies be making more money or less money? I think the answer should be more.”

6. Valuation: ~$300M of 2027 FCF against a 5–6% historical yield — and the compounder paradox

• The setup: ~$3B market cap, ~$500M net debt, $3.5B EV — about 10x the 2027 EBITDA target. Gorelik’s bridge to free cash flow: $350M EBITDA, ~$20M capex, interest potentially falling from ~$30M toward $20M as debt is paid down, taxes largely offset by the stock-comp add-back → ~$300M FCF, a ~10% yield on today’s equity. His north star is not peer comps but what the market has historically paid for this business: a 5–6% FCF yield, 17–20x — implying roughly a double, and ~$30–32/share by 2028–2029.
• Walker’s pushback, worth keeping whole: the thesis “is relying a lot on multiple expansion” — why is the right number 17–20x and not 12 or 14? And baking accretive M&A into the multiple is “the curse of the acquisitive compounder… you kind of run into an infinite loop paradox,” echoing the 1970s issue-high-multiple-stock-to-buy-low game.
• Gorelik’s resolution: DNOW’s acquisitions have historically been done at 4–5x EBITDA including synergies against its own 8–9x — real value creation “not available for everyone” — and that arbitrage is precisely why the market paid a 6% yield rather than 10%: it converts a steady-state zero-growth business into one growing 3–5% a year.

7. Capital allocation, the private-equity question, and the Wesco kicker

• The allocation record Walker calls “the best of all worlds”: $75M of buybacks in the first half of the year — ~5% of the company annualized — executed at $10–12, never at $30, including a $50M repurchase in Q1 while the ERP crisis raged, which Gorelik calls “interesting and ballsy.” Debt paydown cuts interest, which funds more buybacks and bolt-ons; leverage is headed well under 2x. Gorelik says David Cherechinsky owns over a million shares and has been at DNOW for over 25 years.
• Should it even be public? Gorelik’s hedged answer: yes if listing lowers its cost of capital, but “given how volatile the business… maybe it should be private.” Walker notes a PE owner would lever this 4–6x, and that some firms have been adding to DNOW; he also recalls MRC-linked shareholders who argued MRC belonged “with either DNOW or a private equity firm.”
• The one real disagreement: Gorelik guesses PE stays away without addressable-market growth — “what happens when you have a highly levered company in a shrinking market… a melting ice cube.” Walker’s counter: the data-center, utility, and water growth is real, so PE could underwrite midstream growth with upstream recovery as “a cherry on top.” Gorelik won’t underwrite that scenario but concedes DNOW-plus-MRC “could be in all the right places” — his comp is Wesco, an electric-parts distributor that went from 2–3% growth to 8–10% on data centers with multiple expansion, “not in a meme stock way but probably in a more sustainable way.”
• The closing riff on why distributors win: 3–6% EBITDA margins repel entrants — nobody says “I want to build a new DNOW” — while the incumbent’s moat is the $2 screw: miss it and the customer can lose a day on the job and tens of thousands in revenue, while a day of lost production at an upstream well can mean millions. Nobody risks switching from the guy who’s been selling them screws for seven years.