Collect 14% Annualized Premium on America's Dominant Industrial Distributor
DNOW keeps energy infrastructure running and trades at a 10% free cash flow yield on depressed estimates. Seth Klarman's Baupost is a holder. Collect premium to wait — or own it at $10.25.
The trade: Selling a Cash Secured Put
Ticket: DNOW
Current Price: ~$13
Expiration: November 20, 2026
Strike Price: $11
Strike to Current: −16%
Premium: ~$0.75
Annualized Return: ~14%
Actual price if assigned: ~$10.25
The Company
DNOW distributes the parts that keep industrial systems running. Pipes, valves, fittings, pumps — whatever an oil producer, gas utility, or processing plant needs to avoid downtime, they order from DNOW.
The business is defensible by proximity. When a pipeline valve fails, operators aren’t shopping for the cheapest supplier — they’re calling whoever can deliver the right part before the downtime bill compounds. Once embedded in a customer’s procurement workflow, DNOW is hard to displace.
In November 2025, DNOW acquired MRC Global in an all-stock deal, doubling revenue to $5.3 billion and creating the dominant U.S. energy and industrial distributor. The stock is down from $17 to $13 since close. The drag is entirely MRC’s botched ERP implementation — a known, contained problem. The underlying cash generation is intact, and the company is already buying back shares at a 10% free cash flow yield.
Value Investors that already own it
Seth Klarman - Baupost Group
Greenhaven Associates
First Eagle Investment Management
Why We Are Glad to Own It If Assigned
Unplanned downtime doesn’t get deferred — it gets fixed immediately at whatever cost necessary. That urgency is structural, not cyclical. DNOW sits at the point where that urgency meets the physical supply chain.
At an assigned cost of $10.25, we are buying the business at roughly 5-6x forward EBITDA with synergies — a level that implies no credit for the MRC combination, no improvement in energy activity, and no resolution of a known ERP problem that management is actively remediating. The buyback is already running at 6-7% of shares per year. We get paid to wait.
The base case is $18. That requires no multiple expansion — only that the combined company generates the free cash flow the financial model projects and continues returning it to shareholders. An energy capex upcycle would simply make it better.
What could go wrong
The ERP remediation could drag longer than expected. MRC’s system issues have already proven harder to fix than initially disclosed, and a second-half 2026 earnings miss would test the thesis before it has time to prove itself.
Customer concentration is a real structural risk. Chevron and Exxon gain negotiating leverage as the shale patch consolidates, and some large customers may deliberately diversify spend away from DNOW post-merger — to DXP or others — precisely because the combined entity has grown too important to their supply chain.
Energy volumes remain correlated to rig count, which is near multi-year lows. A sustained oil price decline would pressure the top line before synergies fully offset it.
We are aware of all of this. It is why the strike is set 16% below current prices, not at them.
Go deeper — further reading
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A quick note before you act.
This newsletter is for informational and educational purposes only. Nothing here constitutes financial advice or a recommendation to buy or sell any security. Options trading involves significant risk. Always do your own research and consult a qualified financial professional before making any investment decision.